Economic Realism

Republican House Minority leader John Boehner demonstrated the kind of economic silliness that helped bring us to the point we’re at in this country.   First, he defended Senator Kyl’s claim that tax cuts don’t need to be offset with spending cuts, saying you can’t assume revenues will increase with tax increases.   But you also can’t assume that revenues will increase with tax cuts.   It can happen, and if the economy is growing it often does.  But when the economy is in deep trouble to say “I know the answer, let’s just cut taxes” is a horrid form of populist illogic.   Obviously tax cuts can’t always lead to revenue increases, that would yield a paradoxical notion that no taxes means maximum government revenue.   When they do or don’t increase revenue depends on the circumstances, with a myriad of different factors in play.

However, it was this next statement that really caught my eye — again, defending the Bush tax cuts of 2001:

Listen, there was a surplus here, and if the surplus hadn’t been given back to the American people, guess what would have happened? Congress would have spent every dime of it.” – John Boehner.

Wow.   Does he really think that Congress spent less because of the tax cuts?   Given that during the Bush Administration every budget was in deficit, and total debt rose from about 55% of GDP to over 70% of GDP, the idea that the public was “given some of the surplus” during those years is insane.   Tax cuts were paid for by borrowing money!   In other words, money wasn’t given back, it was borrowed, meaning we pay interest on it, and countries like China have more power over our destiny.

The lack of economic realism of our political leaders is not limited to any one party.   Many Democrats paint a picture of an economy that just needs to start growing again, and once it does, all will be fine.   Unfortunately, that overlooks deep imbalances in the economy.

The only solution I see to the current crisis is for both political parties to embrace a mix of tax revenue increases and spending cuts.  It can only be done in a bi-partisan manner because no party has, or ever will have, the political power to implement a solution on its own.

Tax restructuring: The current tax system is arguably unfair, allowing numerous deductions by the wealthy while giving no tax burden to those earning little.   This is done through deductions, credits, and other devices that have been patch worked together over decades.   But even the poor don’t necessarily benefit by having no taxes.  Often to understand how to fill out forms and get any refunds they need to pay a tax service.  The service deducts their fee from the refund, and often entices people into a very high interest loan in order to get their refund right away.

One alternative that avoids all this is what is called a fair tax.   Essentially it is a consumption tax with “prebates” to those who earn below the poverty level to assure they do not have to pay taxes.    This kind of tax — though not exactly what is suggested by the advocates linked to above (it would need a higher rate than 23%, and might be made progressive for higher levels of income and consumption) could both increase revenue and generally relieve the tax burden for most middle class taxpayers.

Republicans, of course, will resist the idea that we should increase tax revenue, especially as much of that increase will come from wealthier folk who consume more, but now find various loopholes and legal ways around paying taxes.   To sweeten the pot for them, Democrats must embrace real spending cuts.

Reduce Spending: Both parties should contribute to a commission to analyze the federal budget and prioritize reforms.    I do not think we get our money’s worth from current spending.   But while “waste” is easy to complain about in the abstract, the only way to identify it is to go through programs and really determine if they are doing what we need them to do, and if particular programs are a priority.   This includes infamous “bridges to nowhere,” but also programs that are popular.   Things like raising the retirement age or other entitlement reforms should be on the table.

The President must charge this commission with coming back with prioritized budget cuts of various amounts.    The idea is not that the commission will recommend cuts directly, but say “if we want to cut 50 billion, we’d recommend the cuts come here, for $100 billion add these additional cuts.”   Accountants and calculate the impact over the years, and then the President has the hard job of selling both the American people and those partisans who would defeat anything standing in the way of their agenda that for the sake of the future of the country, these changes must be made.

Balancing the Budget: The mix of tax restructuring and budget cuts should be calculated to yield a balanced budget in a reasonable amount of time.  Given how deep the debt is, it may take awhile to reach.    There could even be a mix of program refunding and tax relief should the economy out perform predictions.

A new economy: Finally, without a new economic identity, the US is destined to lose more ground and become a far less prosperous nation.  For thirty years we’ve lived off debt driven consumption, while production declined.  We let our factories die, we bought the myth that investment and service industries could give us “something for nothing.”   The new economy has to produce, and it has to produce things the world wants.    That means that alongside budget cuts, there may need to be budget enhancements, aimed at helping grow infrastructure.   Businesses need incentives to invest and take risks, and the government can help provide these.    We may not have a comparative advantage in steel, cars, and electronics any more, but we need to produce something.   Just relying on banks, insurance companies and government jobs won’t do it.

I think the focus on alternate forms of energy production is a good one, but certainly there are other high tech products that could be produced.   This isn’t limited to ‘material stuff,’ it can include intellectual property and things not necessarily produced in factories.   However, it can’t be just shuffling around money or creating get rich quick schemes.

To do this, as a culture we have to embrace the need for sacrifice, we have to understand things won’t change quickly, and we’ll have to be willing to work and pull together.     We need economic realism, a willingness to compromise, and a rejection of ideological orthodoxy.   If we think about the founding ideals of this country, and our generally optimistic/pragmatic culture, I think we can create a better future.   Maybe this crisis is in fact a needed push to teach us some humility, move us away from wasteful hyper-consumerism, and get us to recognize that we are part of the world and need to work with others, and not try to run the planet.

  1. #1 by renaissanceguy on July 16, 2010 - 03:41

    I agree with about half of what you wrote.

    Neither party totally gets it. Both parties have to bite the bullet and solve the existing problems. True.

    A fair tax would be preferable to the current unfair tax system.

    We do need to both increase tax revenue and get the budget under control.

    The retirement age does need to be raised gradually to compensate for higher life expectancy rates.

    The way to cut the budget is to create a bipartisan list of priorities and start by cutting the lowest priority items.

    As a country, we do need to sacrifice and pull together. The most important thing to do though is to demand that our leaders do the right thing with the power that they have.

    I’ll list a few points of disagreement.

    I do not like equating the general economy of the United States with the financial status of the United States government. The two things are linked, but I wish that they were liked a lot less.

    If the stimulus was supposed to get the economy booming by putting money into the system, then it stands to reason that tax cuts would also get the economy booming, because they also put money into the system. Obviously, taxes cannot be reduced to zero, but they could be cut to 20% or less on everybody, if we the people could live with a much, much reduced government.

    The Congress seems to spend way too much whether there is a surplus or a deficit. (Of course, I do not actually think it is right to talk about a surplus until we have all but eliminated our debt.) They seem to spend too much when they raise taxes and when they cut taxes. Spending is just what the U. S. Congress does–at least what they have done for about 100 years.

    I think that we need more than a few prioritized budget cuts. I think that several government departments should be completely eliminated. I think that all spending on local projects should be completely eliminated. I think that a very hard cap should be put on the printing of currency to cover spending or debt payments or revenue losses. Congressional rules should change to absolutely prohibit the amending of blls so that they contain spending items unrelated to the topic of the bill. Spending items related to different projects should be introduced as separate bills or the President should be given the power of a line-item veto, so that any ridiculous spending items could be vetoed without killing the entire bill.

    Businesses do need incentives, but the best incentives would be to reduce their taxes, so that they have more capital to spend, and unburden them from some of the more ridiculous regulations that drive up their overhead. Any other incentives would be intrusion and interference, and would include favoritism.

  2. #2 by Scott Erb on July 16, 2010 - 13:22

    Good points. I think the reason economists tend to think tax cuts less efficient is that they might get used to save, pay off debt, or to consume foreign goods rather than directly stimulate the economy. I’m not sure about eliminating spending on local project (every project is local to someone). I think that is worthwhile as a goal, especially if less tax money goes to the federal government giving more leeway to states and localities to decide their own priorities. I do agree with having it be separate bills or giving the President line item veto power. Tax relief can be a good incentive for businesses. Regulations should be effective but not “ridiculous.” Clearly lack of regulation contributed to the recent debacle; too much regulation just gets in the way.

  3. #3 by Mike Lovell on July 16, 2010 - 14:09

    One point of disagreement. while I’m generally in favor of the fair tax as they lay it out, I may be willing to agree that 23% isn’t the right number. However, making it progressive is a- the opposite of fair, and b- damn near impossible to do.

    On Point A- The wealthy are already contributing a much larger amount of real dollars and the percent of total taxation contributions by what they purchase at (usually) higher prices, and by the volume of goods they purchase. Just as they are now, both in general sales tax revenue, as well as their income.

    On Point B- How are you gonna tell the rich guy that you have to price check his goods, and please present his annual income statement for proper sales tax adjustments?

    • #4 by Scott Erb on July 16, 2010 - 14:43

      The gap between the rich and the poor is higher than ever in this country, and the wealthy hold a much higher proportion of wealth than in the past (it’s been growing since the 1970s), and far more than in other industrialized countries. I don’t think we can balance the budget and give relief to the middle class if we don’t add some progressive elements to those who can most afford to pay. Perhaps once the budget is in balance and we have our house in order they can be reduced. I think either very high price items will have to be taxed at a higher rate, or else there may have to be some other elements.

      I again have to admit that this idea came from my CPA wife who did a paper for an MBA class comparing different tax systems, and she thought the fair tax should be tweaked to be more progressive. I’ll have to get her paper and find out exactly how it was supposed to work. (We actually talked a lot about this, and she convinced me – I just don’t remember all the details.)

  4. #5 by renaissanceguy on July 16, 2010 - 15:01

    Scott, why do you feel that you must sock it to the wealthy people? Are you Robin Hood?

    I really, really wish that Atlas would shrug for just one day. Just one day would convince people that those wealthy people sustain everything that we enjoy in our lives.

    Do you think that your job would exist if there were no wealthy people?

    • #6 by Scott Erb on July 16, 2010 - 15:19

      Now, in Europe, Japan and elsewhere where the wealthy are taxed more and do not receive the money Wall Street bankers and the like make, the lack of such huge salaries and bonuses don’t bring about economic downfall. Your argument lies on a premise that cannot be defended. You seem to think that any distribution of wealth is OK, that the wealthy never can be seen as earning more than they should, and that taking value from the work and efforts of others than is by definition just. I don’t know why you hold such a belief.

      The wealthy have benefited most from the stability and legal protections the state provides. They benefit from the fact the poor don’t rise up in revolt (which could happen if not for social welfare programs and progressive taxation — either violently or via elections). They have whatever they want: vacation, have servants, and can spend money on consumption of vast luxuries. Asking them to give a little more of that excess to save the country from this crisis instead of putting it on the backs of the middle class is not only fair, it is necessary.

      In fact, what people forget is that back when the tax rate went up to 95% for the highest bracket (not something I’m suggesting!) we also had the biggest growth in economic prosperity and expansion of wealth in history. We also had a more fair distribution of wealth even though there were still obviously very wealthy folk alongside poor. We also had balanced budgets. Things started to go in different directions on all those factors in the 1980s, setting up the crisis we face today.

      So practically and philosophically, there is no danger from moderately progressive taxation, and no injustice. It’s been proven to work, and the rich remain rich.

  5. #7 by John H on July 19, 2010 - 00:44

    Can we please stop whining about how unfair our tax system is for the wealthy…please? I’m begging.

    In the disability insurance field, I see every day what the wealthy get to do with their “taxes” because they provide the tax returns.

    Our current tax system favors the wealthy because they can write off everything.

    Anecdotal evidence: I looked at an attorney’s taxes. His income was 94,000 (I know, not even wealthy anymore, but not doing too bad) and his federal tax bill before business deductions was just over $7000. After writing off lunches and depreciation on his car, and a couple of business trips, he got back all but $364.

    He assured me this is what it looks like every year. So tell me about the millionaire business man who can write off entire divisions of his company as a loss every year.

    Middle class and lower get standard deductions, period. Our tax system does NOT unfairly tax the wealthy.

  6. #9 by Scott Erb on July 19, 2010 - 01:44

    I do not understand how some people think the wealthy are the ones hurt by taxation, or that whatever outcome exists is just. Did the big corporate CEOs in the banks really deserve $20 million just because the market allowed them to ciphen that much? Factually, the gap between rich and poor is as high as ever, the wealthy benefit from the current tax code immensely, and there is no reason to think they deserve a luxurious life style while others struggle on just because that’s what one’s ideology says (and ideologies are all very simplified interpretations of a complex reality anyway)! Why is there this defensiveness regarding the very wealthy? They’ll take care of themselves. They’ll still be the upper crust, even if they pay a little more. And right now, they’re making sure they pay as little as possible. They obviously don’t show the same concern for those who make less than them that they receive. They want to evade as much as possible, and are fine with the middle class paying a larger percentage of their wealth and income.

  7. #10 by renaissanceguy on July 21, 2010 - 04:33

    Scott, for me ultimately it makes no difference who is hurt or helped by taxation; what matters is whether our current tax system is just.

    Whether somebody deserves $20 million dollars is not for you or me to decide–unless you are a major stockholder or member of the board of directors. If you are a customer, vote with your wallet. I

  8. #11 by renaissanceguy on July 21, 2010 - 04:40

    Oops! I hit the button too soon.

    You ask if they deserve a bonus. I would similarly ask if they deserved a bailout. In fact, since they got a bailout, why wouldn’t they think it would be okay to spend $20 million on a bonus for the CEO. After all, if they run out of money again, they’ll just get another bailout.

    You say the wealthy benefit from the tax code. That is a strange, arbitrary comment to make. Sure, they are better off than they would be if they were paying 90%, but so what? But they are not as well off as they were paying just 15%.

    There is no point in talking about whether somebody deserves a luxurious lifestyle. I would say that nobody deserves it. The question is whether a person has the money to have a luxurious lifestyle and whether that person acquired it honestly and fairly. Besides, all the manufacturers and service workers who provide those luxuries like it when people pay for them.

    Scott, I am all for middle-class tax cuts. I agree that middle class people are paying way too much, too.

  9. #12 by John on August 10, 2012 - 16:10

    ah, yes, big government can choose for us. Let’s just trust them to figure out what is best for us.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: