In 1937, Treasury Secretary Henry Morgenthau (right) and Undersecretary Roswell Magill (left) conferred during congressional testimony over tax avoidance techniques.
Prints and Photographs Digital Item Display – hec2009009580
Sphere: Related ContentEarlier this week, I did a blog post for tax.com on the problems bedeviling Wall Street pay curbs. Here’s an expansion on that post, inlcuding some observations of the state of play among liberals talking about tax.
Executive Pay Curbs: Punitive or Progressive?
By Joseph J. Thorndike
Recent efforts to curb executive pay are facing some predictable problems. The return of the guaranteed bonus, highlighted in a recent New York Times article, is just one of many pitfalls. More generally, lawmakers are discovering (as they have in the past) that regulations designed to limit compensation are prone to failure.
In a recent blog post, Matthew Yglesias, a fellow at the Center for American Progress Action Fund, tries to explain the disappointing results of pay regulation:
you don’t get to be an important person in the world of finance without being really, really, really good at figuring out ways to pay yourself a lot of money. That’s what the field is all about. And it’s extremely difficult for the government to catch up with the ingenuity that can be deployed when people’s livelihoods depend on it.
This observation is hardly a revelation, at least to compensation experts. But Yglesias thinks he has a solution: don’t cap executive pay, just tax it.
Yglesias isn’t suggesting that we use the tax system to discourage excessive compensation, as the Clinton Administration did when it engineered the 1993 cap on deductions for executive pay not tied to performance (a reform that notoriously encouraged the explosion of stock, option, and bonus compensation). As history demonstrates, such techniques often prove wanting, or even counterproductive.
Rather, Yglesias is arguing for a more straightforward tax-based attack on excessive pay: higher rates. “The world of finance has been the main driver behind the growth in inequality at the extreme high end, and establishing additional tax brackets with higher rates would help lean against that trend,” he explains. He also endorses the Obama proposal for limits on itemized deductions.
Kevin Drum, blogging at Mother Jones, isn’t so sure that taxes are the answer. Taxes can help, he says, but they’re a “pretty broad brush.”
But that’s the point, isn’t it? Higher tax rates are more likely to effectively curb outsize pay because they apply a broad brush. Sure, avoidance will increase along with rates, so they are no progressive panacea. But that doesn’t mean higher rates will fail entirely to collect additional money from well-paid executives.
Back in the day, when statutory rates on the rich were really high (during World War II, for instance, when they reached 94 percent), effective rates on the top 1 percent of earners were pretty high, too (58.6 percent, according to historian Elliot Brownlee). Even after the war, effective rates stayed fairly high (in the low to mid 30s).
Eventually , Congress riddled the tax law with enough favors to force effective rates below 25 percent (they reached 24.6 percent in 1963). But it took a while: for almost twenty years, higher rates did their job. The broad brush worked until Congress plucked out most of the bristles.
When it comes to executive pay, then, the broader the brush, the better chance it will actually work. Problems creep up when policymakers start trying to make fine distinctions in the tax law. Nearly every tax rule contains within itself the seeds of its own avoidance. Try to target a tax provision narrowly — especially one designed to separate rich people from their money — and you almost guarantee failure.
Of course, broad rate hikes have a broad impact. In the case of executive pay, they would force rich people outside lower Manhattan to pay more, just like the bad boys on Wall Street. If compensation limits are just about punishing a few high-profile malefactors of great wealth (to steal a characterization from Teddy Roosevelt), then taxes aren’t the answer.
But if the real problem is gross inequality, especially in the midst of economic hardship, then taxes might actually get the job done. As Yglesias writes:
we actually have a well-established method of taking market distributions of income and trying to transmogrify it into a more just, useful, and welfare-enhancing deployment of social resources—taxes and public services … It strikes me as ultimately unlikely that the political process will be able to micromanage high finance in a way that strikes people as meeting the claims of justice. But the political process very much can collect tax revenues and use that revenue to finance things that we currently “can’t afford” like more widespread provision of health care services, better rail transportation, cleaner streets, more police officers, more and better pre-kindergarten, etc.
Yglesias has managed to illuminate an important issue dividing progressives today. Most liberals are more focused on punitive taxation than they are on progressive taxation. Liberal activists (with the exception of a few key organizations, like Citizens for Tax Justice and the Center for Budget and Policy Priorities) seem to regard taxation as epiphenomenal (as my dissertation adviser once put it to me). The important issues – labor organization, for instance, or anti-trust policy – take aim at the fundamental distribution of economic power. Taxes, on the other hand, simply reflect whatever distribution is currently in place.
As a result, many liberals start talking about progressive taxation (and especially higher rates) only when they have particular targets in mind: hedge fund managers, for instance, or bankers employed by bailed-out banks. This penchant for whipping boys is not new. Over the long history of American taxation, progressive reform has often been galvanized by the demonization of a few key figures. Like J.P. Morgan, Jr. in 1933. Or the famous non-payers of 1968 who jumpstarted a policy process that ultimately led to today’s AMT.
But the problem with narrow targets is that they are exceedingly easy to miss. Try to bring down a few evildoers (and no one else), and you’ll probably miss the mark. Worse, you’ll miss the larger problem altogether.
Sphere: Related ContentA very early “talkie” featuring Calvin Coolidge on the White House grounds. Talking about taxes, of course.
Sphere: Related ContentIn a couple of days, I’ll be starting a new blog, with Amity Shlaes, on Calvin Coolidge and his times.
Amity’s writing a biography of Coolidge and hopes to make the blog part of her larger project. As for me, I’m fishing around for book topics and hope to find one in the 1920s or thereabouts.
In any case, you’ll be able to find the new blog at silentcal.com. In fact, it’s there right now, though there isn’t much to see. Visit again on Tuesday to see the real stuff.
In the meantime, here’s something to whet the appetite: today’s CalQuote. I hope to make these a semi-regular feature of the new site.
Sphere: Related ContentIn public life it is sometimes necessary in order to appear really natural to be actually artificial.
– Coolidge on the perversity of public life, The Autobiography Calvin Coolidge, page 20.
There’s a small boomlet developing among liberals in support of plans that would raise money for health care reform by curbing the tax exclusion for employer-provided health benefits. See, for example, Matthew Yglesias’s endorsement below:
Lori Montgomery had an informative article in yesterday’s Washington Post about the latest thinking of Senator Max Baucus (D-MT) on the subject of raising money to pay for health reform by curbing the exclusion of employer-provided health benefits from taxation. This is, in my view, an entirely reasonable idea. John McCain’s way of doing this would have left large numbers of people stranded without health insurance, but the premise of Baucus’ revenue quest is that everyone will have health insurance and he needs to find money to pay for it. Under the circumstances, the exclusion is arbitrary and we should work to do away with it.
Depending on the details, such a change might raise a nice chunk of change. According to the Joint Committee on Taxation, as much as $420 billion over 10 years, assuming that taxes were levied only on plans worth more than the one provided by the Federal Employees Health Benefit Plan.
Obama has long claimed to oppose any change to the health benefit exclusion. And organized labor has urged him to stand firm. But recent reports suggest that he’s coming around. And Ezra Klein, for one, is not surprised:
For reasons I can’t understand, the media has gone along with this months-long role-play in which Obama pretends to be against capping the employer tax exclusion and Max Baucus pretends to be cajoling him to change his position.
But administration officials have been assuming this revenue sources for months. I reported as much back in February. And that’s no surprise. Most all policy experts — liberal and conservative — support capping or even eliminating the exclusion. It’s close to a consensus position in health reform circles. And Obama is, in general, a guy who employs experts and listens to their opinions. It’s also the main pot of money for health reform. And Obama is a guy who wants to pass health reform.
Klein is right. Even reliable liberals like this idea — witness this recent report from the Center on Budget and Policy Priorities. Basically, CBPP concludes that capping the exclusion (if done correctly) would be fair, efficient, and (most important) necessary:
the White House has announced that it will insist that health reform legislation be fully paid for. Congress will likely find it difficult to meet this objective unless the bill includes a cap on the exclusion as a significant source of financing. As a result, attaining universal coverage may depend on including a cap in the legislation.
This is all welcome news. But color me skeptical. Not so much about this proposal, which now seems to enjoy real momentum. But about the long-term viability, adequacy, and permanence of this funding. If Congress insists on cobbling together the money for health care reform — a little from international tax reform, some more from capping the health care exclusion, maybe even a chunk from soda and liquor taxes — the resulting program will never enjoy long-term security. Big new entitlements need big new funding sources. Preferably dedicated funding sources. Like the payroll tax. Or a VAT.
But that’s a post for another day.
Sphere: Related ContentInteresting post — from a less-than-disinterested source — on the finance of health care reform.
Dionne: Dont Let Paying For It Get In Way Of Nationalizing Health Care | NewsBusters.org.
Sphere: Related ContentElliot Brownlee, the leading historian of American taxation, has reviewed War and Taxes, my recent book with Steven Bank and Kirk Stark of UCLA Law School:
Sphere: Related ContentSteven A. Bank, Kirk J. Stark, and Joseph J. Thorndike, _War and Taxes_. Washington, DC: Urban Institute Press, 2008. xix + 224 pp. $26.50 (paperback), ISBN: 978-0-87766-740-7.
Reviewed for EH.NET by W. Elliot Brownlee, Department of History, University of California, Santa Barbara.
In early March, 2003, Secretary of the Treasury John W. Snow explained to the House Ways and Means Committee how a Bush administration proposal for a round of massive tax cuts would be consistent with fighting a war in Iraq. Snow declared that “The cost of the war will be small,” and went on: “We can afford the war, and we’ll put it behind us.” In reporting in the _New York Times_ on this testimony and the Bush administration’s “determination to cut taxes even while waging war in Iraq,” the late David E. Rosenbaum observed that “President Bush is bucking history.” Rosenbaum explained: “With the exception of the war against Mexico in the 1840s, taxes have been increased for every war the United States has fought.”[1] _War and Taxes_ responds to propositions that Bush (and the Congress) were “bucking history” by attempting to write “a thorough and balanced account of the politics of U.S. tax policy during wartime.” The authors — Steven A. Bank and Kirk J. Stark, who are professors of law at the University of California, Los Angeles, and Joseph J. Thorndike, who is director of the Tax History Project at Tax Analysts and scholar in residence at the University of Virginia — explain that “our chief objective has been to put the tax cuts enacted during the war in Iraq in historical perspective” (p. 174).
In the introduction and conclusion, which set forth the book’s key interpretations, the authors assert that in one sense the Bush administration was, indeed, bucking history. The contrast “between an active war effort on one hand and substantial tax cuts on the other … has no precedent in American history,” they write (p. xii). Further, it is “an inescapable fact,” the authors declare in their introduction, that “the United States has a strong tradition of wartime fiscal sacrifice, and the Bush tax cuts mark an abrupt departure from that tradition” (p. xiii). However, the authors seek to diminish the extent and significance of this departure. Most important, they discount the historic force of the tradition of fiscal sacrifice: “Our commitment to wartime fiscal sacrifice has always been uneasy — and more than a little ambiguous” (p. xiii). While they find evidence for a “strong” tradition of fiscal sacrifice that appears “in the extraordinary tax changes wrought by World War II and, to a lesser (through still significant) extent, during World War I and the Korean War, … in many of the wars we examined the tradition is better described as one of reluctance, resistance, and opposition” (p. 167). Thus, the authors suggest, the politics of wartime taxation during the Iraq war have not been fundamentally different from the politics of “many” wars. Sacrifice has been debated, but three factors, the authors assert, have worked against any form of increased financial sacrifice and in favor of tax cuts. These crucial elements of contingency have been: (1) relief from the kind of fear of inflation that helped drive tax increases in earlier wars; (2) “increased partisan polarization and the corresponding marginalization of deficit concerns” (p. 172); and (3) the end of the military draft in 1972, which means that “arguments for the ‘conscription of wealth’ simply no longer have the same moral force that they once did” (p. 173).
The authors’ crucial chapter on “9/11 and the War in Iraq” follows five chapters which provide discrete narratives of tax politics during the American Revolution and the War of 1812; the Civil War; World War I; World War II; and Korea and Vietnam. The book gives only cursory treatment to the Mexican War, the Spanish-American War, and the Gulf War, and does not discuss the Indian wars or the Cold War. In the narratives, the authors focus on the provisions of wartime tax laws and the legislative process, paying special attention to “the influence of arguments concerning ‘shared sacrifice’ in shaping wartime tax policy” and the role of “wartime _opposition_ to increased taxes” (pp. xiii-xiv). In doing so, they stay close to the surface of politics. For example, they “offer no single definition or methodological answer to the question of what constitutes a tax cut.” They explain: “We have … let our subjects define the terms. If political leaders in a particular era called something a tax cut, then so do we” (p. xvii). They also do not develop their own definitions of “shared sacrifice”: “Although we use the term throughout the book, we have deliberately avoided assigning it any particular definition, choosing the let historical actors speak for themselves when invoking — or refusing to invoke — principles of shared sacrifice” (p. xviii). The resulting narratives, each one self-contained, are exceptionally informative yet compact. Indeed, there is no more thorough and efficient survey of, and introduction to, wartime tax politics in the United States than this collection of essays. In addition, the essays, particularly those on World War II, Korea, and Vietnam, make lively reading, providing the human depth and drama often missing from tax history.
The authors are successful in indentifying the diverse ways in which politicians have invoked “shared sacrifice,” but I believe they overemphasize the force of “sacrifice” arguments on behalf of higher levels of aggregate taxation, and neglect the influence of “sacrifice” arguments for more progressive taxation. It was the especially powerful role of the arguments for progressive taxation that distinguished the mobilizations for World Wars I and II, and profoundly shaped, in path-dependent fashion, subsequent federal taxation. At the same time, the authors have some difficulty placing the “sacrifice” arguments in historical context because they rarely engage the social, economic, institutional, and intellectual forces that shaped wartime tax regimes. The influence of important factors such as political learning from earlier wars, growing administrative capacity, and changing economic structure, for example, are largely unexamined in the book.
Even without systematic analysis of the political economy of war, the authors have successfully identified, I believe, most of the key elements that explain (thus far) the departure of public finance during the war in Iraq. However, they do not have the space to discuss these factors in depth and leave unexplored at least one critical element: the power of the continuing “Reagan revolution.” During the Iraq war, George W. Bush and the Republican leadership in Congress were able to implement a fiscal strategy based on their reading of the historic legacy of wartime finance. They were determined to break out of a historic process (unexamined in this book): the upward ratcheting of taxing capacity, domestic spending, and tax progressivity associated with the financing of the world wars of the twentieth century. They did not want the Iraq war to disrupt their effort to increase the downward fiscal pressure on entitlements and other domestic spending, and to shift the base of taxation toward regressive consumption taxation. Their strategic effort required muting or countering traditional calls for “shared sacrifice” via taxation. The outcome of the 2008 elections, however, may well have marked a defeat for the strategy and signaled a future revival of the two-pronged tradition of “shared-sacrifice” in public finance during national crises.
Note:
1. Snow quoted in David E. Rosenbaum, “Threats and Responses: Washington Talk; Tax Cuts and War Have Seldom Mixed,” _New York Times_, March 9, 2003.W. Elliot Brownlee is the author of “Wilson’s Reform of Economic Structure: Progressive Liberalism and the Corporation,” in John Milton Cooper, ed., _The New Fiscal Sociology: Taxation in Comparative and Historical Perspective_ (Washington, DC: Woodrow Wilson Center Press and Johns Hopkins University Press, 2008), 57-89.
Copyright (c) 2009 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator at eh.net). Published by EH.Net (May 2009). All EH.Net reviews are archived at http://www.eh.net/BookReview.
Matthew Yglesias has an interesting post on using alcohol taxes to help finance health care reform:
Taxing Booze to Pay for Health Care: “
USA Today reports that we might see increased taxation on alcoholic beverages as a way to pay for health care:
Consumers in the United States may have to hand over nearly $2 more for a case of beer to help provide health insurance for all. [...] Beer taxes would go up by 48 cents a six-pack, wine taxes would rise by 49 cents per bottle, and the tax on hard liquor would increase by 40 cents per fifth. Proceeds from the new taxes would help cover an estimated 50 million uninsured Americans.
The article is extremely unenlightening on the policy merits. Suffice it to say, however, that the real value of taxes on beer, wine, and liquor has declined substantially over the past fifty years. So an increase of this sort would not be an unprecedented burden on the American consumer, it would be more like a return to the level of taxation that existed a few decades ago. As I’ve said previously, I wouldn’t necessarily be enthusiastic about this sort of thing purely as a public health measure. But when you consider that universal health care is highly desirable and has to be paid for somehow, I think this is a pretty attractive way of going about it. The economic efficiency of this sort of tax is high, the public health benefits would be large. What’s more, the incidence would fall overwhelmingly on a relatively small number of problem drinkers (rather than the broad mass of people who drink moderately on social occasions) and the businessmen who profit off them, while the public health benefits from decreased drunk driving and alcohol-related violence would be broadly shared.
In technical terms, it seems to me that this proposal could be improved. For one thing, there’s no reason to tax beer, wine, and liquor all on separate scales. What we ought to do is tax the alcohol content of beverages. For another thing, it would be useful to take this opportunity to peg the tax level to inflation or take some other related step to avoid its real value from eroding over time.
In general, I’m not a fan of using sin taxes to finance new entitlements. They’re politically unstable and perpetually vulnerable.
Not to mention regressive. The regressivity of the tax might be offset by the progressivity of the benefit. But there’s no reason we can’t use a more progressive tax in the first place. Or at least choose a more robust (if still regressive) tax like the VAT.
A new post at tax.com on the role of experts in tax policymaking. The point:
Sphere: Related ContentLeft to themselves, tax technocrats would craft a simple tax system – or at least a simpler one than we have today. They would resist the use of taxes to achieve most non-revenue goals (with a few important exceptions, like combating global warming). They might even prove less susceptible to the special pleading by narrow interests and paid lobbyists.
But the dispassionate, apolitical approach to tax policy – were it even politically possible – is not desirable. Many of the most important questions surrounding taxation are not susceptible to rigorous scientific analysis. In particular, issues of vertical equity are notoriously difficult to de-politicize. If history is any guide, redistribution is a vital and inevitable part of the American tax system. But settling on the degree of redistribution is an aesthetic, not a scientific, endeavor. As the economist Henry Simons observed in 1938:
The case for drastic progression in taxation must be rested on the case against inequality – on the ethical or aesthetic judgment that the prevailing distribution of wealth and income reveals a degree (and/or kind) of inequality which is distinctly evil or unlovely.
Experts have a vital contribution to make in debates over inequality. But only politicians can decide when the status quo has become sufficiently “unlovely” to justify a policy response …
The democratic nature of tax policymaking comes at an undeniable cost. Our tax system is more complex and less evenhanded than it probably would be if we handed it over to the experts.
But it would also be less fair, at least when measured by the only standard that matters: public opinion.
Just posted a new article at taxhistory.com: “Reform for Sale, No Money Down.” The intro:
Sphere: Related ContentWhat’s with all the down payments? Every time you turn around, the White House is making a “down payment” of some kind or another — for healthcare, foreign aid, mass transit, energy independence, you name it. It’s a puzzling metaphor to use in the midst of a mortgage crisis. It’s also a confusing one. On March 5 President Obama described his $634 billion healthcare reserve fund as a “significant down payment that’s fully paid for [and] does not add one penny to our deficit.” This was real money (in theory, if not legislative reality), gathered from higher Medicare premiums and deduction limitations for well-off taxpayers. But a month earlier, Obama called the economic stimulus bill, replete with unfunded spending, a “down payment on the American Dream that serves our children and our children’s children for generations to come.” This was money out the door, not cash in the Treasury. Clearly, the White House has lumped several different concepts under the rubric of a down payment. (The rhetoric flows fast and loose in the Obama administration, but not always coherently.) Some down payments represent new revenue. Others describe new spending or programmatic reform. Still others cover both.
More (including why this matters) here.
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