Posts Tagged ‘taxes’


Pushing the Middle Class Over the Cliff

   Posted by: Robert    in Politics

There’s no shortage of things to dislike about the way the Fiscal Cliff was “avoided” by the politicians in Washington.  Deferring talks about cutting spending, again, is one of the most prominent failures I can imagine.  The impotence of Republicans in winning even a single meaningful battle is an embarrassment to the party and to conservatism.  The fact that America’s real fiscal disaster looms as large as ever, even as we pat ourselves on the back for fixing a so-called disaster that we specifically engineered for our political theatre, is inescapable.  But perhaps the greatest thorn in my side as I consider everything that went wrong with the Fiscal Cliff “solution” is the restoration of Social Security taxes to their level three years ago.

In the media and in political discussions, the battle over the Fiscal Cliff was played out in a world foreign to most Americans.  The debate on the table was largely about taxes on the “rich,” meaning people who have incomes significantly higher than most of us are likely to achieve.  The political battle over the definition of “rich” (is it $250k?  $400k?  $1 million?) happened way over the heads of most Americans, since most of us don’t live in households with six figure incomes.  Of course, this focus on “the richest of the rich”, “the 1%”, or whatever you want to call them was entirely the point.  As the rhetoric went, “they have more money than they need, they aren’t you, so screw them.”  And so we did.

But even as Republicans celebrate passing a permanent tax cut for the middle class — a “tax cut” which merely makes “permanent” the “temporary” tax rates that had lasted more than a decade — most Americans won’t see a tax cut when they open their next pay stub.  In fact, everyone who gets a pay stub will see a tax increase, thanks to the two year old Social Security tax “holiday” being allowed to expire.  When a tax cut causes taxes to go up, you know something is broken.

Welcome to America.

That Republicans would fail to protect the lowered Social Security tax rate is hardly a surprise.  Republicans, despite being the party of lower taxes, have opposed the lowered rate from the very beginning.  Republicans cited the already weak condition of Social Security which would be weakened further by the tax cut.  In practical terms, the tax holiday likely did very little to inspire job creation, because employers had to spend the same amount of money anyway; it was just allocated differently between employees and the government.  Nevertheless, outside the topsy-turvey world of Washington, the tax “holiday” was a tax cut, and its expiration is now a tax increase.

Of course, raising Social Security taxes does precious little good for anybody.  Social Security was going broke before the tax holiday and will continue going broke after.  With discussions of actually fixing Social Security in a state of perpetual deferral, Republican “problem solvers” have failed to solve any problem that needs solving.  And while Republicans seem institutionally incapable of understanding why people vote for them, things like this will do nothing but help drive away those very voters.

Republicans could make great strides if they stopped looking at taxes through the lens of Washington and started looking at them the way the people do.  If I look at my pay stub and the number for me is higher while the number for the government is lower, that’s a tax cut.  If my number is lower and the government’s is higher, that’s a tax increase.  A tax cut that goes away — it doesn’t matter how or why — makes my number go down and theirs go up, which means it’s a tax increase.  Making a “temporary” tax cut “permanent” is utterly meaningless, because the numbers don’t change.  And of course, there’s no such thing as a permanent tax cut anyway, because the government can always just raise taxes again.

But no, Republicans think like Democrats and live in a world where words don’t mean what they mean.  And all of us whose paychecks got smaller now have to suffer for it.

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Income Taxes as Class Protections

   Posted by: Robert    in Philosophy, Politics

In the buildup to the “resolution” of the Fiscal Cliff, there was a great deal of discussion about the effects of tax rates on the American economy.  For Democrats, the magic word was “revenue”, meaning how much more money the government could take from the hands of the private sector.  For Republicans, the magic word was “jobs”, meaning what that money meant to the entrepreneurs who need help to maintain and grow their businesses.  There was a great deal of talk about the “rich” needing to “pay their fair share,” and the plight of the middle class who are perpetually caught between government welfare programs and self-sufficient wealth.  But amidst the flurry of frequently repeated words, one comment caught my ear which I only heard once, but which struck me as so powerful as to be the most important thought in the entire debate.  Those taxes tied to high incomes are classist and serve as a means to insulate the “rich” from upwardly mobile Americans.

The key to understanding the classism of taxes is to understand what it means to be rich in America.  Our political discourse treats “the rich” as a single group of people with access to far more money than any “ordinary” person could ever hope to gain.  In reality, there are at least two different groups of “rich” in America with different profiles and different concerns.

Classic examples of “rich” people in America include Warren Buffet, Bill Gates, and the Kennedy family.  Those people, and others like them, are rich in the sense that they have accumulated a great deal of wealth which they hold independently of any other productive activity in which they may be engaged.  In other words, their bank accounts are overflowing and would continue to do so even if they never worked another day in their lives.  So too with the other wealthy people who have come out in favor of high taxes on the “rich”.  While these people have piles of cash, it isn’t their income today that makes them wealthy.

The other group of “rich” people in America are a lot of people that we might not normally consider.  While everyone knows that doctors and lawyers make tons of money, they mostly aren’t the people we think of as being among “the rich”.  Neither is the small business owner who can certainly earn a good living.  Indeed, as any Jane Austen novel can attest, the professional class of doctors, lawyers, and business owners is distinct and different from the gentry or aristocracy.  In America, where money and class are intimately related, professionals (especially business owners) have the ability to jump into the higher classes if only they are able to accumulate enough wealth.  Ultimately, though, these are people who still need to be able to generate income in order to better their lives.

Seen in that way, consider the effect of raising income taxes on people with incomes over some arbitrary amount.  For people already in the higher class, this won’t affect them very much because their incomes are rather beside the point — Bill Gates will still be a billionaire even if the government doesn’t let him earn another cent.  However, for people striving to earn their first billion dollars, a tax powered income cap of $400,000 would force them to wait over two thousand years before having that first celebration — assuming they never spend any money on anything.  Even at more modest tax rates, higher taxes still impose barriers to entry which will reduce the number of people willing or able to move into the higher class.

A tax based on income is a real barrier to upward mobility particularly for people (such as minorities) who don’t come from a background of privilege.  Earning wealth in America already requires a commitment to saving (and an ability to save) plus a knowledge of investing (and an ability to invest) which tends not to exist (and may not be possible) among the lower classes.  As taxes become more confiscatory, and as the tax code makes shielding wealth from taxation more difficult, the level of knowledge required to succeed becomes ever greater.  A person escaping from poverty will need to rely more on strangers for help and support, and so will be more susceptible to bad advice whether given honestly or by people trying to take advantage.

Historically, the upper classes have gone to great lengths to maintain their status above the people in the classes below.  Rules of society, the privilege of money, and even armed conflict have all been employed to protect “old money” from new.  But I am aware of no other time in history when the rich, by appearing to harm themselves, have so successfully won popular support for their own class protection.  While everyone focuses on the people who have already become rich, it is the people who are most successfully trying to get there who will experience the greatest harm.

Far be it from me to say that the rich in America — a class which includes most politicians — is trying intentionally to structure the tax code to prevent other Americans from intruding into their class.  But like any other identityism, classism need not be intentional to be real.  The fact remains that raising taxes on higher income earners imposes barriers to upward mobility which will tend to further separate the rich from the people who are trying to get there.

High taxes on the rich are classist; not against the “rich”, but the “poor”.

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Healthcare costs so much because it costs too little

   Posted by: Robert    in News, Politics

According to the Associated Press, Senate Finance Committee Chairman Max Baucus has managed to find a way to make even less sense than Obama on the subject of healthcare.  Assuming that the AP article is an accurate reflection of what Senator Baucus actually said, he has just added another huge contradiction to the healthcare debate.

From the article:

A key Senate chairman says he hopes to convince President Barack Obama that taxing some employer-provided health benefits will help control escalating health care costs  … Baucus says the tax-free benefit packages Americans now enjoy are a big factor in the high costs of the country’s health care system, because they provide workers free or low-cost access to too many health care services.

So, according to Senator Baucus, a “big factor” which makes healthcare more expensive are “tax-free benefit packages … [that] provide workers with free or low cost access to … health care services.”  Put another way, healthcare costs so much because people don’t  have to spend a lot of money to get it.  Yet a third way, healthcare is expensive because it’s not.

Senator Baucus’s solution, which I guess is pretty obvious if you can swallow the contradiction above, is to tax private healthcare benefits.  The line of reasoning is certainly sound: Make healthcare more affordable by increasing the price.  Of course, with President Obama wrangling with care providers to knock costs lower, the only way to jack up the price is to do so artificially, with a tax.

Of course, it is possible that I misrepresented the Senator, and honesty demands that I address his “too many” straw man.  While some people certainly do behave this way, I know of very few people who seek out medical services that they do not actually need.  Indeed, part of the reason America’s emergency rooms are so full is the fact that most people don’t seek out medical services until they’ve long past needed them.  Even if you assume that people are overconsuming healthcare, are they doing so to the tune of offsetting nearly 46 million people who are not insured at all, and for whom President Obama wants to guarantee “free or low-cost” coverage?  And even if the answer is somehow, astonishingly, yes, exactly how is the government going to determine when a person has used “too many … services”?  And why wouldn’t private insurers do the same thing if they could?

The string of illogic given to us by Senator Baucus is only reconcilable with the proposition that he wants to end private insurance without saying so.  If President Obama goes back on his campaign rhetoric mocking McCain for supposedly having similar ambitions, it will be proof even stronger that his goals are the same.

Perhaps we should have given honest debate a health insurance plan ages ago.

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Taxing Virtual Worlds

   Posted by: Robert    in News

Today I came across the National Taxpayer Advocate’s annual report to Congress.  The context for finding my way over there was an article over on another blog mentioning that the IRS may be considering taxing “virtual worlds” like Second Life and World of Warcraft.  The report stops slightly short of recommending that the IRS actually contrive some way of imposing a virtual tax, but I was left with the general impression that the Taxpayer Advocate would like to see taxpayers shelling out real dollars to the IRS for each gold coin picked up in WoW.  The Taxpayer Advocate points out a few reasons why such a scheme might be difficult to put into practice, but the report leaves out the myriad of reasons that taxing virtual worlds is a bad idea in the first place.

Volume 1, Section 13 of the report lays out the question of what the IRS should do with virtual worlds.  That section is framed from the standpoint of asking the IRS to clarify points of confusion regarding when income taxes might arise from the transfer of property in a virtual world.  Prior to reading the report, I would have thought the answer fairly straightforward: Converting your virtual goods into real goods (i.e., selling gold for dollars) is taxable, everything else is not.  This rule is simple, intuitive, probably what almost everyone does anyway, and avoids the need for the IRS to promulgate new rules which are sure to be more harmful than the rule we have today.

The most obvious problem with taxing virtual worlds is figuring out how much each piece of virtual property is worth in terms of real dollars.  The Taxpayer Advocate touches on some of the principle concerns with valuing virtual goods, including the fact that all virtual property is subject to forfeiture at the discretion of the virtual world operator and certain limitations imposed on the transfer of some virtual goods.  In addition, unlike real goods which are limited in both quantity and lifespan, virtual goods can be created by virtual world operators at will, in any quantity, and do not deteriorate with time.  This leaves virtual world operators uniquely able to affect the value of virtual goods by exercising nearly absolute control over supply at effectively zero cost.

One vitally important question that the Taxpayer Advocate does not address is which games would be subject to taxation.  The report named World of Warcraft and Second Life explicitly, but made no suggestion that the taxing authority could or should be limited to those games.  The outer bounds of reason require that taxes can only apply to games which are persistent; a game like Starcraft, in which the entire world expires when one player wins or all players exit, cannot rationally be said to confer income on a player.  WoW and Second Life are both Massively Multiplayer Online Games (MMOs), so MMOs would certainly fall within the tax.  But what of Multi-User Dungeons (MUDs), or smaller scale online roleplaying games like Diablo?  Does the popularity of the game matter?  Does a game need to have an interface to the real world market, such as people who actually want to buy and sell game items on eBay?

But perhaps the most important consideration that the Taxpayer Advocate should have kept in mind is that imposing a tax on virtual worlds will almost certainly destroy the entire market for online gaming.  Most people buy and play games for the purpose of entertainment.  In that sense, no matter how well a player may do in-game, nearly everyone will find that gaming is best viewed as an expense.  Adding a tax on items in the virtual world itself would serve only to add the stress of bureaucracy to what should be a fun venture — imagine the frustration of needing to figure out if you have enough money in your real world bank account to pay for a random sword you picked up on the dungeon floor.

Hopefully, the Taxpayer Advocate’s brain-twisting “confusion” will remain buried deep within the bureaucratic nest from which it came.  Nobody is well served by the expansion of the government’s tax authority into the realm of things which do not even exist.

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