Archive for category Taxes

Money and Power

I’ve been reflecting on the economic arguments made this election cycle and find myself dissatisfied with a lot of thinking on both the left and the right.

Many people buy into a way of thinking that is essentially materialist and anti-human: that people are at base value creating mechanisms and the market correctly assigns them money according to their work and value.   This leads to false thinking on both the right and the left.   On the right, the state is demonized and the market is seen as almost magic.   On the left the rich are demonized and the the role of the state is seen as equalizing outcomes.   Both views are wrong.

Turning first to the pro-market side, many believe that taxation and efforts to expand opportunity are wrong because they “confiscate” money from those who have “earned it.”   Earning it is defined by being able to take whatever you can get away with in the market.   If one is super wealthy and the other poor, then that’s how “nature” or the “market” justly caused events to turn out.    The rich can choose to help the poor, but have no obligation.

However, no one who buys, sells, works or trades by using federal legal tender has an ethical claim on all his or her own money.   That money is provided by the government to facilitate trade and cooperation.    It brings a tremendous amount of efficiency to the system and allows people to have massively more wealth then they would without this government service.

Render unto Caesar that which is Caesar’s…

If you are part of this system that makes wealth generation possible for large numbers of people, you have chosen to be part of a collective.   You have cast your lot with a web of relationships and interactions that allow you to achieve much more than you could on your own.   Without the state, only organized crime and other thugs would have wealth and most people would be living in poverty.  Only stable functioning states bring about true prosperity for large numbers of people.So if you’re benefiting from this, your money is a result of your effort, ingenuity, and the role of effective government.   Your effort matters, but the level of your success and prosperity is due to being part of a collective.    That means that the state, through legal democratic processes, has a legal claim on a chunk of your monetary wealth.

Moreover, the role of the state must be more than just being a “referee” to make sure nobody is cheating.   Power permeates all social relationships.   If you have wealth, you can structure the game in your favor.   You’re inherently not on an equal playing field with those who lack wealth.   You can get for yourself and your progeny excellent education, opportunities, good health care and if need be, start up capital.   To get a level playing field the state must actively work to assure real opportunity for all citizens, not just those with structural advantages.    

The state acting solely in the role as umpire cannot protect a level playing field because the playing field is already made uneven by the distribution of power and wealth in society.

The winners often don’t acknowledge the vast structural advantages they are able to enjoy in the system

The rich often ignore this problem by denigrating and demeaning the poor, calling them “takers” and making it seem as if they want to live off the work of the rich rather than simply wanting opportunities to succeed.   This was seen in the latest gaffe by Governor Romney (quickly repudiated by other Republicans) that Obama won because he “gave gifts.”   At the height of perversity is the claim that the poor have the same opportunity simply by being in the same legal system, as if all the wealth and power of the rich don’t provide them structural advantages.

The left errs as well when they lose sight of the fact that the goal of government should be to expand opportunity so that everyone has the chance to succeed.    That does not mean equalizing outcomes.   It does not mean demonizing the rich or punishing success.  It only means that the winners pay a portion of what they’ve gained thanks to both government protections and their position in the system to create conditions whereby the losers and their children have the education, health care, legal protections and opportunities to succeed that the rich enjoy.

The rich will always be able to afford better colleges, tutors and equipment for their children.   Trying to level that will do more harm overall, and is not necessary.   Here the materialist delusion hits both the right and the left:  Wealth is irrelevant to success and happiness in life, so long as people have a sense of meaning and personal responsibility for their lives.

Demonizing the rich ignores the complexity of assuring initiative and reward in a complex economy

I am absolutely convinced that the wealthy are no happier or more content than the poor so long as the poor have opportunity and the chance to work to make something of their lives.   Only when poverty is so intense that basic needs are not met, or that there is no hope to be able to build a better life, does lack of wealth lead to despair.    Moreover, a psychology of dependency on government handouts damages that sense of meaning just as much as poverty can.   If the left tries to “fix” the system in a way that simply makes the poor dependent on handouts, the solution is as bad as the problem.

True wealth is far more than that which we buy and sell

Not only is it OK to have rich and poor if the poor have real opportunity and their basic needs met, it’s necessary.   As long as all citizens have access to a quality education, decent nutrition, health care without risking bankruptcy and ruin, and the opportunity to succeed, outcomes should be diverse.   The market then functions properly, reflecting the desires and preferences of the public.   The left should focus on that – true liberty and opportunity for all – rather than worrying about outcomes.

This requires an active state, but also civil society and civic engagement.   Community organizers should be more important than government bureaucrats in social welfare programs.    Most importantly, we need to recognize that money and wealth are not ends in and of themselves, nor are they key to having a happy and successful life.   The rich lose no liberty just by paying more taxes, and the poor need not have equal material outcomes if they have their basic needs protected and an opportunity to succeed.

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Paul Ryan: Class Warrior!

Class warrior Paul Ryan, fighting for "Team Wealthy"

If you had any doubt that class war was being waged in America, doubt no more!   Paul Ryan’s proposed GOP budget was a direct assault on the poor by the rich, cutting programs that benefit the poor by $5.3 over ten years, while giving tax cuts to the wealthy worth $4.3 trillion.    He promises that he can get the GOP House to pass his budget — something that could give Democrats real fodder in the House campaigns this summer!

What’s perverse and audacious in this effort is that he is trying to make it sound like he’s actually helping the poor.   Dana Milbank points out the “Orwellian euphemisms” in Ryan’s rhetoric.   From Milbank’s column:

Ryan’s budget outline omits specifics about how much he would take from programs. Instead, it provided a string of Orwellian euphemisms. The budget “repairs the safety net” by allowing the states to award public assistance to fewer people — “those who need it most.” Financial aid for college would be slashed — er, “put on a sustainable funding path.” And the Ryan plan would give workers “the tools to thrive in the 21st century” — by killing off various job-training programs.

Ryan would cut Medicaid by a third and ship the remnants to state governments to handle. Or, as the congressman described it: “We also propose to strengthen Medicaid by empowering our states.

What makes this class war instead of a bold initiative to cut spending is that so much of the money “saved” doesn’t go to deficit reduction but instead to tax cuts.   The claim is that this will grow the economy more and wealth will “trickle down,” much like the right claims happened when Reagan cut taxes.   Rather than go over all the lists of what is cut, how is hurt and all that — articles delineating that are ubiquitous — there are four clear reasons to reject Ryan’s approach.

The blue box shows the huge spike in total debt during the Reagan years, hyperstimulating an economy already benefiting from a recovery and lower oil prices.

1.  The Reagan years were driven by debt, not tax cuts.   The 1980s saw economic growth, but that growth was due to declining oil prices and a massive increase of both governmental and private debt.   Government debt soared from 30% of GDP to 60% by 1990.  Private debt grew as well, meaning that the country was partying on borrowed time.   It was like the early stages of someone who borrows their credit card to the max and then takes out new credit cards to make payments.  For awhile you’re living on top of the world, but then reality bites.  Reagan economics were voodoo economics because it was deficit spending in a boom.

2.  Tax cuts harmed the economy and worked against investment.   Those who argue for tax cuts rest their case on a myth — a belief that has been shown false, but still lives on in the ideological heart of some on the so-called right.  The myth is that these new tax cuts provide money that will be invested and create jobs here in the US.    However, that doesn’t happen on a scale that helps the economy; perhaps it could have back in the 60s when economic affairs were state-centric, but in an era of globalization the rules have changed.

Money from tax cuts goes to four different places:  a) some money is used to consume goods and services — that can help the economy, but much of that spending is for foreign produced goods and oil; b) some money gets invested overseas, c) a lot of this money helps create bubbles and ‘unreal’ investments out of a desire for ‘something for nothing,’ and d) a small fraction gets invested at home in businesses that create jobs.    During the dot com bubble and the real estate bubble low taxes fed two consecutive bubble manias as people were less concerned about long term “real” investment and more interested in playing the casino.   It seemed it was a casino where everyone won!   Easy money!

When the bubbles burst, that money was gone.   It would have been far better to tax and use much of that money for infrastructure or business loans/aid.   Instead, the misguided belief that tax payers know best how to spend their money (the two bubbles show that proposition to be decidedly untrue) brought us to a crisis that just about took down the world economy — and still could!

Ryan's cuts will harm states already hurting

3.  States will be devastated.  States right now are seeing their deficits grow due to increased medicaid and medicare costs.  State budgets are being pushed to the brink across the country.  If the feds simply cut that spending and claim they are “empowering the states” (but not enriching them!), then state governments will be forced into massive layoffs.   This will hurt the poor the most (such cuts always do), but could severely damage state economies.   Ryan’s plan is an attack on every state budget, and should get the opposition of every Governor, Republican or Democrat.

It's hard to blame children for their poverty - and they can't "pull themselves up by their bootstraps" without education, health and a stable environment

4.   The human cost is immense.   Ryan’s budget is a fantasy of ideology.  It’s not built on practical observations or the use of real world wisdom.   He has a theory and extrapolates the theory into a budget that would intensify the problems of the poor while adding to the wealth of the rich.   It’s a grand experiment on the basis of an ideology.

Ideologies appear persausive.  They simplify reality and then set up internally consistent propositions based on the definitions and assumptions of that theory.   Ideologies can never lead to truth, they simply provide one interpretation of real world evidence.  Ideologies are always simplifications — the world is too complex to be captured by any human theory.

Ideologues always put humans second to their “ism.”  The “ism” promises to solve all problems, if only people would embrace it. While Ryan’s ideology isn’t as dangerous as the utopian fantasies of Mao or Pol Pot, it is similar to the kind of thinking Marxists engaged in, just with different base assumptions.   Any time you put theory above people you’re putting fantasy above reality.

In this case, the ideology must already be doubted for the three reasons above.  Taking from the have nots and enriching the haves is not only immoral, but could lead to social breakdown.   It would push us towards a third world kind of economy and ultimately Ryan’s fellow class warriors on the right might find that they’ve awoken a sleeping giant — the potential class warriors amongst the poor and middle class.   In an ironic twist, adopting Ryan’s plan might put us on a path to a socialist revolt!

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John Boehner Loses Control

The Republicans in the Senate were getting nervous.   The House had passed an extension of the payroll tax holiday for a year in a bill so overly partisan that it had no chance to pass in the Senate.   They believed the Democrats were engaging in demagoguery by saying that the Republicans refuse to raise taxes on the very wealthy but don’t mind the working middle class paying more.

Nobody liked the idea of a two month extension, but intense negotiations between both parties, which included John Boehner, yielded that compromise.  It would buy time for them to reach broader agreement on a year extension after the holidays.   The deal sailed through the Senate 89-10, with overwhelming bipartisan support.   Speaker Boehner indicated the House would vote the deal through as well, and it appeared that the two sides managed to avoid giving the middle class a higher tax bill in January.

Then the rumbling started.   Republicans in the House complained that they shouldn’t yield again to the Senate, and that a two month extension was meaningless.   Lead by the tea party freshman, the House GOP revolted against Boehner and soon he was backtracking.   The House turned down the extension and called for a Conference Committee to come together to patch up the differences between the Senate and House bills.

For Democrats, that’s a non-starter.  First, the Senate bill was a compromise, negotiated between the two parties with Boehner indicating he approved of the agreement.   Given that, a conference committee would not only be inappropriate, but if they couldn’t quickly come to agreement then both parties would share blame for not being able to extend the tax break.   Why should the Democrats risk that?   This way the onus is solely on the GOP.

If the Senate GOP hadn’t sided with the Democrats (with many Republican Senators urging the House to pass the two month extension) then the Republicans in the House would have some political wiggle room.   As it is, they are finding it impossible to spin this as a failure of both parties — it’s a failure of the House Republicans.

Republicans who supported the measure in the Senate include budget hawk Tom Coburn, tea party stalwarts Pat Toomey and Marco Rubio, and of course Mitch McConnell (who was reportedly convinced Boehner would be able to get the measure through).    Only seven Republicans voted “no.”   This was a done deal.

Perhaps the House GOP thought that they could play Russian roulette with this issue like they did with the debt ceiling earlier this year, forcing the Senate and President to cave to some of their demands so they could claim victory and make the President look weak.   Yet the debt ceiling was a serious issue.  If it hadn’t been raised there would have been global economic turmoil and havoc for the US economy.

On this issue Democrats see themselves as having little at risk.   They’re the ones who are calling for an extension, they worked out a bipartisan compromise, President Obama was ready to sign it, and the Republicans in the House moved the goalposts.  Many Democrats see this as the first pivotal moment in the 2012 election cycle, whereby the Democrats nail home the argument that it’s GOP obstruction and extremism that is causing dysfunction in Washington politics.

Moreover the symbolism of the Republicans caring more about avoiding tax increases on the wealthy than imposing them on the middle class make this a dream issue for the Democrats going into 2012.   If class war is being waged, it looks like the Republicans in the House want to wage it on the middle class.   Exasperated Senate Republicans are furious, both at the tea party wing in the House, but also at Boehner for breaking another promise.   It’s not that Boehner wants to break promises, it’s just that his caucus won’t follow him.   The result is a Christmas gift for the Democrats.

John Boehner is proving to be a weak Speaker of the House.   He got lucky with the debt ceiling debacle because even though he had indicated to the President he wanted a grand deal that could include closing tax loopholes, the President got punished in public opinion polls when Boehner couldn’t deliver.   This time he’s not going to be that lucky.   If he can manage to pass an extension early next year and make the issue go away as soon as possible he might limit damage.  Otherwise, 2011 ends with the House GOP delivering a self-inflicted wound that could have profound ramifications for the 2012 election.

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Obama Should Go to Wall Street

Pundits used to 20th Century politics are mystified by the growing “Occupy Wall Street” movement, now spreading to other cities.   Like the conservative tea party movement two years ago, its growth comes through new media, a real dissatisfaction with how things are going, and is not centered around specific demands and agendas.    Starting small and overlooked in the media, it has grown in breadth and scope and can no longer be ignored.

This creates a problem for President Obama.   Obama is a centrist establishment Democrat who despite achieving some significant reforms in health care, finance, stimulus spending and repeal of “don’t ask, don’t tell,” has tried to find common ground with the Republicans.   It appeared he was going to succeed too, until the “tea party” movement pushed John Boehner farther right then he originally wanted to go.  Fearing wrath from the right, establishment Republicans are running scared and engage in a more ideological and uncompromising rhetoric than any time in the past, including the years of hostility to President Clinton.

Establishment Democrats have responded to this by shifting right; Obama is no exception.  He embraced lowering domestic spending to that of any time since the Eisenhower administration, calling for closing of loopholes for the wealthy (like Reagan did) rather than an increase in tax rates on the wealthy, and making regulatory calls which infuriate environmentalists and the left.     While his approval rating suffered — probably 15% of the ‘disapprove’ comes from the left — it appeared that liberals had no alternative.  There simply is no pressure from the left:  no movement, no leader and no alternative.

The calculus in the Obama camp is that an intense campaign combined with fear of the GOP will bring the base home.   Republican candidates are weak and vulnerable to negative campaigning that will scare independents into grudgingly vote for Obama as the safer choice.   If there is a strong movement on the left, however, Obama might find hostility growing much like Johnson did in the Vietnam war.   The most intense protests of 1968 were at the Democratic national convention, after all.

But while the protests are dangerous for Obama, they also represent an opportunity for him to harness the emotion and anger on the street and rekindle the kind of energy that brought him to office in 2008.    It won’t be easy — many on the left have become hostile towards a man they believe has drifted to the right of even former President Bush — but it is possible.

The first thing he should do is announce that he is going to Wall Street to talk with the protesters and give a major speech.   This should be scheduled for late October, assuring that the protest movement will continue and grow — they won’t give up if the President is planning to visit.    In the meantime the President should hone his populist rhetoric to support a key argument:  “I tried to meet the Republicans half way, recognizing that we need to work together to solve the problems we face.   They refused, saying it was their way or no way.   So now I’m taking the argument to the people — I’m asking the American people to send a strong message that things need to change.”

On Wall Street, a place where the Obama campaign raised so much money in 2008, and whose banks have benefited from Obama’s reluctance to anger the business elite, he should declare a new agenda:

1) Reform of the tax code to simplify and make more fair a system that currently taxes the middle class and poor too much, and allows the wealthy to use accountants and tax lawyers to evade paying their fair share.   Yeah, he’ll be charged with class warfare, but he should counter by saying it’s not the rich who are at fault, but the politicians.   The wealthy are simply acting rationally by trying to pay the legal minimum tax they owe — that’s what almost everyone does, Republican or Democrat.   If they aren’t paying their fair share it’s the fault of Washington for making a complex, screwed up and often absurd tax system.   The tax system should be made simpler, more fair and clear.

2) A jobs program that aims at rebuilding the middle class and America’s productive capacity.   The poor and unemployed aren’t lazy — they want to work.  The system that benefited unproductive financial industries who built bubbles based on bizarre financial instruments like Collateralized Debt Obligations and Credit Default Swaps should give way to a system that benefits main street businesses and people who want to produce stuff that other people want.    A strong middle class is the determinate of a state’s economic health.   Our middle class is battered and torn, and that damages the country.

3)  Honest talk about debt.   He should tell the young people gathered that their generation will inherit a country that has to sell itself off to foreigners thanks to the massive debt the last generation has built up.   Starting in 1982 the US has embraced “borrow and spend,” ignoring increased debt.   Government has done this, so has the private sector.    For a long time the problem could be ignored because unemployment was low and the bubble economy made it appear wealth was strong.    Now we see that global debt has created a crisis as bad as the last great depression, but one that cannot be cured with more debt or dismissing this as just part of the business cycle.

The US has to rethink its approach to everything from foreign policy to domestic programs; we can’t afford the kind of budget we’ve had in the past, but we also can’t afford to just cut, since spending cuts can slow the economy.    A smart mix of revenue increases, spending cuts, and investments in jobs can turn this around, though it will require global cooperation.

Obama needs to focus on these themes and embrace a populism that can appeal to independents as well as the youth.   The fact is that those who dismiss the protests as meaningless do not understand them.   It’s just like the old hands in the Arab world who couldn’t comprehend the changes being pushed by protesters from Egypt to Yemen.   This is no longer the 2oth Century.   Political activism is changing, and the ideas and energy being generated in New York is not going to dissipate.   Energy and activism may wax and wane, but a new movement is being born.

To win re-election, Obama needs to show the protesters that despite his slow start, he understands that the country needs fundamental change.    While one can say he’s blown the chance by being so establishment in his first four years, in the campaign he won’t run against Obama of ’08 but a real Republican candidate with whom he can compare himself.  He’ll also have a lot of money to get his message out.

Moreover, this message can appeal to independents.  Most aren’t ideological — if they were, they wouldn’t be independent.   They’ve shown they can vote Democratic or Republican, depending on their mood or assessment of whether what’s being done is working.   If Obama can make a credible argument that he stands for simpler taxes, a more ambitious jobs plan, and an honest discussion of debt, then as we get into the dog days of the campaign people currently disillusioned thanks to the economy may decide Obama is their best bet.

But he has to go to Wall Street.   He can’t ignore a movement driven by the same emotions and ideals that brought so much energy to his campaign in 2008.

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Obama Channels Truman

President Obama put the Republican party on notice last night that while he would still talk the bi-partisan talk, he was done merely calling for unity and an end to bickering.  It was clear that was making him look weak as the Republicans rejected compromise and continued their unrelenting attack on the President.  From now on he’s going to “give ’em hell,” as evidenced by his speech before a joint session of Congress.

Besides evoking the same kind of blunt straight talk as President Truman, he also set the Congress up for the charge of being a do-nothing Congress.   The most important parts of Obama’s jobs plans — the parts that can genuinely reduce unemployment — cost money.   President Obama’s plan pays for this by closing corporate and individual tax loopholes.  It does not constitute a significant tax hike on the wealthy, and it’s easily defensible politically.

This puts the GOP in a bind.   If they reject Obama’s plan outright, labeling it just ‘the same failed policies,’ they’ll be refusing to act on the biggest problem Americans perceive in the country right now.   Obama’s approval ratings are low, but they are above those of the Republican Congress and especially the tea party!   His bit at the end about how there are 14 months before the next election so playing politics with this is wrong will resonate.   If the Congress doesn’t act, he can run against Congress and, as his speech showed, with a new kind of fire that will rally his base and bring independents sick of tea party rhetoric back.   He may not have the level of support and hope he had in 2008, but a vote is a vote.

The GOP could pass his plan pretty much as is.   While that would undercut complaints about a do-nothing Congress, it would also under-cut claims by Republicans that Obama isn’t a good leader.   Right now the GOP blocks everything Obama wants in the House, and then uses that to show that Obama can’t get anything done.   That’s a good gig — all they have to do is refuse to cooperate and he looks weak.   Obama has called them on that.   Yet passing his plan would also divide the GOP because either it would add to the deficit, or they’d have to accept closing tax loopholes.    Even if Boehner wants to do that, his party will not follow (he’s actually the weaker leader).

The GOP could decide to pass the plan, not include revenue increases, and make spending cuts elsewhere.   That would appeal to the tea party base, but force them to defend wanting to cut programs that might hurt in the coming election.   Moreover, such proposals would probably not get past the Senate and would take time to develop.   That would play into the image of a ‘do nothing Congress’ in the hands of extreme elements of the GOP.

Worse news for Republicans: the President plans to double down by offering a major deficit reduction plan.   This will undercut the argument that he wants to simply tax and spend, and again challenge them to do something other than just play politics.   No doubt this will also include tax increases on the wealthy, but those are not unpopular with the general public.    I know a myriad of average and even active Republicans who are open to some tax increases to share the burden of paying back the debt.   Again, the Republican party appears to be stymied by extreme elements in their own party.

Obama goes into the fall with a new deficit reduction plan, a new jobs plan, a firey attitude, and increased public dismay about the Republican House and the tea party movement in general.     While Obama’s approval rating has been down at about 43%, at least 15% of those are Democrats angry that he’s veered right.  If he wins back his base — which started to happen already with his speech last night — he’s still in good position even with his worst poll numbers of his first term.

While Republicans were right that this was in part a campaign speech, it also was a speech about the number one issue facing Americans and it is 14 months until the election.   Obama is framing the campaign to be about politicians in Washington acting responsible and not with partisan blinders.   He is positioning the GOP and the tea party as the villains, or at least as not being responsible and reasonable.   People may not love Obama in 2012 like they did in 2008 but they’ll find him a safer bet.

Even worse news for the GOP: the House may well be in play.   If the Republicans don’t rally around a reasonable candidate and Congress appears unable to act, tea party types that rode the anger of 2010 to victory will find that independents are disappointed by their desire to play politics rather than solve problems, and shift back.

I believe the bold and risky act of calling Congress back for a joint session will mark the point where Obama’s Presidency turned around and took on new vibrancy.   He’s now setting the terms of the argument, not the GOP.   He’s using the bully pulpit not just to plead for civility but to push for change.     He let the GOP paint themselves into a corner, and now he has the upper hand.

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Has the tea party ‘jumped the shark’?

President Obama announced last week plans to speak next Wednesday night to Congress in order to propose a bi-partisan set of steps to address the number one issue facing the country: jobs.   When such a request is made, normally the decorum is for the Congress to accept — having the President come to speak on the biggest issue facing the country, and to offer suggestions on how to move forward is a big deal.

Instead, after initially signalling acceptance (which is why the White House went public) Speaker Boehner changed his mind, and decided that he would not accept Obama coming on Wednesday and instead invited him for Thursday.   This would mean he’d have to speak earlier since at 8:30 EDT much of the country would be watching the Packers-Saints game, a rematch of the Super Bowl to open the 2011 NFL season.

The reason was totally political.  First, many Republicans are still in a tea party “take no prisoners” mood, and rather than working to solve the country’s problems their most important job is to try to defeat and humiliate Obama.   If they can make him change the date of his speech he looks weak, and they act big and tough.  It’s rather pathetic, but apparently for some this brings great satisfaction.

A less convincing reason is that a Republican primary debate was being held.   I believe a few have already been held, and primary debates in the late summer of the year before the election are hardly big events.   Viewership is limited to only the political junkies, and it’s on cable.   In terms of relative importance, the debate is meaningless — and could easily be moved if they really wanted to.

So the President again is reaching out to Republicans, set to offer a bi-partisan approach on jobs, and Boehner is again acting childish.   The GOP muffed a huge compromise that would have cut spending by $4 trillion and brought non-military domestic spending to the lowest level than anytime since Eisenhower, all because they couldn’t accept closing a few tax loopholes on the very wealthy.   Given the massive shift of wealth from the middle class to the most wealthy, the idea that the cost of getting the budget in line should be born by the working middle class and poor while those who benefited the most and have the lowest tax rates in the industrialized world should play nothing is perverse.

The left hated Obama’s compromise.   They correctly noted it was the kind of compromise you’d expect a moderate Republican to propose, with Democrats proposing an increase on actual tax rates.   Obama knew that was impossible for the Republicans to support so he offered something he thought anybody could accept.

Nope, the GOP is in a no-compromise, slash and burn mode, with tough talk, bravado, and anti-Obama rhetoric that reaches absurd heights not seen since the right’s attacks on Clinton in the early 90s.    Perhaps a bit drunk on the success of the 2010 election, it’s all political, all partisan, and more extreme than the Republican party at any time since the early fifties.   It’s not all Republicans, it’s just that the tea party wing has the moderates running scared.

Eisenhower once responded to a Democratic call to cut taxes by saying cutting taxes when you have budget problems is wrong — Eisenhower was trying to keep the budget under control.   Republicans always had the anti-tax wing of the party, but it was small; the tea party partisanship, often very extreme, anti-government and ideological, rarely dominates the party.    Again, only in the early 50s during the McCarthy era has the GOP drifted into such extreme territory.   Fiscal conservatism traditionally trumped anti-tax ideology for conservatives.

Most people know I was once a Republican.  I was a state officer of the South Dakota College Republicans.   I was at the Detroit convention that nominated Ronald Reagan, and I worked for a Republican Senator in the eighties.   It’s not just that the party moved away from me, though I did like Ford and Dole, but I also started to study advanced economics and political science, and realized that a lot of the free market slogans of the GOP are simply wrong.   The market is not magic, without a state to regulate and guide it the powerful elite will dominate and control — third world conditions happen without a good legal regulatory system.    Those who try to defend a total free market approach always drift into abstract theroy; it doesn’t work in the real world.   I also rejected the Jerry Falwell “moral majority” idea, which seemed to be big government at its worst — trying to implement religious ideals with the power of the state.

Yet I resisted the Democrats.  I voted third party most of the time and yearned for a perspective where community is taken seriously and ideology gives way to practical problem solving.   There is a wing of the Republican party that believes that way (Jon Huntsman is probably the best example – and I’ve voted for both my moderate Republican Senators), but right now they are being shouted down by the ideologues.   Preisdent Obama (and earlier President Clinton) are moderate/pragmatic Democrats who often angered their left wing, but yet have been villified as “socialists” and “unamerican” by the far right.    Talk radio sets the meme, and many on the right follow, egged on by partisan blogs.

John Boehner’s snub of the President is the latest example of this effort to humiliate, put roadblocks in front of, and refuse to compromise with the Democrats.   For the left wing of the Democratic party, this is fine — it proves that you can’t work with the Republicans like Obama is trying to do, so therefore it’s better to simply match their partisanship and play hardball.   Obama’s resisted that.   I believe he sees the office of the Presidency as above that — and he’s right.

I think this may be the point where the right wing of the GOP has jumped the shark.   As the rhetoric remains shrill, and Obama takes the bully pulpit to make a call for bipartisanship to solve the country’s problems, the Republican primary is going to give the Democrats oodles of material for the general election.    Given what I wrote about a few days ago on the 13 keys, Obama is in a stronger position than Republicans realize.   Moreover, his current disapproval ratings are driven up by people on the left who are disappointed with Obama’s  centrism.   Most will come home in 2012, especially in swing states during an emotional campaign.   And don’t forget the way the Republicans are making it relatively easy for Obama to get Latino votes — their stance on immigration or in some cases “English as the national language” make a group that should lend the Republicans considerable support a solid Democratic bloc.

A defeat in 2012 (especially if a significant number House seats are lost — which is very possible) would be a repudiation of the tea party rhetoric and the extremist wing of the party.     Right now the extremists know they have power in primaries and are scaring the moderates.   I suspect this is their peak.    Obama got Bin Laden, had success in Libya and may have success in Syria before the election.   As he makes a push on jobs there is some evidence that the economy is slowly moving forward.   Given how bad economic conditions have been, Obama’s personal popularity has remained surprisingly high.   If the Republicans lose, moderates like Olympia Snowe, Scott Brown (if he gets re-elected) and Jon Huntsman can offer a new vision for the party and be poised to have a couple very good election cycles.

Because if the GOP is Michelle Bachmann, Sarah Palin and Rick Perry…well, that appeals to a small segment of the population and is not the stuff of a major party.

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Fixing the Budget

The debate about balancing the budget and dealing with the fiscal crisis facing the US is intense and warped.  It is warped because the two things that need to be done — a) significant entitlement reform and b)  tax increases — are resisted every step of the way.   First, taxes.  Please consider the following charts:

1) The percentage of income earned by the top 10% of Americans
2) The GINI index representing income distribution before taxes and transfers
3) The GINI index representing income distribution after taxes and transfers  (0 = perfect equality 1.00 = maximum inequality)

OK, note a couple of things.   The relative percentage of income held by the top 10% of the population has been steadily increasing since the late seventies, now at a level greater than any other time in history.    As I noted in my post last December on the tax debate, this correlates with a decrease in tax rates for the wealthiest.  Moreoever, while there has been little real growth in wealth for the poorest, the richer you are, the more your wealth has increased in the past three decades.   The wealthiest 10% of Americans are wealthier than anyone other country’s top decile, while the bottom 10% are way back, below Greece.  (Charts for this stuff can be found on that December post).

Next, consider the Gini co-efficient.   Created by Italian sociologist Corrado Gini, it is a well regarded statistical analysis of the distribution of wealth in a society.   To reach 1.0 all wealth would be in the hands of one person; to reach 0 everyone would have equal wealth.   Note that the OECD average before taxes is 0.45, while the US is at 0.46.  This suggests that the pre-tax distribution of wealth in the US is pretty close to average for the industrialized world.   However, after taxation and transfers the OECD average is 0.31 while the US is at 0.38.   Taxes have meant a transfer of some wealth to the poor, but not a lot.   The US is in fact last among the OECD states in that regard.

US taxation appears to be the least progressive of any industrialized state.  Portugal is tied at .38, but it’s pre-tax/transfer level was .54.  Poland is next at .37, but pre-tax/transfer it was .57.    Some like Germany begin at .51 and taxes and transfers move them to .30.

Note the following map:

As far as the Gini index is concerned, the US has more in common with China, Venezuela, Mexico and Argentina than Western Europe and Japan.

What does all this mean?  Combined with the argument I made last December I believe this is a strong argument for significant tax reform.   I agree with blogger Vern Kaine that the “tax the rich” mantra is often used purely for emotion, and that tax increases to the wealthy tend to be accompanied by deductions and loopholes that do them no harm.   That is why simply increasing the percentage taken from those earning higher may do little to improve the problem.

I could use this information to argue for greater transfers of wealth through taxation and government spending in order to move us further towards equality on the Gini index.  I am not doing that now.   Right now I’m arguing that the evidence is strong that given our budgetary mess we can ask the wealthiest Americans to contribute a bit more.

There is significant tax revenue that can be gained relatively easily, and likely with little harm to the economy. According to a New York Times “balance the budget” application, there are ideas already on the table to do that.  Going back to the Clinton era estate tax would bring in $32 billion by 2015, $104 billion by 2030.  Allowing the Bush cuts to expire on those earning over $250,000 would bring in $54 billion by 2015, $115 billion by 2030.   Payroll taxes for money earned over $106,000 would add $50 billion by 2015, $100 billion by 2030.  A 5.4% millionaire’s surcharge would add $50 billion by 2015, $95 billion by 2030.  A plan to eliminate loopholes would gain $136 billion by 2015, $315 billion by 2030.   Reducing the mortgage benefits for high income families would gain $25 billion/$54 billion, and a consumption tax would bring in $41 billion/$280 billion.   These together could bring in $488 billion by 2015, and over $1 trillion by 2030.

If we added this with entitlement reforms such as raising the age of retirement, limiting social security payments to wealthier individuals, and limiting the growth in medicare payments, we’d be in the black easily.  If we combine that with cutting military spending, recognizing that in the 21st century we don’t need a 20th century style military behemoth, we’d have excess money to invest in creating a productive future and ultimately we could reduce tax rates for everyone.

Tax increases and entitlement reform tend to be lose-lose issues.  Yet no budgetary solution is possible without a mix of those.   For taxes, I’d NOT recommend simply passing the tax increases I list above.  That was just to demonstrate that money is available.   Instead I’d recommend a reform of the system that eliminates most deductions and loopholes and is at least slightly more progressive.   At least until we get our fiscal house in order we need more taxes.

Entitlement reform finds Democratic opposition, often in the form of denying there really is a problem.   Wisconsin Representative Paul Ryan’s solution that relies on incentives for finding low cost care runs into the same problem — you can’t wish this away.  Most costs are near end of life, and aren’t related to wasteful use of funds.    Is it really necessary to spend so much right at the end of life, trying to squeeze out a few more months on the planet, while neglecting to cover so many who have real problems in the middle of life?  With life expectancy rates higher than ever, what is wrong with increasing the retirement age?   And with the country facing potential economic crisis, why should the wealthy get transfer payments from social security?

Ultimately our problems are not that severe.   Common sense tax increases, spending cuts, and a new approach to military and defense policy could put us in a position not only to balance the budget but to invest in infrastructure to rebuild productive capacity for the 21st century.   We could explore the potential of alternate energies, technologies so solve or avoid problems emerging in the environment, and be prepared for an increasing rate of global and domestic change.   We are not facing an existential crisis if we have the courage to embrace a few politically difficult choices and recognize that the only feasible path will be bi-partisan, will require painful compromises, but can yield a much brighter future.

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The Tax Debate

Right now Republicans and Democrats are both trying to claim their view represents the “common sense” on taxes.  Meanwhile, President Obama and the GOP leadership have hammered out a compromise neither side’s base likes — but that’s always the case for compromises.   But as Renaissance Guy asks over at his blog, what is the right tax rate?

For context, consider this graph:

Tax rates historical

The lighter multicolored lines represent different rates at which Americans were taxed.  Between the 40s and 1980 the highest marginal rate was 90%.   It was a very progressive tax, and most economists agreed the marginal rates were too high.   In 1982 the Reagan reform dropped the highest rates to levels that hadn’t been seen for the wealthy since the 1930s (and they were even lower the the 1920s).    In 2001 the Bush tax reform dropped them even more.   Clearly, in terms of taxes we do not have a very progressive tax structure, and tax rates are historically very low for the wealthiest tax payers.

For one result of this, look at the red line – debt as a percentage of GDP.   Right when tax rates dropped, debt levels started rising.  After dropping a bit just before 2000, they rose again after 2001.  The idea that increased revenues come from tax cuts and thus they pay for themselves is clearly misguided.

For another result, look at this graph:

As our taxes got more progressive in the 40s, the wealthiest 10% went from controlling nearly half the wealth to less than 35%.   The gap between the rich and poor narrowed.   This was also a period of massive economic growth.   As soon as the Reagan cuts were put into effect the gap started to grow again, and by 2007 the wealthiest 10% controlled half the country’s wealth, the most ever.   Clearly the tax cuts were bad for the debt, but good for the very wealthy.

This graph breaks it down:

Arguably, the wealthier you were, the more you benefited from the tax cuts.   As a social scientist I know I’m showing only correlation here, causality would require something far more sophisticated.   But the correlation is strong, especially the timing.   By the way, both of these graphs are from: http://seekingalpha.com/article/157061-gap-between-rich-and-poor-growing-in-u-s

And while the richest in the US earn far above the richest in other states, the poorest don’t fare so well:

Our poorest 10% are behind Greece, but ahead of the Czech Republic and Italy!  (This image was from: http://thesocietypages.org/socimages/2010/01/21/income-inequality-in-international-perspective/)  And yes, they also show where our top 10% are:

Our wealthy are doing superb!   Now, this doesn’t settle the debate about tax rates.  It does prove, though, that those who claim the wealthy are hurt in the US, and that somehow they are victimized while the poor get all the breaks is pure nonsense.  Our wealthy are the wealthiest in the world!

Last bit of evidence: the growth in some incomes since the tax cuts of 1982:

While it is true that income rose for everyone, how much it rose depends on your wealth.   The wealthier you were to start with, the wealthier you got.   And, since 16% of 20,000 is a lot less than 281% of $200,000, it’s clear the balk of the money went to the wealthiest.

Lower marginal rates help the wealthy.  However, it’s not clear they help the economy.   Overall a lot of that wealth went into consumption of foreign produced goods, or financed bubbles as our manufacturing sector declined.   It does not seem to have produced a lot of investment in anything that increased production.   Instead, we had speculative bubbles.

All that said, politically the Obama-GOP compromise was wise, even necessary.  Still, we have to look at the data and ask some hard questions — does this gap between the rich and the poor make the country stronger or weaker?   It’s the largest gap in the world, and our poor don’t have things like guaranteed health care and other protections that other industrialized states provide.   Perhaps that’s a good thing — keep the government small — but as long as taxes are being collected, it does seem to me that in a time of high federal debt, it would not hurt the rich to pay a more progressive tax.

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