Archive for the ‘ Taxes ’ Category

U.S. “social netting” lacks and inequitably distributes

In the middle of a series of articles titled “The High Cost of Low Taxes” for Moyers and Company, Josh Holland challenges the stigma of higher taxes and exposes the issue in its proper context. Whereas compares the United States to 11 of the top performing Organization for Economic Co-operation and Development (OECD) countries, Holland includes all 37 OECD countries for his series. Simultaneously dispelling myths and reconstructing the argument in the terms we should have been using all along, Holland evaluates whether the U.S.’ tax system is equitable, efficient, effective, or enough.


Holland raises the argument that we should be comparing how much we spend (publicly and privately) on social costs and what kind of “social netting” we get as the product for our expenditures. Noting that since the U.S. public and private sectors combined social spending is comparable to the OECD average (29% to 32%, respectively), U.S. quality of social netting should also be proportionate. However, this is hardly the case. In his second article, he tackles specifically the issue of health care, revealing through a World Health Organization report and a compilation of statistics at Bloomberg just how poorly the U.S. health care system performs (in many cases close to last and others dead last) compared to its most relevant peers. Here, then, is Holland’s reasoning: if we are paying nearly the same social costs, why is there such a discrepancy in the quality of the results?

The discrepancy begins in the imbalance between public and private spending on social costs. According to the statistics, OECD countries that delegate social spending to the public sector provide better social netting for its citizens. Health care, as established above, is one dynamic example of how the U.S. has been short-changed; the U.S. tax systems is yet another.

Americans’ heavy reliance on the private sector to provide social goods and services doesn’t only result in us paying a lot and getting a lot less for it, compared to other wealthy countries. It also makes the financing of our entire social welfare system far less fair. It’s a great deal for the wealthiest, and a huge rip-off for the rest of us.

Holland introduces his third installment with this remark and proceeds to discuss that the tax system is not only unequally weighted, but also that there are hidden implications. For example, federal taxes might seem more progressive, but the distribution of state taxes is the antithesis of progressive. In fact, the weight of taxes is nearly level, but the bottom-most quintile provides for 11.1% of state tax revenue. As the quintile groups ascend by earning, the percentage by which they’re taxed descends with the largest earning quintile being taxed 7.5%.

Taken from: Rip-off: High Out-of-Pocket Social Costs are a Stealth Tax on the Middle Class and the Poor,

Still, even within the federal tax system, examples of regressive taxes thrive. Holland discloses that payroll taxes that provide for social security and Medicare are a flat tax with those making $20,000 a year paying 6.2% just like those who make up to $113,000.

We may deduct from Holland regarding social netting that those who need it and pay for it the most–whether by the unfair tax system or by out-of-pocket costs they can hardly afford–receive the least from it, especially when compared to the social nettings of the best performing OECD countries.

Holland has two more installments yet to come in the series to be published at in the next few weeks.

Norway=model; exception

In addition to already having country profile pages for Germany and Japan, we have recently just added Denmark and Norway (also accessible from our home index page under the “countries covered” listing). While putting together the Norway page, we realized even more how exemplary Norway truly is.

Norway is not a member of the European Union. Also a factor in escaping the eurozone crisis is their oil and gas industry which has them benefiting from the largest budget surplus among all advanced democracies. Norway has an unemployment rate below 3%, no net national debt, and around $640 billion dollars stored away in a sovereign wealth account, mostly from its oil and gas industry. In 2009 Norway earned the highest per capita income.

Deserving much credit for its success is Norway’s fearlessness to tax. Their prosperous oil and gas industry receives a 28% corporate tax and a 50% industry surtax. Overall tax as a share of GDP is among the highest in the OECD. Corporate taxes are four times as high as U.S. rates. Their highest income tax bracket kicks in at $124,000 at 47.8%. Yet businesses aren’t saddling up to head to places where they might save on looser tax breaks, an argument from those in the U.S. representing a vast majority who refuse to consider any tax increase. In fact, start up activity not only in Norway, but also Denmark, Switzerland, and Canada is higher than that of the U.S. From 2006-2009, the U.S. economy treaded at a practically stagnant .1% growth rate compared to Norway’s exponentially faster rate of 3%. Norway also boasts more entrepreneurs per capita than the U.S.

Part of the reason why business owners are so keen to comply without raising a stir at Norwegian taxes is the sense of appreciation they have for the system. Norwegians benefit from free education from preschool to graduate school (often including universities outside of Norway); free healthcare; generous unemployment benefits due to a competitive, employee-friendly job market; forty-six weeks of maternity leave paid in full, 10 weeks for paternal leave. Education, retirement, and medical expenses are three paramount concerns for the average U.S. citizen, but all of which are provided in Norway. There’s a sense of giving back to the system in Norway for the ways one has benefited previously from the system.


Adapted from“US fiscal debate could learn from Norway” by Mark Provost from Progressive Press and  “In Norway, start ups say Ja to socialism” by Max Chafkin in Inc. Magazine.

The price of income distribution

We have all had our blinders on and carried our focus for Tuesday’s election (with tragic exception to Sandy and, hopefully, its indications concerning climate change). But before we resume full throttle in election reports with an international perspective next week, we offer a quick break from your Obamney monopolized newsfeed and towards the issue of income distribution.

In his review of Joseph E. Stiglitz’s book The Price of Inequality, Thomas B. Edsall cites culpability with both neoliberal and free market strategies, both democratic and republican parties. According to Edsall, the fundamental issue is

not only that inequality violates moral issues, but it also interacts with a money-driven political system to grant excessive power to the most affluent.

With the all-too-fine line between financial power and its influence on policy and elected officials, the affluent aim to perpetuate their position and status at the top with political demands to protect their ability to generate their money (by successfully fighting off tax hikes). Stiglitz and Edsall reveal the result: a far less efficient economic system that has discounted the contributions of (and even the opportunities to contribute by) those at the bottom of the system. As our income distribution page implies, there is a relation to the US’ position in income distribution (the GINI index) and our positions in child income poverty, Index of Health and Social Problems, and the Human Poverty Index, all in which we rank at the bottom among the 12 advanced democracies studied.

Tackling taxes and misconceptions concerning US recovery

US deficits are a result of massive tax cuts, huge increases in military spending, the new Medicare drug benefit, and a serious recession caused by poor use of tax cut funds, crazy mortgages, and a massive housing and financial derivatives bubble. First: taxes. American politics is awash with the idea that lower taxes will help the economy; however, higher taxes properly spent will, in fact, help the economy. Advanced democracies (such as many of the subjects on all have significantly higher tax rates than the US while maintaining a higher standard of living. In modern US economic history, higher tax rates are usually associated with higher growth rates. The last tax reform in 1986 increased taxes on business and was followed by years of increased investment. When taxes were lowered during a boom in 2001, it was followed by the biggest bust since the Depression. The danger is posed not by taxes, but by debt, speculation, and excessive money growth.

Under-taxation causes deficit spending, which increases borrowing. Money in Treasury bonds may or may not be invested in growth. The borrowing can be redeemed if the spending it supports is productive, that is, longer term and causes more growth than the burden of debt. Otherwise, taxes that are designed to pay interest on debt become a dead weight on economic growth. Unfortunately, in recent years most of the deficit has not been invested in growth. At the end of the Clinton years, the US budget moved into the black, a rare event, followed by the biggest tax-cut deficits in US history under Republican G. W. Bush. Tax cuts have gone to increase upper incomes with devastating results for the deficit, jobs, and growth. Job growth, in fact, slowed down and the economy went into the worst crisis since the Great Depression. On top of tax cuts, doubling down on bad policy, for the first time in American history, the elite decided to fight wars without paying for them, ballooning debt even more. Over comparable six year periods, Clinton’s tax increase was followed by a 16.2 percent jobs growth; Bush’s tax cuts were followed by a 4.8 percent job growth. For GDP growth, the score was Clinton, 26 percent; Bush,16 percent. For median income, Clinton, up 14.7 percent; Bush, up 1.6 percent. Bush claimed his policies would decrease national debt by $3 trillion; the debt went up by $1.7 trillion over the six years. Continuing the cuts raised the debt by $2.5 trillion over 10 years.

I have been unable to find any audit of where the tax cut money actually went. I only found: “Moody’s Analytics Chief Economist Mark Zandi estimates that making the Bush income tax cuts permanent would currently generate only 35 cents in economic activity for every dollar in forgone revenue.” A lot seems to have gone to personal consumption by the wealthy. One corporate mogul bought a bigger boat in Italy, for example. A lot must have gone into purchases of assets without increasing their productivity, that is, into houses, collectibles, and housing speculation. Unqualified buyers bought homes they could not afford and gullible investors trusted corrupt bankers, insurance companies, and bond rating agencies who pushed the Ponzi bubble higher and higher. Some of the money that went abroad came back from Asian exporters into US treasuries, an unproductive investment. Some of the money probably went into US growth and jobs. (If you know of a good quantitative analysis, let me know.)

The underlying reality is that, within some limits, taxes usually create more jobs and growth than does private spending, so long as the taxes are progressive and the money is wisely spent. Government does a better job because the private sector has a higher cost per job than government. Taxes shift money from high-cost jobs to a larger number of low-cost jobs, creating more jobs for the same amount of money. Consumer demand shifts from serving high income consumers, who spend less and save more as a percent of income, to average incomes who spend more of their income.

Keynes was right: slack economies can recover very slowly or government can prime the pump of demand for growth. Adequate taxes and anti-cyclical spending combined solve the problem. The late W. Bush and early Obama bailouts to the bankers and AEG who caused the problem, the stimulus, and the rescue of GM prevented a deeper recession. Recent Fed policy, however, seems misguided: lower interest rates do little good when businesses won’t borrow because consumers can’t buy because of unemployment.

The value of taxes for the economy is very well understood by the banks themselves who received government funds to maintain liquidity during the recession. The banks also forecast that lack of federal spending and its spillover into lower state and local spending will be a drag on the economy through 2021. California alone gets $79 billion per year, 40 percent of the General Fund, from the federal government.

So, more specifically, how should the money be spent and how should the taxes be increased? First, how to spend: Non-ideological economists agree that using the money for infrastructure, aid to states, temporary payroll tax reductions, and unemployment benefits would have been more productive for short-term demand and long term productivity. The tax cuts, by contrast, were like a quick blood transfusion from the weak to the healthy that in the end reduced the ability of the weak to buy much, undermining the long-term health of the wealthy, themselves. I am not, however, happy with payroll and unemployment ideas. I like what the CCC and WPA did and I’d like to adapt it to current needs. There is a lot of work not being done, and low to middle level skills are still needed. There are a lot of people willing to work for what they used to make or less, which has a low cost per job, is not inflationary and is not enough to keep them when better jobs come along with recovery. It’s a triple play: it gets work done, helps aggregate demand, and provides a social benefit totally superior to giving the affluent even more money.

Another issue is how taxes should be reformed, with five choices:

  • reduce taxes by raising fees,
  • raise rates above historic levels (tax rate increase),
  • restore rates to previously prevailing levels (tax rate restoration),
  • close tax loopholes, and
  • shift taxes from “goods” to “bads.”

Fees replace taxes: If a state lowers tax support for its colleges and raises tuition, is it a tax increase on students? For a social good like education, the fee approach is regressive. However, for private goods it requires beneficiaries to pay, which makes sense.

Concerning rate increases or restorations, the US is fortunate to not have to raise rates; it only needs to restore rates that prevailed during a better economy.

Concerning loopholes, they need to be understood as a budget expenditure, a tax budget
expenditure, no different from an outlay budget expenditure. Is closing a loophole a tax
increase or a budget cut? It’s both, but it is not a tax rate increase. Closing loopholes has four benefits: it reduces deficits, improves vertical equity, improves horizontal equity, and improves economic fair play. Vertical equity improves because more taxes come from some upper incomes, increasing the amount from all upper incomes. Horizontal equity improves because people with similar incomes are taxed in a similar way. Fair play improves by creating a level economic playing field by not using the tax code to promote market winners.

The tax code does hundreds of favors to vested interests reducing their taxes relative to other high incomes. The Joint Committee on Taxation and Treasury Department disclose the tax expenditure budget but only list the loopholes without adding them up. In 2011 Citizens for Tax Justice estimated $365 billion in subsidies for business and investment.

Tax expenditure budget spending is out of control, perpetuating itself, unlike the outlay budget, without annual review by Congress. Upper income people who do pay their share—and many pay much higher taxes than other high income people—should be more concerned about the unfairness to them and the distortion of markets, undermining market-based growth. Many giant corporations pay little or no tax. Corporate tax incidence is difficult to figure out, but assuming half falls on owners and half on consumers, the result is the same for individuals: corporate tax avoidance equals personal income tax avoidance. In June 2011 the Center for Tax Justice reported that 12 big corporations with profits of $57 billion per year paid taxes of minus $833 million. That is to say, they did not pay takes; on average, they received checks from the IRS.

We should shift taxes from “goods” to bads”: A simple carbon tax, increased gradually, is a tax on “bads” that can easily allow reduction of taxes on “goods” like earned income. This policy will not harm the economy, but, instead, shifts prices at the margin to create an incentive for real growth, improve US competitiveness, and reduce the cost of buying foreign fossil fuels. It will be difficult to catch up with Denmark and Germany; they are decarbonizing and growing sustainably.

“Our addiction to foreign oil is hampering our economic recovery and we desperately need investments in clean energy. We can address these pressing problems, while reducing our budget deficit and pollution, by enacting a simple carbon tax.” –Congressman Pete Stark, Sept. 2011.

Do you know of any other Representative stating the obvious?

Government can promote jobs and growth in the several ways outlined above, but does much more if it does what it is supposed to do. Both private and government investment help economic productivity, but in different ways. Government consumer protection creates consumer confidence, reducing the cost of selling. Government investor protection creates investor confidence, increasing the availability of capital. Government spending on natural resources and reducing pollution provides quality of life services and nature services of great economic value that the private sector is unable to provide. Government spending on health reduces what private business would spend or, absent business spending, increases worker health directly, promoting economic growth either way. Government spending on education has a pay-off in human capital essential for long term growth. Government spending on research provides technological capital used by business for growth. Under-funding government spending on social programs leads to high costs of criminality, jails, and prisons. The US prison population is so big it ,reduces the labor force, increasing the cost. The Advanced Democracies, as reviewed at, with a fraction of the US crime rate and a fraction of the costs, show how effective education and social programs can be.

European Financial Crisis: Euro weakens against the dollar, what does it mean?

Solvency vs. Liquidity: Some governments–especially Greece but also Spain and Italy–are insolvent. Governments that do not collect taxes and spend money inefficiently are headed for bankruptcy. At some point banks will stop buying their sovereign debt bonds and the government will only have tax income. It can refuse to pay on its existing loans but still will not have enough tax revenue to support its budget, leaving many without the money they were expecting. At this point, the weak lose and the strong survive on less than they had before.

Liquidity: Liquidity is the funds needed for loans for business. Businesses usually borrow to conduct business. The lenders have enough security and enough interest to feel they are doing okay. Security is usually created by lending only to those who can pay the money back, although the sovereign debt crisis is raising questions about the probity of the banks in making loans to government with large deficits. Businesses like to borrow because they can usually make a higher profit on its owned assets (equity). Businesses make money on its owned plus its borrowed assets. The loan only requires the cost of interest, leaving the rest of the profits to equity. The ratio of equity to debt is called leverage, with less equity meaning higher leverage and potentially greater profits. More leverage usually means greater risk. It is common for business assets to be about half equity and half debt which generally means the banks can accept a lower interest rate. If the loan is not repaid there would be enough assets as collateral to be seized (foreclosure) and sold to cover the loan.

Business borrowing is not essential, but, like mortgage loans, it is helpful because with minimum risk, lenders can get some return and borrowers can do more business.

Insolvency of governments in Europe is threatening the liquidity needed to do the customary lending that sustains the economy. If a bank can’t get its loan back, it has less to lend out again. Its capital is reduced by the amount of non-performing debt. It can only stop lending or charge a higher rate of interest, both of which are bad for business.

The US avoids this problem because the Federal Reserve has the power to loan to the rest of the US government however much it needs to cover US sovereign debt.  “The Fed” can do this because it is the monetary authority; it has to power to create money by writing a check. If the Fed stopped monetizing the debt (creating money to loan to the Treasury), interest rates would rise on Wall Street as lenders would have increasing doubts and greater concern to cover their risk. It at some point they would not lend to the US, a US version of what is happening in Europe might occur.

The Europeans have a bank like the US, but until recently it has refused to lend to insolvent governments, aggravating the liquidity problem. A few days ago, the bank announced a “back door” in Europe to do what the Fed does in the US: create money by buying bonds in the market place. In this case, the European Bank has said it will keep interest rates at 1%. If private bidders push interest over 1%, the bank will out-bid them to keep 1% interest.

The problem is that the back door policy resolves the liquidity issue but leaves the insolvency issue unaddressed. After over a year of intense negotiations, the European governments have agreed on an approach that does not quite do the job. The Fed has proven a propensity to bail out the US government no matter how irresponsible it is. Led by the influence of a responsible Germany economy, the Europeans and their bank have so far remained reluctant to follow suit. They say, why give money to Greece (i.e., buy Greek bonds) that might not be repaid when Greece is hesitant to tax and quick to over-spend?

The solution is a new European authority to discipline their member states, requiring a significant reduction in national sovereignty and some risk that the new authority would abuse its power–the same risk we run in the US (the federal government power over the states). American states can borrow like the European nations, but have been disciplined enough to stay within their borrowing capacity through huge spending cuts and some tax increases.

It seems possible to let a small economy like Greece’s go bankrupt with much more austerity than what Greeks are complaining about now. This model has helped Iceland to allow some of its banks to go bankrupt and not repay its sovereign debt. Iceland, however, was in much better shape fiscally (government taxing and spending) than Greece. A Greek default could easily precipitate the political will in Spain and Italy to implement fiscal reform which is the basis for their ability to borrow money. However, it is probably better if the European Union and the Greeks collaborate to reform taxes and spending. The banks are already losing half the money they lent to Greece, therefore it is reasonable for fiscal reform to do the rest, regardless of street protests.

The European debt crisis has pushed the value of the Euro down against the dollar, which will help lower the cost of European exports and increase the cost to Europeans of imports from the US. Unfortunately, the European crisis overshadows the US crisis from Americans. Our spending crisis has very simple causes which are ignored by the media, apparently for partisan and ideological reasons. The Republicans in the 2000’s abandoned fiscal conservatism for low tax-high debt policies. The tax cuts did not produce growth but fueled high-end consumption, overseas investment, and a speculative bubble, which caused a major recession and was exacerbated by abandoning market economics in favor of socialism for rich and capitalism for the poor. The government bailed out most of the companies responsible for the crisis. Its efforts to sustain liquidity were implemented in a way that subsidized insolvency due to the political influence of the big banks on Wall Street and AIG.

Ultimately, there is little economic difference between the hidden fiscal crisis of the unitary US government and the publicized crisis of the multi-governmental European system. Both systems are failing because of an inadequate implementation of Keynesian policies, which would require another blog to explain.

The fiscal crisis of the advanced countries is also diverting attention from a more important question: what countries, overall, are performing best, and how do they do it? For all their problems, the Western European countries within the EU are doing significantly better across a wide range of measures than the US. See for details.

Germany: country profile

Dave Johnson in his article, “Germany’s Economy Shows Government ‘Interference’ Works,” makes a valid point that the United States’ reluctance in making adjustments within the market has further solidified the exclusivity and position of the upper class. The true interference, Johnson holds, is the manner in which the larger businesses in the United States inhibit productivity and competition from smaller companies. Johnson exerts Germany’s system as an exemplary remedy. Germany’s cohesion between the government and the labor force has sustained Germany as an exceptional economic case even during a time in which most economies struggle to stay afloat. To Johnson, there is an apparent connection between Germany’s esteemed productivity and its health care, higher education, child care, and pension systems. Germany has sustained higher wages for employees, closer union ties, and closer cooperation between the industry and government sectors. Johnson implores his readers to consider Germany’s case carefully and to compare it to our case here in the U.S.

Highlights to the reasons for and benefits from Germany’s economic success are outlined below:

  • Industrial development policy that favors some manufacturing over others. The government is currently helping promote green manufacturing, for example.
  • Very high worker incomes and benefits
    • Hourly manufacturing compensation (wages plus benefits) was $48 in Germany in 2008, the most recent year surveyed by the Bureau of Labor Statistics, while it was $32 in the United States.
    • Six weeks vacation, by law
    • Health care: German “Medicare-For-All” takes the expense of health care off of the people and businesses; giant insurance companies play no role, allowing more personal income and more for business investment
    • Receive child care and pensions.
  • Strong unions: Germany requires worker representatives to hold seats on the boards of directors of companies, depending on the number of workers, so the companies take the interests of workers and communities into account.
  • Investments in worker productivity with government-funded research, vocational training, and policies to retain skilled workers. As a result, they have higher productivity.
  • Fossil fuel businesses have little influence, and German policy is successfully reducing GHG and increasing energy efficiency.
  • German tax policy prevents transfer of wealth to the wealthy, rather than mandating it.

New links posted

A new article from Citizens for Tax Justice entitled “United States Remains One of the Least Taxed Industrial Countries” has been linked on the Income Distribution page. The article indicates that of the 27 OECD countries, the U.S. ranks 25th in federal, state, and local tax totals.

Another article link has also been added to the Crime page. Families Against Mandatory Minimums contend in “What America Can’t Afford” that the U.S. prison is too costly to maintain and its incarceration numbers are incomparable to any other country in the world.

If you have any thoughts on either article or have other relevant articles presenting other insights, we’re very glad to hear them! Just drop a comment.