Presidential Candidates Weigh in on Wealthy's Taxes

As discussed in a previous post, Warren Buffett made news earlier this week by arguing that the rich pay too little in federal taxes. Buffett's commentary was tax topic #1 at last night's Democratic Presidential debate, held at Howard University. Here's a transcript of how each candidate reacted to Buffett's comments:

Ruben Navarrette, Jr.: Thank you, Tavis. This week, billionaire Warren Buffett said that the very wealthy aren't taxed nearly enough. In fact, he noted that he's taxed at a lower rate than some of his employees who earn much less. Do you agree that the rich aren't paying their fair share of taxes and, if so, what would you do about it?

John Edwards: Well, in fact, I've heard Warren Buffett himself talk about the genetic lottery that we have in America where the family you're born into has an awful lot to do with what happens with your life. What we want to do, I think, is live in an America where, no matter who your family is or what the color of your skin or where you were born, everybody gets the samechance to do well and people who have done well ought to have more responsibility to pay back to the country and to the community and those around them. I think there are at least a couple things we need to do. First, we need to get rid of George Bush's tax cuts for rich people which have distorted the tax system in America. I would use that money to pay for universal health care to make sure everyone's covered. But the second problem that he's talking about is, we have a capital gains rate, fifteen percent, which is the rate that most people pay on their investment income like Warren Buffett that's significantly lower than the tax rate that his secretary pays. That's not right. There is a moral disconnect. We ought to honor work in this country and not just wealth.

Tavis Smiley: Thank you, sir.

Barack Obama: There's no doubt that the tax system has been skewed and, the Bush tax cuts, people didn't need them and they weren't even asking for them and that's why they need to be lapsed so we can pay for universal health care and other initiatives. But I think this goes to a broader question and that is, are we willing to make the investments in genuine equal opportunity in this country? People aren't looking for charity and one of the stressing things sometimes when we have a conversation about race in America is that we talk about welfare and we talk about poverty, but what people really want is fairness. They want people paying their fair share of taxes. They want that money allocated fairly. One of the distressing things about Katrina was the fact not only that the Bush administration did not respond, but the tragedy had happened before the hurricane struck. That is because we had not made systematic investments and the only way we're going to make it is by making sure that those of us who are fortunate enough to have the money actually make a contribution for all the programs that we've been talking about tonight.

Tavis Smiley: Congressman?

Dennis Kucinich: There's three questions involved here.What are we taxed, who is paying and how are our tax dollars spent? Right now, we know that those who are in the highest brackets are not paying a fair share. We understand that. And we also understand that a lot of these corporations are taking their business offshore so they can offshore their profits and escape paying tens of billions of dollars in taxation. We also know that our tax dollars right now are being spent overwhelmingly on war and military buildups. I want to see a new direction. I want to see the wealthy pay their fair share. I want to make sure that these corporations, if they have an American name, they have to pay taxes here and I want to see the end of war as an instrument of policy.

Tavis Smiley: Senator Gravel?

Mike Gravel: I want to say that none of you are going to live in your lifetime to see our system of taxation change based upon what you've heard here. I was eight years on a Finance Committee. None of them have served on that committee and, I'll tell you, the code stands that high and there's not a human being alive that understands it. It's with Democrats, with Republicans. They take care of the people. You think it's an accident that all of a sudden we wake up and the wealthy aren't paying a fair share? The only way they're going to pay a fair share is wipe out the income tax. It is corrupt. It is corrupting our society. Begin to put a place a tax that everybody will know what everybody is paying, and that's a retail sales tax. You can make it as progressive as you want. Keep in mind, a tax where everybody will know what everybody is paying. You won't see it with this.

Tavis Smiley: Senator Dodd?

Christopher Dodd: Thank you, Tavis. I happen to believe very strongly that our tax and fiscal policies ought to reflect our moral values. Our tax and fiscal policies ought to be fair, responsible and pro growth as well. We live in a society where obviously it's going to be important to expand our economy so that jobs can be created and businesses can grow and people have an opportunity in this life. I'm deeply disappointed, as many. We had a very good period of time, I might say, under the Clinton administration where we balanced the budget. We had a tax policy that was much more fair. We need to get back to those days again where we had that kind of fiscal policy. One of the taxes that needs to be addressed because we're losing manufacturing jobs in this country. We today reward industries that leave America by giving them tax breaks. I would like to see us reward companies that stay in our inner cities, go to places where jobs ought to be created. That ought to be a part of our tax policies.

Tavis Smiley: Senator Clinton?

Hillary Clinton: Well, I clearly think that our economy was working a lot better in the 1990s. We had the creation of twenty-two million new jobs, a balanced budget and a surplus. Certainly, when the Bush administration came in, they were determined to tilt the balance back toward the privileged. We are paying a very big price for this because middle class and working families are paying a much higher percentage of their income. That was Warren Buffett's position that he pays about seventeen percent because, don't forget, it's the payroll tax plus the income tax. When you cut off the contribution at $90,000 or $95,000, that's a lot of money between $95,000 and the $46 million that Warren Buffett made last year. He's honest enough to say, look, tax me because I'm a patriotic American and I want to make sure our country stays strong and is fair. So, yes, we have to change the tax system and we've got to get back to having those with the most contribute to this country.

Tavis Smiley: Thank you, Senator. Senator Biden?

Joe Biden: Warren Buffett is right. I would eliminate the tax cut for the wealthy. They didn't ask for it, as someone earlier said. They don't need it. They're as patriotic as anyone else if you ask them. We've asked nothing of them. The second point is, understand what happened this last election in 2000. The first time in our history since we had the federal income tax, there was a fundamental shift of the burden from people who were wage earners away from people who were investors. For the first time in our history, we are in a position where those who are the wage earners are paying a bigger chunk than they should. It's got to shift back and the basis for them doing that is they really believe the wealthy know better. They think we don't know how. Average folks don't know how to make the economy work. It's all about their ideology. It's got to fundamentally change. You have to tax investment and you've got to give a break to wage earners.

Tavis Smiley: Thank you. Governor?

Bill Richardson: There's no question that there's tax unfairness in this country, but we have to rebuild the economy. Yes, the Bush tax cuts, the two percent, that has to go. But I would replace those Bush tax cuts with tax cuts for the middle class. I would reward companies that pay over the prevailing wage, that go into the inner cities, that go into rural areas. I would also have tax-free holidays for technology startups. Three years if they train people in the inner city, if they hire people over the prevailing wage. We need to rebuild this economy by being pro growth Democrats. We should be the party of innovation, of entrepreneurship, of building capital, getting capital for African American small businesses. We need to find a way in this country that we say that globalization must work for the middle class. We need to find ways also to use the tax code not just to simplify it, but to make it fair and also to generate jobs and reward entities in this country.

You can read the whole transcript or watch the full debate here.

Arcane Budget Rules Create Problems for Federal Tax Collection

The budget process that governs how Congress funds public services and programs is geared towards keeping track of how much money is spent and how it affects the nation's fiscal situation. A particular spending bill or tax measure, for example, will be "scored" by the Congressional Budget Office, meaning an assessment will be made of how much money it will cost or gain for the federal government. Obviously provisions that raise taxes result in more revenue, while provisions that spend money results in less revenue.

But there are some situations where things get more complicated and the budget process might need some fine-tuning to deal with this. Funding for the IRS clearly results in a big gain, since that agency collects 98 percent of the revenue. The budget process does not recognize this, however. As a result of this and other factors, over the past few years Congress has cut funding for the IRS. (And let's face it, not many people are out there lobbying to protect IRS funding the way they lobby to protect other types of federal spending). This is clearly shortsighted, because every dollar you cut out of IRS funding can lead to several dollars lost in revenue. Anyone who managed a business this way would be considered insane.

As Bob McIntyre testifiedearlier this year before the Senate Budget Committee, "From 1994 to the present, the overall IRS budget has been slashed by more than a fifth, both as a share of the economy and in terms of the number of IRS employees compared to the total U.S. population... IRS audit rates, of both businesses and individuals, declined precipitously, especially for upper-income tax returns. In 1996, the IRS audited 210,000 returns of people reporting more than $100,000 in income. By 2001, the number had fallen to only 92,000 — even as the number of returns with incomes above $100,000 jumped by 80 percent."
Someone from the National Treasury Employees Union who works on this issue directed me toward the National Taxpayer Advocate's legislative recommendations which start out by noting that on a budget of over $10 billion the IRS manages to collect over two trillion dollars, a return-on-investment of about 210 to one. Increasing IRS funding, especially after budget cuts, can more than pay for itself. So it makes sense that former IRS Commissioner Charles Rossotti told the IRS Oversight Board in 2002 that assigning more revenue agents to debt collections could see a return of $30 to every $1 invested.

But Congress did not take Rossotti's advice. Instead, in 2004 Congress authorized the IRS to contract with private debt collection agencies to seek unpaid tax debts. One serious problem with this program is that the private agencies take a commission of 21 to 24 cents on every tax dollar they recover, while it's estimated based on Rossotti's figures that IRS staff could do the same work at a cost of just 3 cents on every dollar collected. The private debt collection program is totally irrational (unless you represent a state where one of the collection agencies is based).
As Congressional Quarterly reports, now Congress wants to cut off funding(sorry, subscription required) for this program. But apparently, the money the private debt collection program is projected to recover is recognized by the budget process while all the revenue that the IRS is projected to collect itself is not recognized by the budget process. So the private debt collectors could be scored as eventually paying for themselves, and the real tax collectors back at the IRS (who are far more efficient) are not.

What this means in practical terms is that defenders of the private debt collection program could attempt this week to block the bill to cut off funding because, it is argued, getting rid of the program will increase the federal budget deficit (which the budget rules are geared toward preventing). In the same appropriation bill that cuts funding for private debt collection, the IRS gets an increase for enforcement of $239 million and an increase for taxpayer assistance of $51.9 million (both of which will lead to more revenue collected) but none of this is "scored" as paying for itself several times over, which of course it will.

Apparently House leaders plan to bring the appropriations bill to the floor and either waive the rule as it concerns the private debt collection program or find some other procedural solution, which is sensible. But the more important lesson is that the budget rules are a little backwards when it comes to tax collection. IRS funding, as the National Taxpayer Advocate's legislative recommendations argue, should be dealt with under rules separate from the normal budget process.

Buffett: The Rich Pay Too Little

Back in 1986, a turning point in the federal tax reform debate came when President Ronald Reagan realized (with a little help from Donald Regan) how absurd it was that he should pay a lower income tax rate than his secretary. The subsequently-enacted 1986 Tax Reform Act got rid of special tax breaks for capital gains that were helping to make this possible, and brought our federal income tax system back where it should be: taxing wages and capital gains at exactly the same rate.

Twenty years later, the capital gains tax breaks are back with a vengeance-- the top tax rate on capital gains is 15 percent, less than half the 35 percent top rate on regular income-- and Berkshire Hathaway chairman Warren Buffett is ringing the same bell:

Last year, Buffett said, he was taxed at 17.7 percent on his taxable income of more than $46 million. His receptionist was taxed at about 30 percent.

By most accounts, the driving factor behind his super-low tax rate is that virtually all of his income comes in the form of capital gains.

It's a little bit harder to figure how his receptionist could be paying an effective tax rate of 30 percent, however.

Read more about it here.

Private Collection Agencies, RIP?

The Washington Post reports that the US House of Representatives plans a vote this week on restricting funds for private collection agencies (PCA's). The PCA program, which was created by the GOP-led Congress (remember them?) in 2006, farmed out the collection of certain delinquent federal income tax debts from the IRS to private companies.

The PCA program was started because the IRS simply didn't have the resources to police collections adequately-- a persistent problem ever since Congress held McCarthy-style hearings in the late 1990s on the supposed excesses of IRS collections agents. But it immediately became clear to many that it was the wrong solution to the problem, since private collection agencies receive big commissions on their collections. It simply costs more to have PCA's do this work than to have the IRS do it.

It's not too late to tell your lawmakers what you think on this issue: visit CTJ's "action" page here to write a letter to your member of Congress.

Parenthetically, if you had to guess what an organization called the "Tax Fairness Coalition" does, would you ever, in a hundred years, guess that it's a coalition of private debt collection agencies lobbying to preserve their role in the tax collection process? Neither would I.

Are Corporate Lobbyists the Greatest Threat to Conservative Principles?

Like most people, I have probably always associated the Chamber of Commerce and corporate lobbyists with more conservative lawmakers on the state and federal level. The conservative movement has been telling us forever that the government needs to get out of the way of business and just let it thrive, which is one part of their larger story that government should be smaller and that big government just can't operate in a way that is fair or efficient.

So it's a little jarring when we see conservative lawmakers touting positions pushed by corporate lobbyists that essentially call for special favors for business owners at the expense of taxpayers. Two stories from this week's Tax Justice Digest demonstrate the startling phenomenon I'm talking about.

The first concerns a new law just signed by the governor of Oklahoma, Brad Henry (D) that will require the state to "build a web site detailing virtually all expenditures of state funds, including state contracts and tax credits and incentive payments given to businesses." Remarkably, the Oklahoma Chamber of Commerce opposes this measure, saying it will "will shine an unwanted light on those who invest in Oklahoma, and it will make it much more difficult to attract those investors."

Think about this for a second. Ordinary people, working people with families, who pay state taxes, are supposed to see their tax burdens increase so that special subsidies or tax breaks can be enacted for certain business interests. Then to top it off, these businesses believe that the public should not have access to a list of the gifts that the public is paying for. Can you imagine what conservatives would say if a single mother on welfare said she didn't think the public had a right to see how much public money was being spent on programs for low-income people? Put in this context it becomes clear what an absurd argument the state's chamber of commerce is making.

Thankfully the legislature and the governor have put aside these complaints. But there are legislative bodies less enlightened than the one in Oklahoma. Like the U.S. Congress, for example. On Capitol Hill, corporate lobbyists display the same sense of entitlement to the public purse and they're widely defended by lawmakers who like to call themselves conservative.

Take this week's debate over energy policy, another story in this week's Digest. The Senate yesterday was unable to pass a package of tax provisions that would essentially eliminate or reduce some loopholes enjoyed by oil and gas companies and redirect the money towards tax breaks for alternative energy sources.

Now we can debate all night about whether the tax code should be used to encourage one kind of energy production over another, but the fact is we're already handing out special tax breaks to oil and gas companies, so redirecting those tax breaks to more environmentally friendly energy sources would be an improvement. Anyway, lobbyists for the oil and automotive industries have been screaming, and many conservative Senators seemed to be repeating their talking points for them.

Kay Bailey Hutchison (R-TX) complained about the closing of tax loopholes for oil, saying "It's commonsense that if you tax something, the price will probably go up because the higher the business cost, you know the consumer is going to have to absorb that cost at some point." How this justifies a tax break for oil companies that other businesses or tax payers don't get is entirely unclear. By this logic we should probably have more loopholes for companies that provide gasoline since we use it and we want it to be cheaper, but... isn't that true of just about every product we buy and use? What makes BP and Exxon-Mobil special? At least the people advocating tax breaks for alternative fuels have an argument about helping the environment, for what it's worth.

But more to the point, how can someone like Hutchison ever claim to be conservative? Isn't giving out goodies to oil companies (or anyone) courtesy of the federal taxpayer sort of against what the conservative movement is all about? Special tax loopholes for business are really just a form of corporate welfare; they cost us in terms of revenue lost and ordinary taxpayers (as in you and me) have to make up for it with higher taxes or fewer of the services we depend on.

Conservatives talk a great deal of their fear of higher taxes, but they really ought to be afraid of the corporate interests that are eroding all the principles they claim to believe in.

Can A Tobacco Tax Benefit Lower-Income Groups?

A recent publication by the Campaign for Tobacco-Free Kids claims that federal cigarette taxes aren’t regressive because they actually benefit low-income people more than high-income people. Why? “Higher smoking rates among lower-income groups means they are now suffering the most from smoking and will, consequently, benefit the most from any effective new measures to reduce smoking,” namely higher Federal cigarette taxes. The group sites a study done by the Center for Disease Control proving these results. While the results seem valid, I think there is still another side to this story.

There are many social and health-related benefits that can come from a tobacco tax. Some adults may choose to quit, many children may choose not to start, and as a result these people and others perhaps, will have improved health. Most would agree these are desirable outcomes. However, the issue remains that these lower income groups are the ones being essentially forced to bear the costs, whether “costs” entail additional taxes or changing their behavior. They are giving something up, more so than higher income groups and this is still somewhat regressive. This also opens another can of worms about whether it’s paternalistic or not to have the government dictate what level of health every individual ought to attain, which is beyond our scope for the time being.

If a tobacco tax was put in place to change smoking behavior in the first place, fine; you can argue about whether this is correct for moral reasons. But this tax is being put on to raise money for a social program, with the side effect of decreasing smoking. The tax is regressive if you exclude the unintended effects, and probably still regressive if you include the unintended effects. The bottom line is, any type of progressive tax is always going to be the superior way to fund a program. You can choose to support the tax because it can cause good things to happen, but don’t be mislead into thinking that having these good things absolves any negative consequences.

For previous blog discussion about the cigarette tax and SCHIP see April 6 and April 23.

And The Award Goes To......

The Progressive States Network released an interim report Thursday detailing state-by-state legislative successes this past year and promoting best practices. The report was presented as part of a conference hosted by the Center for American Progress which featured representatives from Iowa, Washington, and Maryland, three of the clear leaders in progressive policy. Unified around a progressive agenda, and fueled by constituent support, Democrats in many states pushed through reforms that failed to be tackled by the federal government. Tax policy reform didn’t seem to be the focus of legislative summaries in the PSN publication despite its omnipresence in state budget debates. Nevertheless, it’s important to recognize themes of reform appearing among the states. Which tax policies garnered the most attention and favor? Here are the highlights.

Income Tax Reductions

Since state and local governments primarily rely on regressive property and sales taxes, efforts to make income taxes as progressive as possible take some burden off the lower-income citizens. Arkansas completely removed the income tax burden from 81,000 lower-income families and also cut the grocery tax in half. Virginia similarly removed 140,000 lower-income residents from income tax rolls. Hawaii created a plan to allot $245 million in tax benefits to the poorest citizens.

Earned Income Tax Credits

By rewarding work and allowing credits for income taxes paid, adopting the EITC at the state level is another effective way to make a tax system more progressive. Iowa increased their EITC to 7% of the federal credit amount, and also made the credit refundable if no income taxes are owed. New Mexico created an EITC program, giving credit to 200,000 New Mexico families for 8% of the federal credit amount. Kansas expanded its EITC program, providing it with $46 million over the next five years.

For the complete listing of progressive victories see the Progressive States Network report.

Taxing Illegal Immigrants for Wire Transfers

A new bill in North Carolina proposed by Rep. George Cleveland (R-Onslow) seeks to place a 5 percent excise tax on wire transfers made by illegal immigrants. Similar bills have been filed, but not passed, in Georgia and Texas. Lawmakers in North Carolina see it as a way to ‘get a handle’ on the state’s rising number of undocumented immigrants, now exceeding 400,000, about half of whom send billions of dollars back home each year. The tax would be imposed at companies like Western Union, not banks, when transfers were made. Businesses don’t seem enthusiastic about the plan since it will require them to verify the citizenship status of every customer. All customers would have to show identification proving legal status such as a passport, Social Security card or military ID. Rep. Cleveland responded to business concern by saying clerks should be able to identify illegal immigrants using other methods:

"If a fella comes in with a pair of shaggy boots on, jeans and a T-shirt
and he's got a straw hat on - I mean, come on, give me a break."

I say, give ME a break. Cleveland’s remarks are completely out of hand and the entire plan is unjust. Cleveland claims the excise is meant to collect taxes on thousands of dollars of income that currently go untaxed. This seems like a reasonable goal in theory; however, the action plan is poorly targeted and based on false premises.

Undocumented immigrants, in most cases, are able to use a false SSN to gain employment. In doing so, they are subject to the payroll tax as well as federal, state and local income tax that are usually automatically deducted from their paychecks. Most immigrants never see this money again, either because they do not complete tax forms, or because they are not eligible for Social Security benefits because they are undocumented.

To contend that the income they earn is untaxed is quite simply false. According to the National Immigration Law Center, illegal immigrants contribute $8.5 billion to Social Security and Medicare, and $50 billion in federal taxes every year. Furthermore, many undocumented immigrants do not earn enough to pay federal income taxes and often do not apply for available tax credits and refunds. They are clearly paying their fair share into the system.

Putting a flat excise tax on only one group of people is completely discriminatory and also regressive. It’s like adding on an additional sales tax just for immigrants. This tax will only continue to burden an already overburdened section of the populous. The implementation is ill-reasoned and logistically prone to all kinds of discriminatory acts. I think lawmakers could have come up with something better than this.

Is Energy Reform Finally Coming?

Senate Majority Leader Harry Reid (D-NV) spoke yesterday at the Center for American Progress about the goals of bill S. 1419, an extensive piece of energy legislation which is scheduled for debate this week in the Senate. He cited our “addiction to oil” as causing a “three-pronged crisis: threatening our economy, threatening our national security, and threatening our environment” and made it clear he felt that President Bush was not doing enough of the right things to combat the problem. He harshly condemned Bush for allowing working families to face doubling energy prices, buying oil from other countries that are unstable and antagonistic, and for failing to acknowledge the perils of global warming.

Reid then went on to describe the steps the bill would take to amend such societal ills. The bill would set new green standards for federal buildings, raise CAFE standards for new cars and trucks to 35 mpg by 2020, reduce crude oil consumption by 10 percent over 15 years by producing renewable fuels, and set new energy efficiency standards. It also plans to punish companies that price gouge, provides research funds for carbon sequestration programs, and seeks to improve relations with worldwide energy partners.

Reid was noticeably unspecific in his brief speech as to exactly what types of policies would be created or amended to accomplish such tasks. The Energy Tax Act of 2005 sought to remedy our energy problems through a series of tax incentives and breaks. Unfortunately, the oil and coal industries were given tax incentives to produce at the same time credits and breaks were introduced for consumers practicing energy efficiency, two goals at odds with each other. Reid seemed determined this time around not to allow Big Oil companies to receive any more privileged treatment after seeing their profits continue to increase the past year at the expense of everyday citizens.

Reid made only a passing mention of tax incentives which may be a sign of real progress. The idea of raising CAFE standards to a target mpg is a concrete action plan that will not allow special treatment or incentives, car companies will just have to do it. Setting other legal standards for green building and energy efficiency in certain products would be equally as concrete and easily enforceable. Reid also did not mention a possible cost the bill would entail.

Reid seems to have high hopes and expectations for this bill and faith in the ingenuity of our society to solve complex problems. Stay tuned this week to see how the bill fares in debates.