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25
Oct 2012

Taxes vs. Bonds for California schools

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Funding for California schools is like the stacked-wood block-tower game, Jenga. Over the last thirty years, we pushed out blocks of money, leaving unfilled holes that destabilize schools. While the structures still stand, many educators and parents wonder whether the next block will be the one that topples public education.

Several blocks alone were pushed out by Prop 13, the 1978 voter-approved ballot initiative championed by right-wing, anti-tax zealots Howard Jarvis and Paul Gann. Not only did Prop 13 hollow out property tax revenues for schools, but it also created two-thirds supermajority requirements to raise taxes to fill those holes.

Stripped of realistic options for raising local revenues, school districts used bonds to shore up that leaning tower for the past two decades, because general obligation bonds only require a 55% majority of voters to pass (if it meets other requirements). Because bonds borrow their funds from wealthy investors, funds must be spent on projects that provide tangible collateral to secure the debt. In other words, it is easier in California to borrow from the wealthy than it is to tax them.

It is also more expensive. Poor credit ratings mean that Californians pay $2 for every $1 borrowed. The State budget includes nearly $7 billion annually in debt servicing, of which $2.6 billion is from school bonds. Meanwhile, blocks of funding for non-collateral expenses such as teachers, librarians, nurses, counselors and administrators continue to be pushed out of the tower because they can only be paid through taxes. Propositions 30 and 38 are attempts to fill some of those holes. Although insufficient, they are better than nothing. And they are cheaper.

One hundred six school districts in California have bond measures on this November’s ballot, including four local school districts — Temple City, Whittier City, Covina Valley and Rowland. They deserve serious consideration. As a parent and the former president of the Temple City Schools Foundation, I know first hand that our Measure S will put back a vital block of funding need to shore up our deteriorating school infrastructure. Plans include electrical upgrades, the removal of asbestos and lead paint, and improved heating and cooling systems. Each bond measure makes a worthwhile investment in local communities by local communities, just as the Pasadena Star-News’ October 15th endorsement indicates.

Bonds make sense as a way to finance expensive infrastructure projects over time without overburdening taxpayers with large lump sums. But bonds are inadequate building blocks to fund a statewide education system unless they are accompanied by sufficient general fund revenues. Restricting our investment in education to what wealthy bond investors need for collateral leaves our community’s children with new buildings but few people inside to support learning.

Education funding is incomplete without both taxes and bonds. Unlike Jenga, education is not a game that we can easily reset and rebuild when it topples. We must support both general fund tax increases for schools and bond measures in order to stabilize it.

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Categories: election 2012, Taxes Tags: , ,
31
Dec 2011

Where to Find Financial Security

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I grew up with the expectation that I should strive to financially support myself and my family all by myself, regardless of what my partner might earn. Why? Death, divorce, disability, disease, you name it. Life is risky. Anything can happen and often does. My work ethic was my personal safety net to insure me against potential financial disaster. I thought as long as I could work, I would be safe.

And then one day, I couldn’t work anymore. Poor health and severe post-partum depression set in after my daughter was born, and I left the workforce to care for myself and my new baby. When I suddenly realized I no longer had the self-sufficiency that working meant to me, my depression deepened. I felt helpless without a means of earning money. I hated depending on anybody, and my stress compounded with financial insecurity.

In truth, I wasn’t financially insecure at all. I was actually deeply supported by my husband, family, friends and collegues. I had a spouse with a job, some savings, maternity leave and COBRA health insurance. Those people and resources helped me get better, and two years later I joined the workforce again.

Here’s what I learned from that experience: When I thought what I needed was more cash, what I really sought was freedom from financial anxiety. I didn’t want to worry about if we were going to have enough to pay the rent just because I couldn’t pull my weight at the moment, but I also thought that caring for myself was a luxury I could not afford. What turned the dial down on my financial fear and worry was recognizing that I was part of a community that was not going to let me fall through the cracks. It turns out that my  self-sufficiency — my confidence in my own resourcefulness to be able to care for myself and family  – had a limit, and that limit was me. My bootstraps could only pull me up so far. To transcend the limits of my self, I needed to see that I was connected to and supported by others — even financially.

It turns out that even people who do have ample bank accounts feel financially insecure. A study from early 2011 by Boston College’s Center on Wealth and Philanthropy found that even the super rich “still do not consider themselves financially secure; for that, they say, they would require on average one-quarter more wealth than they currently possess.” The average net worth of the people in this study was $78 million. If $78 million didn’t make someone feel financially secure, then what would?

Our instinct in times of financial hardship is to narrow our focus to the survival of ourselves or our family. Unfortunately, it also ends up narrowing our focus of solutions to what we can do all by ourselves: cut expenses or increase income. Ironically, what creates the financial security and financial wellbeing that we actually seek lies outside the small, narrow focus in the larger networks of communities. With more resources to access, there is also more flexibility in how to respond.

But right now, our communities and governments are going through the same downward spiral of scarcity, cost-cutting and income-raising dilemmas we have at home. This is the time  to make investments in our capacity to support each other. Instead of debating what to cut and who to tax, we can ask ourselves:

  • How would we feel if we knew that the community supporting us was as big as a town, city, nation or a continent?
  • What would we do differently if we knew that our basic financial needs would be met through our community networks and supports when we hit rough spots such as unemployment, caring for sick family members, our own ill health?
  • What government policies can create the conditions in which we will feel supported by the financial strength of an entire community until we can regain our self-sufficiency?
  • What can we do now to dial down our collective financial fears? Who needs to be involved and how?

I’m not suggesting that we don’t need to cut expenses or raise taxes, but those are actions that need to be taken in the context of a vision we are trying to achieve. We are a country of unquestionable, tremendous wealth, and that wealth was supposed to be a proxy for financial security. But none of us feel financially secure, even if we have the wealth. If having the wealth doesn’t do it, then what would actually free us from financial fear?

Here are two things we can do with public policies to create conditions that lessen financial fear and increase our overall financial security:

  • Narrow the bandwidth for wealth– The wider the gap in wealth, the more room there is for comparison and stronger feelings of financial inadequacy. It’s like trying to keep up with the Joneses but always failing because there will forever be someone with (lots) more money than you. The more narrow the room for comparison, the less inadequate we feel. Plus, when we narrow the bandwidth, the fall from fiscal grace is shorter and the climb back up not so steep. Policies that narrow income and wealth gaps (such as progressive taxation) can do this.
  • Fulfill universal needs without contingencies for income — Our need to be able to care for each other is universal, not limited to those at the poverty line. If the need is universal, then so should be the program. Designing policies that help anyone who needs it, not just those who fall below certain income thresholds, creates a public good for everyone even though it will only be used by those who need it when they need it. One existing example is the Family and Medical Leave Act which requires employers of a certain size to offer unpaid leave to workers caring for new or ailing family members. Workers are eligible regardless of their income, and while anyone can envision a situation where they might need to use it, only some will need to at any given time. Strengthening this program allows us to focus on supporting the people who support others in need, so that there isn’t a competition between income and care. It supports a community’s ability to care for itself.

Maybe our government solutions to provide income supports (such as unemployment or welfare) have been incomplete in part because of our focus on getting individuals back on their feet. Investments in the community’s capacity to care for each other could top off those efforts, because it’s the supportive relationships that will give us the financial security we truly seek.

 

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Note: This is the last in a series on financial wellbeing. You can read the other posts in the series here, here and here.

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Categories: Government, Taxes, wellbeing Tags: , , , ,
26
Sep 2011

Give vs. Take

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As the board chair for a local education foundation, I have to confess that what we do as an organization is a bit strange. Most foundations use their endowments to generate money that they give out as grants. We volunteer a ton of time to raise a bunch of money so that we can give it all away. Why?

Because it is fun.

It is fun to create something, especially with other people. It is fun to support programs that make a positive difference in children’s lives. It is fun to know that the work you do helps teachers teach and students learn. It is fun to turn your life and your community into the kind of place where you want to be.

Giving is one way to create something that lasts. It is one of the many reasons why charitable giving feels so good and is a core element of our financial wellbeing. We enjoy making a difference and using money with broader impact and purpose.

What if we thought about taxes in this way — a vehicle for giving, for creating something valuable and meaningful together? What would be different? What would need to be different about taxes to imbue them with this sense of purpose and generosity? How can we bring our experiences of raising and spending public revenues closer to the good vibes we get when we make charitable donations? I’d love to hear what you think.

 

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Categories: Emerging Economic Models, Taxes, wellbeing Tags: , ,
12
Apr 2011

Enough taxes?

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I’ve been telling you that understanding taxes is really quite simple. Except when it’s not. One of the biggest misunderstandings about tax policy is how progressive taxes work. Progressive income taxation is commonly thought of as the more you make, the more you pay — as in Sam pays 10% of earnings in taxes because he makes $20,000, but Sally pays 20% in taxes because she makes $50,000. Well, it’s a little more complicated than that.

Taxes are like a tiered cake.

Our federal income tax system uses graduated marginal rates. This is how to think about it: Imagine each dollar that you earn is stacked one on top of the other. Next, picture a large wedding cake next to the stack of dollar bills. Each tier of the cake (called the tax bracket) has a corresponding tax rate that increases as you go up each tier. So in the example pictured, the bottom tier is 0%, the next tier 10%, the next 15%, and so on. (Note that this picture is based on information from 2008. The 2010 tax brackets are listed at the bottom of this post.)

When you calculate your taxes, the first part of your stack of bills (dollars $1-$7,200) gets taxed at 0%. The next part (dollars $7,201 to $14,200) gets taxed at 10%. The next part (dollars $14,201 to $33,450) gets taxed at 15% and so on. You only incur the higher tax rate if your stack of bills reaches that layer. After the taxes on the various layers are tallied, the percentage of your income that actually goes to tax is called your effective rate. Notice how “fair” is defined in this system — everyone gets the first $7,200 of their income exempt from taxes. The same dollars are subject to the same tax.

Is it progressive?

There are at least three general ways to make an income tax progressive (by progressive I mean that it reduces inequality, see definition in this blog post). One is to increase the rates. That’s what most people think of when we say “we are raising taxes.” Another is to change the tax brackets. For example, we could increase the dollars subject to 0% tax from $7,200 to $10,000 (as well as make various changes in the other tax brackets).

Notice the top layer of cake. This is commonly referred to as the top rate. In 2008, if someone made $300,000, the $4,450 she made in that tax bracket is subject to the 35% rate ($300,000 minus $295,550 — remember it only applies to the dollars in that bracket) — the same tax rate as someone who makes $2 million. In other words, our federal income tax is graduated at the lower end of the scale, but doesn’t differentiate at all between high earners and the mega-earnings of CEOs. It starts progressive, but then goes flat.

The third way is to increase the number of brackets. The Tax Reform Act of 1986 enacted by Ronald Reagan’s administration collapsed our income tax brackets from fifteen to four, with the top rate being 28% (in the 1950′s the top rate was 91%). Let me state that again — it went from fifteen brackets to four! Obviously, this legislation had the effect of making our tax system more regressive than it had been previously. There are lots of ways to play with these three options in combinations to come up with a very finely tuned definition of “fair” with regard to taxes.

How much is enough?

Much of debate about taxes focuses on the tax rates, less on the brackets, and nearly nothing on the top rate — largely because of our economy’s assumption of scarcity (and because it requires some explaining). If we assume that more is better and that we can never really have enough, then we are focused on tax rates to help us answer the question, “How much of what I earn do I get to keep?”

But what happens if we shift our focus to this question: how much is enough for a person to earn? What does a person need to thrive — and among those things, how much does he or she need to earn to do that? These are the questions that start from sufficiency, discovering and exploring the place of enough and enough for whom. Answering these questions helps us think about what constitutes a life worth living, what is basic and essential, and what is reserved for the “deserving” if we believe in such a thing. The answers to “enough for whom” start to reveal how we think about other people — our judgments, assumptions and prejudices about them. We can start to observe how we think of others and whom we consider deserving of what.

So, how many brackets do you think our tax system should have? What would your top rate be and where would it start? Where do you think we can say as a society to an individual, “You have enough, and now it’s time to share the wealth.”

 

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Note: The picture uses 2008 tax brackets and was easier to use than trying to draw my own cake. Here are the tax brackets for 2010:

Single Filing Status 2010 [Tax Rate Schedule X, Internal Revenue Code section 1(c)]

  • 10% on income between $0 and $8,375
  • 15% on the income between $8,375 and $34,000
  • 25% on the income between $34,000 and $82,400
  • 28% on the income between $82,400 and $171,850
  • 33% on the income between $171,850 and $373,650
  • 35% on the income over $373,650

Married Filing Jointly 2010 [Tax Rate Schedule Y-1, Internal Revenue Code section 1(a)]

  • 10% on the income between $0 and $16,750
  • 15% on the income between $16,750 and $68,000
  • 25% on the income between $68,000 and $137,300
  • 28% on the income between $137,300 and $209,250
  • 33% on the income between $209,250 and $373,650
  • 35% on the income over $373,650

 

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Categories: Taxes, Values Tags: , , , , , , , , , ,
29
Mar 2011

Taxes and Fairness

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Just and fair inclusion. An equitable society is one in which all can participate and prosper. The goals of equity must be to create conditions that allow all to reach their full potential. In short, equity creates a path from hope to change.

Striving to be fair often feels like a futile pursuit. As the mother of two young children, I hear a lot of “That’s not fair!” and it drives me nuts because all that really is being said is “I don’t like it. I don’t agree.” Criticizing something as unfair is rather easy to do, while proving that something is fair is rather difficult because somebody somewhere will figure out how it is not fair for them (“Mommy, she has more sprinkles.” “No, you each got 30.” “But she has more red ones.” Ugh.)

The claim to fairness in taxes especially makes me want to scream. Everyone claims their tax proposal is fair. And, frankly, they all probably are. Let me show you:

 

    • Fair #1: We all pay the same amount or percentage of what we buy. The bill is fixed at a certain dollar figure or a percentage of the cost of a good or service. Examples include sales taxes and taxes on gasoline or cigarettes. The rationale for this kind of tax is that we have a choice about what we buy and whether to buy at all. The amount of tax to which one is subject is under the individual’s control.
    • Fair #2: We all pay the same percentage of what we make (income) or have (wealth). This is the Steve Forbes-style, do-your-taxes-on-the-back-of-a-postcard kind of taxation. Regardless of what you make, we all pay the same percentage. The rationale here is that we should all bear the same burden of tax.
    • Fair #3: Those who earn the most pay the most. In this version, people pay different percentages of their income or wealth, and the burden you bear increases in proportion to your income or wealth. It assumes that those with the most wealth or making the most income can more easily bear the burden of taxation without it affecting their well-being substantially.

Taken alone, all three versions of the tax are fair. In Fair #1 and Fair #2, the fairness as equal treatment is pretty clear because you are talking about everyone paying the same amounts or percentages. Fair #3 requires a sense of duty or responsibility to contribute more to the common good when you have been blessed with more in order to understand why this is fair.

But so what? If each can be seen as fair, then they can also be seen as unfair:

    • Fair #1, this type of fairness usually has regressive redistributive effects (pushes us further apart) and is tied to consumption, not income or wealth. Those with the least spend actually spend virtually all that they have in order to subsist. There is no choice to not consume that doesn’t significantly alter one’s well-being. (This argument doesn’t apply to luxury taxes, and may only dubiously apply to sin taxes.)
    • Fair #2 has a flat effect — it doesn’t do anything to redistribute wealth. This version of fairness doesn’t change anything, which I suppose is a version of fairness, but then why bother having taxes at all? (Oh right, that’s probably the point.) In fact, depending on the percentage and to what the tax applies (define “income” and you’ll get the point), it actually could have regressive redistributive effects even though it is theoretically flat.
    • Fair #3 has a progressive redistributive effect (brings us closer together) and that just strikes some folks as wrong – “if you earned it, why can’t you keep it?” Critics who don’t agree with the progressive redistributive effects of this kind of tax usually assume that those who earn money deserve it and should maintain control over it. I also tend to hear people say that private philanthropy is the appropriate role for wealthy people to make contributions towards the common good, rather than through taxes and government (but that’s a future blog post).

Pro or con “fair taxes” arguments are morally anemic largely because taxes are a tool. If you need to build a house, are you really going to argue about whether using the wrench or the hammer is fair? No, you are going to see if it is the tool you need to get the job done. Avoiding the conversation about a vision of an economy we really want, and just bickering about the means as if this could substitute for having the real conversation about what we really want, hasn’t worked very well so far. How much longer are we going to keep doing this?

Let’s talk about equity instead of fairness (the definition I like is from PolicyLink’s Equity Blog shown above). If we are serious about wanting a society where all can participate and proper, then policies that minimize inequality should be our highest priority. Even the language of equity has a more robust feel to it, especially compared to “fair.” Of course we want things to be fair, but equity is something for which we can strive. And an economy where all can participate and prosper must exist before we truly can have a nation of equals.

It’s about life, liberty and the pursuit of happiness. A country where all can participate, prosper and reach our full potential has always been an American ideal, and it should be what drives our tax and fiscal policy. At a minimum, we should be adopting tax policies that narrow the range of income inequality and create the foundation for a healthy and vibrant middle class. And the steps to getting from here to there are going to mean that some policies will look unfair when considered in isolation, but when taken in context of the larger goal, many people will embrace them because they understand why they are necessary. So let’s quit bickering over what’s fair and hold up a vision worth working towards.

(See this bonus blog post about how my seven-year old learned why vision is important and why fair processes or means don’t always get you to your vision.)

Definitions of regressive, flat and progressive can be found here.

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Check out United for a Fair Economy’s Fairness in Taxation Act (yes, I know I just blasted the use of the word “fair” with taxes, but they didn’t consult me!) Their members of the Responsible Wealth project have a vision for a more equitable society and have this to say about the wealthy paying higher taxes:

“I think very wealthy people like me should pay substantially higher taxes, since we have done exceedingly well in the last few decades. Our taxpayer-funded government contributed to my success.” – Katharine Myers, Responsible Wealth member, in a March 16, 2011 press conference with Rep. Schakowsky et al.

“I strongly support the Fairness in Taxation Act…While I certainly wish to pass on to my children some of the wealth that I have been fortunate to accumulate, I also want my children to live in a country which avoids the political polarization that may develop as the wealth gap increases.” – James E. Mann, Co-owner of New Hampshire Business Development Corp. & Partner in MerchantBanc

“[M]y husband and I are huge beneficiaries of government support. Every step of our careers was made possible with taxpayer dollars. We strongly feel the debt we owe our society… [R]aising our taxes would not affect our standard of living…I  heartily support Rep. Jan Schakowsky’s Fairness in Taxation Act.” – Dr. Alice Chenault, Responsible Wealth member

“I support the Fairness in Taxation Act…because rich people can afford to pay higher taxes. About 90 percent of my income comes from investments, which currently are taxed at the lower capital gains or dividend rate of 15 percent. I would pay much higher taxes under this bill. That’s fine with me, because our government helped contribute to my wealth by protecting the patents I used to start a company.” – Steve Kirsch, CEO of Propel Software Corp.

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Categories: Government, Taxes, Values Tags: , , , , , , , ,
17
Mar 2011

Taxes, simplified part 2

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When I do workshops on tax policy, I am always struck by how hungry people are for information that could help them understand some very basic concepts about taxes. More and more, people are realizing that we are much more effective advocating for how to spend money if we also can articulate plans for how to raise that money. But taxes tend to be unnecessarily complex, so the next couple of posts will focus on breaking down the basics.

Tax and budget policies make up fiscal policy – how we raise and spend money. It is democratically controlled through our federal, state, and local governments, meaning we can have a say in how it is structured. (This is different from monetary policy which has to do with money supply and interest rates.  Monetary policy largely dictated by members of the Federal Reserve board who are not elected by the public.)

Tax policy is a powerful tool because it can do one or more of the following things:

1) redistribute wealth up or down (move us closer together or farther apart)

2) raise or decrease money that can be invested back into the our communities through government

3) encourage or discourage certain private economic behaviors through incentives

That list may seem obvious, but it’s actually a pretty important list to remember when evaluating a tax proposal. With any tax proposal you can ask yourself which of those effects the tax will have. Will it move us closer together or farther apart? Will it raise or decrease revenues available for us to decide how to use through our government? What behavior will it encourage or discourage (and will it be effective in doing so)? I find that these questions can help us see through the spin and determine if we agree with the outcomes these taxes actually are designed to create.

As powerful as tax policy is, it has its limits. It can encourage or discourage certain behaviors, but it doesn’t necessarily dictate them or make them happen. For example, it is popular to provide tax incentives (also known as subsidies) to businesses to invest in certain markets or locate in certain areas as a way to attract jobs or encourage community economic development. Such tax breaks can certainly be attractive to businesses, but do they really work? Many times, the more important factors for that decision are things like proximity to the target market, availability of skilled workers, and good infrastructure such as roads, plumbing, and lighting. (Check out the great work of Good Jobs First and their Corporate Subsidy Watch and Subsidy Tracker for more on that specific topic.) Tax breaks sweeten the deal, but they don’t necessarily make or break them.

Some economists dedicate their entire career trying to prove whether or not a particular tax is an effective incentive or not. Why? Because when it comes to creating incentives for certain behaviors, using tax policy is a weak choice because it is indirect. For example, vouchers have become a popular choice for providing services through the tax code rather than having government provide the service. But a voucher for senior transportation services doesn’t necessarily get you senior transportation services. You just have a voucher program that hopefully is large enough to create a market to attract businesses that will provide senior transportation services. Basically, if you want to achieve a certain goal, then raise the money and go for it head on. If you want to create jobs, then use the money we raise to hire people. And if the proponent of the tax policy insists on achieving the goal indirectly, then I’d look carefully for what they are trying to achieve with regard to the first two objectives on the list — the distribution of wealth and revenues for public investment through government. Because when it comes to taxes, if it looks complicated, the real aims are probably pretty simple.

 

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Categories: Government, Taxes, Wealth Distribution Tags: ,
06
Mar 2011

Taxes, simplified

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If you shy away from talking about tax policy because you think it is complicated, I’m happy to tell you it is really quite simple. While calculating one’s taxes is not simple enough to put on a postcard, understanding tax policy is. Here’s what it would say:

Taxes structure relationships.

If you arrange people on a spectrum according to their wealth or income from low to high, tax policy is one of the key tools we can use through our government to move people closer together or farther apart — and not just in terms of money. It can be used to create equality or inequality which impacts where we live, who we have as neighbors and who we get to know in our local community — literally our relationships with other people. It sets the stage for us to have competitive relationships with each other or cooperative ones. It can promote or discourage civil discourse by creating favorable conditions for common ground or stark difference and animosity.

It’s really that simple. From this perspective, taxes have just three types of effects:

1) they can move us further apart (regressive)

2) they can leave us in the same place (flat)

3) they can move us closer together (progressive)

These effects are not inherently good or bad, despite the fact that different political ideologies will assign them as such. Rather, they each need to be used judiciously and applied thoughtfully to a particular situation.

More importantly, since tax policy is really a means to an ends, we need to know the ends or what we are aiming for. Are we aimed at creating a society where there is a wide gap between the haves and the have nots or a much narrower range of disparity? Are we aimed at creating a vibrant, broad middle class? From there we can choose the kind of taxes would create the favorable conditions we need to have in our economy at this moment in time.

Where we aim makes a big difference in making sure we choose the right kinds of taxes and in the right combinations, because we will achieve that at which we are aimed — whether we consciously choose to aim or not.

During this month and April the blog posts will be all about tax policy — the much maligned, but powerful tool we collectively have to shape our democracy. My hope is that this series gives you a different perspective than what you find in current tax debates and offers some of the positive potential that tax policy can offer.

[The other posts in this series can be found here, here and here.]

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