THE BLOG
04/01/2014 01:45 pm ET | Updated Jun 01, 2014

Why We Are Losing the Tax Reform Debate

The tax reform debate is being lost because of the way it is being defined in the media, and by the politicians beholden to their wealthy contributors. Reform does not mean raising taxes on the rich. It means cutting tax subsidies to the rich to slow the dramatic shift of wealth from the middle class to the very rich.

How you ask a question often decides a discussion. If you ask persons on the street whether they would prefer to increase taxes on the rich or cut tax subsidies for the rich, the chances are that you will get far different answers even though the economic effect is the same. Even someone as smart and sophisticated as Larry Summers has fallen into the trap of talking about increasing taxes on the rich as part of any tax reform, although he surely knows that what he is talking about is cutting tax subsidies or expenditures that benefit the rich.

Between 2009 and 2012 the incomes of the top one percent grew by 31.4 percent, while those of the bottom 99 percent grew only by 0.4 percent -- or to put it another way, the top one percent captured 95 percent of the income gains during the first three years of the recovery. Much of that disparity is because of the tax subsidies or expenditures that primarily benefit the rich.

Lower tax rates on capital gains are subsidies that overwhelmingly benefit the rich. The top 20 percent own over 80 percent of the stocks. But there is no economic justification for taxing income from investments at a lower rate than income from labor. Eliminating the difference would eliminate many of the financial shenanigans that primarily benefit Wall Street. For example, it would no longer make economic sense to use corporate assets to buy back stock so shareholders can convert ordinary income into capital gains. Those assets could be then put to more productive uses. Another example of miss-allocated resources is that, if the $26.7 billion in Wall Street bonuses last year were used to double the pay for all 1,085,000 Americans who work full-time at the current federal minimum wage of $7.25 an hour, it would have tripled the boost expected from the Wall Street bonuses to our GDP growth.

Even the mortgage interest deduction is a subsidy for the wealthy because 73 percent of the deduction goes to the top 20 percent in income since most taxpayers do not itemize their deductions. Indeed, a recent study found that Federal tax benefits for homeowners primarily help wealthier people borrow more money to buy 11-18 percent larger houses rather than boosting homeownership...." Even Camp's tax reform proposal recognizes these tax expenditure, which cost about $175 billion annually, are not cost effective because it contains a significant, albeit hidden, cut back on the mortgage interest deduction for all but 5 percent of individual taxpayers.

We all know that the more complicated a tax scheme is, the more likely it is to benefit some special interest whose subsidy can't be justified. The most current example is the push to adopt territorial taxation contained in Congressman Camp's proposed tax reform. Territorial taxation sounds like a reasonable proposal until you cut through the complexity and realize it is really a job-killing tax. By taxing the "foreign" income of multinational corporations at a lower rate than paid by domestic companies, it will encourage the continued export of jobs and profits and keep domestic companies at a real competitive disadvantage.

We should be talking about leveling the playing field and not allowing the government to pick winners and losers hidden from public view in the tax code, e.g. discriminating against domestic business in favor of multinational corporations, discriminating against people who earn money through their own labor in favor of those who earn money by manipulating the financial system that adds nothing to our productivity. Economically, the difference in rates is a tax expenditure or subsidy just as if it were appropriated.

Those who talk or write about taxes and other economic issues need to be very careful in their choice of words so the public has a chance to really understand what is at stake. It is all too easy to fall into the trap of using Pavlovian phrases that the Koch Brothers spinmeisters use to hide what is really at stake.

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