Pay Up

February 10, 2019

by Steve Stofka

When I was growing up in New York City, each kid’s name was shortened to one syllable, two at the most. New York is a busy town; people didn’t have time to pronounce long names. Guillermo became Will or Bill.  An exotic name like Anastasia was shortened to a rather pedestrian Ann. Melodic names like Florinda became Flo. In a sign of the changing times, N.Y. Representative Alexandria Ocasio-Cortez has became known as AOC. That’s a generous three syllables!

She has proposed a 70% Federal income tax on Adjusted Gross Income over $10 million. That’s a straight 70% haircut on only the income above that threshold. Deductions, credits and favorable tax treatment for capital gains could apply to income below $10 million but everything above that is a bada-bing-bada-boom 70%.

How much revenue would that generate? I used IRS sample data from 2016, the latest available (Note #1) and calculated an extra $218 billion collected on 15,000 returns for tax year 2016 (Note #2). This would have been an additional 14% over the $1550 billion collected in individual income taxes that year (Note #3). It would make up for the corporate taxes that are not being collected because of the 2017 Tax Act.

If AOC’s proposal were passed by the House, it would not make it out of the Senate Finance Committee, which is controlled by Republicans. If it did become law, it would incentivize the accountants and lawyers of the super-rich to craft clever solutions to avoid the tax. Most of them can buy citizenship in another country. They can put income in tax havens (Note #4). They can make hefty political campaign contributions to buy loyalty in Congress.

The rich complain about taxes. Yes, they do pay much of the income taxes collected. It should be all of the income taxes. The 16th Amendment was “sold” to the American people as a tax that would apply only to the rich, the top 1% of incomes. When the amendment was passed in 1913, half of the population worked in farming and thought that the tax would never impact their lives. It didn’t until a few months after the U.S. entered World War 2.

Under FDR, the tax base increased ten-fold and now affected 42% of the population. FDR called it the “greatest tax bill” (Note #5). The American people didn’t think so. Many were not paying their income taxes. As the fate of nations lay bloody on the altar of history, FDR regarded tax delinquency as a personal disloyalty. He turned to economist John Kenneth Galbraith who suggested that employers should be forced to become the tax collector for the government. In 1943, Congress passed legislation requiring that employers withdraw taxes from their employees’ paychecks. Employing more than 7% of the workforce, the Federal government was the largest employer (Note #6). Before employees could feed their families or pay their rent, the government had its taxes.

It’s time for Democrats and Progressives to undo what they did under FDR. World War 2 ended 75 years ago. Let’s return to the original intent of the 16th Amendment and impose most of the income tax burden on the rich.

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Notes:
1. 2016 IRS tax data by adjusted gross income
2. A screenshot below of the IRS spreadsheet with my calculations of revenue collected.
3. A breakdown of 2016 federal revenue
4. The Rolling Stones, Bono, and Mark Knopfler of Dire Straits took advantage of tax havens to avoid paying hefty U.K. taxes on royalties
5. Highlights of IRS history
6. Federal Employees CES9091000001 series / PAYEMS (All employees) series in the FRED database

IncTaxbyAGI2016.xls

The Tug of History

February 3, 2019

by Steve Stofka

As we receive our income tax forms, we can be reminded of the reach of history into our daily lives. Over a hundred years ago, the 16th Amendment was passed as a way of paying Civil War debts and pensions. We are paying income taxes because of a horrific war that occurred 150 years ago (Note #1).

Since the recession, politicians on both sides of the political aisle have proposed some version of a universal basic income (UBI) that would replace many individual federal assistance programs. New idea? No. Fifty years ago, President Nixon and more than a thousand economists proposed an income plan to replace the existing welfare plan (Note #2). Democrats opposed the idea because they feared that the proposal would divert some aid from black families in the North, who were Democratic constituents, to white families in the South. Many southern Democrats switched parties in reaction to the “imposition” of civil rights legislation passed by northern Democrats in the 1960s (Note #3). The North and South have traded political parties since the Civil War but the animosities of that war guide current legislation and the fortunes of American families.

The recent government shutdown halted paychecks for many thousands of federal employees. The legislation that enables Congress or the President to shut down government was a budget act passed in 1974 by a Democratic Congress. Following President Nixon’s refusal to spend money allocated by a Democratic Congress, Democrats wanted more control of the budget process. Nixon was afraid that the additional spending would further fuel inflation (Note #4).

Two years later, Jimmy Carter was elected President and had to fight with his own Democratic party for budget control. The government was shut down five times during Carter’s four-year tenure, the most of any President. The legislation that emerged from a battle between a Republican President and a Democratic Congress 45 years ago laid the groundwork for today’s battle between a Republican President and a Democratic House. As the families of some Federal workers waited in line at food pantries last month, they might not have appreciated being victims of a historical political feud.

Prompted by the prejudices, concerns and animosities of past generations, we walk through our lives with a legal leash tied around our necks. According to the utopian rhetoric of the Declaration of Independence, our leashes should all be same length. Political and economic realities contradict those sentiments, and underlie the long history of housing, job, voting and regulatory discrimination in this country.

If my family or group enjoys a longer leash, another group must endure a shorter leash. Any equality we reach is a temporary balance in the tug of war for a longer leash. Equality is a happenstance, not a permanent right we have. “But it shouldn’t be that way!” an idealist might protest. It is that way. That’s history.

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Notes:
1. A history of 19th century income tax legislation following the Civil War, and the court decisions which nullified them.
2. Family Assistance Program proposed by Nixon. He and other economists like Milton Friedman called it a “negative income tax”
3. A timeline of the Presidential electoral map
4. A short account of the political impetus behind the act . A summary of the 1974 Budget Act.