StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



The Oregon Tax Vote

27 Jan 2010
Posted by Bruce Bartlett

Yesterday, the citizens of Oregon ratified a large tax increase on corporations and the wealthy. The top personal income tax rate will rise by two percentage points and the minimum tax on corporations will also rise, including a new tax even on those with no profits to report, according to a Wall Street Journal report. According to Tax Foundation data, this would make the top rate in Oregon 13 percent

This vote is considered a bellwether because the state has previously been supportive of tax limitation measures. Also, it appears that populist anger, which has previously been channeled toward the anti-tax tea party movement, may have the potential to swing in the other direction when people are faced with cuts in programs with wide support.

I can easily see many tea party goers becoming rabid tax-the-rich folks if the alternative is higher taxes on them. Let us not forget that just about a year ago many of the House of Representatives' most conservative members voted to impose a 90 percent tax rate on bank bonuses. As I noted at the time, those supporting this confiscatory tax measure included Eric Canter, Peter Hoekstra and Paul Ryan.

I have foreseen this development for some years and feared that once our budgetary problems forced action that sharply higher tax rates on the rich, corporations and capital in general would be the inevitable consequence. That is why I have championed the value-added tax as a way of raising the revenue that will be raised one way or another, but in a way that exempts capital because it is a tax on consumption. In short, it is the most conservative way of raising revenue that we know of.

Thus it's ironic that almost all of the opposition to a VAT comes from conservatives. Just the other day the right-wing Heritage Foundation published a blast against it that made no serious effort to address the real reasons for a VAT: taxes will be raised and all the alternatives to a VAT are worse from Heritage's own point of view. It must be nice to live in a right wing dream world where deficits never lead to tax increases, only spending cuts (except on defense or Medicare, which the Republican National Committee has declared to be sacrosanct).

I may add some addendums to this post later today when I have had a chance to absorb the various analyses that I assume will be forthcoming on both the right and left.

Addendum

Megan McArdle comments here. Roundup of views here.

why is raising taxes bad?

We did OK in the postwar era; how terrible a thing, really, are slightly higher tax rates? We aren't looking at punitive rates here-- a couple percentage point increase isn't exactly the French Revolution. And the small tax hikes under Clinton and Bush Sr. certainly seem to have coincided with a much better, faster-growing economy than the tax cuts under Bush Jr.


Thanks

for your analysis. The same thing happened in the 1930's (taxes raised on the rich). At some point there is no other politically feasible choice. In Minnesota the governor tried a trick called "unallotment", but it has been struck down by a judge as unconstitutional (and I believe that ruling will stand on appeal). His next sleight of hand (this week) is withholding payments from the public schools to divert the money to other needs.

This will be the straw that breaks it for Minnesotans. K-12 is the sacred cow, and as soon as cuts are made and class sizes rise it will be all over.

The rich will be taxed, no doubt about it.


I'm a lifetime Oregonian and

I'm a lifetime Oregonian and a lifetime Democrat. I've voted for Packwood and Hatfield back when the Oregon Republican party was a bit more constructive. Would have voted for McCall but was a little too young. I believe Packwood is an independent these days and Hatfield seldom seen. The Oregon Republicans keep painting themselves into a smaller and smaller corner.


Tax

The mood and movement towards punitive populism is a little scary.. And exactly what I expected from an Obama-era. 13 percent on top of federal taxes will put a total tax burden at over 50%. In my opinion that is un-American.

I don't see how people can be so blind to the fact that it will ultimately hurt a states economy. Just ask NY and NJ. The wealthy are leaving, and quickly. I would too.

It won't be long now before they take torches to the oil companies on the campaign trail. These proletariat ambitions will only drive our economy further down.


A Note About Depression

A Note About Depression History: What got many states off the edge of bankruptcy in the great depression was the adoption of retail sales taxes. Those are far different from the "tax the other guy" taxes that the "courageous" Oregon voters approved this week. Did we have more statesmen in the 1930s than we have now or is it a different media that pushes them?


Fiscal personal responsibility

What got many states off the edge of bankruptcy in the great depression was the adoption of retail sales taxes. Those are far different from the "tax the other guy" taxes that the "courageous" Oregon voters approved this week.

Exactly so. "I want mine, and more, with somebody else paying for it", is hardly the road to fiscal responsibility. And hardly all that courageous either.

FDR explicitly rejected all "rich pay for poor" financing for Social Security, and went with a payroll tax on the workers who would benefit from it instead. LBJ (and Ted Kennedy) did the same thing for the most part with Medicare, going with a payroll tax.

Once upon a time progressives like FDR believed that if such a social spending program benefitted people, those people should pay for it, at least in good portion -- in no small part because that proved it was "worth it" to them, and because with them paying its cost the politicians would have to manage it to continue to be worth it to them (rather than, say, turn the program into a pork dispensing machine).

In a world of ever more, "I want the govt to give to me, but it's not worth it to me if I actually have to pay for it, so we'll have to drop the cost on someone else", what quality does that say we're getting?


I support punitive taxes on

I support punitive taxes on the top 1% to the levels that tax-cutting POTUS JFK made.... UNTIL .... the income of the bottom 3 fifths starts keeping pace with productivity gains AND top 10% wages, retroactive to 1980. (BTW, capital gains would be taxed at the same rate as wages.)

Once this is done, the taxes can be rolled back to Clinton levels. That seems to work good for things like balanced budgets.

I might be willing to entertain cutting (or eliminating) corporate taxes (on profits) as long as there is no way for them to be avoided as the profits are distributed to investers/owners.

There should be a junk food tax, and a tax on fast foods which are deemed unhealthy.

There also should be an automatic across the board increase for all defense increases. If Congress raises defense spending, then the taxes for everyone has to go up proportionally.

Everyone wants to hear the music, nobody wants to pay the band.


"Slightly" higher tax rates?

how terrible a thing, really, are slightly higher tax rates?

The Tax Policy Center tells us that to get the deficit down to a sustainable level (2% of GDP) post-2015 will require a 50% across-the-board increase in income tax rates on everyone.

That would of course be by far the largest tax increase since the temporary tax hikes of WWII. And it would be only the start, because it doesn't even get us to when the big increases in Medicare and SS cost kick in -- tax rates have to go up steadily forever after that.

That's "slight"?

The TPC concludes: "We can’t balance the budget with income tax increases alone". Period. No matter how large, it's not possible.

"I support punitive taxes on the top 1% to the levels that tax-cutting POTUS JFK made.... UNTIL .... the income of the bottom 3 fifths"

It is a myth, fiscal urban legend, that the top 1% ever paid those rates -- and also that the richest paid the highest tax rates under them.

Investment income, which is the bulk of income at the top 1%, was not subject to those rates and legal tax shelters and "preference items" were replete, endemic for it.

Under the Kennedy tax rates, persons with income over $1 million in fact actually paid a lower effective tax rate than those with income from $50k to $100k (as I've noted here previously).

Some myths never die, but the hard way.

The self-deluding belief of the "protect all spending, and let's have more!" people today is that only a little, "slight", tax increase can cover everything -- and it need be only on the rich (not them!).

But come the 2020s, a near 15% across-the-board income tax increase is going to be needed just to cover the operation of the Social Security trust fund -- and, of course, that tax is going to have to be paid by seniors on all their income from pensions, lifetime investments, and Social Security ... to pay for their own Social Security. (Unless they choose from pure self-interest not to redeem the SS trust fund bonds -- which they might!).

The self-deluding belief of the "not a penny more of taxes, ever!" people today is believing that even the biggest plausible spending cuts (e.g., seriously means-testing entitlements, moving the qualifying age for Medicare benefits back to match that for Social Security) can come anywhere close to closing the funding gap without major tax increases too.

In the end, by force of hard necessity, it is going to be big benefit cutbacks and big tax increases.

And everybody will be unhappy. Which, after all the years of mutual denial of reality, will be well deserved.


VAT

it's ironic that almost all of the opposition to a VAT comes from conservatives

Yes, and seeing "progressives" rush to embrace a regressive tax in order to avoid the progressive remedy for social program overreach -- means-testing "the rich" down or out of them, instead of increasing taxes on the poor to preserve the benefits of the rich -- is revealing.

Irony is replete across the political spectrum.

the right-wing Heritage Foundation published a blast against it that made no serious effort to address the real reasons for a VAT: taxes will be raised and all the alternatives to a VAT are worse from Heritage's own point of view.

But it is rather naive to think adopting/endorsing a VAT today is any kind of solution for protecting fiscal solvency -- or even not making the situation worse, not incurring those worse taxes anyhow.

Four countries headed to a "junk" credit rating. Three of them have a VAT, but there they are nonetheless. One doesn't have a VAT.

Which country is in the best fiscal condition? The one without the VAT -- because it hasn't wasted it! It can still impose it when its fiscal crunch hits to cover its bills. The other countries have already blown through their VAT revenue -- because they had it to blow. When their crunches hit, what new tax are they going to come up with then???

So there are two ways to look at the VAT:

* From an impartial, objective, analytical view: Of course a VAT (or some as yet unimagined equivalent) is coming. To deny it is absurd.

* From a political reality, "protect national solvency as best as possible" view: Not a penny of VAT until the big bill for already promised spending arrives ... and then only to service the $60 trillion of implicit debt we've already incurred -- not to bloat spending larger while watching the implicit debt grow ... and only as part of a bargain that cuts the bloat out of entitlements (boomers collecting payments for their yachts ... Warren Buffett getting paid from the payroll taxes of his Dairy Queen employees, etc.)

In the political fight, assuring this best use for a VAT obviously means saying "No! No! No! Never!" until the other side is willing to give its side of the deal.

Look at what the Democratic Congress did with the supposed big revenue-raising deficit cutter of the Obama agenda, cap and trade. In a blink of an eye they gave the whole thing, near $100 billion a year, to the big corporations, when CBO said no more than 15% was the right amount -- and immediately after their own Budget Director, Orszag himself, said it would be "the biggest act of corporate welfare in history".

Does anyone doubt they would do the same thing with all the revenue from a VAT if we just gave it to them today? *Poof*, gone, and then where will we be when the real fiscal crisis hits and the national credit rating is shaking?

How VAT revenue is to be spent -- blown immediately to buy votes right away, or applied to the real debt -- will be a matter of hardball political negotiation. Nobody goes into hardball negotiations saying "I think our final solution should be this, so it is my starting bid". Ha! Talk about giving away the store! The other side will laugh as they loot you.

Instead you say publicly, "Not a damn thing do I give", and you mean it, until you get a message from the other side that it is willing to deal, which message will be delivered by back channels.

If Heritage and the politicians on the right said today, "Sure we need a VAT, let's have one", what would they get back in return from the left? Tell me. Except chortles.

So to the extent they actually care as conservatives about restraining the growth of government, and meeting the future fiscal crisis with the minimum tax increases possible, they are doing exactly the right thing today.

The day for the VAT will come when, as per the Social Security crisis of 1983 Writ Large, the politicians of both sides see no alternative (in pain minimization terms to themselves) to a tax increase-for-spending cuts deal (almost exactly 50-50 in 1983) with all the savings actually applied to closing the fiscal gap -- with them thus then remarkably finding "the courage" to make such a deal. (Though they will doubtless create a Prestigious Commission to recommend the deal's details and cover their butts in doing so).

Then we'll get our VAT, and our entitlements will be rationalized somewhat, and the credit rating of the US will be saved until another day.

But what will those other three countries be doing, with no VAT to enact to save their credit ratings?

Heritage is doing its best to keep us from being in the position of those other three countries. Good for it.


British Columbia going in the opposite direction

Interestingly enough British Columbia right up I-5 along with Ontario are going in the opposite direction by harmonizing its traditional retail sales tax system with Canada's federal VAT/GST creating the so called HST and at the same time are cutting corporate income taxes to a combined federal/provincial rate of 25% compared to 40%+ combined rate in Oregon. A prominent Canadian tax expert named Jack Mintz has called these changes some of the most radical tax policies ever attempted in North America. When this policy was first announced in BC the government took substantial political heat from voters but as of right now tensions seem to have cooled. Ontario further away from the populist Pacific Northwest did not nearly have the same political outcry.

Jack Mintz videos:
http://www.youtube.com/watch?v=z4hB95hPfbU
http://www.youtube.com/watch?v=oCoI8kX8lXE&feature=related


This post strikes me as

This post strikes me as somewhat confused. It seems Mr. Bartlett is using the Oregon vote as an excuse for yet another attack of the so-called Tea Parties and another pitch for his beloved VAT. I'll limit my comments to the Oregon situation.
The problem in Oregon is not that it taxes its rich too little, but rather than it taxes its poor too little. The state has hovered behind Michigan in terms of unemployment for most of the decade, yet young people continue flocking there, attracted by the idea of Oregon instead of the economic reality. Contrary to the theories of Richard Florida, this concentration of youthful vitality has produced little in the way of growth. The only growth has been in government services, so its higher taxes mean the state will continue feeding off itself.
Michigan and Oregon are wonderful examples of the importance of demographics. Both states have populations larger than their economies warrant. Michigan can't get people to leave and Oregon can't get them to stay away.


Since household financial

Since household financial balance + business financial balance + government financial balance + foreign balance must = 0, then with non wealthy households tapped out and a positive trade balance out of the question for the foreseeable future, if you want to reign in the fiscal deficit it by definition must come out of business. On the other hand, if you think business is where wealth is created and future export earnings will come from, the hit must be taken by the government fiscal position. But this latter course is only sustainable if that government fiscal position is in fact positioning businesses for future export earnings which current budget priorities clearly do not.

Given the growing threat of fiscal extinction at the non wealthy household level, expect people to recognize where the money is: it is no secret that corporations in general and financial corporations in particular are quite cash rich at present. People may not be trained economically, but they are not stupid. That corporations have intermediated themselves between voters and their elected representatives will be fairly easy to demonstrate as a consequence of last weeks Supreme Court postmodernism which added the confusion of legal entities (corporations) with citizens to the courts previous metonymy in confusing money and speech.


Make the rich pay? and other illusions

"The rich" don't get rich and stay rich standing still for your "punitive" taxes. They can organize their affairs in ways to generate less taxable income, not by cheating, just by rearranging things within the law. It is not quite what they mean when they say our tax system relies on voluntary compliance, but so it does.

If you depend on such people for your job (or your welfare payments), it might be you that hurts when "the rich" get squeezed. It never works quite the way the friends of the common man say it will. I remember one time when my state needed more money (like when did it ever not?) and had the great idea of socking it to the boat people. If you owned an expensive boat, built them, sold them, or worked on them, the state was going to make you pay. The industry folded overnight. When the state realized how self-defeating its action had been, it reversed its decision. But the industry's decision was final.


VAT and a conservative

it's ironic that almost all of the opposition to a VAT comes from conservatives.

Scott Sumner, a "small government" conservative, offers up a model of a left-right Grand Bargain on the budget that includes a VAT.




Recent comments


Advertising


Order from Amazon


Copyright

Creative Commons LicenseThe content of CapitalGainsandGames.com is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 3.0 United States License. Need permissions beyond the scope of this license? Please submit a request here.