Taxing the RIch at the State Level

Article in the weekend edition of the Wall Street Journal talks about states that rely on taxing the rich for most of their revenues suffered significant declines in revenue as a result of the last recession. Incomes of the wealthy tend to be more volatile than for other people. Much of this is due to the fact that most wealthy people have substantial income from equity markets. A sharp fall in the stock market reduces their incomes a lot. For example, the article reports that earnings of the top 1% of households in California fell by more than twice as much as the rest of the state's population. In New York the top 1% of earners paid 41% of the state's income taxes in 2007, compared to 25% in 1994. A result is that when the economy declines, state tax revenues decline even more. The federal government increasingly is relying on tax receipts from the top earners. The problems associated with volatility are less at the federal level, but increasing. Taxing the rich sounds good to many, but there are costs. Once again, there are not free lunches.

GE Avoids Paying Taxes

A front page article in the New York Times concerns how General Electric managed to pay zero corporate income taxes in 2010 even though its profits from U.S. operations was $5.1 billion. It's total profit was $14.2 billion, with the difference not repatriated to the U.S. One can imagine the hue and cry this may cause among liberals, but I think all of us should be concerned.

Taxes distort decision making; there is virtually no way to prevent that. But the U.S. tax code distorts at so many levels it is hard to know the final effects. From the high rate on repatriated profits, to the high corporate tax rate, to tax credits for some activities--the code encourages firms to spend huge amounts of money on lawyers and tax accountants to understand and take advantage of the code. But, that isn't all. The article shows that GE often takes the initiative in lobbying for tax breaks. They have a lot of lobbyists and utilize them. The article ends with a quote from Gary Sheffer, a G.E. spokesman, "We are a diverse company, so there are a lot of issues that the government considers, that Congress considers, that affect our shareholders. So we want to be sure our voice is heard."

I do not object to lobbying since it is difficult to see how a representative democracy would operate if people cannot make their views known to their representatives. Of course, corporations are not people, but the shareholders and workers are.

The recent task force that made recommendations on ways to reduce the deficit argued for lowering of rates but reducing loopholes and tax breaks. I enthusiastically endores such a plan. On the other hand, I am somewhat pessimistic or cynical. If Congress enacted a simplified tax code for both individuals and corporations that eliminated tax deductions and credits for every item Congress has thought needed support, we would have a better system. But, I would expect that breaks, loopholes, credits and other distortions would creep back in over time, so that a decade from now it would look a lot like the current code.

Government Debt Receiving Attention.

Two items of interest related to federal government deficits are available today. The first is a letter written by ten former chairs of the president's Council of Economic Advisers. The ten include four who served democratic presidents and six who served republican presidents.

A second is a ranking of countries provided by the Comeback America Initiative. A video of his interview on CNBC is also available.