Friday, December 31, 2004

It's Your Money

Myths about taxation in America, deflated.


Blogger Management said...

Issue: Taxes
Conservatives have succeeded in framing the argument as one of support of taxes vs. opposition to taxes. Successfully arguing requires reframing this argument.


Some arguing tips

One of the problems for progressives in the ongoing debate over taxes is that conservatives have succeeded in framing the argument as one of support of taxes vs. opposition to taxes. Successfully arguing against conservatives requires reframing this argument.

So a good place to start is to grant that nobody likes paying taxes. But there are a lot of things that we want government to do. You can rattle off the things conservatives support – highway construction, firefighters, cops, prisons, and most of all national defense (at current levels of funding, each American family needs to contribute about $5000 a year just for the Pentagon). Once it's established that the question isn't whether or not we're going to pay taxes, because of course we are, the question becomes how we can design the tax system to be as fair and effective as possible. Once that reframing has taken place, you've almost won the argument. So let's get into the specifics of the conservative claims.

Argument: Americans pay high taxes.
Response: Among industrialized countries, taxes in America are remarkably low. In fact, Americans pay less in taxes as a proportion of GDP than citizens of almost any other industrialized country.

Across the ideological spectrum, Americans love government services but hate paying taxes. So when a conservative starts complaining that taxes are too high, a good way to argue back is to say, "OK, what do you want to cut? Do you want to cut defense spending? Do you want to cut spending on schools? Social Security? Medicare?" If they say something like "How about cutting welfare?" you can let them know that welfare, currently known as Temporary Assistance to Needy Families, comprises less than 1% of the federal budget.

Argument: Rich people pay all the taxes in this country.
Response: Although income taxes are progressive – meaning that people at higher incomes pay a higher percentage – many of the other taxes people pay aren't, and some, like sales taxes, are highly regressive.

Because state and local taxes hit poor and middle-income people much harder than they do rich people (you can read more about the effect of these taxes here), when you add up all the taxes people pay, what emerges looks a lot like a flat-tax system: poor, middle-income, and rich people all end up paying between 15 and 20 percent of their income in taxes.

So you can ask your conservative friend if she thinks taxes should be progressive or not. If she says yes, then you can respond that she favors making them more progressive than they are now. If she says no, then you can respond that she should be happy with what we have now.

Argument: It's important to reduce the top income tax rate, because that helps small businesses.
Response: This is what President Bush says whenever he's asked about the top rate. But the argument is just false: less than 2% of small business owners pay the top income tax rate.

Argument: Tax cuts help the economy.
Response: This is true as far as it goes. But it only works if the money is spent, and this is where Bush's tax cuts were so poorly designed (if helping the economy was actually the goal). If you want tax cut money to be spent, the obvious answer is to give the cuts to those who are most likely to spend it. People who have small incomes don't save much, simply because they can't. So if you give poor and middle-income people a tax cut, they're likely to spend it. This means that the benefits are multiplied: the recipient gets a new clutch for the car, then the garage owner uses the money to buy some new tools, then the auto parts store uses part of the money to hire a new clerk, and so on. On the other hand, if you give wealthier people a tax cut, they're much more likely to save it, which means that the cycle of benefits only has one step (not that there's anything wrong with saving, but we're talking about short-term economic benefits here).

Argument: Everybody who pays taxes got a tax cut from Bush.
Response: Like many of the things George W. Bush has said about taxes, this is false. Everyone who pays federal income taxes got a tax cut from Bush. But a quarter of American taxpayers pay no federal income taxes because their incomes are too small. They do, however, pay substantial payroll taxes - which fund Social Security and Medicare. In fact, four out of every five Americans pay more in payroll taxes than they do in federal income taxes.

Bush's tax cuts didn't touch payroll taxes, which are highly regressive. For instance, since you only pay Social Security taxes on the first $87,500 of your income, the more you make above that, the less you pay. So someone who makes $87,500 a year pays 6.2% of her income in Social Security taxes, while someone who makes $875,000 a year pays less than 1%.

And the real question isn't how many people got something from the Bush tax cuts, it's who got what. And as we all know, the more money you make, the more you got from the Bush tax cuts. So for instance, if you just filed your tax return, and you're a married couple with one child and an income of $35,000, you got $1210 from the combined effect of Bush's 2001 and 2003 tax cuts. But if you're a married couple with one child and an income of $1,000,000, you got a tidy $38,426 (you can read more here).

Argument: Recent job gains show that Bush's tax cuts are working.
Response: As Gadflyer editor Paul Waldman has shown, even if things go spectacularly well for the remainder of this year, each job Bush can take credit for creating in his first term cost the government over $871,000 in tax cuts. Bush doesn't have much to show for a couple trillion dollars worth of tax cuts that were supposed to make the American economy just explode with job creation.

Argument: President Bush has gone after unfair taxes, like the death tax and the double taxation of stock dividends.
Response: The conservative arguments on these taxes are based on false premises. Let's start with the "death tax," as conservatives call it, which is not a tax on death but a tax on inheritances (the tax is officially referred to as the inheritance tax or the estate tax). By calling it the "death tax," conservatives hope to build support for its elimination by making people believe that since everyone dies, everyone must pay this tax. In fact, before the 2001 tax cut initiated a phase-out of the estate tax, it was paid by only the largest 2% of estates; that means that when 98% of people die, their heirs pay no estate tax.

Bush also argues that he wanted to eliminate the estate tax "to keep farms in the family." But Republicans have actually fought against proposals to eliminate the estate tax on family farms and small businesses.

As for the alleged "double taxation" of stock dividends, the administration argued that since a corporation pays taxes on its income, and then those who receive stock dividends pay taxes on their income, there is double taxation going on. By that logic, pretty much every tax we pay is a double, triple, or quadruple tax, since people pay taxes on their incomes, then give some of their money to others for goods and services, and those people then pay taxes on their income. The idea that taxing stock dividends is somehow less fair than any other tax is simply absurd.

You can see a perfect synopsis of the how ridiculous the conservative argument is on this issuein this cartoon.

Argument: The wealthy should get tax cuts, because they're the ones who create jobs. That way, everybody benefits.
Response: Here's a handy argument to flummox a conservative: In 1993, Bill Clinton passed an increase on taxes for the wealthy. Not a single Republican in either house of Congress voted for it. Instead, they predicted, in a phrase repeated over and over, a "job-killing recession." And we know what happened – 22 million jobs gained over the course of Clinton's term. In contrast, Bush pushed through two huge tax cuts, mostly directed at the wealthy, and what did we see? A couple of million jobs lost.

But that's an oversimplification, your conservative friend will cry. True enough. But even if Clinton can't take credit for all of the job gains in his terms and Bush can't take the blame for all of the job losses in his term, it still puts the lie to the argument that raising taxes on the rich leads to economic disaster and cutting taxes on the rich leads to economic nirvana.

If there has been one principle guiding Bush's tax policies, it's that work should be taxed, but wealth shouldn't. That's why Bush has worked to eliminate taxes on inheritances, stock dividends, and capital gains, but never considered cutting payroll taxes – a tax on work. So ask your conservative friend: shouldn't the tax system offer incentives for people to work harder, instead of waiting around for their stocks to give them dividends or their millionaire grandfather to die?

6:01 PM  

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