Taxes at the Top

January 19, 2012

By PAUL KRUGMAN

Call me peculiar, but I’m actually enjoying the spectacle of Mitt Romney doing the Dance of the Seven Veils — partly out of voyeurism, of course, but also because it’s about time that we had this discussion.

The theme of his dance, for those who haven’t been paying attention, is taxes — his own taxes. Although disclosure of tax returns is standard practice for political candidates, Mr. Romney has never done so, and, at first, he tried to stonewall the issue even in a presidential race. Then he said that he probably pays only about 15 percent of his income in taxes, and he hinted that he might release his 2011 return.

Even then, however, he will face pressure to release previous returns, too — like his father, who released 12 years of returns back when he made his presidential run. (The elder Romney, by the way, paid 37 percent of his income in taxes).

And the public has a right to see the back years: By 2011, with the campaign looming, Mr. Romney may have rearranged his portfolio to minimize awkward issues like his accounts in the Cayman Islands or his use of the justly reviled “carried interest” tax break.

But the larger question isn’t what Mitt Romney’s tax returns have to say about Mitt Romney; it’s what they have to say about U.S. tax policy. Is there a good reason why the rich should bear a startlingly light tax burden?

For they do. If Mr. Romney is telling the truth about his taxes, he’s actually more or less typical of the very wealthy. Since 1992, the I.R.S. has been releasing income and tax data for the 400 highest-income filers. In 2008, the most recent year available, these filers paid only 18.1 percent of their income in federal income taxes; in 2007, they paid only 16.6 percent. When you bear in mind that the rich pay little either in payroll taxes or in state and local taxes — major burdens on middle-class families — this implies that the top 400 filers faced lower taxes than many ordinary workers.

The main reason the rich pay so little is that most of their income takes the form of capital gains, which are taxed at a maximum rate of 15 percent, far below the maximum on wages and salaries. So the question is whether capital gains — three-quarters of which go to the top 1 percent of the income distribution — warrant such special treatment.

Defenders of low taxes on the rich mainly make two arguments: that low taxes on capital gains are a time-honored principle, and that they are needed to promote economic growth and job creation. Both claims are false.

When you hear about the low, low taxes of people like Mr. Romney, what you need to know is that it wasn’t always thus — and the days when the superrich paid much higher taxes weren’t that long ago. Back in 1986, Ronald Reagan — yes, Ronald Reagan — signed a tax reform equalizing top rates on earned income and capital gains at 28 percent. The rate rose further, to more than 29 percent, during Bill Clinton’s first term.

Low capital gains taxes date only from 1997, when Mr. Clinton struck a deal with Republicans in Congress in which he cut taxes on the rich in return for creation of the Children’s Health Insurance Program. And today’s ultralow rates — the lowest since the days of Herbert Hoover — date only from 2003, when former President George W. Bush rammed both a tax cut on capital gains and a tax cut on dividends through Congress, something he achieved by exploiting the illusion of triumph in Iraq.

Correspondingly, the low-tax status of the very rich is also a recent development. During Mr. Clinton’s first term, the top 400 taxpayers paid close to 30 percent of their income in federal taxes, and even after his tax deal they paid substantially more than they have since the 2003 cut.

So is it essential that the rich receive such a big tax break? There is a theoretical case for according special treatment to capital gains, but there are also theoretical and practical arguments against such special treatment. In particular, the huge gap between taxes on earned income and taxes on unearned income creates a perverse incentive to arrange one’s affairs so as to make income appear in the “right” category.

And the economic record certainly doesn’t support the notion that superlow taxes on the superrich are the key to prosperity. During that first Clinton term, when the very rich paid much higher taxes than they do now, the economy added 11.5 million jobs, dwarfing anything achieved even during the good years of the Bush administration.

So Mr. Romney’s tax dance is doing us all a service by highlighting the unwise, unjust and expensive favors being showered on the upper-upper class. At a time when all the self-proclaimed serious people are telling us that the poor and the middle class must suffer in the name of fiscal probity, such low taxes on the very rich are indefensible.

 

• Patricia Mulholland
• Arundel, Main
  Thank you, once again, Professor Krugman, for pointing out the bitter truth of the income disparity that finds our democracy at risk. A professional woman, still struggling to recover from the recession, I find little to be hopeful about. The banks continue to operate without accountability -- I can't refinance my home, which was never underwater -- and participation in s supposedly government sponsored program to help homeowners trashed my credit and has made it impossible for me to take advantage of record low interest rates so that I can get caught up and, yes pay my taxes! (A legal complaint to the OCC and Wells Fargo was never satisfied.)
  I find myself saying often, "If I were younger (61 now) I would seriously consider living somewhere else - Europe, Denmark, etc. Sure, taxes are high, but a middle class life is possible - which benefits people and institutions - and there is a network to help the less fortunate. The social problems we have in this country shock people overseas. I wonder if and when we are going to really "get it." And I wonder what is in the water that Republicans in the headlines are drinking. Perhaps we are simply going to be, in the end, a failed experiment -- a democracy that got stolen by capitalism gone amok.
  Taxing the very rich at the rates you reference would help redeem our democracy --support infrastructure development, pay down illegal wars, etc. and re-engage the hearts and minds of yes, the other 99%.
  Weary,
  Patricia
• Jan. 20, 2012 at 8:49 a.m.

Merry Christmas!

America’s Unlevel Field

January 8, 2012

By PAUL KRUGMAN

Last month President Obama gave a speech invoking the spirit of Teddy Roosevelt on behalf of progressive ideals — and Republicans were not happy. Mitt Romney, in particular, insisted that where Roosevelt believed that “government should level the playing field to create equal opportunities,” Mr. Obama believes that “government should create equal outcomes,” that we should have a society where “everyone receives the same or similar rewards, regardless of education, effort and willingness to take risk.”

As many people were quick to point out, this portrait of the president as radical redistributionist was pure fiction. What hasn’t been as widely noted, however, is that Mr. Romney’s picture of himself as a believer in a level playing field is just as fictional. Where is the evidence that he or his party cares at all about equality of opportunity?

Let’s talk for a minute about the actual state of the playing field.

Americans are much more likely than citizens of other nations to believe that they live in a meritocracy. But this self-image is a fantasy: as a report in The Times last week pointed out, America actually stands out as the advanced country in which it matters most who your parents were, the country in which those born on one of society’s lower rungs have the least chance of climbing to the top or even to the middle.

And if you ask why America is more class-bound in practice than the rest of the Western world, a large part of the reason is that our government falls down on the job of creating equal opportunity.

The failure starts early: in America, the holes in the social safety net mean that both low-income mothers and their children are all too likely to suffer from poor nutrition and receive inadequate health care. It continues once children reach school age, where they encounter a system in which the affluent send their kids to good, well-financed public schools or, if they choose, to private schools, while less-advantaged children get a far worse education.

Once they reach college age, those who come from disadvantaged backgrounds are far less likely to go to college — and vastly less likely to go to a top-tier school — than those luckier in their parentage. At the most selective, “Tier 1” schools, 74 percent of the entering class comes from the quarter of households that have the highest “socioeconomic status”; only 3 percent comes from the bottom quarter.

And if children from our society’s lower rungs do manage to make it into a good college, the lack of financial support makes them far more likely to drop out than the children of the affluent, even if they have as much or more native ability. One long-term study by the Department of Education found that students with high test scores but low-income parents were less likely to complete college than students with low scores but affluent parents — loosely speaking, that smart poor kids are less likely than dumb rich kids to get a degree.

It’s no wonder, then, that Horatio Alger stories, tales of poor kids who make good, are much less common in reality than they are in legend — and much less common in America than they are in Canada or Europe. Which brings me back to those, like Mr. Romney, who claim to believe in equality of opportunity. Where is the evidence for that claim?

Think about it: someone who really wanted equal opportunity would be very concerned about the inequality of our current system. He would support more nutritional aid for low-income mothers-to-be and young children. He would try to improve the quality of public schools. He would support aid to low-income college students. And he would support what every other advanced country has, a universal health care system, so that nobody need worry about untreated illness or crushing medical bills.

If Mr. Romney has come out for any of these things, I’ve missed it. And the Congressional wing of his party seems determined to make upward mobility even harder. For example, Republicans have tried to slash funds for the Women, Infants and Children program, which helps provide adequate nutrition to low-income mothers and their children; they have demanded cuts in Pell grants, which are designed to help lower-income students afford college.

And they have, of course, pledged to repeal a health reform that, for all its imperfections, would finally give Americans the guaranteed care that everyone else in the advanced world takes for granted.

So where is the evidence that Mr. Romney or his party actually believes in equal opportunity? Judging by their actions, they seem to prefer a society in which your station in life is largely determined by that of your parents — and in which the children of the very rich get to inherit their estates tax-free. Teddy Roosevelt would not have approved.

In Memory of Christopher Hitchens…

 

Christopher Hitchens (1949–2011). Photo by Christian Witkin.

Does science make belief in god obsolete? No, but it should. Until about 1832, when it first seems to have become established as a noun and a concept, the term “scientist” had no really independent meaning. “Science” meant “knowledge” in much the same way as “physic” meant medicine, and those who conducted experiments or organized field expeditions or managed laboratories were known as “natural philosophers.” To these gentlemen (for they were mainly gentlemen) the belief in a divine presence or inspiration was often merely assumed to be a part of the natural order, in rather the same way as it was assumed—or actually insisted upon—that a teacher at Cambridge University swear an oath to be an ordained Christian minister. For Sir Isaac Newton—an enthusiastic alchemist, a despiser of the doctrine of the Trinity and a fanatical anti-Papist—the main clues to the cosmos were to be found in Scripture. Joseph Priestley, discoverer of oxygen, was a devout Unitarian as well as a believer in the phlogiston theory. Alfred Russel Wallace, to whom we owe much of what we know about biogeography and natural selection, delighted in nothing more than a session of ectoplasmic or spiritual communion with the departed.

And thus it could be argued—though if I were a believer in god I would not myself attempt to argue it—that a commitment to science by no means contradicts a belief in the supernatural. The best known statement of this opinion in our own time comes from the late Stephen Jay Gould, who tactfully proposed that the worlds of science and religion commanded “non-overlapping magisteria.” How true is this on a second look, or even on a first glance? Would we have adopted monotheism in the first place if we had known:

1. That our species is at most 200,000 years old, and very nearly joined the 98.9 percent of all other species on our planet by becoming extinct, in Africa, 60,000 years ago, when our numbers seemingly fell below 2,000 before we embarked on our true “exodus” from the savannah?
2. That the universe, originally discovered by Edwin Hubble to be expanding away from itself in a flash of red light, is now known to be expanding away from itself even more rapidly, so that soon even the evidence of the original “big bang” will be unobservable?
3. That the Andromeda galaxy is on a direct collision course with our own, the ominous but beautiful premonition of which can already be seen with a naked eye in the night sky?

These are very recent examples, post-Darwinian and post-Einsteinian, and they make pathetic nonsense of any idea that our presence on this planet, let alone in this of so many billion galaxies, is part of a plan. Which design, or designer, made so sure that absolutely nothing (see above) will come out of our fragile current “something”? What plan, or planner, determined that millions of humans would die without even a grave-marker, for our first 200,000 years of struggling and desperate existence, and that there would only then at last be a “revelation” to save us, about 3,000 years ago, but disclosed only to gaping peasants in remote and violent and illiterate areas of the Middle East?

To say that there is little “scientific” evidence for the last proposition is to invite a laugh. There is no evidence for it, period. And if by some strenuous and improbable revelation there was to be any evidence, it would only argue that the creator or designer of all things was either (a) very laborious, roundabout, tinkering and incompetent and/or (b) extremely capricious and callous, and even cruel. It will not do to say, in reply to this, that the lord moves in mysterious ways. Those who dare to claim to be his understudies and votaries and interpreters must either accept the cruelty and the chaos or disown it: they cannot pick and choose between the warmly benign and the frigidly indifferent. Nor can the religious claim to be in possession of secret sources of information that are denied to the rest of us. That claim was, once, the prerogative of the Pope and the witch-doctor, but now it’s gone. This is as much as to say that reason and logic reject god, which (without being conclusive) would be a fairly close approach to a scientific rebuttal. It would also be quite near to saying something that lies just outside the scope of this essay, which is that morality shudders at the idea of god, as well.

Religion, remember, is theism not deism. Faith cannot rest itself on the argument that there might or might not be a prime mover. Faith must believe in answered prayers, divinely-ordained morality, heavenly warrant for circumcision, the occurrence of miracles or what you will. Physics and chemistry and biology and paleontology and archaeology have, at a minimum, given us explanations for what used to be mysterious, and furnished us with hypotheses that are at least as good as, or very much better than, the ones offered by any believers in other and inexplicable dimensions.

Does this mean that the inexplicable or superstitious has become “obsolete”? I myself would wish to say no, if only because I believe that the human capacity for wonder neither will nor should be destroyed or superseded. But the original problem with religion is that it is our first, and our worst, attempt at explanation. It is how we came up with answers before we had any evidence. It belongs to the terrified childhood of our species, before we knew about germs or could account for earthquakes. It belongs to our childhood, too, in the less charming sense of demanding a tyrannical authority: a protective parent who demands compulsory love even as he exacts a tithe of fear. This unalterable and eternal despot is the origin of totalitarianism, and represents the first cringing human attempt to refer all difficult questions to the smoking and forbidding altar of a Big Brother. This of course is why one desires that science and humanism would make faith obsolete, even as one sadly realizes that as long as we remain insecure primates we shall remain very fearful of breaking the chain.

by Christopher Hitchens

The Numbers!

Nobody Understands Debt

January 1, 2012

By PAUL KRUGMAN

In 2011, as in 2010, America was in a technical recovery but continued to suffer from disastrously high unemployment. And through most of 2011, as in 2010, almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit.

This misplaced focus said a lot about our political culture, in particular about how disconnected Congress is from the suffering of ordinary Americans. But it also revealed something else: when people in D.C. talk about deficits and debt, by and large they have no idea what they’re talking about — and the people who talk the most understand the least.

Perhaps most obviously, the economic “experts” on whom much of Congress relies have been repeatedly, utterly wrong about the short-run effects of budget deficits. People who get their economic analysis from the likes of the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now!

And while they’ve been waiting, those rates have dropped to historical lows. You might think that this would make politicians question their choice of experts — that is, you might think that if you didn’t know anything about our postmodern, fact-free politics.

But Washington isn’t just confused about the short run; it’s also confused about the long run. For while debt can be a problem, the way our politicians and pundits think about debt is all wrong, and exaggerates the problem’s size.

Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.

This is, however, a really bad analogy in at least two ways.

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.

But isn’t this time different? Not as much as you think.

It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.

Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion. But these costs are a lot less dramatic than the analogy with an overindebted family might suggest.

And that’s why nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100 percent of G.D.P. for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan.

Of course, America, with its rabidly antitax conservative movement, may not have a government that is responsible in this sense. But in that case the fault lies not in our debt, but in ourselves.

So yes, debt matters. But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way.