For John, BLUF: We aren't out of the Federal Fiscal Forest yet and thinking we can find our way out by raising taxes indicates a lack of math skills. Nothing to see here; just move along.
Over at The Washington Examiner is a Commentary by Joel Gehrke regarding President Obama's plan to fix the Fiscal Cliff. Per the article, and the accompanying video, the President sees the current increase in taxes as just a down payment, with more to come for the richer members of our society.
Obviously, there is still more to do when it comes to reducing our debt. And I’m willing to do more, as long as we do it in a balanced way that doesn't put all the burden on seniors or students or middle class burdens but also asks the wealthiest Americans to contribute and pay their fair share.So, at this point the deal agreed by the US Congress earlier in the week is about a lot of taxes and a few spending reductions. What is it going to be at the end of February? The President seems to be saying it will be more taxes on the wealthy. The problem is that we can not tax our way out of this problem. There is not enough income out there to be taxed.
And, our creditors are whinging.
Worst case scenario? We become the "Weimar Republic" (Germany from August 1919 through to January of 1933). Wikipedia says "Princeton historian Harold James argues that there was a clear link between economic decline and people turning to extremist politics."♠
Solutions? Belt tightening. My youngest son said to his Mother, the other day, that we don't need the Social Security we are drawing, since we are well off (we own our home outright). That was a little over the top, but he is on the right path. What we are giving to ourselves as the elderly, as students, as government employees, as farmers, as the unemployed, may have to be trimmed here and there. And, we may have to increase taxes some more, on all of us.♥
Regards — Cliff
♠ James, Harold, "Economic Reasons for the Collapse of the Weimar Republic", in Weimar: Why Did German Democracy Fail, ed. Ian Kershaw, Widenfeld and Nicolson, (London: 1990), pp 30–57. When we say extremism, be are not talking about the kind of differences we have here in these United States. We are talking much worse.
♥ Dirty little secret. Everyone will be seeing more taxes this year.
The dirty little secret about the deal just struck is that taxes are going up, and up, and up.....the middle class is still going to pay a ton of money.....AND....now for the secret.....Obama just committed us to $4T more in debt over the next 10 years.....and we are only 3 days into 2013 and 4 more years of him.
ReplyDeleteNobody in the MSM has said a word about this.
The SUN editorial either twisted the facts, or disclosed their lack of knowledge of the tax system. I
ReplyDeleteFirst of all, in 2010 there was a temporary tax break put in place where 2% of the social security payroll tax was waived. It shouldn't have come as a surprise to a knowledgable editor that this tax break was going to expire.
But he goes on to say that the Capital Gains tax would increase from 15% to 23.8% and would affect all Americans. Not so, as the tax rate remains at 15% except for the highest earners.
And he tops that off with saying that this tax increase will take away from the retirement savings of everyone, apparently not clear that the withdrawals from those plans are taxed at the ordinary income rates.
Warren Buffet was on CNBC a few weeks ago and postulated a solution that would require federal taxes at 18.5% of GDP, and spending limited to not more than 21% of GDP. Apparently that level of defict spending would be OK in his mind, a policy that I have heard other economists advocate.
ReplyDeleteBefore this latest "fiscal cliff" change the taxation has been running about 15.5%, an historic low. The trouble is, once you have given candy to the baby, it is hard to take it away.
As for spending, I believe it is been running nearly 23%, so that provides a target of at least 2% for cuts, about $300B per year.
Joe, the problem is that the "cuts" don't even pay the interest on the debt, so it is a pathetic shell game enabled by creative accounting. The year end interest for 2012 was about $360B. The year before, $454B.
ReplyDeleteWe are not even coming close to paying down the debt....let alone the interest. You cannot begin to enjoy prosperity when you continuously defer interest on the debt to the next FY.
The major problem for us today is that in spite of the so called recovery from the cliff, it is an illusion. The year is full of surprises, none good. Obamacare is now in full swing and we don't really know its costs. We do know that realistically, it is going to be much more expensive than was projected.
Importantly, of the more than $15T in debt, China holds over $5.1T of it as of the end of 2011. You can bet that the number is higher now. The problem that creates is that it invokes the golden rule, "He who has the gold rules." We have become intimate with the devil and all of our politically driven fiscal decisions must reflect that odorous relationship.
Those horrible little obstructionists in the House are absolutely correct in their stance. We have to spend less than we take in....and we will have to spend less than we take in for many years to come to TRULY balance the budget.
Just as deficit spending has ruined the lives of many individuals beholden to multiple credit card companies, the same principles are working against us.
And now Obama wants to raise the debt ceiling again?? Well, actually, he wants to eliminate the debt ceiling. Perhaps we need to require ESL in our public school classrooms and teach Mandarin as the national primary language.
As far as China owning out debt (and also a lot of our assets) it is our own fault. We run a trade deficit with China of several hundred billion dollars per year, and to make the accounts balance there has to be corresponding debt or ownership of assets. Several years of such imbalance in trade has left us in that precarious position.
ReplyDeleteBut since China is able to supply us with products at a price we can "afford", we continue to rack up the account deficit. We need a drastic change in tax policy to even make a dent in that inequality.
I have been absent from this debate, but in joining in at this point, I am interested in Joe's "drastic change in tax policy to even make a dent in that inequality."
ReplyDeleteI am assuming Joe means that we face up to the fact that corporate income tax is really an indirect tax on the consumer and that we should take it down to zero and directly tax the consumers, who are the voters, so they know what the real tax bill is, rather than having it hidden from them by a tax on corporations. If, as some contend, corporations are not individuals, why should they pay an income tax?
Regarding the Federal Spending Limit to allow for economic growth, I have seen figures of 19.5 to 20 percent. I think there is a trick there. We can't cut Federal spending only to see state and local spending balloon. Government sector is government sector. Yet there are things Government has to do. The Republic needs to be defended, but it could be done more cheaply. Taxes need to be collected and common use infrastructure (e.g., roads) needs to be maintained, and even expanded. Museums and parks need to be maintained. Very important, the less fortunate need to be cared for. Students need to be educated and basic research needs to be encouraged. Common sense rules and regulations need to be designed and enforced, to protect the common man (and woman) from his predatory fellow man (and woman).
Regards — Cliff
Now I am going back toward the top of the comments, where the Editorial writer for The [Lowell] Sun is taken to task. I agree that the writer didn't acknowledge the temporary nature of the Keynesian like rollback. But, as Neal, JoeS and I agree, we have to pay our bills. I will not drag the other two into my belief that Keynesian economics, although looking good on paper, may actually miss the mark in practice.
ReplyDeleteIn all this we have to strike a balance between economic growth for all and income inequality. The common measure of this, the GINI, or GINI Coefficient (where 0.0 is perfect income equality) has the US at 0.49 for the year 2010, but after taxes it is 0.38. which shows the progressive nature of our tax system.
One policy question is if equality is more important than economic growth. I think that is a whole new post.
Regards — Cliff
This topic deserves a fuller discussion, but let me know correct the assumption that the drastic change in tax policy that I envision is not a zero corporate tax rate.
ReplyDeleteThat said, I believe a corporate tax rate reduction is in order, but accompanied by a reduction in corporate tax "loopholes" with a zero sum result.
The larger issue on taxes to help balance the account deficit is one that recognizes the tax levy contribution of US workers make (via the personal income tax) to the country, and the much lesser contribution by those companies who import their products to sell here in the US with very little (comparatively) tax levy from their employees.
We have to at least remove the onus of health care costs from the companies, as well as their social security and Medicare tax contributions to our welfare. Of course that would leave a further deficit to pay the health care and tax bills, so we need some smart way to rebalance that. That discussion is for another day.
Cliff, you have made a good point relative to Keynesian policies, that if the government were to use those policies in a zero sum manner over time they may actually be effective. So when we are in a recession, the government stimulates with overspending, but when the economy recovers it "re-pays" its accounts.
ReplyDeleteMaybe your objection to Keynes is that what may work in theory is never applied in practice.
I agree with Joe's assessment of Keynes. The theory is fine, but it has not worked in the practical, applied world. There are many reasons for that failure, but mostly I would attribute it to than hand of the political man and the never ending quest for power and philosophical supremacy. To that end I point to the also never ending tension between the bourgeoisie and the proletariat which flirts with the fundamental conflict between "socialism" and "capitalism."
ReplyDeleteThat aside, I think we miss the whole solution by narrowly defining the problem. It is NOT a problem of taxation rates or classes. The produce of taxation are erroneously viewed as "revenue" However, the classic definition of revenue is " income that a company receives from its normal business activities, usually from the sale of goods and services to customers." The government has perverted the definition to mean a funding stream that is essential to its operation...and GROWTH. Thus, when we have "needs" that cannot be met because of budget deficits, it is always because we don't have enough "revenue."
The problem is spending and the solution is to spend less. Cliff is correct that there are many things we need to spend on, but there are far more things that are "luxury items" that can be deferred until we "save up" enough. But, we've fallen a total victim to "instant gratification."
Screwing with the tax structure may improve its "fairness" but will do almost nothing to solve our fiscal problems. Until America and Americans are willing to live off of a balanced budget...in the classic sense of the true balance sheet.....we will continue to slide down into the depths of fiscal Hades.
BTW...remember that the Federal income tax was brought into being as a "temporary" tax to pay off war debt. And then the fight began.........
Let the discussion involve the spending side of the equation. Yes, we spend too much (23% of GDP?). We (federal government) should spend less (<21% according to Buffet, and 19.5-20% according to Cliff).
ReplyDeleteBut I think merely cutting the top line is a lazy man's way of addressing the problem, and one that may have unintended consequences. A better way is to review each function and evaluate it for cost effectiveness. When we do so, we must remember that one person's spending is another person's income.
There has been some attempt to eliminate waste and abuse in the Medicare program (one of the positives of Obamacare). In some volunteer work I have to review health care statements and billing practices to make sure the proper bill is paid, and I have observed what I consider extremely unproductive spending. I cannot yet determine if it is fraud or waste, although I have to give the benefit of the doubt and call it waste. That "waste" is a result of a doctor practicing defensive medicine and writing a prescription for health services. In talking to the patient it seems there is no real benefit for the services authorized, and the patient would deny the service if he had to spend a single penny for it. But since his cost is zero, the service is provided (or is it? - no real record available). And when I see the Medicare statement, my conclusion is that the cost is excessive, and the Medicare payment is equally excessive. Although I have made a complaint in this instance, it appears nothing will be done unless fraud is established. So the government will continue to overpay for questionable services.
We should really clamp down on things like this, which I am certain are replicated throughout the government. However, we should realize when we do so, there will be a reduction in income for someone, and that in itself says that what we think we save pops up as a cost somewhere else. Not that it should stop us.
Next steppp the Department of Defense. Although an essential function of the federal government, let's look at how much it costs as a percentage of what we should be spending. If we take Neal's number ($2.6T of total federal spending based on current tax law, with no deficit) the $633B budget is nearly 25% of federal spending. Even with Cliff's 20% of GDP, it would be about 20% of federal spending. There should be a lot of cost reduction to be had there, albeit with kicking and screaming by the affected parties. The not-in-my-district cuts will be hard to come by.
I can't find anything to disagree with Joe. I would add that what needs to be reintroduced to government budget planning and execution is some fairly straight forward cost benefit analysis coupled with an upfront analyses of alternatives. While some agencies engage in this kind of exercise, I am afraid that in the end not much of the data is used as it may well be counter to someone's "rice bowl." I recall with some bitterness having conducted analyses regarding training effectiveness and business process improvement, only to have the bosses pretty much do something completely different, if not in opposition. A colleague once told me that I simply hadn't provided the correct solution set.
ReplyDeleteMedicare is frankly a massive weeping wart on the ass (pardon me) of medical care delivery progress. We try to regulate and deliver cookbook medical treatments when patients are not ticky tacky boxes. I agree that many if not most doctors over prescribe. Not only defensively, but because that is what patients demand. If you are ill, your doctor must DO something. When I was a young AF medic, we had a doc in our AF clinic who became a sensation. He prescribed Trocodillonaldehyde to quite a number of patients with an array of illnesses. He had nearly a 100% cure rate. The "drug" was grape food coloring in sterile water (that we produced by the gallons in our distilling system) and a touch of alcohol to give it a "mediciney taste." Probably cost the AF about $1 for 20 gallons. But there is terrible fraud and there is almost no willingness to prosecute it harshly and openly. That is a disgrace. And Joe, don't get me cranked up about Defense procurement and contractors. If you think Medicare is bad........What is the difference in the end between outright fraud and "gaming" the system? In my opinion, both are dishonest. But that is another posting for Cliff.....if and when he gets the urge.