As Easy As Falling Off A Cliff: Part I

Oh boy.

Wednesday was the 3rd in the Dartmouth College ILEAD summer series on Polarization: A Dangerously Divided America, with two one-hour talks, the first by Tim Dickinson of Rolling Stone magazine and the second by Matthew Slaughter, Associate Dean of the Tuck MBA program (as well as professor of management there, and economic adviser to the Congressional Budget Office, Senior Fellow at the Council on Foreign Relations, member of the U.S. State Dept’s Advisory Committee on Tax Policy Reform, etc.  More here. ).

Dickinson’s talk was titled Why Elephants March in Lockstep (see below for notes). Slaughter’s talk was titled “Is the U.S. Bankrupt? Or ‘Merely’ Dysfunctional.” (See Part II for notes, to be posted on 7/28/12)

Both men are energetic and articulate speakers who didn’t use notes.


You can get a sense of some of Dickinson’s talk from this Rolling Stones article, “How the GOP Became the Party of the Rich: The inside story of how the Republicans abandoned the poor and the middle class to pursue their relentless agenda of tax cuts for the wealthiest one percent” (9 Nov, 2011).

What’s interesting is that Dickinson develops his case through two things: hard numbers, and the words of Republican politicians and Republican budget analysts. He interviewed and quotes, for instance, David Stockman, Reagan’s budget analyst; Paul O’Neill, GW Bush’s Treasury secretary (fired by Cheney); Mitch Daniels, GW Bush’s budget director (now governor of Indiana); Bruce Bartlett, an architect of Reagan’s 1981 tax cut; Glenn Hubbard, chair of Bush’s Council of Economic Advisers and an architect of GW Bush’s tax cuts; George Voinovich, former Ohio senator; Lincoln Chafee, former RI senator;  and Alan Simpson, former WY senator.  All are Republicans.

He also includes comments from Joseph Stiglitz, Nobel-prize winning economist; Robert Greenstein, president of the nonpartisan Center on Budget and Policy Priorities; David Cay Johnston, Pulitzer-Prize-winning author of Perfectly Legal: he Covert Campaign to Rig Our Tax System to Benefit the Super Rich – and Cheat Everybody Else; Robert McIntrye, director of Citizens for Tax Justice; and Grover Norquist, of Americans for Tax Reform.

It’s a provocative article, chock full of historical facts. I highly recommend it.


Dickinson’s talk, Why Elephants March in Lockstep,
“traces from Ronald Reagan to Mitt Romney how the Republican party has abandoned its historic love affair with fiscal balance to embrace the anti-tax zealotry championed (and enforced) by largely unknown Grover Norquist.”

My notes on it (all note-taking mistakes are mine, obviously) follow:

This is not Ronald Reagan’s Republican party.

Eisenhower is the last Republican president to balance the budget (Clinton is the last Democratic president to do so.) He imposed a 91% tax on the top earners.

Kennedy (1963) was the first to use tax policy to try to create growth. He and the Democrats lowered the top tax rate to 77%, feeling that a 91% rate was a disincentive to work or earn income. but this cut, from 91% to 77%, was opposed by GOP House members.

Under Carter, we had stagflation (inflation that hung around). At that time, tax brackets were not indexed for inflation, causing bracket creep: people’s salaries went up, pushing them into a higher tax bracket, but their purchasing power stayed the same or decreased because inflation caused prices of goods and services to rise so much.

The Reagan Era: Irving Kristol strategised that if supply-side economics didn’t work, the Democratic administrations could clean up the mess when it was their turn. (“As conceived by the right-wing intellectual Irving Kristol in 1980, the plan called for Republicans to create a ‘fiscal problem’ by slashing taxes – and then foist the pain of reimposing fiscal discipline onto future Democratic administrations who, in Kristol’s words, would be forced to ‘tidy up afterward.’) This is happening now for Obama after Bush.

Reagan cut taxes in 1981 but even he thought he went overboard. This is from Dickinson’s article:

The Reagan tax cuts spiked the federal deficit to a dangerous level, even as the country remained mired in a deep recession. Republican leaders in Congress immediately moved to reverse themselves and feed the beast. ‘It was not a Democrat who led the effort in 1982 to undo about a third of the Reagan tax cuts,’ recalls Robert Greenstein, president of the nonpartisan Center on Budget and Policy Priorities. ‘It was Bob Dole.’ Even Reagan embraced the tax hike, Stockman says, ‘because he believed that, at some point, you have to pay the bills.’

In fact, contrary to the mythology, Reagan raised taxes 11 times during his administration. He was not “allergic to revenue.”

Reagan is also famous for hating tax evaders and for closing tax loopholes. The 1986 tax reform, under Reagan, cut the top marginal rate to 28% by closing loopholes and cutting out corporate tax breaks. It was a bipartisan effort. On paper, it was actually the largest corporate tax hike in history, with corporations now paying much more in taxes than before even though the top rate was lowered.

Americans for Tax Reform was set up then to lock in these tax reforms. Headed by Grover Norquist, whom David Stockman (Reagan’s former budget director) calls a “fiscal terrorist.” Before heading up this group, Norquist worked for the Chamber of Commerce as a speech writer. In 1986, he started asking politicians to take the anti-tax pledge.

Alan Simpson, former WY Republican senator, says of Norquist that he’s “more powerful than the president of the United States.” Simpson asks how anyone can sign this pledge

before they even hear the damn debate.” It makes legislators into robots. Simpson went on to say that Norquist “can’t kill ya. He can’t burn down your house. The only thing he can do to you is defeat you in re-election -– and if re-election means more to you than your country, then you shouldn’t be in the legislature.

The reason the Norquist pledge has power is because of George H.W. Bush, who “won the GOP presidential nomination in 1988 in large part because he signed Norquist’s ‘no taxes’ pledge” while Dole looked like “a vampire had landed in his lap” when asked by Norquist to sign it.

Once in office, however, Bush moved to bring down the soaring federal deficit by hiking the top tax rate to 31 percent and adding surtaxes for yachts, jets and luxury sedans. … The tax hike helped the economy –- and many credit it with setting up the great economic expansion of the 1990s. But it cost Bush his job in the 1992 election…. ‘The story of Bush losing,’ Norquist says now, ‘is a reminder to politicians that this is a pledge you don’t break.’

“Read My Lips: No New Taxes” originally came from Roger Ailes, now chief executive for Fox News.

Under the first Bush, the top marginal tax rate went from 28% to 31%, plus surtaxes for luxury items. Gingrich, who has signed Norquist’s pledge, wouldn’t vote for the tax package, Bush had to negotiate with the Democrats to pass it.

Clinton: Raised the top rates, balanced the budget. From Dickinson’s article:

Rather than simply trimming the federal deficit, as his GOP predecessors had done, [Clinton] set out to balance the budget and begin paying down the national debt. To do so, he hiked the top tax bracket to nearly 40 percent and boosted the corporate tax rate to 35 percent. ‘It cost him both houses of Congress in the 1994 midterm elections,’ says Chafee, the former GOP senator. ‘But taming the deficit led to the best economy America’s ever had.’

When Clinton left office, the U.S. had a massive surplus. Though he seems like a man of excess, he actually was very concerned with fiscal balance.

George W. Bush/Cheney: Cheney was in the driver’s seat from day one on tax policy. The first thing the administration did in 2001 was an across-the-board tax cut, which wiped out the surplus Clinton had left them with. In 2003, they cut taxes on capital gains and dividends again, to 15%. They got rid of “tax harmonization” — “economic jargon for a joint project by the world’s developed countries to shut down offshore tax havens in places like the Cayman Islands” — which Clinton had supported. From Dickinsons’ article:

At the time, such illicit havens were costing U.S. taxpayers $70 billion a year. For Republicans, going after big-time tax evaders should have been as American as apple pie. As Reagan once said of such cheats: “When they do not pay their taxes, someone else does – you and me.”

But for Bush and other leaders of the Party of the Rich, blocking corporations from hiding their money overseas wasn’t an act of patriotism – it was tyranny. Rep. Dick Armey, the GOP majority leader, railed against tax harmonization as an effort to create a “global network of tax police.” One of Bush’s biggest donors, Enron, was using a network of nearly 900 offshore tax hideaways to pay no corporate taxes – while reporting massive profits that later turned out to be fraudulent. In one of his first acts as president, Bush “basically vetoed the initiative,” says Stiglitz.

For the Republicans, tax evasion = freedom. Dick Armey felt it was good for corporations to compete for off-shore tax havens. Couldn’t be a sharper contrast with Reagan.

Grover Norquist was in the wheelhouse of Republican power. He convened the Tuesday Morning meetings of lobbyists, Republican politicians, homeschoolers, et al. to develop the Republican agenda. He positioned himself as gatekeeper from those who wanted to get to Bush. His Americans for Tax Reform helped Jack Abramoff launder money, with the help of Ralph Reed.

From a July 2011 piece in The Nation by Ari Berman:

Norquist “was a central player in the Jack Abramoff scandal, using his connections to launder nearly $1 million from Abramoff’s Indian tribe clients to conservative activist Ralph Reed and Christian anti-gambling groups who were fighting a proposed state lottery in Alabama, according to an extensive report by the Senate Indian Affairs Committee. ‘Call Ralph re Grover doing pass through,’ Abramoff wrote in an e-mail reminder to himself in 1999. In return, Norquist’s organization, Americans for Tax Return, took a piece of the cut. ‘What is the status of the Choctaw stuff?’ Norquist wrote to Abramoff that same year. ‘I have a 75g hole in my budget from last year. ouch.’

[Dickinson went through all that in his talk but I thought it was summarised better in the Nation article than in my notes.]

Norquist famously said “I don’t want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.” And “bipartisanship is another name for date rape.”

His strategy was and is to kneecap Democrats, to consolidate power so that he and his Republican cronies are the only name in town for lobbyists.

Switching gears a bit from politics to tax code…

The benefits of increased productivity in the last 35 years have not gone to the middle class. Productivity has gone up 300% in that time and the average wage has increased 2%. From 1997 to 2007, the income of the top 400 richest Americans has tripled, while their taxes paid have stayed the same. Their effective tax rate is in freefall, down from 28% to 16%, the same rate that someone making $50-75K/year pays. The income tax is mostly progressive: From incomes of $0 to $103K, rates rise steadily to about 21% and then stay there. But over $353K, the rate goes down.

The Hidden Side of the Tax Code

With the no-tax pledge, Congress can no longer get rid of tax loopholes (like ethanol subsidies) because they’re considered tax increases, unless proportionately offset.

Discretionary tax spending amounts to $600 billion per year; defense spending is $650b/year; taxes forgiven via loopholes (called “tax expenditure”: “exemptions, deductions, or credits to select groups or specific activities”) amount to $1.2 trillion per year, more than the amount of taxes collected each year.

There is a tremendous amount of money locked up in tax expenditures:

1. Long-term capital gains taxes = 15%. And 70% of the benefit goes to those who earn more than $1 million per year, or .3% of taxpayers. Less than 4% of the benefit goes to those who have incomes under $100K/yr. Over 10 years, this represents a $500b cost to revenue.

2. Step-Up Basis. Capital gains taxes are forgiven on investment assets transferred at death, if the estate is worth less than $5 million. The heirs get the new (current) basis of the asset. So, e.g.,  if a stock was bought for $6/share in 1950 and its owner dies in 2012 still owning it, with its price now $60/share, when the heirs sell any portion of it (if they do), they never pay taxes on the appreciation from $6 to $60; they start with a tax basis of $60/share. Over 10 yrs, this represents a cost to revenue of $700b. Dickinson suggests a policy of “carry-over rates” that keep the original cost basis.

3. Inside Buildup. Whole life insurance allows all benefits to be paid out without any tax. Over 10 yrs, this represents a cost of $260b to revenue. [This actually seems fair to me, as the insurance is bought with after-tax dollars.]

4. Offshore Tax Deferral. Corporate taxes booked offshore are not taxed until they are “brought home.” And there are ways to book profits offshore even though they are made onshore. Over 10 yrs, cost to revenues is $400b.

5. Unlimited Itemized Tax Deductions.  $100 of tax deductions saves a wealthy person $35 but a person of moderate means only $15. Reform could limit the top deduction rate to 28%. (I missed the cost to revenues of this one.)

6. Yachts. The wealthy are allowed to deduct interest paid not only on second home mortgages but also on yachts, if they have a bathroom. Over 10 yrs, cost to revenues is $12b.

7. Accelerated depreciation. Writing off the cost of big-ticket items up front. (I missed the rest of this.)

8. Arcane accounting. How a cost-basis is arrived at (first in, first out; first in, last out; etc.) Over 10 yrs, cost to revenues of $140b.

Policy changes in these areas could come up with $2.3 trillion in deficit reduction without touching any discretionary or defense funds at all.

Then Dickinson played an audio clip of Grover Norquist answering Dickinson’s question: “How do you feel that your pledge takes all these policies off the table?”

Norquist replied “I understand greed and envy. The idea that somebody’s making money and you want to steal some of it? That’s an interesting idea. But it’s not morality. It’s certainly not justice.”

For Norquist, a progressive tax system is the same as theft.

The anti-tax pledge is skewing national and state policies. 1,200 state legislators in California have signed it and have made a rule that a supermajority has to pass any tax increase. So now policy changes and tax increases are going directly to the voters.

Finally, he played another audio clip of former senator Alan Simpson, who spoke about how taxes are the “noble” thing to do to enjoy what we have in America: “People are going to look around in five or 10 years and say, ‘Whatever happened to the things that made me comfortable? That made our streets and schools good things?’ … Whatever happened to common sense?”



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