Government raises taxes, while denying it

These days, people consistently oppose any proposed tax increases by the federal or state government.  Candidates rally support by promising to cut taxes.

If that’s true, the amount of money governments take out of people’s pockets ought to be going down or at least remaining the same.  In Maine, the governor has led the drive to cut the top income tax rate and now wants to eliminate the tax altogether.

If taxes had been brought under control, people ought to feel better.  The reduced costs imposed by government should offset some of the disappointing effects on personal income of the slow economic recovery.  But this is not happening.

One reason is that government uses several ways of tapping the income of most people without the levy showing up as a tax increase.

The most frequently used method is the so-called “tax expenditure,” better known as a tax loophole.  

In theory, the tax system is supposed to treat each taxpayer in similar circumstances in the same way.  That way, each pays its own fair share.

If government wants to encourage certain activities, it can allow some taxpayers to get a break on the amounts they pay.  The U.S. Treasury estimates that these breaks – tax expenditures – in 2013 were $1.1 trillion.

The cost of any break is picked up by taxpayers not getting the benefit of that tax expenditure.  It is built into the amount of money the government needs to raise.  In practice, that means each time government creates or increases a tax expenditure, it raises the taxes on all other taxpayers.

With 169 different federal tax expenditures, each taxpayer may be both getting some benefits and picking up somebody else’s costs at the same time.

At the federal level, many of the tax expenditures go to corporations.  Tax breaks for companies that develop oil production or earn some of their income abroad and leave it overseas are the targets of ongoing debate.  Is a tax expenditure that may have once been justified to help a new business still worth the cost to other taxpayers?

Tax breaks not only go to big corporations to increase their profits, but to individuals.  For example, if you are paying interest on a home mortgage, that interest may be deducted from your taxable income.

Breaks keep being added.  Just this year, the House of Representatives added generous deductions for the dollar value of business gifts of food.

If a state income tax is mostly based on the federal return, as in Maine, the federal tax expenditures influence state tax collections.  In other words, some people pay too much tax to the state, because of a federal subsidy for the oil industry. 

The recipient’s most desirable tax expenditure is the “refundable” tax credit.  That credit can be subtracted from the amount of taxes to be paid.  If there’s a balance, the government sends the taxpayer a check.

The earned-income tax credit, for lower income workers, is perhaps the best known.  Recently, the Maine Sunday Telegram revealed Maine is paying $16 million in refundable tax credits to investors in a project specifically designed to achieve that result.  Maine taxpayers foot the bill.

The tax system is riddled with loopholes.  The most elementary tax reform would be to eliminate as many tax expenditures as possible.  Then, the tax rates for all taxpayers could be drastically reduced.  That’s called tax simplification and is usually most strongly opposed by those benefiting from tax expenditures.

Without tax simplification, all taxpayers will be paying someone else’s bill.  There’s no easy way to know who gets a net benefit, but average taxpayers may wonder how much their taxes could be cut with the end of tax subsidies for energy companies or those with foreign operations.

That’s not all.  Governments can also boost their bill for people without even using the tax system.

The federal government is adjusting how much doctors are paid under Medicare, and the money will come from an increase in charges for upper income recipients.  While not strictly a tax, the funds will flow to the government.

In Maine, a debate now goes on about a bigger adder to electric utility bills to finance support for efficiency measures.  Again, increased rates are not taxes, but the money will flow to the government.

Congress and legislatures impose these new costs, secure in the knowledge they will not be seen as tax increases.

In a bewildering and incredibly complex world of taxes, loopholes and tax-like charges, the average person ends up blind to who gets what and how much.

To cut budget, government would be slashed

The battle continues to cut the size of government budgets and, as a result, the size of government itself.

In Maine, the proposed cuts come under the cover of tax reform.  In Washington, the struggle comes more openly.

The federal government is now operating under a rule called “sequestration.”  That effectively places a cap on federal spending and requires that for every increase there must be an offsetting decrease or tax increase.  It’s like an informal balanced budget amendment.

But it turns out there may be much less room for budget cuts than we might think.

Scott Lilly, senior fellow at Washington’s Center for American Progress, has provided a sound explanation and the following review is based on his work.

The budget has three pieces.  One is composed of “mandatory programs.” which obligate the government to make previously agreed payments.  Most are payments to retirees, mainly for Social 

Security and Medicare.  These expenditures are larger in total than what the federal government spends on all the rest of the budget.

That remainder consists of defense and non-defense spending, about equally divided between the two.  Together they amount to only about one-third of all spending.  Because these are supposed to be “discretionary,” they may be decreased or increased. 

In other words, only about one dollar of every three spent by the federal government is subject to the budget balancing game.

Few expect defense spending cuts.  In fact, many in Congress seek to increase it.  Their ploy is to shift some of the increase into accounts outside the budget itself, so it simply doesn’t count in the balancing game.  Of course, that blows up the whole point of trying to cut the size of government.

If defense spending is either untouched or stealthily increased, the balancing game has to be played in the remaining 16 percent of total federal government spending.  That’s all of the non-defense, non-mandatory money there is in the budget.

On what do we spend that money?  The top programs are veterans care, law enforcement, protecting health, fighting cheating in the mandatory programs and education.  Foreign aid, the favorite target of many, accounts for far less than one percent of all spending.

The problem with the spending cap, especially in the non-defense, discretionary area, is that new problems can suddenly arise to absorb funds.  Who could have foreseen the Ebola virus and the need for federal action to prevent its spread?

Many people and interests support cuts in federal spending so long as they are not in programs they consider vital or from which they benefit.  The sum of all their demands cannot result in major savings.  That may translate into increased support for more tax increases to support spending.  That’s where Lilly’s analysis leads.

If the budget and government cutters have their way, the outlook is not for tax-based solutions, but for non-defense reductions, possibly pretty deep.

The obvious targets are the “mandatory” programs.  They are only mandatory, because Congress says so, and Congress can change its collective mind.  Benefits under both Social Security and Medicare could become rich targets if spending shifted to a massive military buildup.

Within the discretionary spending for purposes other than defense, both health protection and research and education could be targets.  Although not really a big budget item, spending on environmental and consumer protection could be slashed.

Congress could raise taxes without leaving fingerprints.  Just recently, it increased Medicare payments to doctors by increasing the contributions of higher income participants.  There was no outcry against this tax increase on the wealthy.

The tax laws are riddled with “tax expenditures,” breaks that have to be covered by revenues from others or by cutting spending.  For example, they make it possible to subsidize the oil industry, even if that means cutting education spending.  Revenues could come from closing such loopholes.

The objective may go beyond blocking added expenses that are not covered by cuts or new revenues.  Gov. LePage’s proposed “tax reform” was obviously intended partly to reduce the size of government not merely block increases. 

Reductions in government revenues coupled with the prohibition on deficit spending, such as exists in Maine, lead inevitably to reductions in the scope and programs of government itself.

A key reason for capping government spending is the claim that taxes are too high.  No matter that, compared with almost all other major economies, taxes in the U.S. are not high. 

But people have grown accustomed to resisting government taking their money for common purposes, which they consider not essential for their personal well-being.

Religious rights may bring “nullification”

Two Native Americans, fired from their jobs at a rehab center because their blood tested positive for mescaline, applied for unemployment benefits.  Despite explaining the drug resulted from their religious use of peyote, they were rejected.

They sued the state of Oregon, and their case went to the U.S. Supreme Court.  Though it recognized the religious use of peyote by some Native Americans, the court rejected their appeal.  It said benefits would be denied to anybody with mescaline in their blood, so the Indians were not subject to religious discrimination.

The Court’s decision relied on a standard that had evolved over decades, allowing religious beliefs to be overridden, so long as the law applied equally and did not target certain religions.

When members of Congress learned of this case, virtually all of them agreed that this interpretation of government power went too far in denying religious rights.  So, in 1993, Congress almost unanimously adopted the Religious Freedom Restoration Act.

Under this law, there must be a “compelling government interest” that justifies overruling religious practices.  Mere neutral application of a law was no longer enough.

The general effect of the new law was to “restore” (hence the use of the word “restoration”) an older Supreme Court decision and invalidate the later interpretation that made it easier for government to overrule religious beliefs.

Congress also said that this requirement would apply to actions by both federal and states governments.  In 1997, the Supreme Court ruled that the constitutional provision allowing the federal government to impose standards on states did not cover this law.

A state could pass its own version of this law to ensure that its government accorded the same respect to religious belief as the federal government.  Some, but not all, states enacted such laws.

Religious freedom is guaranteed in the First Amendment to the Constitution.  Like other protections of the Bill of Rights, it is a right to be free from excessive government interference.  As matters now stand, government can only impinge on religious rights if there is a “compelling government interest” – an interest higher than unfettered religious practice.

The law came before the Supreme Court again in the Hobby Lobby case.  Hobby Lobby is a company owned by just a few people, whose religious belief opposes abortion.  They did not want to provide abortion coverage in their health insurance program or even to tell employees where else they could get such coverage without charge.

In 2014, the Court said that, because the employees could get the coverage, the company should not be forced to provide it or inform them of its availability.  In other words, there was no “compelling government interest,” because an alternative existed that left the owners’ religious beliefs untouched.

Since the adoption of RFRA, some have interpreted it to mean they could refuse to obey any law they claimed was contrary to their religious belief.  They would not have to seek judicial approval for their action.  The government would have to take them to court if it thought they could be forced to act because of a significant government interest.

To some, this development opened the door to “nullification,” the ability of people to refuse to obey the law, simply because they asserted a conflicting religious principle.  Thus, RFRA became part of the arsenal of weapons to be used by people who thought government had become too powerful.

The underlying conflict emerged when Indiana passed its own version of the law.  The state has no anti-discrimination law and hence no resulting “compelling government interest,” as do the United States and most other states, allowing it to limit a claim of religious rights. 

Opponents charged Indiana had enacted a license to discriminate and to resist government.

Gays and lesbians protested against the Indiana action.  Some national and state Republican leaders stated clearly that the purpose of the law was to allow businesses to deny at least certain services or products to homosexuals.

After a national outcry, in which major businesses opposed the new law, Indiana retreated and modified the law to ensure it could not be used to discriminate against LGBT.

Still, what had happened in the 22 years since the law was adopted was that it had shifted from a limit on government to a new right for individuals to refuse to obey the law.

Some states are considering simply refusing to apply federal laws they do not like.  RFRA may be the beginning, not the end, of new battles over “nullification,” the way to destroy or drastically limit federal government authority.

Obama touts success, gets opponents' disdain

President Barack Obama, with more than a year and a half remaining in his second term, has begun taking his “victory lap,” according to the political insider media.

Not waiting until his last days in office, the president has begun touting his most important accomplishments.

He reminds us that he found high unemployment and an economy falling into deep recession when he entered office, but now the country has normal levels of joblessness and is experiencing sustained economic growth.  Justifiably, he gives some of the credit for the recovery to his stimulus program.

The much heralded “signature” accomplishment of his administration is said to be the Affordable Care Act, which he accepts being called “Obamacare.”  He points out that more than 16 million Americans have gained health insurance as a result of this program.

These are significant accomplishments, and Obama can fairly claim that his administration is responsible for pushing both of them against tough opposition.

But Obama’s “signature” accomplishment is not Obamacare.  It took place in January 2009, when he was inaugurated as president.  For the first time in modern world history, a major power elected a person from a racial minority to head its government.

That was why Obama received the Nobel Peace Prize during his first year in office.  The Nobel committee’s announcement said, “Only very rarely has a person to the same extent as Obama captured the world's attention....”  The award was essentially to him for his achievement in being elected and to the U.S. for setting an historic example by electing him.

Though his election was historic, too much can be read into it.  Like all other Democratic presidential candidates since the 1960s, he won the support of only a minority of white voters.  In some ways, his election was less significant in terms of white sentiment than it appears.

Its true significance may have been in showing that the U.S. was becoming a multi-racial nation in which “people of color” would soon come to outnumber the traditional white majority.

Like all presidents, Obama must await the judgment of history, but he already suffers from the greatest disrespect of any president in memory.  Setting aside claims that he is a communist or a Nazi or a dictator, there are three reasons why he is treated so badly by his political opponents and so distantly by his own party: race, conservatism and himself.

Increasingly, political observers are willing to say the lack of respect for Obama shown by congressional Republicans is based on a lack of respect for African Americans.  House Speaker John Boehner’s invitation to Israeli Prime Minister Benjamin Netanyahu without discussing it with Obama is the clearest case of such disrespect.

The letter by 47 Senate Republicans, but not Maine Sen. Susan Collins, to Iran, America’s adversary, in which they explicitly undercut the president shows similar deep-seated disloyalty.  Like Boehner’s invitation, the letter was meant to tell the world it need not respect the American president.

Actions like these would not have happened previously when the White House and Congress were dominated by different parties, making it is possible to conclude that the only difference between then and now is the president’s race.

Another fundamental reason for opposition to Obama comes from recent political history.  When Ronald Reagan was elected president in 1980, conservatives saw his victory as the beginning of their era in political control of the U.S.

The elections of Bill Clinton and Barack Obama, both two-term presidents, interrupted the plan for long-term rule by conservatives.  A failed attempt was made to remove Clinton, seen as the usurper of the conservative regime, by impeachment and conviction.  Though responsible for unforgivable indiscretions, Clinton would have been punished for his politics not his behavior.

Having failed once, the congressional Republicans would not try impeachment and removal of the president again when it came to Obama.  Instead, they have simply attempted to seize the powers of the presidency for themselves.  Only their fear of being labeled “the party of ‘no’,” makes them cooperate with him occasionally.

Finally, Obama created some of his problems.  In successive elections, he had expected congressional Democrats to defend him rather than he himself making the case for his policies that they could then support.  Lacking his leadership, many of them ran away from him.

 
He has not been a strong and consistent advocate of his own policies, and his efforts now to publicize his successes may be an attempt to repair the damage.  In his last 18 months in office, he still has the chance to provide stronger leadership.