Wednesday, September 28, 2022

Tax Policy Colloquium for September 27: Taub, No Income Taxation Without Basic Accommodations

Yesterday, our presenter was Jennifer Taub, whose above-titled piece is an early draft relating to a broader book project. The latter will not mainly be about tax, but aims to influence broader public debate. 

The tax piece of the project (yesterday's focus) offered what one might call an opening bid regarding how Democrats and progressives should approach federal income tax reform. It expresses linked concerns about rhetoric and substance.

On the rhetorical side, it responds to a decades-long disparity in the approaches of the two major parties. Republicans repeatedly offer large tax cuts to their friends, without regard to the long-term budgetary implications. Democrats, by contrast, worry at least intermittently about blowing up the deficit. Hence, they often will settle for saying there should be no tax increases for people below the top (e.g., those earning $400,000 or more). Taub wants to reclaim tax cut rhetoric from the Republicans, while applying it to the general public rather than to the usual targets of Republican largesse.

While Democrats have recently emphasized "taxing the rich" - which polling data suggests has gotten some positive feedback - this doesn't offer any clear direct benefit to the general public. While the revenues might conceivably be used to help fund, say, better healthcare or education, there is no clear link to which Democrats could point.

Not directly mentioned in the paper, but I think important in the background, is a concern (which I share) that the US faces a broader crisis of rising fascism, and that the fascists are aided by a widespread feeling that neither the Democrats nor conventional politics more broadly can offer anything significant to improve people's lives. "You can't have nice things." Making a visible positive difference in people's lives could help a great deal in defeating fascism.

Turning from rhetoric to substance, the paper expresses especial interest in bettering the lives of the bottom 50% or so among us. They would benefit both from having more cash to live on, and from the easing of such needless vexations as those around income tax filing (which can both be costly and yield anxiety), and over-withholding that is only refunded much later without interest.

A key term in the paper is "basic accommodations." This refers to the amount one needs to pay for such items as rent, "electricity, heat, cable ... internet .... [f]ood, transportation, insurance premiums, co-pays, [and] laundry." It thus is related to the concept of basic necessities, but is a bit more expansive, including also items that aren't life-or-death but that have become parts of Americans' basic expectations regarding what everyone should have as regular parts of contemporary life.

The paper suggests that one should not face income tax liability until one's income is great enough to fund providing these basic accommodations. And it argues that one cannot meaningfully participate in politics until these have been met.

To this end, it proposes what it calls the People's Tax Shelter (PTS). In particular, this involves creating exemption amounts of $50,000 (single), $70,000 (head of household), and $100,000 (joint return). Withholding would likewise be changed, perhaps by exempting the first $25/hour of one's wages from withholding. In addition, marginal tax rates for labor income (up to a ceiling) would not exceed those for investment income (i.e., dividends and capital gains). The paper also contemplates, as linked changes, (a) capital income tax reform (such as the Wyden proposal to tax currently, or charge interest on the benefit of deferral, for high-end taxpayers' unrealized appreciation, and (b) the enactment of a VAT.

Here are some quick thoughts on my part regarding the proposal in its current form:

1) I share the paper's concern both about the affordability of basic accommodations for millions of Americans, and about the steep decline of democratic (yes, small-d) accountability and efficacy. People feel - rightly! - that they have zero influence on public policy and that those who determine (or at least can block) policy outcomes have little concern with their welfare. But I don't think that the daily struggle to meet basic accommodations is at the core of today's pervasive political dysfunction. In that regard, we have a whole lot of other problems (e.g., the roles played by money and by the promulgation of falsehoods). Thus, I might not link the two problems in the same way that the paper does.

2) I am uneasy with calling the proposal the People's Tax Shelter. To me (although views may differ), this tends to legitimize abusive tax shelters by analogizing them to a basic structural feature such as exemption amounts.

3) While I would certainly support enactment of a VAT (assuming that the revenues are used in such a way as to improve overall federal tax and spending policy by my lights), it's not a great rhetorical fit with PTS.

4) The proposed large rise in exemption amounts (plus VAT) brings to mind Michael Graetz's tax reform plan, the main purposes of which he well captured in his book title "100 Million Unnecessary Returns." Here, however, while there is some overlap, the focus is more on after-tax cash benefit to the people who would be removed from the federal income tax rolls. And if one is thinking about aiding these people financially, whether so they can meet "basic accommodations" or to offset a VAT's distributional effects, one faces some classic design questions. Say we are considering a $100,000 exemption amount for joint returns. The tax saving from this depends on the marginal rate at which the last $100,000 (or less) of one's income would otherwise have been taxed. E.g., if it would have been taxed at 40%, the taxpayers save $40K of tax. If 15%, only $15K. If one's taxable income was under $100,000, some of the tax benefit is lost (assuming nonrefundability and that one can't carry it over to other taxable years. 

This line of thinking naturally leads one to consider such alternatives as refundable credits. And that in turn leads one to think about universal basic income (UBI). Plus, once one has gotten to there, then, given the existing UBI debate, one may also want to think about whether one favors or opposes work requirements. And if one favors them, should jobs (and what kind) be provided (and on what terms), who is excepted from such requirements, should related aspects such as childcare and transportation be addressed too, etcetera. All this goes well beyond the contours of federal income tax reform as it often is conceptualized, but a focus on the welfare of the bottom 50% (many of whom don't pay a great deal of income tax in a given year, if any) makes it part of the relevant inquiry.

5) I wonder about the workability of relying on hourly wages to implement the reduced withholding that would pair up with increased exemption amounts. We don't always know what someone's hourly wage is (e.g., what is mine?), plus there is a risk of mismatch when the exemption amount and the withholding rule operate on different tracks (annual vs. hourly income). Better to key the two more closely together, although this would require addressing scenarios such as multiple employers?

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