Taxes: Political vs. Reality

It's not every day the Working Families Party and the Manhattan Institute agree on a issue. But in the case of capping property taxes here in New York, they found a common cause.

Last week Governor Cuomo and Republican's in the Senate agreed to cap property taxes by 2 percent for parts of Long Island, Westchester, and most of upstate New York (you're welcome Westchester, I won't bundle you in with the suburbs of Albany, Syracuse, or Buffalo). There was no choice but to lower property taxes. Being that they were already one of the highest in the nation and many families were already tightening their belts as much as they could. But the problem was that the revenue was not made up from anywhere else.

Instead of raising taxes on the wealthy or corporations, New York's legislature cut programs for education, the homeless, and safety. These cuts have had a disproportionate affect on the bigger counties and cities. While 93 percent of counties were able to pass education budgets, New York City's Council is now debating the ways it can stop experienced teachers from being fired. Neither Syracuse, Buffalo, or Albany, figured out how to pass their budgets either.

One of the reasons for the bad employment data that came out today was because state governments cut their budgets. But raising taxes is never a popular move, especially in bad economic times. One of the problems with tax policy is that it's so complicated. The federal code is longer than War and Peace, and it makes it hard in this thirty seconds or less media to explain the effects this compromise will have on the state.

But the fact remains people are willing to pay for the programs that benefit their families like public education and safety. Cuomo got the political victory for getting his agenda passed, but the reality is most New Yorker's are facing the reality of those cuts.  
     

Add Value To Your Buck

It's almost that time of year again, tax season! OK, maybe I'm exaggerating on how exciting this is. The US tax code is longer than War and Peace, but just like the classic book, almost no one can understand it, and almost no one today has read it. But someone has to read the code in order to figure out how much money people owe their government. If only there was a simpler way…

Debating tax policy is almost as bad as actually paying them, but here I go. The last time any serious tax reform occurred was during the Reagan administration. The Tax Reform Act of 1986 reduced individual and corporate taxes almost by half, and indexed those standards for inflation. The number of tax brackets were also reduced. But the Act also included the Alternative Minimum Tax (AMT) which only complicated the code more. The more complicated the code became, the more loopholes were there for people to take advantage of. While less money was coming in, the government was spending more, which increased the national debt. The code has become so complicated, and hard to enforce, only 47% of American's who file for federal taxes actually pay them.

President Obama has said he wants to reform the tax code to make it easier for Americans. But what's the best way to do this? There are a lot of ideas out there. Some say there should be a flat tax where everyone pays the same amount. But that's not progressive. It can also hurt those who do not have a lot of money, while people who earn more won't be paying their fair share. Another idea is to eliminate loopholes and certain credits. This could work, but doesn't go at the heart of the problem, which seems to be the way we calculate how much American's need to pay.

One idea that works for forty other countries (mostly in Europe) is the Value Added Tax (VAT). Instead of pushing a sales tax onto the consumer, items are taxed at a percentage as the product is put together. So if the VAT was 10% it would work like this:

- The manufacturer pays $1.00 for the raw materials, certifying it is not a final consumer.

- The manufacturer charges the retailer $1.20, checking that the retailer is not a consumer, leaving the same gross margin of $0.20.

- The retailer charges the consumer $1.50 + ($1.50 x 10%) = $1.65 and pays the government $0.15, leaving the gross margin of $0.30.

The government gets paid each step of the way, and it is clear how much everyone owes so it is easy to enforce. Overall this reduces the costs to the consumer because they don't have to pay so much at the end. The French implemented a VAT in 1954 and today it counts for half of the government's income.

 

But there are opponents. People argue implementing a VAT can cause large amounts of fraud such as false claims. There have been instances where the individual or business argues that they did not know they had to pay a tax on a certain item. Then of course there is the old fashion "hidden sale" where the consumer is charged something that is completely made up.

 

Despite those concerns, studies show that if a 5% VAT was implemented, and covered 80% of goods people consume, it could generate roughly $260 billion. The Virginia Tax Review estimates that a VAT of 25% could pay for health care reform, exempt millions of American families from income taxes and still raise the revenues necessary to cut into the budget deficit.

 

One of the reasons American's are less inclined to pay taxes now is because we became a individualistic society. When FDR was President, there was a "we are in this together" philosophy. But that has gone away. The book Bowling Alone explains it pretty well. But when you are paying taxes, you are paying for the freedoms that people in the Middle East and North Africa are fighting for. Whether you are rich or poor, everyone benefits one way or another, and those who don't pay their taxes are cheating their fellow citizens.

Just because something is European doesn't make it scary. Paying taxes is important. It goes to Veteran Hospitals, public parks, schools, and keeps our food and water clean. But paying for these services doesn't have to be a burden. Instituting a VAT could bring in more money for areas that all Americans use, and everyone could get a bigger bang for their buck.

 

 

Tax Cuts Don’t Stimulate The Economy

I hate leaving things for the last minute. Having something hanging over my head just bothers me to no end it always get to the point where I can't sleep until it's done. The political problem for the tax cuts was that the White House waited until the last minute to deal with it, but probably for the right reasons. President Obama has had major legislative victories which will help a lot of people. Making sure women are paid equally, allowing students to stay on their parents insurance after college, and expanding scholarship opportunities to pay for college, just to name a few. As we've all seen those victories didn't just come over night, and unfortunately for Mr. Obama, there was still one last thing he had to get done.

The latest round of tax cuts which will soon be passed by the Senate is being sold so that it will help everybody, the middle class, working class, and of course the rich. The Center for American Progress is defending the tax cuts and claim it will create 2.2 million jobs. What their analysis assumes though is that businesses will spend money and there will be a demand for their products. But if you look at recent experiences, you should know there is no guarantee that businesses will spend more money just because they have it. In these uncertain times, they are more likely to keep it in case the economy goes even more down hill, just like the banks are doing since they received the bailout money. The business cuts aren't even targeted anywhere which proves there is no strong demand for anything right now. Otherwise, policies could be enacted to create more of a demand to help a strong area grow even more, which could help overall growth. That absence is just more proof the economy is really up in the air.

The Center got these numbers from the Congressional Budget Office (CBO) and used their numbers to create their analysis. The CBO however, assumes that the tax cuts will be offset by increasing taxes later so we won't have to worry about deflation. And it does not even take into account that Social Security taxes are being lowered.

But then there are some analyses I just don't get at all. The Heritage Foundation argues that only tax cuts can stimulate the economy. They try and differentiate between "Disposable Personal Income" and "Personal Spending." Now if you're a middle income family earning $150,000 a year, you have enough to go out to dinner, a movie, and keep up with your mortgage payments. But this family is not going to spend money on anything extravagant. They will not be buying a new house, car, or plan a expensive vacation in this time of uncertainty. So when they receive a tax cut, they will not be spending in the areas where it MIGHT help the businesses feel a demand for their products. And if you are working class family, you are more worried about feeding your children and keeping a roof over your head, and that's where they will spend the money. Again, not creating a huge demand for anything, and not beneficial to helping the economy. Families don't think of their money as "disposable" or "personal," and neither should economists.

Instead, programs should have been created to help families cope with the new economic realities. The best part of the package was getting unemployment benefits extended for a year. For middle class families though, there should have been money spent to pay for their children's college, or help lower their payments if the banks unexpectedly raised the interest rates. But if you don't believe me, you can listen to President Reagan's former budget director David Stockman, who helped invent trickle down economics.

The problem with both of these analyses is that they argue broadly about policies that need to be looked at in a more specific design. As I've argued in the past, current economic models do not allow economists to take into account what really matters to families. The tax cuts families receive will be spent on areas that will ensure the families stability. President Obama could have made a strong argument to raise taxes on the wealthy to ensure programs like Social Security and Medicare stay intact. Many people rely on these programs, especially the baby boomers. Who, by the way, will be retiring soon and who will vote in 2012. But by waiting this long to deal with the Bush tax cuts he had no time. The consequences, politically and economically, would have been worse if he allowed everyone's taxes to be raised. He had to let high income earners taxes stay low. It was a classic no win scenario.

All in all, no harm was done, but unfortunately not a lot of good was done either. So lesson learned, don't wait for the last minute to get your ducks in a row.