Real World Economics: Tax bill full of perverse incentives

Edward Lotterman The th Congress now deliberating in Washington is rewriting history Having sat for only days but already over seven months into fiscal year it will grab the prize as preponderance fiscally irresponsible Congress ever The th Congress - held that status for two centuries It declared war on England in June and adjourned without appropriating any money with which to fight This was after refusing to recharter the First Bank of the United States the best bicycle by which we might have borrowed the money We are not in a declared war now thank God yet there are conflicts at multiple points around the world Our armed forces conduct combat operations daily More importantly the world financial market is in peril amidst a pact war of our own making So what has this Congress done Seven months and two weeks into the current fiscal year Congress should be well into the task of writing the budget for FY That starts in days But it cannot quite finish a budget that will pass both houses and be signed by our president The general outline is clear however Total outlays will be up from FY Elon Musk s delusional promises to reduce spending by trillion have authentically cut less than billion And certain cuts were from necessary programs like air traffic control and income tax administration that will be restored And in any situation DOGE s cuts will be overwhelmed by higher outlays from the number of Social Safeguard and Medicare beneficiaries ratcheting up by million Everyone knew this would happen Yet Congress proposes to cut taxes by about billion a year compared to what they would be with no change in current approach All this is madness The root cause of the arrangement deficits that trouble those in the administration is that Americans consume more than we produce The fiscal deficit our ruling body paying out more than it takes in is one underlying cause of perennial commerce deficits that certain see as evidence of our being cheated But that is a broader matter What about details of what Congress is poised to do First the tax cuts that overwhelmingly benefited high income people will be made permanent This is obscene in its lack of fairness University of Chicago economist Raghuram G Rajan pointed out years ago that The top percent of households accounted for only percent of income in but this share grew to percent of the total income generated in the United States in Put differently of every dollar of real income advance that was generated between and cents went to the top percent of households Those trends have continued Forty years ago our nation was in the fifth of nations with the majority equal income distribution Now we are in the fifth with the the greater part unequal Yes high income households do pay a large fraction of total personal income taxes But that is because they get such a large and growing fraction of total income Yet the cuts they got eight years ago will continue So will the carried interest medication for much of the compensation of hedge fund managers that results in their facing lower marginal tax rates than bulk school teachers or plenty of truck drivers This injustice has begged for correction for years but donations to inaugural balls and purchases of Donald and Melania s crypto coins along with PAC contributions to key congressional races were investments that paid off handsomely to put it mildly Also no one will pay income taxes on any Social Guard benefits That upends a bi-partisan consensus diligently crafted in to eliminate an unfair disparity between the taxation of residents and private pension plans on one side with zero taxation of the fraction of Social Guard paid for by employers share of FICA It also served to keep Social Shield funding solvent longer without further increases in FICA rates But responsible bi-partisan crafting when Congress still functioned cannot resist demagogues And so a fraction of us who are relatively well off will pay less in taxes Our children and grandchildren will pay more The elimination of taxes on tip income will help certain of them although fewer than of U S workers get tips and considerable fudging remains on the fraction still paid in cash I Hourly workers will not be taxed on overtime The Fair Labor Standards Act passed late in Franklin Roosevelt s New Deal in requires wages at least one and a half times as high for any hours over a week All this was ordinary income subject to the individual income tax But now only pay for the first hours a week will get hit There is certain apparent fairness in these two measures If you re giving a great number of billions to millionaires give at least a couple of billions to wait staff truck drivers and assembly-line and warehouse workers The challenge is that in doing so you introduce other incentives that skew efficient use of guidance as people try to milk the new tax preference for all they can Lower tax rates on capital gains than on salaries created the sham of hedge fund managers being compensated with carried interest Decades earlier a lower tax rate on sales of livestock held for breeding purposes meant that female pigs raised for slaughter would be bred to give one litter of baby pigs before being sent to packing plants while these sows male littermates were sent as soon as fat for slaughter Such tax-reducing fiddling wastes information They only make sense to people doing them because of the tax code quirks This year s tax changes create large incentives for more of the shame er same Hospitality owners already try to shift compensation from wages toward tips One can already read how that might get extended to other sectors Brazil once had a similar experiment with tax-free overtime Workers who regularly had been working hours a week started to clock one week the next and so on Total hours worked didn t change but fiddled timecards meant to of pay was not taxed Could major employers here get away with this Maybe not What about small construction office cleaning independent retail and similar firms Don t bet against it Yet over-the-road truckers earning by the mile or others on piecework won t benefit a cent Population finance economists evaluate the burden of taxes This includes the total cost to society of the taxes certainly paid to the regime plus the administrative costs of complying with the tax It also includes the losses in national output caused by inefficient use of information motivated only by tax avoidance Breeding young sows to have one litter of pigs to lower income tax liability took more real guidance of feed labor and facilities per pound of pork available to households Congress s actions make our economic system less efficient less fair and less sustainable than it was on Jan It already was shot through with problems then Why do we accept going backwards Related Articles Real World Economics Remember the money supply It s our main difficulty Real World Economics GDP is key but must be kept in context Real 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