Mitch McConnell is rooting for inflation and crime. It suits him well.

Inflation and crime are soaring – if you believe the headlines – and Mitch McConnell could not be happier. He desperately wants his old job back as Majority Leader of the Senate, and had hoped that with Democrats in charge and eager to revert to their tax-and-spend ways, Republicans could simply dust off their deficit hawk talking points and ride public anxiety about a growing national debt to flip the Senate back to the GOP sixteen months from now. 

Federal deficits, however, don’t seem to have the traction as a political issue that they once did. Since the 1980s, we have been warned of the ills that would befall the economy on the heels of federal deficits – from squeezing out capital for private investment, to sky high interest rates, to insolvency and default – yet none of them has come to pass. After Donald Trump layered on $8 trillion in new federal debt in just one term – the third-biggest increase in the national debt relative to the size of the economy of any presidential administration in U.S. history – one might imagine that even Republicans have become cynical of those Republicans who scream about deficits when Democrats are in charge, only to ignore them when the GOP takes back the White House and is ready to cut taxes. When the Wall Street Journal editorial board – the standard-bearer of conservative media – opined last month that it would prefer to see Congress add a hundred billion dollars a year to the federal deficit for ten years to fund the proposed bipartisan infrastructure bill, rather than give the IRS additional funding to crack down on tax evasion, you knew the era of the fire-breathing deficit hawks was behind us. 

Mitch McConnell declared that inflation is “raging” because he needs people to believe it is raging. He says violent crime is “exploding” because he needs them to believe it is exploding. He needs those issues to be foremost on their minds because, according to Gallup, Democrats now hold the largest advantage over Republicans in party affiliation in a decade; and if Republicans are going to win back independent and suburban voters sixteen months from now and take back the Senate, he needs the 2022 midterm elections to be about something other than Donald Trump, January 6th, and Republican voter suppression. 

Yet both issues are looming to be problematic. When Federal Reserve Chair Jay Powell testified to Congress last week, he stuck to his view that while inflation ticked up over 5% in June – the largest year-over-year jump since August 2008 – the inflation that we are seeing is transitory in nature. Lumber has become the case in point. Over the course of the pandemic, lumber prices rose dramatically – apparently due to a combination of restricted supply and growing demand as the house-bound masses took on long-delayed home improvements. Then, as supply lines opened up and supply chain bottlenecks eased, prices have abated. Similar patterns of dramatic year-over-year price increases can be seen in other industries that experienced supply and demand disruptions during the pandemic, and are now revving back up. Hotel and motel rooms, airline tickets and car rental prices have all jumped up compared to last summer when travel demand fell off a cliff. Energy prices – a major factor in the Consumer Price Index (CPI) – have similarly increased as the economy is bouncing back and people are driving again. A significant year-over-year rise in crude oil prices provides a dramatic case in point. Just over a year ago, in the early months of the pandemic, oil prices fell below zero for a brief period; there should be no surprise that they have shown dramatic gains on a year-over-year basis.

But while Republicans are banging the drums about runaway inflation with the hope of stirring popular discontent, the bond markets are not convinced. Market projections of the anticipated ten-year inflation rate are reflected in the spread between the yields on the 10-year US Treasury Bond and the comparable term Treasury Inflation-Protected Securities (the “TIPS Spread”). Suffice it to say that while inflation fears spiked upward during the spring, market inflation expectations have settled back down, as market concerns have pivoted from inflation fears to indications that the pace of economic recovery – at home and globally – is slowing in the face of a rapidly spreading Covid-19 Delta Variant and vaccination hesitancy. The TIPS Spread is currently projecting a ten-year inflation rate just over 2.3%, well below what Mitch McConnell is hoping for.

This is not to say that inflation is not a risk, but rather that spikes in inflation as measured by the CPI may well be transitory, as Jay Powell insists. The underlying economic myth is that inflation has been under control for the past two decades or more, as inflation in the CPI – which reflects the prices of those things that most people purchase on a day-to-day basis – has poked along at a compounded annual rate of just 2.1% over the past twenty years. During this same timeframe, however, asset price inflation – stocks, bonds, homes, cryptocurrency, etc. – have skyrocketed, with residential real estate prices rising by 3.9% annually – nearly twice the rate of CPI inflation – corporate bonds up 7.8%, and a broad measure of stocks up by nearly 8.9% annually. 

Inflation in asset prices has been a direct function of Federal Reserve Bank monetary policy, particularly the practice of “quantitative easing” – Fed-speak for printing money to purchase long-term bonds in the open market to force long-term interest rates toward zero – that fueled the global economy recovery from the 2008 financial collapse. Since then, the Fed has pumped nearly $7 trillion into the markets, an amount that is equal to nearly 50% of the U.S. money supply. While traditional economic theory suggested that printing money causes inflation, all that new money never made it into the pockets of most Americans, where it might have translated into inflation as measured by the CPI. Instead, it flowed through the financial markets into the accounts of the investor class, where asset price inflation is called by another name: wealth accumulation. 

Like inflation, the problem of crime is in the eye of the beholder. According to a Morning Consult poll released last week, three-quarters of Americans now believe that violent crime is a major, and growing, problem. However, while this number is roughly the same among Republicans, Democrats and Independents, the perceived cause falls predictably along party lines. Just over half of those polled blame rising crime on the proliferation of “guns on our street” – meaning the problem is one of gun control – while for the other half of those polled, the problem lies at the feet of those pushing to defund the police.

Although violent crime often grabs the headlines, leading to the broad based concern reflected in the polling numbers noted above, a deeper dive into the Morning Consult numbers suggests that crime is not as much of an issue in most people’s daily lives. While three quarters of Americans suggest that violent crime is a major problem nationally, the problem appears to diminish the closer to home one gets. Only half of those polled – regardless of political affiliation – think major crime is a problem in their state, while the number falls to one-third or less when people are asked about crime in their own community.

The notion that fear of violent crime is being trumped up for political advantage is reinforced by Gallup polling on the issue. According to a Gallup tracking poll, people’s fear of crime in their own community is at the lowest level it has ever been since Gallup began asking the question in the 1960s. Its most recent result, 29%, mirrors the response to the same question in the Morning Consult results noted above. As Paul Krugman observed recently, despite the increase in homicides nationally, “New York is still safer than it was a decade ago, vastly safer than it was 30 years ago, and, for what it’s worth, considerably safer than, say, Columbus, Ohio."

Mitch McConnell wants his old job back, and knows that independents and suburban voters hold the key. With his party now completely captive to its mentally unstable leader, and fearing that the 2022 elections will be a referendum on Donald Trump, January 6th, and the GOP voter suppression, he desperately wants to change the subject. Inflation and crime are the best he has been able to come up with. Cheering for bad news would seem to suit him well, and – with little else to offer – we can expect it to reach a crescendo in the months ahead. 

ORIGINALLY POSTED TO GRAFFITI BY DAVID PAUL ON SATURDAY, JULY 17, 2021.

Follow David Paul on Twitter @dpaul. He is working on a book, with a working title of "FedExit! To Save Our Democracy, It’s Time to Let Alabama Be Alabama and Set California Free."

Artwork by Joe Dworetzky.  Follow him on Twitter @joedworetzky or Instagram at @joefaces. 

Ted Cruz wants to shut down the IRS, should Democrats agree?

Donald Trump is a tax cheat. He inasmuch as admitted it at his rally in Florida last week, just days after the indictment of the Trump Organization and its long-time chief financial officer on charges ranging from tax fraud to grand larceny. Returning to the campaign trail, surrounded by his loyal followers, he relished the opportunity to play the common man besieged by faceless bureaucrats, and the complexities of a tax code beyond anyone’s understanding.

“They go after good, hard-working people for not paying taxes on a company car. You didn’t pay tax on the car or a company apartment…. Or education for your grandchildren. I don’t even know. Do you have to? Does anybody know the answer to that stuff?”

Of course, Donald Trump is not the common man. Rather, he is emblematic of a culture of tax avoidance – which he once playfully referred to as a “sport” – that has been elevated to the modern entitlement of a small, privileged elite. A recent report from ProPublica focused on the extraordinarily low effective tax rate paid by the richest among us. According to that report, over the five years from 2014 to 2018, the 25 wealthiest Americans, as ranked by Forbes magazine, saw their net worth rise by $401 billion. During that period, based on leaked IRS data, they paid $13.6 billion in federal income taxes, or 3.4% of their wealth accretion over that timeframe.   

The ProPublica report was not about tax fraud or grand larceny, it was simply about an income tax system that does not tax wealth that is derived from the growth in stock or other asset values until those assets are sold, when “income” is realized. This is not a matter of tax policy, but rather constitutional law. Few people may realize that when the Constitution was drafted, it did not give the federal government the power to impose an income or other direct taxes, but only indirect taxes, such as sales taxes and import duties. Shortly after the federal income tax was created with ratification of the 16th Amendment in 1913, the Supreme Court ruled in Eisner v. Macomber that the increase in wealth that a person might realize through rising stock values did not constitute “income” subject to taxation under the newly created federal income tax.

Such is the law of the land, and it is the reason why Warren Buffett, Jeff Bezos, Michael Bloomberg and Elon Musk – who saw their collective wealth grow by $160 billion from 2014 to 2018 – paid only $1.7 billion in taxes during that time period, for an effective tax rate of barely 1%. Under the rules established in the wake of the Eisner decision a century ago, stock wealth (referred to as “unrealized gains”) does not become income subject to taxation unless and until the stock is sold. And then there are the myriad other features of the tax code – from those as simple as the lower tax rate levied against capital gains compared to “ordinary” income, to industry-specific tax advantages and inter-generational trusts – that can result in the wealthiest taxpayers paying tax rates that are far lower than the rest of us pay as a matter of course. For example, over that five-year period, Michael Bloomberg reported total income – including “realized” capital gains – of $10 billion, yet he paid less than $300 million in federal income taxes, for an effective tax rate of less than 3%. If tax avoidance is a sport, Bloomberg is apparently very good at it.

Donald Trump, of course, was not charged by New York State prosecutors with tax avoidance – defined as legal efforts to minimize the amount of taxes one is obligated to pay – but rather tax evasion, which is what happens when someone steps over the line into tax fraud, and a range of other crimes and misdemeanors, up to and including, it appears, grand larceny. And tax evasion is a big deal. According to the conservative-leaning Tax Foundation and the Congressional Joint Committee on Taxation, the “tax gap” – defined as the difference between taxes paid and taxes owed – is now estimated to exceed half a trillion dollars annually, more than one-third of which is owed by the top 1%.

The entire topic of how taxes are levied, enforced and evaded emerged dramatically into public view over the past few weeks, with an odd confluence of the indictments of the Trump Organization, the bipartisan infrastructure bill making its way through Congress, and the publication by the U.S. Treasury of its annual “Green Book”.

The publication of the Green Book – where the Treasury lays out its revenue generation blueprint for the coming year – stirred up a firestorm, as it laid out the Biden Administration’s plans to tackle the tax gap and make a dent in tax advantages that have contributed to the massive accumulation of wealth by the wealthiest American families. In particular, those plans contemplate equalizing the tax treatment of capital gains and ordinary income, and forcing the realization of capital gains at periodic intervals within trusts created to pass accumulated wealth – often untaxed – from one generation to the next. 

Central to the Biden Administration plans is $40 billion of funding in the bipartisan infrastructure bill for expanded IRS enforcement. The IRS is responsible for collecting 95% of federal revenues, and since 2010, its budget has been reduced by 20% in real terms and staffing has been cut by 22%. As a direct consequence of reduced funding, the share of individual and corporate income tax returns examined has declined by 46% and 37%, respectively.

There was a time when going after tax deadbeats was popular political rhetoric among Republicans and Democrats alike, as an overwhelming majority of Americans – north of 85% according to polling data – disdain those who cheat on their taxes. After all, why should taxes be raised on those of us who pay what we owe to fund needed public services, rather than collected from those who don’t? And more to the point, why should the wealthiest Americans, with all their high-priced lawyers and accountants, be allowed to skate by while everyday folks dutifully fill out the short form and pay what the government asks of them. 

But that was then, and this is now. If Democrats believed that Republicans – even as they are busy rebranding themselves as working class heroes – were going to sit still in the midst of the uproar among rich GOP donors when the Treasury plans were made public, they were mistaken. Since its publication, Green Book panic has roiled the Senate Republican Caucus. The Coalition to Protect American Workers, an anti-tax dark money group founded by former Vice President Mike Pence’s ex-chief of staff, took aim at Kansas Republican Senator Jerry Moran – a member of the bipartisan group crafting the infrastructure bill – with an attack ad portraying the legion of goose-stepping IRS agents that would be unleashed across the land by the infrastructure bill.

Republican Senators quickly jumped on the issue, mirroring the words of Texas Senator Ted Cruz, who declared that "Throwing billions more taxpayer dollars at the IRS will only hurt Americans struggling to recover after waves of devastating lockdowns... Instead of increasing funding for the IRS, we should abolish the damn place!” None of them sought to explain how cracking down on tax evasion among the wealthiest Americans – who largely cruised through the pandemic year with few ill effects – would adversely impact the rest of the country, but such are the ironies of a GOP that serves the interest of plutocrats even as it positions itself the vanguard of the proletariat. 

The Wall Street Journal Editorial Board piled on, chastising Republican participation in the IRS funding plan. But even its editorial, which cited the road map for attacking the tax gap published by economists Natasha Sarin and Larry Summer, declined to offer a substantive critique of the Treasury plan, beyond musing plaintively: 

“But is that plausible [that investment in the IRS will yield more revenue]? It makes little sense that millions of Americans are willfully violating the tax code. The costs are too high if they’re caught. People who make $5 million a year hire lawyers and accountants to exploit legal means in the IRS code to minimize their tax liability.” 

And there’s the rub. The simple truth is that the slippery slope from tax avoidance to tax evasion has been greased by years of slashing funding to the IRS. Over the past decade, the decreased funding and staffing has resulted in an 80% decline in the chance that the tax return of any given wealthy American will be audited. Accordingly, while the editorial argument might make sense in the abstract, in the real world the economic incentives to tiptoe across the line from tax avoidance into tax evasion have been steadily increased.

And standing there as Exhibit A on the stage in Florida was Donald Trump, a man for whom the sport of tax avoidance appears to have slid easily into tax evasion. However, unlike your average tax cheat, Trump knows that he will have back-up if charges are actually brought against him. If, as he has long suggested, his supporters would turn a blind eye to his shooting someone in the middle of Fifth Avenue, he must surely feel confident that he will be able to weather – if not actually benefit from – indictments for tax fraud and grand larceny, should those be forthcoming. And as long as his supporters continue to stand by him, Republicans in the Senate will be there as well. Pretty soon, no doubt, we are going to see Ted Cruz and others on Fox or the Sunday shows complaining that what the Trump Organization did is no big deal, and that but for the Trump name, none of those indictments would have seen the light of day.

There is a larger issue here, however, than the fate of the IRS funding, the infrastructure bill, or Donald Trump himself. It is the diminishing societal consensus surrounding federal tax policy. On the Democratic side of the aisle, growing wealth inequality and Elizabeth Warren’s call for a wealth tax – buttressed by the ProPublica data illuminating vast disparities in how income is taxed – have raised concerns over the fundamental fairness of the federal income tax system. On the Republican side, the uproar over the IRS funding in the infrastructure bill and the dark money ad attacking Jerry Moran suggest that the line between raising taxes – opposition to which has been a non-negotiable shibboleth in the GOP dating back to the 1980s – and collecting them has become increasingly faint. 

If there is no longer a consensus across the aisle that even taxes on the books should be collected, it may be time to embrace a fundamental reimagining of what we tax and how. Perhaps when Ted Cruz suggests shuttering the IRS, Democrats should take the idea seriously, and consider how much political capital they want to invest in being attacked as the Party of the IRS.

ORIGINALLY POSTED TO GRAFFITI BY DAVID PAUL ON FRIDAY, JULY 9, 2021.

Follow David Paul on Twitter @dpaul. He is working on a book, with a working title of "FedExit! To Save Our Democracy, It’s Time to Let Alabama Be Alabama and Set California Free."

Artwork by Joe Dworetzky.  Follow him on Twitter @joedworetzky or Instagram at @joefaces.