Scuttlebutt: Taxes.
Given the recent necessity for the federal government to shore up the economy with massive deficit spending, one may wonder how we will be able to reverse this trend and lower the national debt. This borrowing by the feds is not only necessary, but a good idea since Treasury bonds are paying less than 1%, while the inflation rate is around 1.4%. That is cheap money, but even cheap money has to be paid back. This fiscal year the U.S. will pay out $393.5 billion in interest payments on our debt. Foreign governments own about one-third of our debt and so about $120 billion will be paid to them in interest.
The national debt is now larger than the gross domestic product for the first time since the end of World War Two. WW II was a major threat to the well-being of our nation and required an all-out effort to prevail. Some 420,000 Americans died during that conflict and the COVID-19 virus is half way there with plenty more deaths to come. A similar response was obviously necessary.
So how did we pull ourselves out of that to create the huge economic expansion of the 50's and 60's? Let's recall the infamous bank robber Willie Sutton's advice and go where the money is. The super wealthy.
Americans for Tax Fairness and the Institute for Policy Studies found that from March 18 to October 13 the total net worth of America's 644 billionaires climbed from $2.95 trillion to $3.88 trillion. This represented a 31.6 percent rise based on Forbes billionaires data.
Elon Musk jumped 277 percent, or $68.2 billion to $92.8 billion. Jeff Bezos' wealth jumped 80 percent, or $90.1 billion, while Bill Gates and Mark Zuckerberg saw a 20 percent and 85 percent rise respectively.
In contrast, as 98,000 businesses permanently closed across the country, almost 62 million Americans lost work between March 21 and September 19, according to the U.S. Department of Labor. The collective work income of rank-and-file private sector employees fell by 3.5 percent from mid-March to mid-September. In addition to this, a total of 12 million citizens lost employer-sponsored health insurance during the pandemic, while 22 million reported not having enough food to eat in the last week.
This is income inequality on steroids.
The Biden campaign is proposing to raise the top marginal tax rate by a mere 2.6% to 39.6% Compare this to over 90% rate from 1951 to 1963 under Republican administrations, at which time it was then lowered to 70% under JFK. Then came the Reagan revolution when the rate fell to 28%.
There are, of course, other proposals in the Biden plan, including taxing capital gains and dividends at ordinary rates for those with annual incomes over $1 million. His proposals are expected to raise some $4 trillion over the next decade and has been generally well received even on Wall Street and in academia.
Of course demanding taxes be paid and collecting them can be two different things. Republicans are famously and proudly opposed to taxes and have been on a particularly virulent rampage since 2013 when they attacked the IRS for allegedly singling out conservative groups for greater scrutiny and delays in reviewing their applications for tax-exempt status as “social welfare” organizations when they were actually nakedly political (the IRS was scrutinizing liberal applicants as well).
For five years, congressional Republicans have taken out their anti-tax wrath on the Internal Revenue Service, cutting its budget by nearly $1 billion, reducing its staff by about 17,000, and even threatening to impeach its chief.
“I’m appalled, that’s all I can say,” said Lawrence B. Gibbs, a tax lawyer who joined the I.R.S. during the Nixon administration and was President Ronald Reagan’s choice for commissioner in 1986.
In the last decade, the I.R.S. budget has fallen (in real terms) by nearly 15 percent. Its enforcement budget has fallen 25 percent over this period, and its work force has been slashed by 20 percent. In fact, as a share of gross tax collections, the I.R.S. budget is down nearly 50 percent from its peak in 1993.
The I.R.S. has 5,000 fewer revenue agents, officers and criminal investigators than five years ago. Tax audits are at the lowest level in a decade, affecting fewer than 1 percent of taxpayers. Reduced efforts to enforce compliance cost an estimated $6 billion in uncollected revenues in 2014 and $8 billion in 2015. Based on current trends, in the next decade the I.R.S. will fail to collect an estimated $7.5 trillion in owed taxes.
So how is it that the wealthy can avoid paying their fair share so easily? Compliance rates for ordinary wage and salary workers are 99 percent because their taxes are automatically withheld. In contrast, richer Americans are more likely to have items like capital gains, rental income and proprietorship income — and the I.R.S. estimates that up to 55 percent of the income from such sources can be unreported, and thus untaxed. Examination rates for those making $10 million or more annually have plummeted by nearly 80 percent. Today you are as likely to be audited if you make so little that you qualify for the earned-income tax credit as if you are in the top 1 percent.
Indeed just a few hundred taxpayers deprived the government of $10 billion from 2014 to 2016 by committing the most blatant form of evasion, failing to file tax returns all together. The I.R.S. lacked the resources to even work these cases. The IRS did not pursue 369,180 high-income non filers, with estimated tax due of $20.8 billion.
Larry Summers, former Treasury Secretary and past Harvard President and Natasha Sarin, professor at Trumps's alma mater, Wharton School, have made suggestions to narrow the gap between taxes owed, but unpaid. Their rough estimate suggests that at least 70 percent of the “tax gap” comes from underpayment by the top 1 percent. Summers and Sarin are the ones who claim that based on current trends, in the next decade the I.R.S. will fail to collect an estimated $7.5 trillion in owed tax.
They would like to see: 1. increased enforcement (every $1 that is spent would generate more than $11 in greater tax collection); 2. improved technology (IRS uses programs from the 1960s); 3. third party notifications (like when your employer reports your earnings). These three proposals would be equivalent to raising the upper tax rate to 70% without touching anyone's tax rate.
Stand-by to see what happens.
