Thanks to my daughter Kathy for naming this blog.

















Bald Eagle in Anchorage, Alaska

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Tuesday, July 9, 2013

An Open Letter to President Obama about Domestic Surveillance

I am writing to protest the NSA’s broad programs of domestic surveillance, and ask for a constitutional amendment guaranteeing the right of privacy.

I supported Mr. Obama in the 2008 and 2012 elections through campaign contributions, social media and writings on the Internet.  I now feel betrayed by Mr. Obama on the issue of privacy and domestic surveillance.

The right to privacy is a fundamental American freedom, recognized by multiple Supreme Court decisions.   The right to privacy has been recognized as implicit in the First, Third, Fourth, Ninth and Fourteenth Amendments to the Constitution.  Nevertheless, these are not sufficient, and we need a new Amendment, specifically defining and protecting the right of privacy against intrusion by government and business.

Funding for the NSA data center in Utah was obtained through misleading testimony to Congress. Authority for domestic surveillance was given by secret decisions by a secret court. Democracy cannot function when the actions of the government are taken in secret.  Secret surveillance, the secret court, and misleading testimony to Congress give credence to those who say we cannot trust the government.

Our constitution was carefully constructed in order to provide checks on the powers of government and protection of individual freedoms. The Fourth Amendment is a particular embodiment of that restraint on government. A 1989 Supreme Court ruling made a narrow exception to the Fourth Amendment, and allowed wire-tapping on a case-by-case basis where a known security threat existed. The expansion of that ruling to perform comprehensive surveillance across the nation on the correspondence, reading and conversations of the citizenry is an outrage.

I believe that these powers of surveillance will be abused by future administrations, in ways small and large. History does not speak well of human nature, given the opportunity to use secret powers to perpetuate power. The NSA, with the permission of this administration, has built and institutionalized the apparatus for political repression in the United States.  Like the surveillance itself, the criteria to track or prosecute violators must also be secret, and the decision to prosecute is likewise secret, and beyond appeal.  At best, it resembles Vladimir Putin’s “managed democracy”.   At worst, it resembles the Stalinist terrors of the 1930’s.

I no longer feel free.  I cannot look at webpages or write an e-mail without thinking about how it might be misconstrued by a computer program or some government hack.  Under the current policies of NSA surveillance, I no longer live in a free country.

Shame.

Thursday, January 3, 2013

United States Federal Income Tax Breaks


In 2011, the United States received 47 percent of its Federal tax revenue through income taxes on individuals and 8 percent from corporate income tax.  (Payroll taxes, i.e. funds dedicated to Social Security and Medicare, provide 36 percent of Federal receipts.)    Individual income taxes provided 1,090 billion dollars, and corporate income tax provided 181 billion dollars. 

Through the years, the government has established many exclusions (termed "tax expenditures") which permit individuals and corporations to avoid taxes on part of their income.  Congress established these exclusions for reasons of fairness, or as incentives for certain economic or social goals.   The Washington Post reports that there are 172 tax breaks, primarily benefiting individuals, which deprive the treasury of over a trillion dollars of revenue each year.  The table below was created from the Washington Post interactive graphic, and show the top 73 tax breaks, using the threshold of one billion dollars.  The top 73 tax breaks amount to nearly 1.2 trillion dollars of lost annual tax revenue, an amount approximately equal to the 2012 Federal deficit.   Over 200 billion dollars of new tax breaks have been enacted since the year 2000.

Although each of the tax exclusions was designed to create specific benefits to society, the cumulative result is massive complexity in the tax code.  The GAO reported that economic distortions resulting from tax preferences cost the United States between 2% and 5% of GDP annually.

These tax breaks are deeply ingrained in American culture.  Individuals have been promised tax relief on their retirement savings and on their home mortgages.  These tax benefits are critical elements of life-long financial planning for many individuals.  Nevertheless, in the interest of simplicity, transparency, and economic efficiency, many of these tax exclusions should be gradually removed from the tax code.

Tax Break
Year
benefit
Billion $
Exclusion of Employer Contributions for Health Care
< 1975
Individuals
173.8
Mortgage interest deduction
< 1975
Individuals
88.7
401K Plans
2001
Individuals
62.9
Earned Income Tax Credit
1975
Individuals
62.5
Step-up of Capital Gains at Death
1977
Individuals
50.9
Exclusion of Net Imputed Rental Income
2004
Individuals
47.0
Making Work Pay Tax Credit
2009
Individuals
44.0
Child Credit
1997
Individuals
42.5
Employer plans for Income Security
< 1975
Individuals
42.2
Deferral of Income from Controlled Foreign Corporations
1977
Corporate
41.4
Deductibility of charitable contributions *
< 1975
Individuals
39.6
Deductibility of non-business state and local taxes **
< 1975
Individuals
37.7
Capital Gains (except Agriculture, Timber, Iron Ore & Coal)
< 1975
Individuals
37.6
Exclusion of Interest on Municipal Bonds
< 1975
Individuals
31.3
Capital Gains Exclusion on Home Sales
1997
Individuals
27.6
Treatment of qualified dividends
< 1975
Individuals
23.6
Exclusion of Interest on Life-Insurance Savings
< 1975
Individuals
21.2
Social security benefits for retirees
< 1975
Individuals
20.3
Property tax deduction
< 1975
Individuals
19.3
Accelerated Depreciation of machinery
1977
Individuals
17.5
Keogh Plans
1983
Individuals
15.0
American Opportunity Tax Credit
2009
Individuals
14.4
Individual Retirement Accounts
< 1975
Individuals
13.9
Deduction for US Production Activities
2004
Corporate
13.8
Exclusion of benefits and allowances to Armed Service Personnel
< 1975
Individuals
13.3
Exception from Passive Loss Rules for $25,000 of Rental Loss
1987
Individuals
10.9
Credit for Homebuyer
2008
Individuals
10.4
Deductibility of Medical Expenses
< 1975
Individuals
10.0
Social security benefits for disabled workers
< 1975
Individuals
7.2
Exclusion of workers'compensation benefits
< 1975
Individuals
7.0
Expensing of Certain Small Investments
1993
Individuals
6.7
Self-employed Medical Insurance Premiums
1998
Individuals
6.2
Credit for Low-Income Housing Investments
1986
Corporate
6.0
Credit for Energy Efficiency Improvements, existing homes
2005
Individuals
5.5
Exclusion of income earned abroad (citizens)
< 1975
Individuals
5.5
Carryover Basis of Capital Gains on Gifts
1988
Individuals
4.8
Expensing of Research and Experimentation
< 1975
Corporate
4.6
Deductibility of charitable contributions; Education
< 1975
Individuals
4.5
Deductibility of charitable contributions; Health
1977
Individuals
4.5
Exclusion of veteran's death and disability payments
< 1975
Individuals
4.5
Credit for Increasing Research Activities
1981
Corporate
3.9
Lifetime Learning Tax Credit
1997
Individuals
3.9
Exclusion of Interest on Hospital Construction Bonds
1980
Individuals
3.6
Graduated Corporate Income Tax Rates
1978
Corporate
3.3
Social security for spouses & dependents
< 1975
Individuals
3.2
Alcohol Fuel Credits
1980
Corporate
3.1
Exclusion of Employee Reimbursed Parking Expenses
1993
Individuals
3.0
Exclusion of scholarship and fellowship income
< 1975
Individuals
3.0
Parental exclusion for students 19 & older
< 1975
Individuals
3.0
Inventory Property Sales Source Rules Exception
1986
Corporate
2.9
Build America Bonds
2009
Corporate
2.6
Credit for Small Business Health Insurance
2010
Individuals
2.6
Additional Deduction for the Elderly
1986
Individuals
2.5
Exclusion of Interest on Bonds for Private Non-Profit Educational Facilities
1983
Individuals
2.4
Premiums on Group Term Life Insurance
< 1975
Individuals
2.0
Credit for Child and Dependent Care Expenses
< 1975
Individuals
1.9
Medical Savings Accounts/Health Savings Accounts
1996
Individuals
1.9
Energy Production Credit
1978
Corporate
1.6
State Pre-paid Tuition Plans
1997
Individuals
1.6
Special Rules for Employee Stock Ownership Plans
1988
Corporate
1.5
Deductibility of Student Loan Interest
1997
Individuals
1.4
Discharge of Mortgage Indebtedness
2007
Individuals
1.4
Employer Provided Child-Care Exclusion
1983
Individuals
1.4
Low and Moderate Income Savers Credit
2001
Individuals
1.4
Exclusion of Interest on Owner-Occupied Mortgage Subsidy Bonds
1978
Individuals
1.3
Deferral of interest on US Savings Bonds
1975
Individuals
1.2
Exemption of Credit Union Income
< 1975
Corporate
1.2
Excess of Percentage over Cost Depletion Fuels
< 1975
Corporate
1.1
Exclusion of employee meals and lodging
< 1975
Individuals
1.1
Exclusion of Interest on Rental Housing Bonds
1980
Individuals
1.1
Qualified School Construction Bonds
2009
Individuals
1.1
Exclusion of certain allowances for Federal Emp. Abroad
1999
Individuals
1.0
Work Opportunity Tax Credit
1978
Corporate
1.0
Total Tax Expenditures >  $1 billion
1169.5
* non-health or education
** other than owner-occupied homes


Source: 

Sunday, December 30, 2012

Tax Reform in the United States

This is the fourth in a series of posts about priorities for Congress and President Obama in his second term.
Priority #1, The Fiscal Cliff:
http://debatablypolitical.blogspot.com/2012/11/priorities-for-obamas-second-term-1.html
Priority #2, Reducing the Federal Deficit 
http://debatablypolitical.blogspot.com/2012/12/priorities-for-obamas-second-term-2.html
Priority #3, Immigration Reform: 
---------------
Priority #4, Tax Reform
The fourth priority for the new Obama administration should be tax reform.  This is an issue that the Republicans got right.  The 2012 Republican platform called for entirely scrapping the Federal Income tax code, and starting over from a clean slate.  Tax reform is necessarily complex, because the tax code is complex.  The political fight will be difficult, because the tax code has penetrated every aspect of American life.  For every provision that might be changed, there will be winners and losers, and it will be difficult to make changes without making enemies.  

The amount of tax collected in the United States is low by comparison to other countries of the OECD.   Overall, the United States collects 24.8 percent of GNP in all taxes, including income, payroll, corporate, excise, and state and local taxes.  The United States ranked 2nd lowest of 34 OECD countries in Federal tax collected as a percentage of GDP (9.4) in 2010, and 3rd lowest  in total tax collected.  However, this blog post is not about the amount of tax collected, but rather about the complexity and economic losses caused by our system of taxes.

A report by the GAO (Government Accountability Office) found that costs to society or our tax system are “large”, but highly uncertain.  According to the report, the U.S. tax system may cost society 2% to 5% of GDP.   This is huge.

The goals of tax reform should be straightforward.   The tax system should be simplified in the interest of fairness and transparency.  The new tax system should reduce economic distortions which presently cause losses of 2% to 5% of GDP.  The new tax system should extend participation to all wage earners, strengthen successful businesses, reduce required record-keeping, and eliminate the motivation for costly tax-avoidance schemes.

Here are the basic areas needing reform. 
1.  Simplify the US income tax.
2.  Gradually eliminate many deductions. 
3.  Extend income tax to all wage-earners, while reducing Social Security and Medicare payroll taxes to keep tax burden on lower-income tax-payers constant. 
4.  Extend Social Security tax to investment income.
5.  Simplify the Corporate Income Tax, and reduce tax rates.
6.  Reduce the Estate Tax rate.
7.  Eliminate Gift Tax, but require payment of Capital Gains upon transfer to another individual.

1.  Simplify the US income tax code
A)  The United States Income Tax Code now amounts to 73,000 pages.  Nobody understands it. 
B)  Employees of the Internal Revenue Service do not understand the tax code.  An audit by the IRS in 2008 showed that its employees provided incorrect tax advice to tax-payers 9% of the time.  The GAO (General Accountability Office) previously found that the IRS error rate was 12% to 25%.  Of course, the tax-payer is liable for any errors made on his return, regardless of the advice he may have received from the IRS.

C)  More than 1.2 million people are employed to assist individuals in preparing tax returns.   Sixty-two percent of tax returns (about 80 million tax returns) are prepared by professionals.  An audit by the GAO found that 12 percent of professionally prepared returns contained reporting errors, and 1 percent contained mathematical errors.  These workers could be doing something of greater value to society, but the potential productivity of these workers is wasted because of the complexity of the tax system.

D)   A 2005 report by the General Accountability Office divided tax costs into compliance (time and effort to complete the tax returns) and efficiency (changes in work, savings, investment and consumption behavior).     The report cited the lowest estimates of the cost to individuals and businesses to prepare tax returns at $107 billion (about 1% of GDP).   Other studies estimate compliance costs to be 50% larger.   Estimates for efficiency losses to the economy range from 2% to 5% of GDP (as of the mid-1990s).

E)  The complexity of the tax code contributes to tax cheating and lost revenue.  The system is so complex that there is a common feeling that other people, particularly the wealthy, are not paying their fair share.  This perception contributes to an attitude that cheating on taxes is justified, in order to pay only as much as others are paying. 

2.  Eliminate many deductions. 
There are seventy-three tax breaks which each reduce tax collections by over a billion dollars.   The largest of these tax breaks is the exclusion of employer-paid health benefits from taxation, which costs about 174 billion dollars each year.  These breaks reduce tax collections by about $1.2 trillion per year; eliminating these tax breaks would balance the Federal budget without any other action. 
These tax breaks are deeply ingrained in American culture, and are a significant part of citizens’ individual tax planning.  Changing or eliminating these breaks will be difficult, but a process of phasing out these deductions should begin, as part of the general simplification of the tax code.
The primary function of the tax code should be to fund the government, not for social engineering.  Congress’ extensive use of taxes for social engineering is impairing the primary function of the tax system.

3.  Extend income tax to all wage-earners.   Reduce Social Security percentage to keep tax burden on lower-income stable.  Every citizen needs to have “skin in the game”, i.e. a vested interest in how US government dollars are spent.

During the 2012 election, much attention was given to Mitt Romney’s complaint (given privately, to roomful of rich donors) that 47% of US wage-earners pay no income tax.  Romney’s statement implied regarding these low wage-earners as parasites on the system.   Interestingly, most of the tax breaks exempting the 47% from income taxes were originally passed as initiatives of Republican presidents.  It should be noted that the 47% are already paying substantial payroll taxes to support Medicare and Social Security. 
Fundamentally, Romney is correct.   It is not right that nearly half of our citizens pay no income tax.  Everyone should pay some Federal tax, to take an “ownership” interest in government.  We should not have a disinterested class of people who have no direct stake in government finances.   Citizens should all feel responsible for some part of financing the government, and to feel some pain about government spending, to motivate interest in voting and spending issues.   It is easy to be disinterested when the government is spending somebody else's money.
Every wage-earner should pay some Federal income tax.  Payroll taxes should be reduced (or incorporated into income tax) in order to extend Federal tax to all workers, without imposing an additional burden.
4.  Extend Social Security tax to investment income.
I see no reason why investment income (interest, dividends and capital gains) should be exempt from Social Security and Medicare taxes.   Social Security and Medicare require additional tax revenue to remain solvent.   It is not fair to make wage-earners carry the entire burden of elder care and the social safety net.   Those who earn money through investments should carry at least an equal burden.

5.  Simplify the Corporate Income Tax, and reduce tax rates.
Federal corporate income tax rates nominally range from 15% to 35% percent.   Additional state taxes are also levied on corporate income.   The United States ranks 17th of 34 countries in the OECD in terms of corporate tax revenue as a percent of GDP. 

Corporate income taxes, like individual income taxes, are unnecessarily complex.  There are fourteen corporate tax breaks costing over one billion dollars are year in lost revenue.   These tax breaks encourage certain economic goals designated by congress, but sometimes produce market distortions and unintended consequences.   An example is the tax break given for the production ethanol fuels.   Since production of corn-based ethanol consumes nearly as much energy as it produces, the tax break encourages misallocation of resources, and makes food scarcer and more expensive.  Simplification of the corporate tax code would reduce economic distortions, and provide a fairer playing field for companies. 

Corporate income tax acts as a drag on the most successful companies, and helps to prop up unsuccessful companies.  Corporate income tax deprives successful companies of the capital needed to expand, and reduces the competitive margin between successful and unsuccessful companies.  Reducing corporate income tax would encourage successful companies to expand, and help them succeed in global markets.

6.  Reduce the Estate Tax rate.
The United States Estate Tax (pejoratively termed “the Death tax” by opponents), is among the most contentious aspects of the tax system.   A substantial reduction in the Estate Tax rate is recommended.   It might be reasonable to peg the estate tax rate to the long-term capital gains rate, and accompany the transfer of title of assets to a step-up in the cost basis of those assets to the market value at the time of transfer.

The amount of money collected by the estate tax is relatively trivial, yet citizens incur substantial costs and undue anxiety worrying over this tax.  It is clear that citizens spend a great deal of money avoiding the tax, but it is difficult to find unbiased data about how much.  Tax avoidance measures through wills and trusts also introduce economic costs.   A 1999 study cited by the GAO showed that the estate tax resulted in efficiency costs to the economy of $38 billion, as a result of distortions in consumer choices.   By comparison, historically the highest amount ever collected by the estate tax was $ 37 billion.

The tax rate above the minimum exclusion is 2nd highest among industrialized countries at 55%.  About half of those countries have no estate tax, and the median of the remainder is 20%.  Only Japan has a higher tax rate, at 70%.  The exclusion amount is currently $5 million, but will revert to $1 million on January 1, 2013, pending any revision.

In my view, the Federal government should take a lesson from Henry Ford.  Ford priced his cars as low as possible, and made higher profits by selling more cars.   At 55%, the estate tax is too high.  People are loath to pay this level of tax, and will expend considerable time and money to avoid it.  But a less confiscatory tax would meet with greater compliance, produce less economic costs and distortions, and might produce greater revenue for the government.

A further step would be to prohibit tax-avoiding trusts and trust provisions.  If Congress has decided, for the good of society, that citizens should pay estate tax, then our laws should prevent avoidance of that tax.  It is absurd to permit legal manipulations which evade the intent of our tax laws.

7.  Eliminate Gift Tax, but require payment of Capital Gains upon transfer to another individual.
The Gift Tax is closely tied to the Estate tax.  Essentially, the Gift Tax is simply intended to prevent avoidance of the Estate Tax by early transfer of assets to heirs.    The Gift Tax is only incurred on large transfers of wealth, but requires life-long record keeping.   A better solution would be to peg the Gift Tax to the Capital Gains tax, and step-up the cost basis for assets, exactly as suggested for the Estate Tax.
--------
References:
Costs of the US Tax System
In 2005, the GAO reported that costs for tax compliance and tax efficiency are “large”.  Estimates are reported in the range of 1% to 1.5% of GDP for compliance; and economic efficiency costs are reported in the range of 2% to 5% of GDP, (mid-1990s).   No better data was available.
ICB (Treasury Department) estimated that individuals, businesses and exempt organizations spent a total of 6.4 billion man-hours filling out tax forms.  Others do not trust these estimates.
Compliance costs are reported over $100 billion or about 1% of GDP; this is given as the low-end of the uncertainty range. 

Interactive OECD comparative tables about taxes as percentage of GDP.
US 2010 total tax: 24.8 percent of GDP, 3rd lowest of 34 OECD countries
US 2010 federal tax:  9.4 percent of GDP, 2nd lowest of 34 OECD countries
Federal 9.4 percent,  State 5.1 percent,  Local, 4.0 percent, Social Security  6.4 percent  (of GDP)
US 17th of 34 in Corporate Tax collected (as a percentage of GNP) in 2010.

General information.

Over 70,000 pages in the US tax code, 2010

IRS Errors and Tax Preparer Errors
1997 article; IRS advice was incorrect 12% of the time by telephone, 40% of the time in person.
IRS advice wrong 25% of the time.
More about IRS errors.
62 percent of tax returns (80 million) are prepared by paid tax preparers (2005).
42 percent of test returns resulted in material errors (of $1500 per return).
12 percent of returns by professional preparers contain reporting errors; 1 percent contain math errors.
10 percent of self-prepared returns contain reporting errors; 5 percent contain math errors.
In a GAO audit of paid tax preparers, the professions arrived at the correct answer on only 2 out of 19 tax returns.
Accuracy at IRS walk-in assistance centers improved from 85% in 2008 to 91% in 2010.   Assistance centers are staffed by volunteers.    Accuracy at call-in centers is not reported.   Only 76% of callers seeking live help receive service.

Costs of Tax Preparation
About 1.2 million tax preparers in the US.
Cost of tax preparation in the United States is $100 billion to $150 billion.
“Understanding the magnitude of these additional costs is important because every dollar spent on compliance and lost due to inefficiency represents a dollar that society could have spent for other purposes.”

Details of 172 tax breaks for individuals and corporations.  Seventy three tax breaks account for more than one billion dollars each of lost tax revenue. 

Estate Tax
Politically biased piece in favor of estate tax.  Costs of compliance with Estate Tax estimated at 7% of tax collected.  Cost of avoidance is belittled, but not quantified. 
Politically biased piece, in opposition to estate tax.  Large costs are claimed for estate tax.   Maximum ever collected by estate tax is $37 billion, in constant dollars.
Cost of compliance with Income tax is estimated at 14.5% of tax collected; cost of compliance with estate tax is estimated at 7% of tax collected.
At 55%, the United States Estate tax is second only to Japan in a list of 50 industrialized countries.
About half of those countries have no estate tax, and the median of the remainder is 20%.
Without new legislation, estate taxes will revert to 55% of the value of estates greater than $1 million.   It is expected that the exemption amount will be raised by new legislation.  An exemption of $5 million was put in place in 2010.
One study cited estimated efficiency costs of the Estate tax at $38 billion in 1999.
The most tax ever collected by the estate tax was $37 billion, in 2000.