It is easier to go down a hill than up, but the view is from the top.
Arnold Bennett
It's Time To Be Honest About Taxes and the Deficit
I want to discuss the question of tax cuts and federal spending in a more honest, substantive level, beyond the talking points learned by rote you typically hear on, say, Fox News Channel. (If any progressives think I'm about to exonerate their disingenuous talking points, let me stop them cold: a tax system that leaves half of the country not paying a dime towards their fair share of government expenses is morally unacceptable.) The status quo tax system is too complex, progressive and morally hazardous; it is biased in favor of consumption and against savings and investment. We need to go beyond predictable talking points on both sides of the political divide.
WALLACE: Let me rephrase that. Maybe the question shouldn't be are they going to compromise on principle. Should they compromise on policy? Let me give you an example.First, let me repeat my admiration for Chris Wallace; he is simply the best interviewer in the business. There have been times I felt he has left some cards on the table. Usually, the mainstream media interviewers (e.g., David Gregory of Meet the Press) play a one-way game of gotcha; I don't recall Democrats being challenged on their dubious assertion that 75% of the Bush tax cuts (affecting lower-earning workers) weren't needed for deficit reduction, but the 25% going to upper-income were? How budget conscious were they when adding 3 trillion dollars to the national debt over the past 2 fiscal years? Yeah, I know: Obama managed to find $17B (half in defense, even though defense doesn't account for 50% of the budget) and $100M. When you're spending more than $3T, that kind of deficit reduction isn't material.
In England, the conservative government has just announced a new austerity package, spending cuts and tax increases, three to one spending cuts over tax increases, because they're trying to get both sides to buy into it. Would you accept something like that, with massive spending cuts but also some tax increases, if that's what you need to address the national debt, which you're concerned about, and to fix entitlements?
PALIN: No. We don't have to compromise on that, because the premise there is false, that you have to increase taxes in order to balance the budget. The first thing they need to look at is the spending cuts and the hiring freezes and the zero-base budgeting. Those principles, those practices -- is they haven't even begun to incorporate yet in order to start balancing budgets. It's a false premise there to believe that we have to increase taxes on the American people to balance out the budgets when we haven't done the things that just make a whole lot of common sense first in cutting budgets. Yeah, you know, look at the Laffer curve, look at the other studies that have shown that increased revenue is not necessarily derived from increased taxes, because that's going to lessen productivity in this nation.
David Gregory got former Fed Reserve chairman Alan Greenspan to concede that tax cuts don't pay for themselves (cf. my discussion of Sarah Palin's discussion of the Laffer Curve below) and ever since then has tried to pin his subsequent Republican guests down in terms of what he tacitly suggests are mutually inconsistent goals of reducing taxes and balancing the budget. The implicit message he is conveying to viewers is that the Republicans aren't being serious about debt reduction, that they are still the big spenders of fiscal year 2006. (Gregory, of course, doesn't note the salient facts that the GOP House balanced the budget for 4 years, the Democrats tripled the highest deficit under the GOP, and the percentage of federal spending relative to GDP over the last several years has been significantly lesser than the Dems.)
Any faithful reader of this blog knows that I am NOT a political supporter of Sarah Palin, but I'm not going to disagree on substantive issues on personal grounds. She is simply repeating the same political spin given by countless other Republicans and conservatives, whom seem to be suggesting that returning to the Clinton tax hikes would be a financial Armageddon. Let me point out that even under the FDR rate of 90% which persisted until the JFK tax cuts (to 70%), the economy grew and prospered. In fact, there have been other price spikes in the past (sugar, coffee, gasoline, etc.); the relevant markets didn't collapse, although clearly economic activity was affected at the margin (e.g., people found substitute products or conserved their products).
I have mentioned in past posts that there are different effects of tax changes--the arithmetic effect and the economic effect. Thus, if we raise the top bracket, as Obama has been insisting is nonnegotiable, from 35% to 39.6%, this means for every $100 of income, the higher-income taxpayer is paying an additional $4.60. (This doesn't include any state/county/local income tax.) The economic effect is the correlated changes that suppress tax revenue. For instance, capital gains from long-term stock positions would effectively be reduced, and hence the sale may be indefinitely postponed; compensation may be deferred. The taxpayer may shift from taxable to tax-free instruments. There's also less incentive to work extra billable hours, open a new store, start working a second job, write that book, or take on that new patient. And we aren't even talking about whether The federal government may in fact get more revenue, but less than it expects. (This is exactly what happened after the Clinton tax hike.)
Sarah Palin does raise a salient point on the Laffer Curve, but she's incorrect to apply it in this context. The Laffer Curve basically says that there is an optimal tax rate for maximize federal revenue; if you raise tax rates above a certain point, you lower aggregate tax revenue, and if you lower it from the optimal level, you also lower aggregate tax revenue. This is what Alan Greenspan was asked on whether the tax cuts pay for themselves. But David Gregory set up the question in a way that most people would infer that it supported Obama's talking points, and I'm really not hearing the Republicans, including Sarah Palin, fleshing out the salient response.
Let me quote Richard Rahn from the Washington Times:
The point is, you don't have to be an economist to understand that if you tax something, you tend to get less of it...Economists do know that taxes on capital (interest, dividends, capital gains) tend to be the most destructive because capital is the "seed corn" necessary for economic growth and job creation, while low-rate taxes on consumption do scant economic harm.There is little dispute among economists that an increase in the tax on labor from 10 percent to 15 percent would bring in almost 50 percent more revenue (there would only be a small behavioral effect). There is also little dispute, at least among knowledgeable tax economists, that increasing the income tax rate on upper income people from 50 percent to 70 percent will, over the long run, bring in no additional tax revenue and eventually will lead to a loss in revenue.So let's put this into context: the progressive Dems are not only seeking to attack the higher-income tax brackets, resetting them to Clinton's 39.6%, but they want to raise the social security income ceiling, they want to limit deductions, etc. Then you also have state/county/city rates pushing the real tax rate up to 70%.
Laffer himself doesn't attempt to predict whether we are at the peak of the curve: "The Laffer Curve itself does not say whether a tax cut will raise or lower revenues." It's because the tax code is complex; in essence, the proof is in the pudding: we are in the lower right area of the curve (i.e., tax hikes are counterproductive) if we cut rates and taxes increase. Laffer points out after Harding/Coolidge, JFK/LBJ, and Reagan, we saw increasing share of revenue funded by higher-income people plus aggregate federal revenue increases.
David Ranson asserted "Economists of all persuasions accept that a tax rate hike will reduce GDP, in which case Hauser's Law says it will also lower tax revenue." Tax receipts are directly related to GDP. Hauser's law asserts that, invariant to upper-income tax rates, that federal revenue tends to find a ceiling at about 19.5% of GDP (starting post-WWII). It should be noted that in 2009, it was much lower: 15%, the lowest since 1950, which reflects the stimulus tax cuts, and a drop in recessionary individual/business payroll/income tax receipts. Why? Basically economic growth increases the number of taxpayers and the relevant ad hoc economic events (e.g., taking profits on stock holdings).
Flat tax rate hikes/cuts have less effect at the bottom in a progressive system. For example, if a taxpayer is at a 10% tax bracket, a 10% tax hike only adds 1 penny per dollar--but at a 35% tax bracket, it's 3.5 cents per dollar; you get more bang for the buck at the upper income levels--for spending and investing, key factors influencing economic growth. But keep in mind that even when taxes had a high tax bracket of 90% during the Eisenhower era, receipts never pushed past Hauser's law. So where is Obama/progressive Dem hope that raising taxes only on the well-to-do? Keeping the tax the same has a neutral effect on the middle class; it won't tribute to economic growth, but a tax hike on the well-to-do will have the reverse effect of a tax cut.
Going back to Palin's response, budget cutting is easier said than done, and I've been pushing for the streamlining of government. There are overhead and metrics issues with zero-based budgeting (i.e., all costs in government operations are examined from the bottom up--wringing out obsolete, redundant or inefficient costs), but I think that certainly has to be a long-term goal). The problem is that Palin and other Republicans are taking or implying taking items off the table, e.g., entitlements and defense. How are you going to make up a $1.3T deficit?
Well, one thing is take a long-term effect and push a pro-growth philosophy. I would streamline and lower business income tax levels and freeze or cut investment taxes at current level across the board. There may be a short-term hit on revenues, but the point is a pro-growth strategy will expand the basis of adding taxpayers and higher-level realized income.
I think if it shows that even after making significant spending cuts there is a structural deficit, we have to look at reversing the dysfunctional excessive progressive nature of our tax system and implementing some form of a consumption tax. We need a more balanced tax system which can help address some of incentives for consumer-driven imports and our structural trade deficit. I am a realist; I think we need to add taxes like the British are doing. The devil is in the details: how to structure the tax burden to minimize effects on economic growth.
Warren Buffett, Put Your Money Where Your Mouth Is!
Warren Buffett, one of the richest men in the world, is fond of telling the world that (in the aftermath of the Bush tax cuts) he pays lower (17% overall) taxes (tax rate) than his secretary (30%). I think Warren Buffett protests too much. Now you might think instead of leaving the bulk of his estate to Bill & Melinda Gates Foundation, he would give it to Uncle Sam--unless somehow he thinks Bill and Melinda may just be more effective at spreading his wealth around. Let's just this straight--instead of paying 35%, the current top rate, he pays 17%; it makes the point made above about the complexity of the tax code. He once also famously called derivatives "financial weapons of mass destruction" but during the "financial reform" debate, it turned out his businesses were using them... So, Mr. Buffett, if you decide to make a class warfare argument to make yourself look hip to progressives, why don't you set a good example for giving to Uncle Sam just how much you think is your fair share of the $13.6T nation debt? By the way, if your secretary is in the 30% tax bracket, she's doing very well, since people in the bottom half don't pay that much...
Political Humor
A few originals:
- No, that wasn't Speaker Nancy Pelosi crying election night. She was melting...melting... ("Ding Dong!")
- I'm sure that the first book hitting the bookstore bargain bins Wednesday was Clinton political guru James Carville whose book last year, 40 More Years, predicted that the Democrats would dominate national politics for two generations...
40 more years: how the Democrats will rule the next generation - Google Books Result
James Carville, Rebecca Buckwalter-Poza - 2009 - Fiction - 209 pages
The political strategist dissects the failures of the Republican Party and examines the reasons why he believes a Democratic majority will maintain a long-term ...
books.google.com/books?isbn=1416569898...
40 More Years, James Carville, (978141
Musical Interlude: Instrumentals/One-Hit Wonders
Percy Faith, Theme From A Summer Place
