Friday, September 22, 2017

Republicans Keep Lying About Taxes, and Reporters Keep Helping Them Do It

By Neil H. Buchanan

Whether or not Senate Republicans finally succeed in taking health care away from tens of millions of Americans, their next big target is the tax code.  And although the mainstream press's coverage of the new health care repeal bill has been appropriately (given the facts) harsh, journalists on the tax beat continue to give Republicans far too many passes.

As I pointed out in a column last month, business reporters in particular seem all too willing to assume that Republicans' favorite talking points about taxes are all true, and that we are only arguing over the details.  I noted, for example, that one reporter for The Washington Post -- a newspaper that is rarely accused of being in the bag for Republicans -- was perfectly happy simply to assume a direct causal relationship between the size of any tax cut and the rate of economic growth, when evidence of such a relationship is weak at best.

Unfortunately, the careless reporting continues, not just from that one reporter at The Post but among her colleagues as well.  Some of their errors might seem minor, but the larger impact of those accumulated errors is to give Republicans cover to pass regressive tax cuts.  That might not be what the reporters intend, but the danger is very real.

Unlike the current health care mess, House Republicans are still very much an active part of the tax debate.  And when House Republicans talk about taxes, their Speaker Paul Ryan is sure to be there, earnestly lying his way through the proceedings.

Ryan, of course, remains a fascinating curiosity of American politics.  He is, after all, a man with a demonstrated level of knowledge about economics that is at best at the B-plus level for a college Sophomore.  He knows how to point to charts and graphs that other people prepare for him, and he has figured out that if you say that your position is based on morality, people will believe that your position is offered in good faith.  And throughout it all, his comrades tout him as their intellectual leader.

On taxes, Ryan never fails to run through the Republicans' greatest hits, from false claims about economic growth to scary stories about failing American businesses crushed under the burden of taxes to families whose jobs and livelihoods have most assuredly been destroyed by an overreaching Leviathan.

The fact-checker at The Post recently wrote a mostly excellent article that took down Ryan's current set of talking points, including the tired line about how American businesses face higher taxes than their foreign competitors must pay.  As the article points out, U.S. companies pay an effective rate that is much lower than the statutory 35% rate, which is the number that Ryan and his brethren obsessively rail against.

Someone on Ryan's staff, however, seems determined to help him bump up his grade to an A-minus.  The Post updated its article with a quote from Ryan's office that argued that effective rates (taxes divided by income) are not relevant to decision making, because what a business really cares about is how much it will pay in taxes on the additional profits that a prospective investment might earn.

And that is right, as far as it goes.  For example, if I were living in a system in which I paid no taxes at all until my income reached $50,000, but the tax rate at that point became 100 percent on every additional dollar earned, I would not bother to earn more than $50,000, even if someone pointed out to me that my current effective tax rate at that point was zero percent.

What Ryan's office did not acknowledge, and what The Post's fact-checker never pointed out, is that this is not how the U.S. business tax system actually works.  The same incentives and loopholes that allow businesses to pay effective tax rates sometimes in the single digits do not suddenly become unavailable at any given point.

That is, if Company X wants to expand a line of business, it will still exploit the same set of special depreciation rules, tax incentives, and so on that allowed it to reduce its taxes on its current profits.  There is nothing in the system that should make a company think: "Gee, if I do this, the profits that I make are suddenly going to be taxed at the statutory rate."

So Ryan now tries to say: "No, that reporter doesn't understand economics.  I know that marginal rates matter."  He then wants us to believe that businesses face a 35 percent marginal rate, which is simply not true.  All of the loopholes that Ryan and his party assiduously protect for their business patrons are available to offset any new income.

And all of this, of course, assumes that businesses are passing up current investment opportunities that would offer meaningful payoffs, because they are put off by the prospective tax hit.  Investment demigod Warren Buffett has famously said that he knows of no businessperson who ever walked away from a deal for tax reasons.

Even if he is wrong about that (at least in degree), one would think that a fact-checker would point out that the underlying assumption -- that taxes stand in the way of businesses' expansion plans, not just as a theoretical assumption but as a real-world fact -- is hardly beyond challenge.

Notice that I am not saying that this reporter seems to be consciously going easy on Ryan.  Instead, even in the context of what was necessarily a very negative fact-checking piece, the argument from Ryan's staff is provided as an "update" without further discussion.

Or consider another example.  The reporter for The Post whom I described at the beginning of this column, the one who simply assumes a calibrated relationship between tax cuts and economic growth, wrote a new column this week with a few more straws to test the strength of the camel's back.

Because of procedural hurdles, the article notes that Trump and the Republicans "probably won’t get much more than a George W. Bush-style temporary tax cut, which did little to juice the economy."  Why?  "Companies are a lot more likely to hire people and build new factories if they know the tax cut is going to last for a long time, not just a few years."

Again, this is presented as simple fact, not as a theory that sounds plausible but that might or might not be supported by empirical evidence.  Even if companies were responsive to tax considerations, after all, it would require further empirical proof to say that companies use time horizons in their investment planning that would be significantly affected by the prospect of taxes changing up to a decade in the future.

Businesses famously want stability, but the idea that a tax bill that is called permanent is actually permanent is hopelessly naive.  Even a decision maker who is responsive to what taxes might be years down the road must engage in a probability analysis about the political environment even a year from now, much less in a decade.  Any executive who says, "Oh good, the tax system has been rewritten in our favor, so we can assume that it will stay that way," should be fired.

Now consider two seemingly minor factual misrepresentations that have show up in recent Post stories about taxes.  At least two articles have referred to the estate tax in a way that makes it seem even less generous than it already is.

As one article put it, Republicans are trying (again) to repeal the estate tax, which "is levied on individuals who die with more than $5.49 million in their estates."  This is not exactly wrong, except that it is.  Most of the estates that might be subject to the estate tax are owned by married couples.  Because one spouse almost always dies before the other one, the question is what happens when a co-owned estate loses the first of its owners to death.

The rule is that the surviving spouse is allowed to add her dearly departed's $5.49 million exemption to her own, resulting in almost eleven million dollars of the estate's value not being subject to tax when the surviving spouse eventually dies.  That is why the estate tax collects so much less money than it could (and once did), with only a fraction of one percent of estates paying the estate tax at all.

Or consider this unhelpful statement from a Post reporter about the Alternative Minimum Tax (AMT), which Trump and the Republicans are also dying to repeal: "It only applies to people making more than $120,000 a year."

Granted, $120,000 is still almost double the median annual income in this country, but that is not where the real growth in inequality has been seen in the last forty years.  Because of some unintended consequences, some upper-middle-class people occasionally do pay a bit more in taxes because of the AMT, but the tax really is one of the only things that we have to prevent the super-wealthy from reducing their tax bills to nearly nothing.

Some readers might recall the flurry of excitement earlier this year when Rachel Maddow on MSNBC ended up looking silly as she ever-so-earnestly tried to promote a big scoop about Donald Trump's taxes.  Because Trump has refused to release his tax returns, and because his Republican enablers continue to allow him get away with that unprecedented move, a peek into Trump's taxes would be big news indeed.

Maddow was hyping a document that purported to be a leaked copy of Trump's Form 1040 (with none of the supporting schedules) for 2005.  I continue to suspect that the entire thing was a hoax, and that Maddow was merely used to promote misinformation that Trump's supporters quickly claimed as vindication.  After all, the form showed that Trump had paid an effective rate of about 25 percent.

Of course, that is still quite a low rate for a billionaire, but at least Trump's people could claim that Trump had not paid "no taxes," as critics had been saying ever since Trump had so resolutely resisted being transparent about his taxes.

Even if the leak were not a hoax, however, some commentators quickly noted that the vast majority of Trump's purported tax liability was due to the AMT.  Of Trump's total tax bill, in fact, more than 80 percent was owed because of the AMT.  In other words, his effective rate would have been five percent rather than 25 percent if the AMT did not exist.

There are, of course, many good ideas to reform or replace the AMT.  The so-called Buffett Tax would have created an alternative minimum tax system that applies only to millionaires and that would never affect people who are merely in the seventh or eighth deciles of the income distribution.

But that is most definitely not what the Republicans want.  They are trying to tell everyone that the AMT must go, and they are only too happy to use sloppy and incomplete arguments to do so.  They do not need supposedly skeptical reporters to be their magicians' assistants in these sleights of hand.

Again, nothing I am saying here suggests that the reporters involved are consciously aiding and abetting Republicans in their efforts to tilt the economy even more toward the rich and powerful. Even though the overall approach and tone of these and other articles in The Post and The New York Times and other places is appropriately skeptical, small errors add up.

Each of these examples amounts to reporters writing things that are incomplete in material ways.  Paul Ryan says corporate taxes in the U.S. are too high, and a reporter says that our tax rates are much lower than they seem to be but then reports without challenge the misleading response from Ryan's eager staffers.  Another reporter says definitively that temporary tax cuts are worse than permanent cuts.  The estate tax ends up looking bigger than it actually is, and the AMT looks bad for middle-class families.

If I were a Republican operative, I would be smiling.  Even the people who are telling the world that I am wrong are still helping me achieve my political goals.  Thanks to confusion and garbled information, inequality might soon become even worse.

5 comments:

David Ricardo said...

The whole basic debate on the coming tax legislation involves media bias in favor of Republicans on its name alone.

The media has bought the idea that what is coming is 'Tax Reform'. Republicans are smart enough to know that the 'framing' of an issue is as important as the issue itself (see Kahneman and Tversky) and that by calling their coming proposal 'reform' as opposed to what it is going to be, i.e. massive tax cuts for the wealthy corporations, pass through entities (expect to hear about how lots of low income folks own LLC's, Partnerships and S Corps) and high income individuals.

Who can be against reform?

Shag from Brookline said...

The 1954 Internal Revenue Code was enacted as I was finishing law school. There have been a number of major tax laws enacted since, some, perhaps many?, with "Reform" in the titles. Over those years, the tax code got more complex. "Reform" can be a misnomer. Was there real reform with the 1986 act? If so, how long did it last? What's in a name that includes "Reform"? For whom? Writing a sensible tax code from scratch might be more difficult than a rewrite of the Constitution. Now take the Emoluments clauses in the Constitution, please!

Joe said...

Trump ran against Pat Buchanan for the Reform Party nomination in 2000, PB winning.

Shag from Brookline said...

Joe's comment on Pat Buchanan and Trump reminded me of David Brooks' NYTimes column yesterday "The Coming War on Business" that featured Sam Francis, whose mentor (Brooks claims) was Buchanan. Brooks indicates that Buchanan was an earlier version of Trump in 2016. Query: Did the Reform Party have a platform in 2000?

Joe said...

Lest anyone out there feels slighted, John Hagelin [perhaps remembered by someone as a leader in the Natural Law Party] ultimately was Pat Buchanan's main competitor for the Reform Party nomination, Trump dropping out early in 2000.

I found this when searching for a 2000 platform: http://janda.org/politxts/PartyPlatforms/listing.html