Monday, February 15, 2016

Fake Tax Policy Experts

Last election cycle I saw ad for a local politician who was running for the State House of Representatives.  The main tag of the politician's campaign was this: "If you send me to Topeka, I will fix Kansas' broken tax system."

A tax wonk candidate?  You have my attention.  So I checked out the background of the candidate.  What I found shocked me a bit, as the candidate's résumé was not close to a typical tax wonk résumé.  I shot off an email to the politician along these lines (this is not something I would normally do, but hey, I was bored):
Hey (insert name here), I saw you're running for office AND that you're interested in tax policy-good for you.  No need for lengthy details, but could you give me a sense of what you think is broken and what a new tax structure would look like? Thanks, LB
The response I received was.  Well.  Here:
Levi-Thank you for your response, I actually don't know that much about the details of Kansas tax policy, I just know that our current system is broken and we need to fix it.  I would look forward to hearing feedback from voters like you on where we should go from here.
Let me get this straight:  You are a candidate for office, running on a platform that "Tax policy is broken, and I'm the one to fix it" and you tell me you don't that much about (cue the profanity storm).

I could go off on this obviously, but that's not the purpose of this post.  The point here, is that there are a lot of people, including politicians and people who are otherwise assumed to be "in the know," who know nothing about tax policy.  The purpose of this post is twofold:
  • To give you the skills (questions) to identify when someone is parroting talking points versus actually knowing what they are talking about.
  • To know a bit about those talking points, so that you don't get sucked into false flag arguments.
Some common talking points, and followup questions to ask.

Talking point: Hedge Fund managers pay less tax than teachers, that's not right! We have to fix that!

Question: What part of current tax law creates this issue; are there any cases in which that lower rate should still apply?

Response: If you don't hear the term "capital gains" in the response then you are probably not talking to a tax scholar. There are good reasons for taxing general capital gains at a lower rate (making money from investments simply functions differently than making money through wages), but (long story short here) some earnings are being mis-classified as capital gains, causing this issue.

Suggested reading (I don't endorse these positions, this is just for background):

Talking point: The rich don't pay enough!  We need to raise income taxes on the rich!

Question: How much do you think a person earning ($200,000) in wages, without significant write-offs actually pays? How much should they pay? (hand them paper and pencil)

Response: So, I'm not a great tax scholar, but I can get to a rough estimate of what someone pays in tax by income in a few seconds just by what I know of tax code.  You should expect anyone who says "this person" pays too little in taxes to at least have an idea of how much that person pays.  There's an urban legend (that likely descends from the capital gains tax) that high-wage earners don't pay much in taxes.  This is simply untrue.

Suggested reading:

Talking point: If we lower income tax rates, especially on businesses, the economy will grow faster and all will be better off in the long-run.

Questions: Economic theory says this is true, however the growth occurs over time, not immediately, and there could be budgetary and spending issues as a result.  Show us your growth models, and...
  • What year will be the break-even year in terms of tax generation (what year does the economic growth lead us to collect the same revenue as before the cuts (adjusted))?
  • Prior to break-even, what are some interim metrics we should watch as early indicators of growth?
Response: You should expect anyone that plans on implementing this strategy to have long-term plans for growth, and likely budgetary outcomes (what are the range of options?  Will we have to cut spending in short term to create long-term growth?  Are parties on board with that?)

Suggested reading:
Search Twitter for "#ksleg tax" and enjoy the read.

Talking point: Tax policy is broken and unfair, we have to change it?

Question: How?  To both parts of your statement.

Response: I agree that there are some issues with tax policy, but coming out guns-blazing *the system is broken* is pandering to groups that think they should be better off.  In this case you have to force politicians to give real answers. Why do you think it's broken?  What would you do to fix it?  What does someone earning the median income pay now?  And, how would you fix it?  What is the economic effect of your change?

Talking point: That tax policy is regressive!

Question: Relatively or absolutely regressive? (Regressive relative to current policy, or do poor people actually pay more than rich people?) Who actually pays more than they currently do, who pays less?

Response: It's really easy to claim that a tax or a tax-change is regressive as regressive tax has become a slur in recent debate, but understanding the ins and outs of policy change generally requires some math.  Before you let someone off the hook with saying a tax is regressive, at least make sure they can explain their position and who is impacted.