October 11, 2011 / 1:15 PM / in 8 years

Orwellian tax talk

By David Cay Johnston The author is a Reuters columnist. The opinions expressed are his own.

Budget cuts that raise costs

Political tax talk is becoming Orwellian: Secrecy is Democracy. Auditors Reduce Collections.  Tax Cheats Will Be Caught With Fewer Auditors.

Let’s start in Kansas, where the Lawrence Journal-World broke the news on Sunday that economist Arthur Laffer, father of curve-on-a-napkin tax policy, is advising the state on a new tax structure. The news is not so much that Laffer is getting $75,000 of taxpayer money, but that Governor Samuel Brownback wants advice only from business leaders; no wage earners allowed behind these officially closed doors.

In Albany, state tax authorities issued a statement asserting they already were pursuing the real estate tax cheats I wrote about last week. Never mind the statistics and lack of public enforcement actions. Maintaining this facade will be more difficult going forward as 300 newly pink-slipped auditors turn a drip of leaks into a stream.

Will Governor Andrew Cuomo, who wants to be president and has declared his eternal allegiance to lowering taxes on the richest New Yorkers, keep looking the other way? Will Lieutenant Governor Bob Duffy, who wants to be governor, mimic the boss?  How long will only the little people of New York feel the full force of tax law enforcement under these two Democrats?

That question is a bit more pointed for Eric Schneiderman, the New York attorney general.

Assemblyman William Colton, an eight termer from Brooklyn, sent fellow Democrat Schneiderman a letter, and a copy of my column, asking for action. Will Schneiderman insist he can only act with Cuomo’s cooperation, as his office hinted last week? Or will Schneiderman add a sharp edge to his carefully polished image as a tough law enforcer?

In Washington the mantra that spending, not revenue, is the problem was repeated endlessly last week. The idea that cutting tax rates, especially at the top, will pave a path to renewed prosperity is promoted by just about everyone in national politics except President Barack Obama and the few Capitol Hill Democrats who do not fear liberal as a political epithet.

Fact is, falling revenue is a problem. In fiscal 2011, which ended on Sept. 30, federal income tax revenues were smaller than in 2001, a recession year when the George W. Bush tax cuts began.

In fiscal 2001 the individual income tax brought in $994.3 billion and in just-ended fiscal 2011 it brought in an estimated $956 billion. That’s 4 percent less money before taking into account 10 years of inflation.

Per capita the federal income tax brought in 31.5 percent less in real terms in 2011 than in 2001.

LESS IS MORE The dominant political response to the fall in tax revenues? More tax cuts.

Bipartisan support is building for reducing corporate tax rates by at least 10 percentage points, from 35 percent to 25 percent or less. So is support for allowing repatriation of profits for companies that shifted them overseas to reduce taxes. The last time Congress did that, in 2004, it was sold with a promise it would create 660,000 jobs. Instead the benefiting companies fired more than 100,000 workers, several studies have shown.

There is also a bipartisan plan to further reduce already enfeebled tax law enforcement. The Senate plans to cut the IRS budget by $450 million, the House of Representatives by $600 million, meaning firing thousands of auditors.

Fewer auditors will not benefit the vast majority, whose taxes are taken out of their paychecks before they get their money. But it will give aid and comfort to high-end tax cheats, who rely on complexity, secret offshore accounts and lack of political will to chase them.

If cutting the government revenue department makes sense, then why not go whole hog and get rid of the IRS? That is what Herman Cain, a top rival for the Republican nomination, promises if voters send him to the Oval Office.

Cain’s 9-9-9 tax plan would scrap the current tax code and replace it with 9 percent levies on corporate profits, on income and on spending. The already rich would only be taxed on their spending since capital income would be tax-free, part of the little known flat tax premise that labor should be taxed, but taxing returns to capital discourages saving.

Under Cain’s plan, employers could not deduct the cost of wages paid to workers, not exactly a job creation scheme. Edward Kleinbard, the former chief of the Congressional Joint Committee on Taxation, said the Cain plan is effectively a 27 percent payroll tax.

Cain’s plan also imposes a one-time 9 percent tax on existing wealth, which may surprise his wealthy friends. He also would double-tax interest income, though, as Kleinbard noted, that must be a mistake.

Slideshow (2 Images)

Under Cain’s plan workers would have far less to spend after taxes. Cain insists that critics don’t understand. But as the chart illustrates, rich investors would pay less, helping their wealth snowball. The Cain campaign did not return calls seeking more information.

Give Cain credit though. Unlike Governor Brownback he is operating in the open. Unlike Cuomo, Duffy and Schneiderman, he is out front.

Unlike Orwell’s Winston Smith, no one from the Ministry of Love will turn you in for beatings until you accept that 2+2=5. The oligarchs and their elected enablers are just trying to convince you that tax deals made in secret are democratic, lower tax rates mean more tax revenue and that the ministries of tax are doing all they can to find the cheats. (Editing by Howard Goller)

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