Category: income taxes

Politics and Principles

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July 13, 2025

by Stephen Stofka

Sunday morning and another breakfast with the boys as they discuss world events and persistent problems. The conversations are voiced by Abel, a Wilsonian with a faith that government can ameliorate social and economic injustices to improve society’s welfare, and Cain, who believes that individual autonomy, the free market and the price system promote the greatest good.

Abel sat back in his seat as the busser poured some coffee. “I wonder how much Trump’s tariffs on Brazil will raise coffee prices.”

Cain waited a moment until the busser left. “I wish Senate Republicans would challenge him on that. I mean, we export more to Brazil than we import. Congress just cowers in the corner while Trump engages in all these petty political vendettas.”

As soon as the busser left, the waitress arrived to take their orders. Abel tucked his table napkin into his belt. “A few weeks ago, we were talking about inequality before and after taxes. Last week, Paul Krugman wrote about the growing inequality since  the 1980s. He mentioned a paper where the authors recommended a 73% top marginal income tax rate, more like the rates this country had in the period after World War 2 (Source). There was more equality, and we paid down the war debt.”

Cain tilted his head slightly. “An accountant will tell you that it’s the effective tax rate that counts more than the marginal rate. That’s the bottom line. So, in the 1950s and 1960s, there were high marginal tax rates, but the rich had so many tax write-offs available to them that it reduced their effective tax rate to about 30 – 35% (Source).”

Abel argued, “Well, that’s still higher than the current effective rate, about 25% (Source). I mean, back in 1980, the top 1% got about 10% of all the income in the country. Now, they get like 20% (Source, Slide 11).”

Cain raised his eyebrows. “And how much has their share of taxes gone up? The Tax Foundation analyzed income tax data from the IRS for 2022. The top 1% had 22% of adjusted gross income but paid 40% of income taxes. The bottom 50% had 10% of the income but paid only 3% of the tax (Source). So, the top half are paying almost all of the income tax burden but liberals like AOC and Bernie Sanders don’t think they are paying their ‘fair share.’”

Abel argued, “Well, the earned income tax is a refund of taxes to those families in the bottom 10%. That distorts the figure for the lower half of incomes. I’ll bet if the earned income tax credit were excluded the bottom half pay a lot more than 3%.”

Cain shook his head. “The credit is about 2% of income taxes collected (Source). That will make only a slight difference in the percentages. The fact remains that the top half are carrying all of the burden already. And another thing. The federal government collected 20% of GDP in 2022. That’s already more than 10% above the long-term average. The government is already taking a big chunk of taxpayer money and still running up big deficits. The problem is spending, not taxes.”

Abel rolled his eyes. “The problem is inequality. Higher taxes help tackle that problem.”

Cain shook his head. “Economic growth and higher productivity helps tackle the problem. Hey, change of subject. I wanted to ask you about the abortion decision by the Wisconsin Supreme Court a few weeks ago. Did you have a chance to dig into that?”

Abel looked into the distance as he tried to recall. “Oh, yeah. That state’s Supreme Court held that an 1849 law banning abortion had been implicitly repealed by subsequent laws. I had never heard of ‘implied repeal’ of a law. It’s when a legislature doesn’t expressly repeal a law but passes a number of laws afterward that can only be valid if the first law is assumed to be void. Therefore, an implicit repeal.”

Cain smirked. “Declaring a law void seems to me like the judiciary was overstepping its bounds.”

Abel nodded. “It was a 4-3 decision and boy, the dissent from the conservative minority made that point very passionately. The majority used a 1941 decision from that same court and, wait, I’ve got it here. Back in 1941, the court said that it had a duty to treat conflicts in separate laws as though both were operative, ‘if possible.’ Note the ‘if possible’ part. So that court stressed that implied repeals should only be recognized, another quote, ‘when the intent of the legislature clearly appears’ (Source).”

Cain sighed. “Let me guess. The conservatives didn’t think that the subsequent laws demonstrated the clear intent of the legislature.”

Abel shrugged. “Right. Those subsequent laws were passed after Roe v Wade. So, of course, the legislature treated the 1849 law as moot because the Roe decision said those abortion laws were unconstitutional. Would those laws have been passed if the Roe decision had not been handed down? Like so many things in this life, it’s not so clear.”

Cain frowned. “The Roe decision sparked a resistance movement among conservatives. A decade later, John Leo founded the Federalist Society (Source). To the conservative justices on the Wisconsin Supreme Court, the Dobbs decision to overturn Roe basically invalidated, or lessened the significance of those laws passed after Roe.”

Abel said, “The majority quoted a Pro Publica article that sepsis cases were up 50% since Texas outlawed abortion after Dobbs. Maternal deaths were up by a third (Source). So the majority was also considering the consequences of their decision. A few weeks ago, I was talking about Justice Breyer’s book Reading the Constitution. He wrote about the struggle in judicial interpretation. Rules or values. Breyer chose values. Conservatives prefer rules. Breyer would consider whether the consequences of a decision undermined the values a law protected. Conservatives preferred rules with less regard for consequences. Breyer and Scalia would often debate in public on these types of interpretation.”

Cain smirked. “In last year’s presidential immunity cases, the conservatives were all about consequences. In oral arguments, Gorsuch said he was looking past the actions of Trump because the court was writing ‘a rule for the ages’ (Source). What pomposity. Like they were handing down the Ten Commandments.”

Abel rolled his eyes. “Yes, but only conservative decisions are rules for the ages. Apparently not the Roe or Casey decisions that validated a right to have an abortion. Not guns laws or campaign finance laws. These conservative justices demonstrate such a lack of consistency and clarity in their decisions. Anyway, I wanted to get your feedback on the Big Bogus Bill, as you call it.”

 Cain replied, “Well, I hate this kind of legislation no matter which party pushes it through. Reconciliation bills are a grab bag of legislative candy. Who invented the reconciliation process? Democrats, of course. My biggest objection is that the bill increases the deficit when the economy is good.”

Abel interrupted, “The federal debt gets larger every year, the rich buy that debt, and the federal government pays those rich people interest on the money it didn’t tax them. It’s a reverse tax, like an unearned income tax credit for rich people.”

Cain smiled. “That’s one way of looking at it. But remember that, when Trump left office in 2020, the interest on the debt was 15 cents for every dollar the federal government collected. When Biden left in 2024, it was 22 cents of every dollar (Source).”

Abel argued, “Well, the interest on the debt was relatively a lot worse under Reagan, Bush and most of Clinton’s term. What’s happened since then? Twenty years ago, Republicans started giving away tax cuts to rich people.”

Cain replied, “Whoa, there, pardner. All the entitlement programs that liberals passed have been the main contributor to the debt, if you ask me. We talked about this last week. Medicaid spending is up to a trillion by now. That’s more than 3% of the country’s GDP. In 1990, we spent five times as much on defense as on Medicaid. Now they are almost equal (Source). This country needs to have a conversation about our priorities.”

Abel sighed. “Health care is an implied right. Life, liberty and the pursuit of happiness is not possible without health care.”

Cain argued, “Defense is an explicit right. The founders stated that in the first sentence of the Constitution (Source).”

Abel interrupted, “And the general welfare was in that same sentence. Health care is a key component of the general welfare.”

Cain shook his head. “They meant the common welfare, the welfare common to everyone.”

Abel showed exasperation. “We argued about this last week and how many times before that? What does ‘general welfare’ mean? So, didn’t you like about the bill?”

Cain replied, “I thought it was dumb that they are cutting back on incentives for wind and solar energy. I’m an ‘all of the above’ guy when it comes to energy. So is Texas, a red state.”

Abel rolled his eyes. “The White House says that they are reducing energy costs by expanding fossil fuel production (Source).”

Cain smirked. “Fine, but why hobble wind and solar production? It’s stupid. It’s just vindictive politics. I’m sick of this childish shit from people who are supposed to be the leaders of this country. This is the kind of stuff kids in middle school do.”

Abel replied, “Seniors get an extra tax break. An older couple can deduct almost $48,000 (Source). According to the Census Bureau’s Supplemental Poverty Measure, 14% of seniors were poor, so this might help reduce that. Help them pay for medical expenses (Source).”

Cain shook his head. “I liked the simpler deduction in the 2017 so I’m glad they kept that. The extra deduction for seniors won’t help poorer seniors much. This deduction basically eliminates income taxes for seniors in the bottom 50% who barely pay income taxes as it is (Source). Poor seniors won’t get a refund if their taxable income is negative. It’s seniors in the top half who will benefit most from the extra deduction. This government already gives plenty to seniors. Too much, if you ask me.”

Abel asked, “Did you see anything you liked?”

Cain replied, “I like the ability to fully expense short-term capital investment. Better allowances for depreciation which is pretty high in tech industries. The Tax Foundation has an article and video explaining some of the good, bad and ugly in the bill (Source).”

Abel asked, “What about the work requirement? Like half the people who are aged 50-64 and on Medicaid are disabled (Source). Ok, maybe some can work. Can they work 20 hours a week to stay on the program? Who knows?”

Cain nodded. “I liked the discipline of it, but they went overboard. Do the states have the resources to monitor all these requirements? No. Does the law give the states some flexibility or specific funding to carry out the law? No. This is another one of those unfunded federal mandates. It’s sad to see Republicans using the Democrats’ playbook.”

Abel said, “I wish Murkowski had not buckled to pressure and just voted no on that bill. She said she didn’t like the bill but hoped that the House would change some provisions. What kind of spineless response is that? The Tax Foundation estimated that continuing these tax cuts will add $4.5 trillion to the debt over a ten-year window (Source). A bunch of old people in Congress passing laws that benefit the rich and the old, then sticking our kids with the bill.”

Cain smiled as he glanced at his watch. “That reminds me. I can’t remember whose turn it is. I got to go help my daughter with something.”

Abel replied, “Yours. Hey, I hear people like the new Superman movie. A story about someone who acts on principle rather than political expediency.”

Cain laughed as he slid out of his seat. “Most of us try to live up to our principles. Yet we have leaders who pay more attention to political expediency than principles.”

Abel looked up at Cain. “The saying goes, ‘you can’t govern if you don’t win.’ Unfortunately, our political system and news cycle focuses on the contest, the winning, rather than the principles.”

Cain nodded as he turned to leave. “Hmmm, something to think about. I’ll see you next week.”

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Image by ChatGPT

Taxes and Investment

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March 17, 2024

by Stephen Stofka

This week’s letter is about the effect of tax revenues on government, on the economy and the role that taxes play in our lives. Tax revenues are the income of a government at all levels – federal, municipal and state. Those revenues fund the courts and prisons, the police, the roads and cultural institutions that connect people together, yet no one wants to pay them. The essence of a tax is a private payment for a public benefit. Few object to the opposite, a public payment for a private benefit when they are on the receiving end of such a subsidy.

Regardless of the amount that people pay in taxes, they feel that they have a right to complain about any good or service that a government provides. It’s in the Constitution. First Amendment – freedom of speech. For those who work in a democratic government, the unpopularity of taxes presents an existential conflict. Paul Samuelson (1947) pointed out the difficulty of designing a purely lump-sum tax or subsidy. A lump-sum tax is like a head tax, a fixed amount of tax regardless of a person’s circumstances. Under such a system, the wealthiest and poorest person pay the same amount of tax. This violates a sense of proportionality that is a guiding ethical principle.

A fixed single rate of tax answers concerns of proportionality. As an example, many districts enact a set rate for residential real estate. However, states have been reluctant to adopt a single or flat rate of income tax. In 1987, Colorado was the first state to adopt a single tax rate, according to the Tax Foundation. Other states were slow to follow Colorado’s lead and less than a quarter of the states have adopted a flat tax rate. Revenue and proportionality are not the only concerns. By its nature, a democratic government is not fair. People elect representatives who will maximize their benefits and minimize their taxes. Politicians naturally want to lighten the tax load of regular voters. In a flat tax system like the one in Colorado, politicians have amended the definition of taxable income to benefit some taxpayer groups at the expense of other groups. Pension income like Social Security and state retirement plans is not subject to state income tax.

The federal government and the majority of the states enact a graduated income tax that penalizes effort at the margin. An employee who works an occasional day of overtime may be surprised by the additional taxes taken out of that additional pay. Payroll software treats that extra amount as though the employee worked overtime every week, increasing the annual income used to calculate the tax rate on that additional income.

Republican politicians routinely champion their principle of low taxes. The justification for the tax cuts in the 1980s was based on an idea put forth in 1974 by the economist Arthur Laffer who drew an inverted curve on a napkin to illustrate the idea that higher tax rates might lead to lower tax revenues. Despite repeated evidence that lower tax rates lead to lower tax revenues, Republicans have clung to the idea. In the graph below, I have charted federal tax revenues as a percent of GDP. They do not include Social Security taxes.

According to the theory behind the Laffer Curve, lower taxes should spur more investment, more output, higher incomes and higher tax revenues. As we see in the graph above, tax raises led to higher revenues soon after they were enacted. Tax cuts did not. Believers in the theory claim that the cuts can take several years to work but this makes it hard to identify causality. In the graph below, I have added in investment as a percent of GDP.

The Bush tax cuts in 2001 certainly helped arrest the decline in investment following the “dot-com bust.” However, too much of that investment went into residential housing and led to the housing boom that preceded the financial crisis. Those tax cuts expired in 2010 and both investment and tax revenues improved. That raises the question: did higher taxes in 1993 and 2010 produce more investment? On principle, it seems unlikely. Following the 2017 tax cuts known by their acronym TCJA, investment again reversed a decline but had little effect on tax revenues. The rise in revenues as a percent of GDP was due to the fall in output as a result of the pandemic.

According to the neoclassical economist’s narrative, savings provide the source of investment. Taxes reduce savings and therefore reduce investment. Italian economist Pietro Sraffa (1932) reiterated a point made by Sir Dennis Robertson that savings were an inducement to more investment as well as a source of investment. Investment occurs in the period before consumption. People have money to save for two reasons. The first is that their incomes increase from new investment in production. Secondly, there are not enough goods in the marketplace to induce them to spend that extra income. The mismatch in supply and demand gives companies pricing power. Investors rush in to take advantage of the additional demand and the flow of new savings gives banks the confidence to make more loans.

For the past thirty years, federal revenues excluding social security taxes have averaged 17% of GDP. For that same period, the government spent 18.6% of GDP. The deficits have been persistent because the federal government consistently spends more than it taxes, an analysis confirmed by the Congressional Budget Office in a recent report. Republican lawmakers try to choke tax revenues to “Starve the Beast” – the beast being the size and reach of the federal government. To Democratic policymakers, our society needs constant remodeling, so they always have a plan for extra tax revenue. Neither party seems willing to resolve this political push-me-pull-you and the public has become used to deficits. There is always one more war to fight, one more wrong to right.

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Photo by Kelly Sikkema on Unsplash

Keywords: tax cuts, investment, taxes

Samuelson, Paul Anthony. (1947). Foundations of Economic Analysis. Harvard University Press.

Sraffa, P. (1932). Dr. Hayek on money and Capital. The Economic Journal, 42(165), 42. https://doi.org/10.2307/2223735

The Free Market Myth

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November 19, 2023

by Stephen Stofka

In this week’s letter I will continue to look at subsidies. Subsidies are created by legislation or agency interpretation that dispenses benefits to people, businesses and institutions. There are two forms of subsidy: a monetary credit of some sort, and an ownership credit, i.e., the granting of a property right. The monetary form includes tax credits and tax expenditures that can be calculated or estimated in dollar amounts. Last week, I noted that some of the biggest tax expenditures were the non-taxability of employer paid health insurance premiums and pension plans. The ownership form includes water rights and land use rights. Unlike the right to vote, these are rights related to the ownership of a physical property or the benefits of a property.

An ownership subsidy can be indirect. A century ago, the western states divvied up water rights to the Colorado River according to the doctrine of prior appropriation which mandates that if one party does not use their share, it is available to the other parties. Water is a scarce resource in this arid region of the country so this principle makes sense. In the wetter eastern states, water rights are based on a common law riparian system where ownership of the right is not coupled with use. Federal water rights are based on this common law system so there is an inevitable conflict whenever the western states cannot resolve their allocation treaties. Today, Colorado does not use all of its allotment while California uses more than its allotment. California does not send the state of Colorado a check every year for the water they use and is a form of indirect subsidy.

Monetary subsidies include agricultural subsidies that I discussed last week. Others include tax credits for buyers of electric cars and homeowners who install solar panels. The oil and gas industry as well as renewable energy producers receive many tax credits. Spending on public transportation includes subways, buses and light rail as well as the roads and highways that motorists use to get to work. Subsidies that support social welfare include public and private schools as well as the school vouchers doled out to parents of schoolchildren. Support programs include subsidies for housing, food and health expenses that involve many tangled cross subsidies. A large retail company can offer discounted merchandise by paying their employees lower wages and the reduced income makes those employees eligible for social assistance programs.

In this jungle of subsidies, it is difficult to compute a net subsidy benefit or deficit. Two-thirds of a homeowner’s property tax might support public schools in their district but they have no kids. Is that fair? They shop at a discount retailer and save hundreds of dollars annually because the retailer can pay its employees lower wages. When this homeowner buys gas, they provide a small subsidy to fossil fuel producers and the farmers who grow corn for ethanol. They buy milk at a lower price because of a government milk support program that is paid for by all taxpayers, even those who do not drink milk. If they eat hamburger, they benefit from grazing subsidies on federal land. The homeowner does not use bus or light rail but they live in a district that includes a sales tax for those systems. Why can’t we just have a free market with no government interference?

The concept of the free market is a useful abstraction but a dangerous idea when politicians and economists advocate for that reality. A “free market” and a “fair market” are oxymorons. A market cannot be free of government influence because all three branches of government are adjudicators, instrumental in awarding and enforcing property claims and the rules of exchange. Whatever the form of money used in a market, governments regulate it. To be fair, a rule giver would treat everyone equally but the world is composed of discrete goods and services that are not infinitesimally divisible. We live in a “clumpy” world and there is no universal standard of fairness to divide the clumps. Some people advocate for equality of opportunity. Others argue for equality of outcome. These abstractions help us analyze the world but we cannot build a society with either and retain a dynamic flow of both opportunity and outcome.

Governments award monopolies for the public good. Companies secure monopolies and market restrictions from government to reduce competition. The government is part of the market as a buyer of goods and services. Some authority must regulate the exchange of ownership that accompanies the exchange of goods and services. The protection of person and property in a market requires either a police presence or an impromptu coalition of people who enforce rules with force if necessary. Some authority must certify weights and measures or a “free market” becomes a “market of force,” a melee of arguments and fights.

We live our lives in a storm of electromagnetic waves, unaware of most of them but dependent on many of them. We rarely make a transaction without the involvement of some subsidy yet many of us live with the illusion of independence. Some pay more in income tax or property tax. Some help coach the school soccer team. As nodes in a social web we cannot calculate the cost of our contribution to the strength of that web. At any point in time some of us contribute more, some less. Over a lifetime our contribution varies from less to more and less again. Our society flourishes when we spend less energy keeping score.

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Photo by Jezael Melgoza on Unsplash

Keywords: monopoly, public goods, property rights, water rights

A Broader Inclusion

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November 27, 2022

by Stephen Stofka

Hope everyone had a good Thanksgiving. This week’s letter is about a type of income that we don’t often think about, how that affects asset values and a proposal to increase homeownership. With left over buying power, people purchase assets in the hope that the buying power of the asset grows faster than inflation. There are two types of assets: those that produce future consumption flows and collectibles whose resale value increases because they are unique, desired and in limited supply. An example of the first type is a house. An example of the second type is a painting. Let’s look at the first type.

House Equals Future Shelter

A house is a present embodiment of current and future shelter. The value of that utility depends on environmental factors like schools, crime, parks, access to recreation, shopping and entertainment. These affect a home’s value and are outside a homeowner’s control. A school district’s rating in 2042 may be quite different than its current rating. Our capitalist system and U.S. tax law favors home ownership in several ways. The monthly shelter utility that a home provides is capitalized into the value of a property. Every consumption requires an income, what economists call an imputed rental income. Two thirds of homes are owned by the person living there (Schnabel, 2022) and a little more than half are mortgage free. Unlike reinvested capital gains in a mutual fund, this imputed income is not taxed to the homeowner. Let me give an example.

If the market rate for renting a similar home were $2000 a month, that is an implicit income to the homeowner. Because there is no state or federal tax on that income, the gross amount of that $2000 would be about $2400. That’s almost $30,000 a year. After monthly costs for taxes, insurance and maintenance, the annual implicit operating income of the property might be $25,000. At a cap rate of 5% (to make the math easy), the capital value of the property is $500,000. Each year, Congress requires the U.S. Treasury to estimate the various tax expenditures like these where Congress excludes certain income items from taxes. The implied income on owning a home is called “imputed rental income” and in 2021 the Treasury (2022) estimated that the income tax not collected was $131 billion. How much is that? A third of the $392 billion paid in interest on the public debt. If we did have to pay taxes on that imputed income, it would lower the value of our homes. For many decades, Congress has not dared to include that implied income.

Mutual Fund Capital Gains

Let’s return to the subject of reinvested capital gains in a taxable mutual fund held outside of an IRA or pension type account. Some of what I am about to say involves tax liability so I will state at the outset that one should consult a tax professional before making any personal buy and sell decisions. When some part of a fund’s holdings are sold, a capital gain is realized from the sale and paid to the investor who owns the mutual fund. If the investor has elected to have dividends and capital gains reinvested, the money is automatically used to repurchase more shares of the mutual fund. The balance of the account may change little but there is a taxable event that has to be included in income when the investor completes their taxes for the year. Many mutual fund holdings recognize capital gains in December.

Mutual fund companies provide the tax basis or unrealized gain/loss for each fund but often do not include that information on the statement. The unrealized gain is the price appreciation has not been taxed yet. For example, the dollar value of a fund may be $50,000 and the unrealized gain $5,000. This is more typical of a managed fund than an index fund which does not adjust its portfolio as frequently as a managed fund. If an investor were to sell the fund to raise cash, they would pay taxes on the $5,000, not the $50,000. The unrealized gain in an index fund might by 70% of the value of the fund. If the fund value is $50,000, the unrealized gain could be $35,000 and the investor would owe taxes on that amount. An investor can minimize their tax liability with a judicious choice of which fund to sell. Again, consult a tax professional for your personal situation.

Affordable Homeownership

Let’s visit an imaginary world where people do not have to pay property taxes outright. Each year they can elect to sell a portion of their property to the city or other taxing authority. Cities sometimes place tax liens on properties when a tax is not paid. This would be like a voluntary lien making the city a temporary part owner of the property until the homeowner sells it.

Imagine that a homeowner owns a home worth $400,000. For ten years, they have elected to have the city deduct an annual $2000 average property tax from the value of the home. Over the ten year period, the accrued sum is $20,000 plus an interest fee that is added to the principal sum of the tax. These voluntary tax liens would be visible to a lending institution so that the sum would lower the home’s value for a HELOC, or second mortgage. The city would report that annual amount each year as an imputed income to the homeowner and the homeowner would have to pay income taxes on it. At a 20% effective federal and state tax rate, the out-of-pocket expense would be about $480 on $2000. After the 2017 tax law TCJA, property taxes are no longer deductible so the homeowner has to earn $2400 to pay the $2000 tax outright. There is a slight change in income tax revenue to the various levels of government. When a home is sold those tax liens would be paid back to the city.

Why don’t we have such a system in place now? In the U.S. private entities own most of the capital. Some people would be uncomfortable knowing that a government authority had some legal claim to their property but they could opt out. In a pre-computer age, the accounting would have been a nightmare. Such a system is feasible today. Mutual fund companies have demonstrated that they can track the complex capital positions of their customers. Cities can do the same.

Such a system would make home ownership more affordable for a lot of people without affecting those homeowners who preferred to pay the property tax outright as we do under the current system. Investment companies would be eager to amortize those voluntary tax liens held by city governments. In the event of another financial crisis, a decline in housing prices and a rise in foreclosures, the city would be first lienholder, first in line to get paid when the property is foreclosed. Interest groups that advocate for affordable housing would be joined with investment and pension companies who wanted to underwrite the bonds for such a program.

A Capitalist System of Greater Inclusion

Some blame our capitalist system for the inequities in our society. The fault lies in us, not the capitalist system. Feudalism, mercantilism, capitalism, socialism, communism and fascism are systems of rules that embody a relationship of individuals to 1) property and the manner of production, both current and future, 2) the society, our families and communities, 3) the government that recognizes those relationships. The capitalist system is the most versatile ever invented and yes, it has been used to exclude people just as the other systems have been used to weaken some classes of people. The capitalist system can be extended to include and strengthen more of us. This homeownership policy could broaden that inclusion.  

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Photo by Hannah Busing on Unsplash

Schnabel, R. (2022, August 19). Homeownership facts and statistics 2022. Bankrate. Retrieved November 24, 2022, from https://www.bankrate.com/insurance/homeowners-insurance/home-ownership-statistics/

U.S. Treasury . (2022, October 13). Tax expenditures. U.S. Department of the Treasury. Retrieved November 24, 2022, from https://home.treasury.gov/policy-issues/tax-policy/tax-expenditures. Click FY2022 for the current year PDF estimates.

Safety Net or Trap?

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June 13, 2021

by Steve Stofka

It has been 200 years since the cloth mills in Massachusetts instituted the “Lowell system,” employing young women and taking half of their pay for company provided room and board (Taylor, 2021, p. 234). 100 years ago, the states ratified the 16th Amendment, permitting the federal government to tax all income, including worker’s wages and salaries. 70 years ago, the government instituted payroll withholding. Today 145 million American workers receive salaries or wages, of which 30% is withheld by employers and sent to the federal government (Bird, 2021). Have we all effectively become government employees leased out to employers?

“Shan gao, huangdi yuan” is an ancient Chinese saying that reflected the attitude of many Chinese toward a central authority: “The mountains are high, and the emperor is far away.” Until the enactment of the 16th Amendment in 1913, most Americans felt the same. In Article 1, Section 8, the framers of the Constitution built a corral around the power of the federal government. The ink was barely dry on the document when Federalists like Hamilton argued for an interpretation of the Constitutional language that would give the federal government more power. In the next two decades, the Supreme Court headed by John Marshall, an appointee of Federalist President John Adams, did just that (Taylor, p. 54). During his 35-year tenure as Chief Justice, the decisions of the Marshall court effectively restated the Constitution.

Still, the federal government’s reach was limited enough that it took an amendment to that Constitution to permit the federal government to tax U.S. citizens directly. Richard Byrd, a delegate from Virginia and an opponent of the 16th Amendment, warned that “A hand from Washington will be stretched out and placed upon every man’s business; the eye of the Federal inspector will be in every man’s counting house . .” (Tax Analysts, 2021). He warned that the new amendment would feed the growth of a Washington bureaucracy remote from the interests of ordinary people. Many of those living today have great-great grandparents who voted for that amendment. Why did they consent?

When the 16th amendment to the constitution was ratified more than a century ago, the IRS enacted a system of withholding. Employers complained and the withholding provision was repealed a few years later in 1917 (Higgs, 2007). Most people who did owe taxes paid only 1% in quarterly installments the year after they incurred the tax burden. During WW2, the federal government wanted more revenue to support the massive wartime spending, and instituted withholding for income taxes.

The federal government employs almost 9 million workers (Hill, 2020), about 6% of the total workforce, but its effective reach is so enormous that employers today only borrow workers from the federal government. Each employer must abide by so many employment regulations that even a small business has to dedicate at least one person to administering regulations. The hiring of an employee initiates an implicit contract not between the employer and employee, but between the employer and the federal government. The employer faces stiff penalties for violating any provisions of that implicit contract. How has the tentacled reach of the federal government affected employees?

Like the young women at the Lowell mills, workers are not allowed to touch their pay until taxes, insurance and fees have been withdrawn. Some taxes are silent, withdrawn by lowering gross pay. After state and local taxes and the employee portion of health insurance is deducted, a worker today may be left with only half their pay. Unlike the women at the Lowell mills, the federal government does not provide room and board for most workers. As Richard Byrd warned a century ago, a federal government is only remotely concerned about those needs. Instead, it takes from the worker in the now and gives back to the worker in the future after forty years or more of work – a pension and medical care after retirement.

In addition to future needs, a worker’s taxes feed a bureaucracy that safeguards the security, wealth and needs of the upper 20%, and selected regional interests. Like the Chinese emperor, the $1 trillion spent on current military needs and past military promises seems far away from the daily security needs of most Americans. That spending  supports local economies in some regions and may be the key economic base in some rural communities who strongly support military spending to maintain a global empire. After all, their local economic security depends on such spending.

Larger than Amazon’s football sized warehouses is the largest warehouse in the nation run by the federal government. It is bounded not by walls but by a web zealously tended by lawyers and regulators, and inescapable for most employees and employers. The restrictions and harsh working conditions of the Lowell mills strike us today as paternalistic exploitation. The parents of the young women welcomed the discipline and extra money that their daughters earned. The hard work instilled moral character in the women before they returned home to marry a local lad.

Many of us today welcome the paternal oversight of the federal government as a safety net. The children of our children 200 years from now will certainly regard this age differently. Will they see the complex net of laws that bind employees and employers as a safety net or a trap?

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Photo by Fikri Rasyid on Unsplash

Bird, B. (2021, May 26). How much does the average American pay in taxes? Retrieved June 11, 2021, from https://www.thebalance.com/what-the-average-american-pays-in-taxes-4768594.

Higgs, R. (2007). Wartime Origins of Modern Income-Tax Withholding. The Freeman, (November). Retrieved from https://admin.fee.org/files/doclib/1107higgs.pdf. Also, see IRS history Timeline (2021) and LOC (2012).

Hill, F. (2020, November 05). Public service and the federal government. Retrieved June 11, 2021, from https://www.brookings.edu/policy2020/votervital/public-service-and-the-federal-government/

IRS. (2021). IRS history Timeline. Retrieved June 10, 2021, from https://www.irs.gov/irs-history-timeline

Library of Congress (LOC). (2012). History of the US income tax. Retrieved June 10, 2021, from https://www.loc.gov/rr/business/hottopic/irs_history.html

Tax Analysts. (2021a). The Income Tax Arrives. Retrieved from http://www.taxhistory.org/www/website.nsf/Web/THM1901?OpenDocument. For PDFs of original tax forms that your great-great-grandparents might have filed, see

 U.S. 1040 Tax Forms, 1913 to 2006. Retrieved from http://www.taxhistory.org/www/website.nsf/Web/1040TaxForms?OpenDocument

Taylor, A. (2021). American republics: A continental history of the United States, 1783-1850. New York, NY: W. W. Norton & Company.

An Explosion of Events

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October 4, 2020

by Steve Stofka

This has been a week of surprises. Sunday night, the NY Times released the details of President Trump’s tax documents which he has sought to keep hidden under the pretense that an IRS audit prevents him from doing so. We learned that Mr. Trump’s wealth is a ruse, like that of Bernie Madoff. We discovered the reason for the IRS audit: a $72 million refund that Mr. Trump was paid in 2009 under a dubious interpretation of rules in the Recovery Act following the 2008 financial crisis.

The report contains many instances of rule bending if not outright fraud. It serves as an example of why Republicans have repeatedly cut funding for the IRS. With fewer people, the IRS is unable to monitor the shenanigans of Mr. Trump and his accountants.

The last two decades have seen the largest accounting scandals, and most of them happened while Republicans controlled the majority if not all of the federal government. Enron, Tyco and Health South in the early 2000s were just the prelude to the 2008 financial crisis. The Enron scandal exposed the misdeeds of one of the largest accounting firms in the world, Arthur Anderson, who was forced to surrender their license in 2002. During these past twenty years, Republicans have consistently fought to undermine the mission of all government monitoring, to bend the rules in favor of large industry. Mr. Trump called us working stiffs suckers for paying taxes.

On Tuesday’s debate between both Presidential candidates, Mr. Trump’s interruptions broke debate protocol and the rules he had agreed to. That’s not a surprise. He is a notorious cheater at golf and has a motor mouth. He is an entertainer, not a statesman or a gentleman. The surprise was that Mr. Biden met the verbal assault without fluster. Afflicted with stuttering since he was a child, Mr. Biden has learned to speak with deliberation, a common strategy taught to stutterers. Kids around the country, watch Mr. Biden. This is how you stand up to bullies.

The announcement late Thursday night that Mr. Trump had tested positive for Covid surprised those of us who wondered how the disease had not caught up to the President, who has played the tough guy and pooh-poohed caution. Mr. Trump has several comorbidities, his physician said, without being specific. A lack of prudence might be one of them. Several hours later, Mr. Trump was taken to Walter Reed hospital out of “an abundance of caution.” With a month left before the election, Mr. Trump had a busy election schedule, which is up in the air for the next two weeks, at least. More on that at the end of this post.

The surprise in Friday’s monthly hiring report was the weak job recovery. The employment population ratio is 56.6%, significantly down from 61% in February, before Covid. In February, 1.5 people working supported each person not working, including children. Now it is 1.3 people supporting each person not working.

The growing debt of the Federal government has relieved some of the burden on workers, because, in times of crisis, the rest of the world wants to buy U.S. Treasuries. State and local governments are squeezed. Governments laid off 216,000 workers in September. Who will they turn to except the Federal government? Senate Republican Leader Mitch McConnell balks at aid to the states, particularly the “blue” states.

In the past weeks, airlines and other industries have been announcing permanent layoffs. Older people may be taking early retirement. The four industries that have not suffered during this crisis are utilities, consumer staples, technology and health care. The effect of tech on the stock market has been dramatic. The SP500, weighted by market cap, is up 7% since January. An evenly weighted SP500 index is down 17%. That reflects a general economic misery.  

The week was still not done. On Saturday, we learned that the President had known earlier that he had Covid. He met with prominent Republicans and did not tell them he had the disease. Former NJ governor and campaign advisor Chris Christie has now tested positive for the disease. Mr. Christie is younger but is obese, the chief co-morbidity leading to death. Kellyanne Conway, Mr. Trump’s White House advisor, has also tested positive. The White House is doing a trace of all people who came into contact with Mr. Trump. He hates his enemies, but he doesn’t spare his friends either.

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Photo by Jens Johnsson on Unsplash

Minority Control

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October 13, 2019

by Steve Stofka

On September 15, 2008 the trading firm Lehman Brothers declared bankruptcy. A small number of outstanding shares traded on the stock market that day. The SP500 lost almost 5% of its value. New Yorkers gathered in Times Square to watch the ticker tape display. A small number of people controlled the direction of the market and constructed a reality that they sold to the rest of us.

In politics, a few key people control the direction and fate of legislation. In the Senate, the Majority Leader decides whether to bring legislation up for a vote. Even if a bill makes it out of a Senate committee, the Majority Leader can stop it from reaching the full Senate.  Unlike the Majority Leader in the House, his position is practically impregnable. Legislation vetoed by the President can be overridden by Congress. There is no recourse to a veto by the Senate Majority Leader.

The current holder of the position is Sen. Mitch McConnell from Kentucky. He is up again for re-election next year. When Democrats held the Senate, Sen. Harry Reid ruled with a similar disregard for others in his own party as well as the minority.

In 2014, 800,000 voters chose McConnell. In effect, less than 1% of the country’s voters control the course of legislation in the U.S. Did the founders of this country intend that one person should control Congress? James Madison, the chief crafter of the Constitution, worried that a majority would overwhelm and take advantage of a minority (Feldman, 2017). Accordingly, the Constitution is structured so that a minority controls power. However, one person is a very small minority. What would the founders think of the current arrangement in Congress? If Americans wanted a king with veto-proof power, America would still be a colony of Britain.

Our method of electing a President is a 230-year-old compromise between republicanism and democracy. An electoral college composed of men not subject to the passions of the crowd would elect the leader of the country. It was an Enlightenment model of dispassionate rationality.

Even if they had Fox News and CNN on Election night at the time of the founding, all the thirteen states were in the same Eastern time zone. At a recent symposium on our election, former RNC chair Michael Steele pointed out the west coast states are mostly taken out of the Presidential election (C-Span.org, 2019). By 5 P.M. Pacific time, they are discouraged from voting because much of the action has already been called. The founders did not design a system for four time zones.

We have 50 states but the election for President takes place in eight to twelve battleground states. Most polling is done at the national level, not in the battleground states. Many polls do not accurately survey the sentiments of the critical minority of voters in the states that will decide the election.

A minority of people own and control much of the wealth of the world. They now pay a lower percentage of their income than the bottom 50%. That includes federal, state and local taxes. In the Triumph of Injustice, due to be released next week, authors Saez and Zucman (2019) tally up the tax bills for the rich and ultra-rich. The book is #1 bestseller at Amazon and it hasn’t been published yet.

In 1980, the top 1% paid 47% of their income in total taxes at all levels. Now they are down to 23% and below the rate paid by the bottom half of incomes. Two sets of rules – one set for the peasants and one for the castle royalty. The Constitution prohibits the granting of titles so the rich granted themselves the titles. This book is sure to get a lot of media attention. Like we need more controversy.

Notes:

Feldman, N. (2017). Three Lives of James Madison: genius, partisan, president. [Print]. New York: Random House.

C-Span.org. (2019, October 7). National Popular Vote Election, Part 2. [Video]. Retrieved from https://www.c-span.org/video/?464997-2/national-popular-vote-election-part-2

Saez, E. & Zucman, G. (2019) Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay. [Print]. Available for pre-order at https://www.amazon.com/Triumph-Injustice-Rich-Dodge-Taxes/dp/1324002727

Effective tax rates: If you make $100,000 and you pay $25,000 in federal, social security, state, sales and property tax, then your total effective tax rate is 25%.

Photo: WyrdLight.com [CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0)%5D Page URL: https://commons.wikimedia.org/wiki/File:Bodiam-castle-10My8-1197.jpg

Unauthorized Tax Revenue

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September 1, 2019

by Steve Stofka

This might be a sensitive subject for some – the amount of taxes that unauthorized immigrants pay. Homeland Security uses the term “unauthorized” (Note #1). Some people prefer the adjective “undocumented” but many immigrants have adequate documentation. Some prefer to use the adjective “illegal” but the only illegal act is being in the country without proper authorization. If someone is speeding but is obeying all other traffic laws, are they an illegal driver? In most cases, they are a legal driver committing an illegal act.

 Those who defend immigrants point out that they pay taxes, so they are contributing to our society. I was curious as to how much because I have not heard an immigrant advocate offer any data. I told my trusty hunting dog, Google, to go find them facts and bring them on back to me.

First the big picture. The total Federal, State and local taxes paid in 2016 was $5,300 billion, or $5.3 trillion (Note #3). What was the share that unauthorized immigrants paid? The Institute on Taxation and Tax Policy recently estimated that they paid almost $12 billion dollars in state and local taxes. The IRS says they paid $9 billion in payroll taxes (FICA) and almost $1 billion in income taxes (Note #4). The total is $22 billion.

How do they report? They get Federal ID numbers called ITINs. To encourage compliance with our tax laws, the IRS says they do not share this information with the immigration and naturalization folks in Homeland Security. I was amazed that unauthorized immigrants would file tax returns. They are not eligible for social security benefits or earned income credits available to low income families. They are not eligible for TANF – what most people call welfare. The only benefits they are entitled to are those directed toward children – free public education and school meals, child medical care and SNAP (food stamps).

So why file? If you follow that IRS link, you’ll find that an unauthorized immigrant who shows “good moral behavior” may have their deportation proceedings waived or be eligible to apply for citizenship after ten years of residence. What is one sign of good moral behavior? Paying taxes. What is a sign of bad moral behavior and might get someone deported? Not paying taxes. Good incentive to pay taxes.

Homeland Security estimated 12 million unauthorized immigrants in 2015. In the aftermath of the financial crisis, unauthorized immigration grew by a small 70,000 per year (Note #5). In the 2000s, the influx was almost 500,000 per year, and that was a decline from the record 1.4 million apprehended at the southern border in 2000. In 2019, the number of border apprehensions will approach one million (Note #6).

Numbers like these cause Americans to disagree strongly about policy choices related to immigration. In the 1980s, in the late 1990s and again in the 2000s, the numbers were high and we argued. This time is no different. These numbers don’t include visa overstays which make up 40 – 50% of the unauthorized immigrant population (Note #7). Let’s guesstimate the population at 15 million, about 4.6% of the population. That 4.6% is paying less than 1/2% of total taxes.

We can go look at unauthorized immigrants and say that they are leveraging their taxes – paying a small amount of tax to receive proportionately more in benefit. But that is the case for all low-income people, unauthorized or not. Low-income people buy less stuff, so they pay less in sales tax. They live in lower-valued properties, so they pay less property tax. They make less money, so they pay less income tax. Those are the three primary sources of tax revenue in the U.S.

When President Trump said he wanted higher quality immigrants, he meant that he is not anti-immigrant. He is anti-poor-immigrant. Like Trump, some say we don’t need more poor people; we already have too many poor people.  Some people anticipate that their taxes will go up to provide benefits for the growing number of poor people, documented or not. Few want higher taxes to pay for services to people who just arrived in the country.

When my grandfather came to this country more than a 100 years ago, there was no income tax, no social security tax and property taxes were relatively low. The only benefit for immigrant families was public education. There were no school lunches, no food stamps, no medical care for children. Despite that, anti-immigrant sentiment was strong enough to pass a bill in 1924 that cut off legal immigration for all except northern Europeans. Our grandparents and great-grandparents were far less tolerant of immigrants than we are today.

Let’s keep some perspective. People who are concerned that they will have to pay higher taxes for benefits are not evil or uncaring. Low-income people who are worried about competition for their jobs in the construction industry are not moral slugs. Whatever your occupation, imagine that the number of people available to do that kind of work doubled in your community. How would you feel? The more the merrier? Probably not. Those workers will compete for your job and that competition will hamper any future salary increases you can expect.

We all need to admit that immigration presents complicated moral, political and economic choices. History has taught us that we don’t know how to solve this problem in a way that satisfies most of us. Each time we have to choose which side of the rope tug we are on. Each side hurls insults and curses at the other side. This is not the new normal. This is the old normal. How about if we try the new normal, sit down and hash out the difficult details of a compromise?

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Notes:

  1. Homeland Security uses “unauthorized” to refer to those in the country without proper authorization
  2. Tax Policy Center calculation of total taxes paid to governments at all levels  
  3. Estimate of taxes paid by unauthorized immigrants – PDF
  4. IRS data on payroll and income tax paid by unauthorized immigrants- PDF
  5. Estimate of unauthorized immigrants – PDF
  6. Apprehensions at the border – CBP
  7. Visa overstays – Potitifact

The Homeowners’ Association

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August 18, 2019

by Steve Stofka

Two quick asides before I get into this week’s topic. A cricket perched on the top of a 7′ fence. It drew up to the edge of the top rail, learned forward, raised its rear legs as though to jump, then settled back. It did this twice more before jumping 8′ out then down into a soft landing on some ground cover. How far can crickets see, how often do they injure a leg if they land incorrectly and do they get afraid?

The bulk of the personal savings in this country is held by the top 20% of incomes, and it is this income group that received the lion’s share of the 2017 tax cuts. It’s OK to bash the rich but that top 20% probably includes our doctor and dentist. Before you start drilling or cutting me, I want to make it perfectly clear that I was not criticizing you, Doc.

In 2016, the top quintile – the top 20% – earned 2/3rds of the interest and dividend income (Note #1). Due to falling interest rates over the past three decades, real interest and dividend income has not changed. Real capital has doubled and yes, much of it went to those at the top, but the income from that capital has not changed. That is a huge cost – a hidden tax that gets little press. The real value of the public debt of the Federal Government has quadrupled since 1990, but it pays only 20% more in real interest than it did in 1990 (Note #2). Here’s a graph of personal interest and dividend income adjusted to constant 2012 dollars. Thirty years of flat.

Ok, now on to a story. Economists build mathematical models of an economy. I wanted to construct a story that builds an economy that gradually grows in complexity and maybe it would help clarify the relationships of money, institutions and people.

Let’s imagine a group of people who move into an isolated mining town abandoned several years earlier. The houses and infrastructure need some repairs but are serviceable and the community will be self-sufficient for now. The homeowners form an association to coordinate common needs.

The association needs to hire lawn, maintenance and bookkeeping services, and security guards to police the area and keep the owners safe.  How does the association pay for the services?  They assess each homeowner a monthly fee based on the size of the home. How do the homeowners pay the monthly fee?  Each homeowner does some of the services needed. Some clean out the gutters, others fix the plumbing, some keep the books and some patrol the area at night. They work off the monthly fee.

How do they keep track of how much each homeowner has worked? The association keeps a ledger that records each owner’s fee and the amount worked off. The residents sometimes trade among themselves, but it is rare because barter requires a coincidence of wants, as economists call it. Mary, an owner, needs some wood for a project and Jack has some extra wood. They could trade but Mary doesn’t have anything that Jack wants. He tells Mary to go down to the association office and take some of her time worked off her ledger and credit it to Jack’s monthly fee. Mary does this and they are both happy (Note #3).

As other owners learn of this idea and start trading work credits, the association realizes it needs a new system. It prints little pieces of paper as a substitute for work credits and hands them out to owners who perform services for the association. These pieces of paper are called Money (Note #4).

The money represents the association’s accounts receivable, the fees owed and accruing to the association, and the pay that the association owes the owners for the work they have done. Then the association notices that there are some owners who are not doing as well as others. It assesses an extra fee each month from those with larger homes and gives that money to needy homeowners.  These are called transfers because the owners who receive the money do not trade any real goods or services to the association. In this case the association acts as a broker between two people. Let’s call these passive transfers. We can lump these transfers together with exchanges of goods and services.

Then some people from outside the area start stealing stuff from the homeowners. The association needs to hire more security guards, but homeowners don’t want to pay a special one-time assessment to pay for the extra guards.

Instead of printing more Money, the association prints pieces of paper called Debt. Homeowners who have saved some of their money can trade it in for Debt and the association will pay them interest. Homeowners like that idea because Money earns no interest and Debt does. The association uses the Money to pay for the extra security guards.

But there are not enough people who want to trade in their Money for Debt, so the association prints more Money to pay the extra security guards.

Let’s pause our story here to reflect on what the words inflation and deflation mean. Inflation is an increase in overall prices in an economy; deflation is a decrease (Note #5). Inflation occurs when the supply of money fuels a demand for goods and services that is greater than the supply of goods and services. Ok, back to our story.

So far so good. All the Money that the association has printed equals a trade or a passive transfer. Let’s say that the association needs more security guards and no one else wants to work as a security guard because they can make more Money doing jobs for other homeowners. The association makes a rule called a Draft. Homeowners of a certain age and sex who do not want to work as security guards will be locked up in the storage room of the community center.

Now there’s a problem. Because the association has taken some homeowners out of the customary work force, those people are not available for doing jobs for other homeowners, who must pay more to contract services. This is one of several paths that leads to inflation. To combat that, the association sets price controls and limits the goods that homeowners can purchase. After a while, the outsiders are driven off and the size of the security force returns to its former levels.

Now all the extra Money that the association printed to pay for the security force has to be destroyed. As homeowners pay their dues, the association retires some of the money and shrinks the Money supply. However, there is a time lag, and prices rise sharply (Note #6).

Over the ensuing decades, there are other emergencies – flooding after several days of rain, a sinkhole that formed under one of the roadways, and a sewer system that needed to be dug up and replaced. The association printed more Debt to cover some of the costs, but it had to print more Money to pay for the balance of repairs. Because the rise in the supply of Money was a trade for goods and services, inflation remained tame.

There didn’t seem to be any negatives to printing more Money, so the homeowners passed a resolution requiring that the association print and pay Money to homeowners who were down on their luck. These were active transfers – payments to homeowners without a trade in goods and services and without some offsetting payment by the other homeowners.

So far in our story we have several elements that correspond with the real world: currency, taxes, social insurance, the creation of money and debt and the need to pay for defense and catastrophic events. Let’s continue the story.

With the newly printed Money, those poorer homeowners could now buy more goods and services. The increased demand caused prices to rise and all the homeowners began to complain. Realizing their mistake, they voted on an austerity program of higher homeowner fees and lower active transfers to poorer homeowners.

Because homeowners had to pay higher fees, they didn’t have enough extra Money to hire other services. Some residents approached the association and offered to repair fences and other maintenance jobs, but the association said no; it was on an austerity program and cutting expenses. Some residents simply couldn’t pay their fees and the problem grew. The association now found that it received less Money than before the higher fees and Austerity program. It cut expenses even more, but this only aggravated the problem.

Finally, the association ended their Austerity program. They printed more Money and hired homeowners to make repairs. Several homeowners came up with a different idea. There is another housing development called the Forners a few miles away. They are poorer and produce some goods for a lower price. The homeowners can buy stuff from the Forners and save money. There are three advantages to this program:

  1. Things bought from the Forners are cheaper.
  2. Because the homeowners will not be using local resources, there will be less upward pressure on prices.
  3. The homeowners will pay the association for the goods bought from the Forners and the association will pay the Forners community with Debt, not Money. Since it is the creation of Money that led to higher prices, this arrangement will help keep inflation stable.

As the homeowners buy more and more stuff from the Forners, the money supply remains stable or decreases. After several years, homeowners are buying too much stuff from the Forners and there is less work available in the community. As homeowners cannot find work, they again fall behind in paying their monthly fees.

Several of those in the association realize that they don’t have enough Money to go around in the community. There is a lot to do, and the homeowners draw up a wish list: repairs to the roads and helping older homeowners with shopping or repairs around their home are suggested first. A person who is out of work offers to lead tours and explain the biology of trees for schoolchildren. The common lot near the clubhouse could use some flowers, another homeowner suggests. I could use a babysitter more often, one suggests, and everyone nods in agreement. I could teach a personal finance class, a homeowner offers. Another offers to read to homeowners with bad eyesight and be a walking companion to those who want to get more exercise.

Everyone who contributes to the welfare of the community gets paid with Money that is created by the association. What should we call the program? One person suggests “The Paid Volunteer Program,” and some people like that. Another suggests, “The Job Guarantee Program” and everyone likes that name so that’s what they called it (Note #7).

So far in this story we have two key elements of an organized society:

  1. Money – a paper currency created by the homeowner association.
  2. Debt – the amount the association owes to homeowners (domestic) and the Forners (international).

Next week I hope to continue this story with a transition to a digital currency, banks and loans.

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Notes:

  1. In 2016, the top 20% of incomes with more than $200K in income, earned more than 2/3rds of the total interest and dividends. IRS data, Table 1.4
  2. In 2018 dollars, the publicly held debt of the Federal government was $4 trillion in 1990, and $16 trillion now. In 2018 dollars, interest expense was $500B in 1990, and is $600B now.
  3. In David Graeber’s Debt: The First 5000 Years, there is no record of any early societies that had a barter system. They had a ledger or money system from the start.
  4. In the Wealth of Nations, Adam Smith – the “father” of economics – defined money as that which has no other value than to be exchanged for a good. This essential characteristic makes money unique and differentiates paper money from other mediums of exchange like gold and silver.
  5. An easy memory trick to distinguish inflation from deflation. INflation  = Increase in prices. DEflation = DEcrease.
  6. The account of the increased force of security guards – and its effect on prices and regulations – is the simple story of money and inflation during WW2 and the years immediately following. The process of rebalancing the money supply by the central bank is difficult. Monetary policy during the 1950s was a chief contributor to four recessions in less than 15 years following the war.
  7. A Job Guarantee program is a key aspect of Modern Monetary Theory.

View From The Top

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July 21, 2019

by Steve Stofka

Several Democratic Presidential contenders have painted a target on the top 1%, claiming that they have not paid their fair share of taxes. After the 1986 Tax Reform Act, those in the top 1% paid 26% of their income in taxes. Thirty years later and they paid the same percentage, even though their incomes had grown 50% in real dollars, according to an analysis of IRS data from 2016 returns (Note #1).

Other high-income brackets have experienced modest income gains and small increases in their average tax rates. In 1987, the top 10% of incomes paid 20%. In 2016, they paid 21%.

The average tax rates of the top 25% of incomes has increased from 16.5% to 18.5% in thirty years. As a group, the effective tax rate of the top half of incomes has increased from 14.6% of income in 1987 to 15.6% in 2016. While the top half has gone up a percent or two in the past three decades, the bottom half of incomes have paid a decreasing share of their income – falling from 5% to 3.7%.

The lesson? Changes in tax rates occur very slowly. A candidate who promises big changes quickly is facing formidable odds.

How much income does it take to get into the top half of incomes? Only $40K (Note #2). I was surprised how low the amount was and it hasn’t changed much in the past thirty years. In 1987, the income threshold to be in the top half of incomes was $17,768 – $38,500 in inflation adjusted dollars.

Want to be part of the upper class? All it took in 2016 was $81K, 9% more than it did in 1987, to be a part of the top 25%. How many workers making modestly good incomes in Los Angeles, San Francisco, New York City or Boston feel like they are upper class? After tax income is about $56K and rent in a middle-class neighborhood of L.A. can be 45% of that disposable income. That’s two paychecks toward rent. One paycheck for bills. One paycheck for food and miscellaneous. Ooops, just ran out of paychecks, didn’t you? Welcome to the upper class.

The threshold to get into the top 1% has increased a lot – from $302K to $480K in real dollars – a jump of more than 50%. Those are the people who are still paying the same percentage of their income in taxes. Their share of the total income pie has risen from 12% to 20% in thirty years (Note #3).

In the past thirty years, incomes have stretched upward by 50% for those at the tippy top. As a group their share of income taxes paid has kept pace with income growth, increasing from 24% to 37% of total personal income taxes collected (Note #4). The top 1% can say, “Yes, we are doing better, and we are paying proportionately more.” Can one of the Presidential contenders convince the Congress to get more out of that top 1%?

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Notes:

  1. At the top of the analysis is a link to the Tax Foundation’s summary tables. Table 8 of that summary shows effective tax rates of the various income brackets. Here’s a link to the summary tables themselves.
  2. Table 7 from the summary tables.
  3. Table 5.
  4. Table 6.