I typically delete comments that get within spitting distance of unpleasant, nasty, name-calling, etc.
I typically delete comments that get within spitting distance of unpleasant, nasty, name-calling, etc.
This has been a terrible few weeks for tax policy.
Donald Trump declares himself “smart” for tax avoidance; leaked returns show him to have claimed almost a billion in losses, much of which stems from ways in which the code privileges those selling real estate, which he presumably has used to write off taxes owed for years, and his proxies—Giuliani and Christie—declare him to be a genius, as opposed to a rich guy in a favored sector with a bevy of tax lawyers.
Ok, that’s all campaign mishegoss, but while all this rhetorical nonsense is transpiring, one of those proxies just noted—Gov. Chris Christie—is currently trying to enact some really bad tax policy, and he’s getting help from lawmakers in both parties, proving that you don’t have to be a Republican to screw this up.
Back in July, I wrote that New Jersey lawmakers seemed poised to do something misguided. Their gas tax, which is among the lowest in the nation and hasn’t been increased since 1990, is insufficient to fund their transportation infrastructure, so Democratic leaders in the legislature put an increase of 23 cents per gallon on the table.
What happened next was the unfortunate part. Both chambers and the governor started lining up tax cuts that would have to accompany the increase. A proposed horse trade in the state Senate would have increased the gas tax by scrapping the estate tax and some taxes on charitable deductions and retirement income, while the Assembly, with the support of Gov. Christie, would have slashed the state sales tax instead.
Eventually and predictably, the cuts outnumbered the increase. The Senate bill, in total, was expected to cost more than $800 million annually after the first year of implementation, the Assembly bill more than twice that amount.
As I asked back in July, where is it written that an overall revenue loss is the optimal outcome? There’s no question that NJ cannot meet its infrastructure needs on a tax that hasn’t been adjusted in decades. But in what world does that imply the need to deprive the state of funds needed for its safety net, education system, and other priorities?
Yes, the gas tax is regressive: low-income people spend a higher share of their income on gas. In this regard, the part of the new, merged deal that would increase the state’s Earned Income Tax Credit from 30 to 35 percent of the federal EITC is warranted. But that cost only amounts to 6 percent of the new gas tax revenue.
The cuts in the new deal include the complete elimination of New Jersey’s estate tax, the expansion of a tax exemption for retirement income for higher-income families, and a reduction of the state sales tax from 7 percent to 6.625 percent by 2018. By the time these and the other measures are fully phased in, they’ll cost the Garden State coffers about $1.4 billion per year, less than the $1.2 billion per year the gas tax is expected to raise (though it would allow enough borrowing to fund $2 billion annually in projects).
The cuts are structured such that there’s some goody in here for everyone. A lower sales tax sounds great to low- and middle-income households. If you’re extremely wealthy, the prospect of passing on millions of dollars to your heirs tax-free surely seems appealing as well. But if the citizens of New Jersey want their kids to have access to functioning roads, bridges, and highways, a world-class education system, adequate health care, and a safety net to catch them when they fall on hard times, they’re going to need to take a stand against shortsighted tax deals that put those things out of reach.
The legislature will vote on the deal tomorrow in a special session. As Vice President of New Jersey Policy Perspectives Jon Whiten points out, it would “disproportionately benefit well-off New Jerseyans while decimating the state’s ability to pay for essential services, promised obligations and other critical investments.”
Policymakers should reject this bill, instead demanding a clean gas tax update (given the fact that inflation has been eroding the value of the gas tax for two-and-a-half decades, raising it would be more of a restoration than something new). We can and must address New Jersey’s infrastructure issues without starving the rest of government of resources. The fact that Christie and legislators from both major political parties have thus far refused to do that speaks volumes to the tired nature of our cramped tax debate, in which what’s playing out in New Jersey is but one salient example of a much larger problem.
For reasons I’ll get to in a moment, I was really struck by the title of this excellent, important new paper by my CBPP colleague Kathleen Romig: Increasing Payroll Taxes Would Strengthen Social Security.
It is well understood that Social Security’s financing needs shoring up; we’ve been drawing down the trust funds to meet current obligations and by 2034 the funds will be exhausted. That’s often mistakenly taken to mean that Social Security will no longer pay out benefits, which of course is wrong: 86 percent of its income comes from payroll taxes, which will continue to support the program, allowing it to pay about three-fourths of scheduled benefits in 2035 and beyond. To be clear, that is a totally unacceptable outcome, and one that could be—must be—avoided using Romig’s roadmap. She is absolutely correct when she describes, contrary to the hysteria I often hear on this issue, that Social Security’s shortfall is “significant, though manageable.”
In fact, the shortfall amounts to 1 percent of GDP over the next 75 years. So how can we close that gap? Much of the solution will have to involve increasing the payroll tax revenue that, as noted, is the mainstay of the program’s funding.
Romig’s key argument is that such an increase is justified by recent trends: “Social Security’s tax base has eroded since the last time policymakers addressed solvency in 1983, largely due to increased inequality and the rising cost of non-taxed fringe benefits, such as health insurance.”
But Americans wouldn’t stand for reversing that erosion through paying more into the program, right? In fact, Romig notes that “…the majority of Americans oppose cuts to Social Security and support strengthening the program by contributing more in taxes.” Other than Medicare, there may be no other government program that has this kind of support. So we should tap it.
To do so, she suggests three revenue-enhancing changes:
The two figures below show the extent to which the compensation base of the program has eroded, due in part to rising earnings inequality pushing a larger share of earnings above the payroll cap. Note first how that total amount of compensation has drifted about the taxable earnings base. The base for the payroll tax used to be three-quarters of total compensation; now it’s about two-thirds.
There are two main reasons for that: higher inequality and the fact that an increasing share of compensation goes to health care and other fringes that are outside the payroll tax base.
The earnings inequality problem is clear in the next figure. The last time we addressed the shortfall, the payroll tax covered 90 percent of earnings. Now it covers only 82 percent.
It is often said that there are three legs to the retirement-security stool: savings, pensions, and Social Security. In benighted DC discussions, Social Security is often derided as the shakiest leg. In fact, it’s the firmest, as decades of wage stagnation and risk shifting (both the shift from defined-benefit to defined-contribution pensions and the simple shedding of pension plans) have undermined the other two legs.
Romig’s big three ideas are great ways to make the strongest leg of the stool even stronger, through broadening the base to correct the factors responsible for its erosion. Yes, that’s a tax increase, which is why I was struck by the boldness of her title. We are in an era where even the Democratic candidate for president will not propose tax increases on any but the top 5 percent; where we are somehow supposed to fund our transportation infrastructure on a gas tax that’s been frozen in nominal terms since 1993.
It is only in magical lands that we can get what we want and need without paying for it. In the real world, this is the way forward, and kudos to Romig (and CBPP) for saying so.
Before the first presidential debate fades into the next news cycle, there are three economic points that bear revisiting:
We need a new paradigm for trade policy. The outsider campaigns of Trump and Sanders, along with the realities of many people and communities hurt by globalization, have elevated international trade as a major issue in this election. Trump advertises an unrealistic nostalgia, a return to a time when trade flows were a fraction of their current size. His word salad on the issue the other night underscores the fact that there is no coherent plan to get back there even if we wanted to. Clinton correctly points out that “we are 5 percent of the world’s population; we have to trade with the other 95 percent.” She aspires to reshape, not restrain, globalization.
What’s needed is a framework for the type of “smart, fair trade deals” that Clinton says should be the norm. Yes, that framework should include enforceable disciplines against other countries’ currency management, something both candidates support. But much more is needed.
Trade expert Lori Wallach and I just published our proposals in this space, which include both process reforms and new negotiating objectives. Our ideas, if adopted, would increase the transparency of trade negotiations, reduce corporate influence over the eventual agreements, discontinue protectionist practices and provisions that put sovereign laws and taxpayer dollars at risk, and strengthen environmental, health, and labor standards both here and abroad.
Trickle-down economics still doesn’t work. Trump bragged that his “tax cut is the biggest since Ronald Reagan” and asserted that “[i]t will create tremendous numbers of new jobs.” To say the least, the empirical record belies that assertion, as I and others have often noted. The graph below shows that, on the individual side of the tax code, there is no historical correlation between the United States’ top marginal tax rate and employment growth, a far different relationship than you’d expect to see if claims like Trump’s were correct.
On the corporate side of the code, tax expert Bill Gale and his colleagues summarize that “there is virtually no evidence that broad-based [corporate] tax cuts have had a positive effect on [economic] growth…That has been amply demonstrated at the national level, where tax cuts have eroded revenue without discernable effect on economic activity.”
One of the most striking and recent real-world rebuttals to the narrative Trump continues to push comes from Kansas, where one of his top advisors made similarly rosy predictions about a massive tax cut that “have proved strikingly inaccurate.”
As I’ve said before, if facts could kill trickle-down propaganda, it would have died long ago. The one thing I can say is that, while it does seem to be the case that such tax plans may buy some votes from their beneficiaries, the rest of the electorate doesn’t buy it, and there are fortunately a lot more people in the latter group.
Federal Reserve policy matters and deserves discussion during election season. As I recently wrote, Trump’s comments about the Fed’s decision-making were completely wrong. But the fact that the Fed came up in the debate was a positive; “there’s no reason such an important public institution – one with such a large impact on people’s lives – should be off limits in political debates.” It was also great to see some discussion of the Fed during the Democratic primary, when both Bernie Sanders and Clinton indicated support for making the nation’s largest bank more representative of the general population.
There’s much beyond these points that matters to the economy, of course, and last night’s debate didn’t even mention several issues that affect millions of people and which the next president absolutely must address: poverty, health care, and immigration, to name a few. But if we can get our trade policy right, debunk trickle-down tax nonsense once and for all, and inject progressive monetary policy discussions into the political debate, we’ll be introducing a lot more substance than I dared to hope for in an election season that’s been a touch devoid of such matters.