Deficits and Taxes

So here, via Paul Krugman, are the income tax rates at various income levels as proposed by Newt Gingrich, Republican front-runner:

Yes, this means that people at the top of the income scale will actually pay a lower average tax rate than people in the middle and upper middle (those lucky stiffs at the bottom still pay less, though).  Ezra Klein has some great points on the Republican dichotomy right now: in congress they're refusing to extend the payroll tax cut because it's not paid for, but on the campaign trail Cain, Perry, and Gingrich are falling all over themselves to make much larger tax cuts without any sign of a thought regarding how to pay for them.  So what's the result in terms of revenue?

The tax plan proposed by Republican presidential candidate Newt Gingrich would add $1.3 trillion to the U.S. budget deficit in 2015 alone, a new analysis shows, complicating his goal of balancing the government’s books.

 That's in one year alone!  It's just mind-boggling that Newt and other Republicans can spend the first half of a speech ranting about the deficits run up by the Obama administration, and then in the second half of the same speech roll out a revenue-eroding tax cut.  And nearly half the country is buying it!!!

Aaaaarrrrrrgggggghhhhhhhhh!

I do not look like this

This stuff, as reported by Paul Krugman, just drives me crazy.  Apparently Senator Olympia Snowe said this:

Fiscal shenanigans such as permanent tax increases to pay for one-year temporary measures are precisely the problem that drove our nation into a $15 trillion debt crisis.

Krugman isn't usually known for holding back, but in his post I think he hits it too lightly.  Snowe's statement is basically the opposite of the truth.

Here is a graph of the causes of our debt:

So the truth is that the Bush tax cuts were the single biggest cause of our current deficit.  Magical thinking that tax increases hurt the budget are not helpful in dealing with this problem.  And Snowe is supposed to one of the moderates!!!

The Party of the Rich

Great piece from Rolling Stone detailing the Republican party's shift to become the "party of the rich".  The conclusion:

...equating taxation with theft – is exactly the kind of talk that dismays old-line Republicans. Many of those who fought for years at the side of Ronald Reagan say they no longer recognize traditional GOP values in the new Republican Party. Fighting for the rich, after all, is not the same as championing the right.
"You can look up my record: On conservatism and taxes I was better than Jesse Helms," says Simpson, the former senator. "But whatever happened to common sense? People are going to look around in five or 10 years and say, 'Whatever happened to the things that made me comfortable? That made our streets and schools good things?' And they'll look, hopefully, at Grover Norquist. I can say to you with deepest sincerity: If this country and this legislature are in thrall to Grover Norquist, we haven't got a prayer."

Laffer Idiocy

Conservatives who keep telling me that a tax cut will increase revenue due to the immense boost to the economy are driving me crazy.  Here's an actual quote from my most crazed right wing correspondent:

If we pay less taxes we have more money, we buy a Cars [sic], when we buy a cars, Car dealers hire, Car makers hire, the people that are hired are now taking less from the Government and are PAYING taxes, the guy that sold me the car has more money, he is paying more taxes, he buys a TV from Best Buy, the Best buy salesman has more money, he pays more taxes,,the manager of Best Buy hires, the people he hires are taking less from the Government and are PAYING taxes,,,

It goes on and on and on,,,and the NET RESULT is less people on unemployment and MORE PEOPLE PAYING TAXES!

Except when you look at actual life, what really happens and has happened when we cut taxes from rates that aren't that high historically now, is that the dynamic he describes happens to a small degree, but not enough to make up for the lower tax rates- the government gets less money than it would have gotten if tax rates had remained higher. So you have to cut government spending or run deficits.

Conservatives tried exactly this in the 2000s- it was an abject failure. Why do we keep revisiting a policy that has never worked in real life? It would be like a Left winger trying to convince the country of the wonders of communism- he could throw out a paragraph from Marx or Lenin, which also sounds great, but we'd all know that when they tried it, it didn't work.

Lowering marginal tax rates when they're in the 30s% leads to less revenue. It has other advantages, of course, but it will unquestionably lead to less money for the government. Try to think about it this way: let's say we do what conservatives want and lower the top tax rate from 35% to 25%. They say this will increase revenue. But then why not go down to 20%? OK, how about 10%? What about 1%? 0.00001%? At some point you get to a tax rate that actually does not increase revenue, right? So somewhere there's a number that is the "right" one to maximize tax revenue for the government. How do we figure out what that number is?

The only way to figure it out is to look at history. When we went from 39 to 35% in 2001-03, revenue cratered.  Then it eventually increased as the Bubble Economy did its magic, but still not on the trend line it had been on.  And THEN, when the economy tanked due to the Great Recession, revenue cratered again. History shows us that the optimal number for government revenue is considerably higher than our current rates.  And we can also look at the 1980s- the Reagan tax cuts caused a flattening of revenue, which only returned to the trend when taxes were increased again in the mid-1980s.  Bush I raised taxes too, and revenue kept right on going up.

We don't have to put taxes at the optimal number of course- it's still totally fine to have lower taxes and smaller government if that's what we want. But it's stupid to say that lowering tax rates leads to increased revenue.

Hey, the US Doesn't Actually Tax That Much

This chart, from ThinkProgress via Kevin Drum, shows how the US corporate tax rate isn't actually choking off growth in our fair country.  Drum's headline asks corporations to "stop whining".  Sounds good to me.

One thing that strikes me about the whole taxes debate here is how conservatives keep going on about the "increasing" burden on them, while the tax burden has been steadily decreasing over recent years.  Liberals and neutral news people need to challenge that narrative.  We should be reporting the trends as they actually are.

A Federal Budget Parable

A family sits around the table.


Dad: Well kids, we're hemorrhaging money, so we're going to have to cut back.

Jonny: But Dad, when you gave up your full time job and went down to part time, you told us we wouldn't have to sacrifice anything!

Dad: Well, Jonny, I didn't realize your mother's spending would be so irresponsible.

Mom: Excuse me? I haven't changed my spending habits at all. The difference is that you spent $50,000 on 12 guns and full body armor for all of us!

Dad: I needed that weaponry to protect us from the neighbors. They're Arabs, after all.

Jonny: But you bought it on credit right after you quit the full time job

Dad: Never mind that- the money's spent. The point is that we have to cut back. Jonny we're not signing you up for baseball this year- we can't afford it.

Jonny: AAAWWWWWWWWW!!!!!!!!!!

Mom: What if you just got your full time job back?

Dad: Cutting out baseball won't be enough. We have to cut down on our medical bills too.

Mom: OK, how about signing up for this new medical insurance plan that cuts bills by determining what care is cost-effective?

Dad: That'll never work! And it's rationing care. No, instead of that we're just going to stop going to the dentist.

Mom: Isn't that rationing too?

Dad: Stop confusing me with facts, woman! Medical care costs us more because we signed up for that prescription drug plan.

Mom: Yes, that plan is really good. But when you signed us up you didn't make any plans to pay for it. And it pays drug companies double the going price so it's more expensive than it should be.

Dad: Oh, you and your facts again! The point is that we have to cut spending. We're going to cancel that plan to fix the roof of the house. We can just keep changing the buckets that catch the leaking water.

Mom: Honey, we were making it just fine when you were working full time. Why don't you just go back to work? Then we can solve more than half of our budget problem.

Dad: You're not listening to me. It's like you want to go bankrupt!

Mom: But I have a solution! It worked 10 years ago, whereas your plan to make ends meet with only a part time job has never worked. But you won't even address my idea.

Dad: It's a good thing it's going to be my turn to run family finances after November 2012.

Jonny: But Dad, you were running our finances for 8 years.  When you started, you were putting money into my college fund and had enough for us to live on. Then you put all our money into your friend's bank and didn't make sure it was an FDIC-insured one, and we lost most of it. Mom has only had a couple of years to clean up the mess you left.

Dad: Yeah, but this time it'll be different.

The Manufactured Social Security Crisis

Amidst all the forecasts of doom regarding the budget deficit, I keep hearing about how politicians have screwed up social security so badly that it's out of money and we have to make huge changes to fix it.  We got some of this from Simpson-Bowles of course, and I keep hearing it from my conservative correspondents too.  Social Security is paying out more than it's taking in!  The Trust Fund is a fiction!

But think about it this way: Social Security is just a Math problem, and a really simple one at that.  We pay a certain rate to Seniors.  Workers pay a certain percentage of their salaries to fund benefits.  A percentage of people get on Social Security Disability at a younger age.  All of these formulas can change.  So the ways to fix Social Security are:

1. Increase the tax rate for FICA for everyone (we just lowered the rate in 2011 from 6.2% to 4.2% as part of the lame duck tax deal)
2. Increase that tax rate for high income people only (currently we only tax the first $106,800 of income- we could increase that)
3. Decrease the benefit level slightly
4. Increase retirement age
5. Means-test benefits, so rich people don't get paid out
6. Toughen up requirements for disability

And of course we could go with some combination of more than one of the above solutions.  These are tough choices of course, and my preference is to go with #2, but reasonable people could disagree.  I am strongly opposed to #5, which would lead to erosion of support for Social Security over time as it would come to be seen like welfare, in which poor people are seen by the Right as sponging off the hard-working. The reason SS has been so successful for so long is that we're all in it together.

So there's really no "crisis" in Social Security.  There's a demographic change because baby boomers are retiring and the population is going to get much older, so there are fewer workers to pay benefits.  That's not because we've become a lazy country or there's some moral failing- just blame those WW II GI's making all those babies at the same time when they got home.

So yes, Social Security needs to be fixed, and can't be left as is.  But there are lots of ways to do it, all of which will definitely work.  It's just a question of enough people in Congress and the President agreeing about our priorities.  All big problems should be so easy and un-complex.

Income Inequality (posted by DT)

So I read that the rich are comparitively richer compared to the middle class than ever before:

The richest 1% of U.S. households had a net worth 225 times greater than
that of the average American household in 2009, according to analysis conducted
by the Economic Policy Institute, a liberal think tank. That's up from the
previous record of 190 times greater, which was set in 2004.

So this is what I don't understand: why are the wealthy and their conservative shills so upset about the tax code and what Democrats are doing to them? They're winning the policy war! And they act like they're losing it.

The right wing machine is so good at politics and so focused, that they can keep liberals on the defensive even in the face of every fact. How do they do it???

(source: http://money.cnn.com/2010/12/23/pf/rich_wealth_gap/index.htm)

Extension of the Bush Tax Cuts (posted by DT)

I've been having and listening to a lot of arguments about the extension of the Bush tax cuts lately, and it occurs to me that to a great extent we're arguing around each other. Last night, for example, I was talking with some family members, and the argument went something like this:

Liberal: These lower tax rates for the rich are unnecessary- they
don't need it and will hardly notice an increase
Conservative: The way to create jobs is to make sure the Rich have
money, since they're the ones who create jobs.

I strikes me that these arguments could theoretically both be correct. It could be that, while the Rich don't really need a tax break, having lower taxes would still create jobs and it would therefore be worth it to keep taxes low. In fact, if both these arguments are right, then the conservative wins the argument because the goal is to get the economy moving. If both arguments are wrong, then the liberal wins, because while the Rich might be unhappy and harmed by the increase, the economy as a whole would be benefiting (or at least not be harmed) and the federal deficit would be reduced.

So let's look at the facts. What's going on now in the economy? It seems that what's happening now is that the Rich (including rich corporations and banks) have mountains of capital in hand. Corporate profits have been stratospheric this year, and companies are sitting on large amounts of cash that they're not investing. Why not? Because there's not enough demand for products, and companies are not confident that this will change soon so they don't want to risk their cash.

So would a 4% tax hike on high earners change this dynamic? I don't really see how. If the argument is that the Rich need to take home more of their money to create jobs, then that assumes that some don't have quite enough cash in hand to create them now, or that they'd invest less money if more taxes were taken. But they're not investing right now, with these historically low rates! We've now gone through nearly a decade of these lower tax rates, which coincidentally has seen the least growth of any decade in modern history.

I think that if conservatives want to make the argument that the Bush tax rates create jobs, they should at least be required to point out some evidence showing that they've done so in the past.

So what are we left with? Everyone wants his/her own taxes lowered. Conservatives are left with a moral argument that this is "my money", not "the government's", and that the government doesn't know how to spend this money as well as the magic of the Invisible Hand. Except the Invisible Hand just created a huge recession, which would have been a second Depression but for federal government spending and policies.

So I know this isn't much of a shock to read on this blog, but liberals are right and conservatives are wrong. Marginal tax rates on high earners should go back up at least to Clinton-era levels. If conservatives want to make the case for lower taxes than that, they need to show it working, and the last 10 years have proven just the opposite.

Massachusetts Question 3

On my state's ballot this Tuesday is a ballot question that would roll back the state sales tax from 6.25% to 3%. http://www.sec.state.ma.us/ele/elepip10/pip103.htm I guess recent polling indicates the question will probably lose, but it's still close. I just have to throw out a little "what are they thinking" note to proponents.

It's estimated (by both sides) that this change would decrease state revenues by $2.5 billion in FY 2012. Where do proponents think this money is going to come from? OK, people are angry about government, but do they seriously think we can wipe out this much cash from state programs without serious consequences?

Massachusetts has been laying off state workers throughout many departments. There's no fat to cut. If you're angry about high pensions for state workers, this law isn't going to change that one bit- we'll still owe pensions and retirement benefits to those workers, only we'll have to cut aid to cities and towns to pay for them, and now property taxes are going up instead. Or towns will be laying off more police, fire, and teaching staff.

These kinds of votes seem more like tantrums than thoughtful dissection of policy. Government has to be funded from somewhere. I would love to see anti-tax types propose ballot initiatives that cut programs and local aid- then we'd be voting like legislators have to when they're formulating a budget, considering the consequences of our tax cutting. There's no such thing as a free lunch.

Meta-Thoughts on Taxes (posted by DT)

I'm going Meta in this post, so beware!

One thing that interests me about questions around taxation is the basis for beliefs of liberals and conservatives. We're not talking to each other at all.

• Conservatives argue for lower taxes saying "we should be able to keep our money- the government should stay out because freedom means no government should do any more than absolutely necessary so that individual citizens can have maximum choice".
• Liberals tend to argue that taxes should be higher, returned to at least Clinton-era levels, and argue that economic history shows pretty clearly that those tax rates coincided with strong growth for the economy and increasing wages for the median American. Increasing prosperity for middle class and poor people is the main goal of society.

Both statements might be right! The Right really has no leg to stand on when they argue that a return to 1990s tax rates will slow the economy- all the historical evidence points the other way. But that doesn't invalidate the main argument of Low-Taxes people, that morally in a free society the government shouldn't be taking our money.

I'm often disappointed that political arguments aren't made honestly in the public sphere. It would be refreshing to hear a conservative say something like "I know higher taxes won't wreck the economy or even hurt it, but the fact is that lower taxes are a moral good in and of themselves, and if the Middle Class has to sacrifice some prosperity in exchange for freedom from government intervention, it's a small price to pay".

Well, on second thought, I guess I can see why they don't say that much; might not play too well with Joe Sixpack.

Unemployment, Tax Cuts, and Deficit Peacocks (posted by DT)

This week we're getting a wonderful window into the priorities of liberals and conservatives. We have virtually every Republican in congress opposed to the extension of unemployment insurance, ostensibly because they don't want to further increase the deficit. Why do I write "ostensibly"?

Well every last one of those same Republicans is in favor of extending the Bush tax cuts for wealthy Americans. This would make the deficit much worse, costing many times what unemployment extension (which is temporary, while tax cuts are permanent) would cost. They apparently see no contradiction here.

Someone in the Blogosphere coined a perfect term for such conservatives: Deficit Peacocks. They talk about the horrible deficit that is passing costs onto our grandchildren, but they are completely unserious about actually solving the problem in the long term.

The current Republican party is genuinely in favor of lower taxes- that's not fake. But you can't seriously propose lowering the deficit and cutting taxes. This just isn't that hard to figure out.

One other thing. If you believe in the claptrap that lower tax rates actually lead to increased revenue through massive economic growth, this post: http://modeledbehavior.com/2010/07/13/ezra-klein-is-dismayed-that-some-people-think-the-bush-tax-cuts-raised-revenue/ pretty much demolishes that argument. You can't get something for nothing, nice as that would be.

Historical Tax Rates (posted by DT)

I was at a social work symposium the other day and heard a talk by Mimi Abromovitz, a well known social work professor at Hunter College in New York. Her talk focused on something I hadn't though much about, federal taxing and spending over time in the US. So much of the debate we hear now is about how the government "keeps taking more and more of my money", but there's little perspective anywhere regarding whether or not that's actually true.

I tried to keep up with Dr. Abromovitz's sources, but I'm not very good at refined searches on wonkish tax policy websites so I'm having trouble digging them up. But a little of what I jotted down:

• The percentage of revenue collected by the federal government compared to GDP has declined significantly since 1945. Of course it was very high then due to WW II, but the percentage has continued to fall consistently since then.
• Federal spending was 21% of GDP in 1976, and now it's 15%
• AFDC/TANF (commonly referred to as "welfare") was paid to more than 10 million recipients in the 1980s and 1990s. In 2009 4 million people received it. As a percentage of the US population, 5% were receiving these benefits 30 years ago, and now it's 1.5%.

Now there are a few ways to look at this data, but here's one way for those Americans who constantly carp about how the government is taking all their money and giving it to lazy, shiftless, poor people: You've already gotten what you want. The Feds are doing way less redistribution of income to the poor than it used to. So why are you angrier than ever?

On a related note, from the Tax Policy Center:

In 2007, federal, state and local taxes claimed about $3.8 trillion, or 27
percent of U.S. gross domestic product. That's nearly $13,000 for every
American. Two-thirds of tax revenues went to the federal government.
It may sound like a lot, but other developed countries collect even more. In
2006, taxes in 30 of the world's richest countries averaged 36 percent of GDP; only
Mexico, Turkey, South Korea and Japan had tax rates lower than ours. And
taxes in many European countries exceeded 40 percent of GDP because these
nations offer more extensive government services than the United States
does. Americans do pay far more in individual income taxes than residents of
other wealthy nations. Nearly 37 percent of U.S. tax revenue came from
personal income taxes in 2006, about 10 percentage points more, on average,
than in other industrialized countries. But we pay much less in sales taxes;
17 percent of 2006 U.S. tax receipts were from taxes on goods and services,
or about half the 32 percent average for rich countries.

Bottom line: We may hate our taxes, but we pay far less than people in other wealthy countries

Email Throwdown! (posted by DT)

I thought I would share with you my loyal readers one of the lengthy email chains that we have been involved in. What follows is an edited and hopefully readable version of an exchange about the general issue of fairness and tax policies. I've taken out names to protect the politically innocent:

From JB:
The general question I have is, where is it written that life is supposed to be fair? Actually, life not being fair is what motivates a lot of people to success....and it builds character too. Secondly, if fairness is something that we should strive to achieve for all, why is it fair that those in the higher brackets are paying 60% oftheir money in taxes, and the government wants them to pay even more? Why is it fair that living in the northeast in order to afford a house and a family, and live like people in the rest of the country, you needto make 75%-100% more? Why is it fair that my buddy in Texas lives in a house just like mine and it cost him 1/3 the price of mine, but my taxes are higher because i make more? Meanwhile he probably can buy much more with the money he makes in Texas? When you start playing the "fair" card, it is a very slippery and dangerous slope - none of it is fact based, it is purely emotional andby definition will create inequities for someone else.

My Response:
I think that it would be nice if life were always fair, though of course impossible. I believe that when government can make life more fair (by, to take an uncontroversial example, enforcing laws against robbing and killing people) it should consider doing so. Some unfairness can't be solved by government (like, for example, gov'tcan't stop a child from being born with cerebral palsy), but can be ameliorated (gov't could make sure that that child's family can still afford health care). I think people's motivation is DECREASED by unfairness- if I know that because my parents can't afford college and because there's no financial aid, I have virtually no chance of going to college, I may not bother studying hard, accepting my fate as a low-wage worker. I'd be much more motivated to improve my situation if I felt like I had a fair chance to succeed. As for the tax issue, the more people make the more they should pay in taxes. It doesn't seem like our progressive tax system has stopped high wage-earners from working lately. As for the problem of your house being worth less than your buddy inTexas, that's one of the fairness issues the gov't should not try tosolve. You're welcome to move to Texas if you want, so it's really not unfair at all. That's not quite the same as the parent whose kid has cerebral palsy- can't exactly give him back.

JB respondes:
I am not sure if you have ready any Thomas Sowell - an African American who grew up in Harlem, pennyless, but went to MIT and has become a brilliant economist. He talks a lot about the same general principles that [another correspondent] touched on, how people need to be motivated to improve their own situation. Too much of our society is inherently lazy and does not produce for the greater good. This government is continuing to move in the direction of enabling this behavior, making indiviuals reliant on handouts, rather than motivating. Now, from the perspective on the top of the food chain: as the government continues to take and redistribute, those who create the jobs become less motivated to continue to do so, as they see less and less return on their own invested capital. By de-incentivizing these individuals, it has a spiraling effect on the whole system. With less motivation on the top of the food chain, there is fewer trickle down effect and everyone loses. Since we can both agree that life unto itself is not fair, the governments role is not and should never be to determine winners and losers i.e. fairness. When you take away more money from the top, and give it to the poor, that is exactly what the government IS doing, it is choosing to whom it wants to be fair, and to whom it wants to be unfair. Your thought is, why shouldnt the government be able to make things more fair for some. My question is why should the government be allowed to make things unfair for others. Everything has a cost to society, there are no free lunches.

Me again:
I find your position a maximalist one, that's all. As I see it, gov't can't do everything, but it also can do SOMETHING. The current conservative argument is that gov't can't do a damn thing and shouldn't even try (except use its military to kill lots of foreigners of course). I agree with you that taxes and redistribution can get too high and lead to the things you fear- a sinking economy that helps nobody. I just don't think that's a big danger with current tax rates, or even with Clinton-era tax rates. The economy was running pretty well during most of the '90s, with higher taxes than in the 2000s. I just don't see evidence that going back to those tax rates would be harmful. I'm not arguing that we should go back to 1970s tax rates, which I believe included a 91% marginal rate at the top- that's too high. My position on taxes isn't really radical based on recent US history. What's radical is the current Republican fixation on tax cuts ad infinitum. It is completely impossible to solve the deficit problem without revenue hikes; so when I hear absolute refusal to raise any tax rates, I can only conclude that you're not really serious about the deficit.

JB:
The one piece that you are missing from the Clinton era (I actually really like Bill Clinton) is the growth of the economy. The taxes issue is a much bigger drag on the economy now, since we are not seeing the economic growth, growth in worker productivity, wage growth that we saw in the 90's. Couple that with the reset of the Bush era tax cuts (that not enough people are talking about) and we are all really about to feel this pinch on our wallets. So, its not the tax rates that are the problem in a vaccum, it is the tax rates combined with the spending increases on top of more taxes yet to come with the absence of economic growth that does not provide a lot of optimism for the future.

Me:
To me the key point here about the Clinton years is that, as you say, tax rates "in a vacuum" aren't the only thing that matters. I agree with you. But I don't hear anything else coming from the Right except talk about tax cuts. The '90s certainly showed that the economy can grow with tax rates higher than we have now. The 2000s certainly showed that tax cuts alone don't necessarily produce growth (we had the lowest taxes since I don't know when, and we had the first presidency ever during which the economy didn't grow at all from 2001-2009).So I think we've dispensed with the argument that tax cuts are what the economy needs. Now the argument we're left with for tax cuts is: "it's my money, the government shouldn't be taking it", i.e. the moral one. Certainly that's the one stressed by [another correspondent], and it's a legitimate point of view. But let's face it, tax cuts have not correlated with economic growth over the last 20 years. We have to keep the deficit argument and the tax rate argument separate, which seems hard to do in this debate. HCR does not increase the deficit- why? Because it raises some taxes to pay for itself. And moderate tax hikes don't appear to wreck the economy- the argument against them is just the moral one. Now the moral argument for less taxes is fine, but it's of course impervious to data so I don't know that we can have a very illuminating debate about it.