Lately there has been a lot of talk about the deficit, the federal debt, and how will we, as a country, pay for all the things we are doing. Taxes are being raised to pay for the health care bill, not directly at first, but by raising the limit on how much of a persons income is subject to the Medicaid tax. There is also a good chance Congress will let the tax cuts put in by Bush expire thinking this will raise money for the government. If this happens it will not have the effect they think. When I studied economics in college one of the things we looked at was something called a Laffer curve. The Laffer curve is a bell curve that shows that as tax rates go down government revenues go up until you reach the top of the curve and then the effect is the opposite. The goal of governments should be to sit at the top of the curve where you have maximized your revenues while keeping the tax rates as low as possible. Going back at least to tax cuts made by John F. Kennedy and all the way to the cuts made by Bush, every tax cut has produced more revenue for the government. The year after the Bush tax cuts the IRS took in 25% more revenues than the year before the cuts. Even once the recession hit revenues were still up by 10% over the year before the cuts. I am not making an argument for more cuts here, it is quite possible that the last cuts put us at the top of the curve and more cuts would produce less revenue, however letting those tax cuts expire or raising taxes in some other way will also produce less revenue.
You might wonder if revenues went up how come our deficits and debt also went up. Spending. In the same period that revenues increased 25% spending increased by 53%. Roughly 10% of that increase was spent on the military and homeland security, the other 43% were things like the prescription drug program for Medicare and built in increases to programs. Lots of programs have it written into their budget to increase by the inflation rate + 1% each year. So where can we cut? The biggest impact comes from making cuts to the biggest pieces. The three biggest pieces are Social Security, Medicare\Medicaid, and the military. Cuts are being made to Medicare and more are planned in the health care plan. Social Security is pretty much off limits as no congressman will want to be the one to cut the income of everyone over 65. Military cuts are hard because even when the Pentagon tries to kill a program Congress tries to keep it alive in order to keep money flowing to their district. So what can be done? First we can get the unemployment rate down. At 10% or more unemployment there are a few million people out there living off federal and state unemployment and not paying in taxes, get the rate to around 3% and revenues go up, expenses go down. I don’t have a good answer how to do this but I think corporate America could make a good start by bringing jobs they outsourced to other countries back to the US. Maybe give them an incentive like a tax break if they bring back jobs or losing a tax break if they do not. Another thing that can be done is to put an end to the inflation + increases in programs every year. I don’t know about you but unless I get an actual promotion my increase each year is at or under the inflation rate and I still manage to pay my bills and feed my family, government programs can do the same. The last part is foreign military bases. Japan flat out does not want us there anymore and I don’t think the European countries would be sad to see us leave. Do a review of the foreign bases and see which are really necessary, they are not in anyone’s district and so would not cost jobs in the US to close them. Also anything the defense department buys should be made in the US. This should not even have to be said but it is US taxpayer money it should create US jobs not jobs somewhere else. Also if for some reason another war on the scale of WWII were to happen do we really want the factories making our supplies in another country? The last thing is something Obama promised and it will be nice if it happens, no new programs that do not somehow pay for themselves. They can pay for themselves by charging the people who use them, replacing outdated programs with something more efficient and cheaper, or some other way but they need to not run up the debt. All of these are fairly mild solutions compared to making deep cuts across every program but they would at least stop the bleeding and possibly start making small dents in the debt.
I agree that we need to reduce spending. I'm not so sure about reducing the spending in Medicare, but I agree that reducing the military budget has to be done. As you point out, reducing military budgets is politically very difficult, namely because of the tendency for congress to insert earmarks for programs that perhaps even the military doesn't really need, but that bring jobs to their communities.
ReplyDeleteI do agree that we need to end any tax breaks for companies that offshore their operations, but I think that giving tax breaks for hiring American workers is just another tax decrease, and I'm not convinced of the positive results.
I don't believe in trickle down economics. It was a Republican congress that went on a spending spree on programs that weren't paid for, on a war that should never have been fought (Iraq) and in general, spent money like a drunken sailor. Now, the problem is, someone has to pay the bill. I don't think it should be the poor. I don't think it should be the middle class. I think the corporations and rich who put the republicans in power should pay with increased taxes, less loopholes, and let them deal with the consequences.
Well for one thing corporations and the rich put just as many democrats in office as republican, just look at where all the money from Hollywood goes. The other thing is raising taxes on just the rich generally hurts the poor and middle class in some way. When they put a luxury tax on yachts people who bought multimillion dollar yachts when to Europe and the Bahamas to buy yachts to avoid the tax and the boatyards in the US mostly closed up. Granted that was less than 2000 jobs but they were all middle class shipyard workers who lost their jobs due to a luxury tax on yachts. With a global economy if we tax something too much here people will get it elsewhere. Look at sales over the internet where you can, about 90% of the time, avoid sales tax. They are growing all the time. As far as programs that are not paid for just keep an eye on the health care bill. Supposedly it will be budget neutral or reduce the deficit. Just remember that prescription drug plan passed under Bush, it now costs roughly double what the CBO estimated. The healthcare plan in Mass costs 4 times what they thought it would. Hopefully things will happen to prevent it but don't be surprised if this plan doubles or triples in cost once you get into yr 5 or 6.
ReplyDeleteI've always wondered Tuck, why it is that the Right gets their knickers in a twist, calling it socialism, when "redistribution of wealth" is overwhelmingly upwards to a few percent of the population due to uneven advantages for the rich", to the disadvantage of everyone else - the middle class and the poor.
ReplyDeleteI have yet to see it convincingly argued that this shift in ownership is merit based in any way.
It seems pretty solidly to be about setting the rules, including tax law, to benefit one side at the expense of the majority of people who work just as hard or harder.
This seems distinctly 'UN-American' if being 'American' means believing nin a meritocracy, where hard work and creativity are things to be rewarded.
I don't see that reward system working the way it should if the playing field is tilted in favor of those who already have wealth accumulating more, while handicapping middle and poor compeititors.
That is effectively what regressive taxation does.
Tuck,
ReplyDeleteI hadn't noticed your post because I've been on vacation (sorry).
First, the government isn't run like a family budget - if it were, we'd have gone bankrupt during WWII - there are legtimate times to run a deficit. As George Bush famously lied about, he said he said during the campaign that, "You should run a deficit during a time of crisis, a war, and an economic recession and hey, I hit the trifecta!" The problem of course was that it was Al Gore, not Bush who said it, and Bush created his own issues regarding deficits - I don't blame him for the economic downturn in 2001-2002, but he DID exacerbate the problem.
Now - as to the issues - SAYING you should cut spending is far easier than doing so. As you rightly point out Medicare D did a LOT to add to the deficits, but so did the 11T in tax breaks for the wealthy (if sustained over a 20 year period) which Bush enacted - and breaks which predominantly benefited the wealthy (by about 95% to 5%). Further, I believe you are incorrect that programs get COLA PLUS 1 adjustments - they tend to get COLA, but not all, in fact, one of the most recent issues was that Social Security stopped getting COLA (Cost of Living Adjustments) in 2007 (iirc), but either way, they don't get Plus 1 (as far as I know). However, during economic down times, costs go up by MUCH more than just inflation - because the need goes up in general assitance programs.
Defense, by contrast, should be cut with a hack-saw at this point. It's hard, but we spend almost 1T per year right now, that's up almost 100% from 2000 - and it's obscene. We don't need strategic nuclear forces of the size we have now, we certainly don't need 46 combat brigades, and we definetely no longer need 10-12 active carrier groups. We should call home our troops from Germany, Korea, and Iraq, and NOT leave 50,000 troops behind.
I do not support cutting Social Security, I DO support putting back the funds we've raided, I believe cutting Medicare fraud will do a great deal to save Medicare money, but medical coverage eventually will be made a public utility, and with it, a HUGE cost savings opportunity will arise.
Yet, all of that aside, you are correct that employing more Americans, especially at living wages, will solve many ills. I have no issue with tax incentives for doing so, but always remember that few companies make decisions for tax policies - they might get "pushed over the top" by incentives, but there still has to be a sustainable model (like wind energy has become - it was seeded by tax breaks, but survived on it's own).
With regard to the parties and their economic affiliations - there is no dispute COMPANIES give to incumbants, and further that Democrats have become about as pro-business as Republicans, but there is also little dispute that Republicans propose massive tax breaks for the wealthy and Democrats generally oppose them. The Republicans know well where their campaign coffers get filled from (the wealthy as large donors), and so do the Democrats (Unions, lawyers, and generally more well off - but not rich - smaller donors). It is not accurate to say the rich divide equally on which party they support - it is accurate to say the overwhelmingly support Republicans. I don't think Democrats support the middle-class (at least not effectively), but they certainly support more fairness in our tax system, with burden laid more heavily upon those who have benefited in the system than those who can barely afford to eat.
The thing is the burden is already overwhelmingly on the rich. I saw on CNN Friday at lunch that 47% of Americans will pay no taxes this yr. I think the numbers are a couple of yrs old but after the Bush tax cuts, but the top 10% by income pay 70% of the taxes and the top 1% pay 30%. Something always said when a tax cut is proposed is that it helps the rich more but that is mostly because the poor and even the lower middle class now are paying little or no taxes so they get little or no benefit from a tax cut. Any tax cut will benefit the people paying the most taxes more than people paying no taxes, just like a drop in the price of gas benefits people who use 10 gallons a day more than people who use 1 gallon a day. That is not unfair it is just basic math. I don't think we need another tax cut right now but we definately do not need a tax increase just as the economy is starting to recover. Also I think it is edging into dishonesty to promise not to raise taxes on anyone making under $250k and then let the Bush tax cuts expire, which will raise taxes, and still claim you did not raise taxes. If people making under 250k have to pay more in then you raised taxes.
ReplyDeleteAlso I never said deficits were bad but there is a point where you need to trim them. When we are borrowing money from the Chinese to put destroyers between the Chinese and Taiwan something is wrong.
Sorry, tuck, but while I'm not saying you didn't see the numbers on CNN - I am saying they are not correct.
ReplyDeleteSheesh, even Mr. Moneybags himself, Warren Buffet, claims we have a regressive taxation problem.
You are also not figuring in how much income is re-categorized as something else.
I guarantee you that as a percentage of income, the lower brackets pay a much much much larger percentage of their income as taxes, and also a much much larger percentage of the total taxes paid.
Tuck,
ReplyDeleteWhile the wealthiest DO pay a large percentage of all taxes, there is a very simple explanation for why, they MAKE a huge amount of all of the pay.
In 1981, the wealthiest Americans contributed about 24% of all taxes, today it's close to 50%. It is NOT because their taxes were doubled, in fact, exactly the opposite, their taxes were halved. Yet, they now pay more than twice as much as a percentage. How can this be? The simple answer is, because they now make FOUR TIMES what they used to as a block of people. By contrast, the middle class makes either sligthly more, slightly less, or considerably less, depending upon where you, and how you, measure.
That said, as a percentage of incomes, TOTAL taxes on all quintiles (20% brackets) in fact are VERY nearly equal. This is because while we don't have INCOME taxes on the poorest of society, we do have sales taxes, property taxes, vehicle licensing fees, and a host of other highly regressive taxes. In fact, the lowest quintile (iirc) pays about 16.5% of total income in taxes, while the highest quintile pays 17.8%, and they aren't evenn the highest payors. The highest is the fourth quintile, at 18.1% (again iirc, and I believe I do). So, while the income TAXES collected may come disporportionately from the wealthiest, it does not represent a large segment of their income due to various tax sheltering strategies. The truth is the wealthy pay no more as a percentage of income, despite having VASTLY more disposable income than those who don't even have enough to buy food on a day over day basis. That's a fundamental unfairness. If you want to reform how we distribute profits between labor and ownership, I'll happily agree to review whether tax rates on the richest Americans, which are at their lowest point since the gilded age, should be changed. The numbers you use present a highly skewed view of how and why taxes are being collected, looking ONLY at the percentage of SOCIETY vs. taxes paid, but totally discounting income.
With respecct to those who pay no taxes, you are correct that a large segment doesn't, but that's because we, as a society, agreed that people at or below the poverty line shouldn't be additionally burdened with taxes. Yet, as a percentage of their income, they are contributing a far more onerous burden as taking even $200 per year from someone making $18k, who has negative disposable income (i.e. the money left over AFTER paying for food, housing, and utilities) is effectively asking them not to eat for a week or two. Whereas, taking $200,000 from someone making $1,000,000, will still leave them with roughly $250,000 of disposable income. That's why we HAVE progressive tax structures (or are supposed to), yet, as you can see from total tax burden statistics, in fact, we no longer do.
Let's take a family of 4, with a combined AGI of around $48,000.
ReplyDeleteLooking at the tax numbers:
AGI $48,000
Less Standard Ded $11,700-
Subtotal $36,300
Exemptions(4) $15,000-
Taxable Income $21,300
Tax: $ 2,364
Credits:
Child Tax Credit $ 2,000
Day Care Credit $ 364
Total Credits $ 2,000
Tax Due: $0
Now, these numbers only represent through Line 60 of Form 1040. Other possible credits which would result in a refund include:
Federal Tax Withheld: $3,504
Making Work Pay $ 800
Total Possible Refund:$4,304
The point is: for a family of 4, $48,000 is not the poverty line. Yet, they pay no tax.
At $60,000, the income tax after credits, etc, is $956. Assuming reasonable withholding, they would get a significant refund.
$956 is 1.5% of one's income in the form of taxes. That's pretty low.
What figures do you use for the poverty line, for the working poor, etc. ToE?
ReplyDeleteI agree with Pen that you have to include sales tax, property tax, state income tax, all of the other witholding, etc.
$48,000 a year, for four people comes out to less than a thousand dollars a month per person take-home. That pays for food, clothing, shelter, insurance and health care, maybe if they're lucky savings including retirement, educational expenses, and so on.
That's middle class for one person, maybe for a couple without children. It's a pretty low income for a family of 4...
I'd call 'middle class' somewhere above $60,000 for a family of 4, but under $250,000. I defer to Pen to do further number crunching; he seems to have better stats at his finger tips.
ToE,
ReplyDeleteYou're right that a family of 4 LIKELY will pay little to no income tax, but Tuck's comments didn't talk about simply those above the poverty line but below median income. He was commenting on the fact that a LARGE section of the population doesn't pay income tax. While true, it clearly includes families of 4 with incomes less than $32k (the poverty line for a family of 4).
Yet, let's consider that the family of 4 with an income of 48k - they are in the 2nd to the bottom quintile - and are paying roughly 17% of their income in various taxes (not income, but other). So.. they pay 6800 in taxes. Considering their income, in contrast say to someone who makes $500k per year, and pays 18% net-net fed/local/state/sales - or a total of 90k in taxes YET has roughly $150k in disposable income AFTER income tax (which comprises MOST of their total tax burden), which do you think should be asked to pay more, the guy who, after taxes has perhaps $1000k in disposable income (the family of 4 with $48k) or the guy with $150k of disposable income?
I vote for the latter, they live far better, and have had their INCOME taxes cut in half since 1981 while seeing their average income quadrupple.
BTW, median income for a family of four is about 62k - YET we have fully 60% of families earning less than 54k. Salaries in the US have been stagnant for 30 years, it's the genesis of most of our economic problems, and pretending the issue is an overtaxed upper class - who've had their taxes HALVED - while the middle class makes much less as a share of profits or productivity, is to complain about the exact OPPOSITE of the problem.
Ok but you are way off track from the point of the article. The point is not whether our tax system is fair, the point is that raising income tax rarely increases revenues for the government, at least at the federal level (I haven't researched or read anything about the effect at the state level). Just as an example assume someone has $1 mil to invest. They can choose tax free municipal bonds that pay 3% and make 30k or they can invest in a money market account that makes 4.5% but is taxable which means they pay 25% capital gains, so they make $33750 and the govt makes 11250. If you raise the capital gains tax to 34% they make 29700 and the govt would get 15300, a nice increase for the govt except for the tax free bonds at 3% which give them 30k and the govt 0. Now I did not go look up any tax rates so I know those are incorrect the point is that raising taxes does not raise revenue all the time. All kinds of things can skew this, in the above example it would have raised revenue to raise the rate to 30% but lowered revenue to raise it to 34%. If the IRS is getting half their revenue from the very rich they need to look at how tax policy affects the very rich, what investments are out there that are tax free and at what point do those become more profitable than the taxable investments. If an executive is given stock as a bonus what part of it is income and what part capital gains. Our tax system is so complicated that you can't just raise taxes on everyone making over 250k and bring in more money.
ReplyDeleteBy the way 2 or 3 of the eastern european countries adopted a flat tax after being free of the Soviets. The first $40k of income was not taxed and everything over that was taxed at 10%, no deductions for anything, everyone got one 40k deduction. They brought in enough that after a couple yrs they lowered the rate to 7% or so and I think one of them raised the deduction some also. I know Poland was one country and I think the other was Hungary but I am not sure of that.
Tuck,
ReplyDeleteI disagree with your contention that raising income taxes does not raise revenues. Both Reagan's and Bush's (GHWB not GWB) tax increases did exactly that. In fact, there was a very illuminating graph in yesterday's USA Today (yeah, I couldn't believe it either) which showed that tax cuts didn't result in revenue increases and tax increases didn't result in revenue shortages (this graph charted federal revenues and debt as a percentage of GDP since 1920 or so). The tax cuts of the early 80's tracked closely to increasing debt, and the tax increases of the late 80's and early 90's tracked with decreasing debts.
That said, no question that the greatest effect was increasing wage base impacts - especially in the late 90's where we began running surplusses (when combined with both spending cuts and GHWB's tax increases).
By contrast, GWB's tax cuts resulted NOT in increases in revenues but SHARP increases in debt.
The question (as you've asked it correctly) is how do we pay for the long term expenses we face? It is the $1M question. There are two ways to deal with this. First, we CAN, as Reagan did, increase taxes, or we can do what we've needed to do for a long time, which is to reverse the trend of concentrating wealth upward. Progressive taxes are not, by nature, intended to be confiscatory, but rather they are intended to provide a disincentive for overconcentration - and an incentive for spreading profits more evenly throughout a workforce. When the highest tax rates were 90% (for incomes above $3M) the idea was hardly to take all the money from the wealthiest people, instead it was to effectively prohibit the most powerful from pursuing ways of keeping profits to themselves vs. sharing it with staff or reinvesting it in their company. It worked - wages were at their most compressed, and the United States enjoyed it's highest standard of living when we had rich and poor, but the distance between them was not so great as it was from 1850-1928. If we are to solve our debt crisis, we MUST do something to begin to increase average wages - by doing so we will pay for Medicare and Social Security and our ballooning debt. Tax rates on the wealthy have little impact on job creation (as the late 90's showed), and lowering them seems to both explode the debt AND create incentives for the wealthy to work to keep a larger share of profits - which is exactly what has happened since 1981.
Going back to the CNN segment Ttuck quoted recently - Jon Stewart's the Daily Show from Tuesday, April 13th did a great sendup of CNN's numbers, along with
ReplyDeletea whoop of a good time at the expense of goofy Glenn Beck of Fake News.
Stewart pointed out the CNN numbers were from July 2009; and he also pointed out that despite record breaking billions in profits, Exxon paid not one penny in taxes to the US because of their off-shore tax loopholes.
ReplyDeleteSomebody, come on, somebody write about that.