Friday, September 10, 2010

Inequality

President Obama stuck to his guns, both in his speech earlier this week in Ohio and in his press conference today, by insisting that the Bush tax cuts on the highest income taxpayers be allowed to expire at the end of the year as scheduled.  Politically this ought to be a no-brainer, since it benefits about 98% of the public.  But Republicans do a good job of scaring people about anything that sounds like a tax increase, even when it is a tax cut for most of us.  Meanwhile, the administration sometimes has an uphill battle trying to make people understand that the opponents of ending the Bush tax cuts for the wealthiest taxpayers are in fact blocking attempts to extend tax cuts for a vast number of middle class taxpayers.  What gets lost in the debate sometimes is that all we are talking about is rolling back a top marginal tax rate of 35% to what it was in the Clinton years, that is 39%. Republicans have been so successful at making any discussion of taxes a minefield, that it seems we cannot have any kind of rational debate over whether the top marginal tax rate should be 30 or 40 or 50 or some other percent. They want voters to forget that the top marginal rate is already near historic lows, and that as recently as the 1950's and 1960's, top income tax rates were much, much higher, for a long time over 90%, and then for another long time at 70%.


Obscured in all of the rhetoric about expanding government versus personal freedom, which doesn't really seem to be the point when all you are talking about is whether the wealthiest taxpayers should pay 35% or 39% of their top marginal income in taxes, is the real underlying philosophical issue of inequality, a subject that it seems politicians cannot even raise without being branded as socialists or worse. (That implies that Eisenhower must have been quite the socialist for tolerating income tax rates as high as 90%.)  To its credit, Slate has been publishing a series of articles by Timothy Noah about what he calls the Great Divergence, which is defined as the period of time, roughly from the late 1970's to date (which we could also call the Reagan era), in which the share of income of the highest few percent has increased markedly over the share held by everyone else.  By contrast from the 1930's through the 1970's, which has been called the Great Compression, we lived through much more egalitarian times.  There is a lot of debate about the causes of the Great Compression, as well as the Great Divergence, but government policy, and tax policy in particular, must have played some role in creating the more egalitarian society of the 1940's, 1950's and 1960's, as well as in creating the world of luxury boxes, second homes, and private jets for the very wealthy that we live in today.  It stands to reason that if the government takes a larger chunk out of everybody's million dollar bonus, either those bonuses are going to be smaller, or the public will get more benefit from them.  Either way, we might be creating a more cohesive, less resentful society.  Lots of conservatives are nostalgic for the good old days of old-fashioned values derived from the Great Depression that people cherished in war years and post-war years.  Let's not forget that those old-fashioned values included practically confiscatory federal income tax rates on incomes above a certain level.

No one is advocating top income tax rates even approaching 50%.  Therefore, we ought to be able to have a rational debate about appropriate tax rates, without hearing about how the Republic would be destroyed by such policies.  Once the anti-tax crowd concedes that we probably need some kind of income tax, and that some amount of progressivity in rates is appropriate (both of which probably even John Boehner and Mitch McConnell would concede), we ought to be able to discuss whether the highest marginal rate should be 30 or 40 or 50 or even 60 or 70 percent without being accused of taking away people's freedoms.   I'm sure I'm incredibly naive to think that.

And I haven't even mentioned the deficit yet.  Isn't it unconscionable for conservatives to complain about a skyrocketing deficit while advocating what is demonstrably the biggest cause, now and in the future of that deficit, namely the fiscally irresponsible tax cuts on the highest-earning Americans?

So let's talk about fiscal responsibility, but let's also talk about fairness, and what kind of society we want to live in.  And let's put aside the fear-mongering and demagoguery that seems to preclude any rational discussion of tax policy.

(chart from fivethirtyeight.com)

20 comments:

  1. It's not just a Republican vs Democrat issue. Obama probably doesn't have enough support in his own party to do much about taxes right now. And a majority of the country might agree with me; we don't care if taxes go up a few percentage points -- just stop spending my money on crap while ignoring gambling on Wall Street, the Fannie and Freddie debacles, while refusing to confront China, and refusal to pass meaningful health care reform while turning a blind eye toward insurance company monopolies. Taxes? I'll pay a bit more in taxes; feel free to add a VAT too; but be aware, my family's insurance policy is going to cost us about 20% more this year than last and our household income has decreased by about 30%. In my opinion, that is a direct result of the items I listed above and those in elected positions of power (both parties for the last 20 years) have set themselves up to pay with their elected jobs.

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  2. I think it comes down to this -- fair people don't mind paying fair taxes to a fair government. On the other hand, when the deck is stacked against fair people (even those who make over $250,000 a year) and the government (Congress) has okayed a rigged system that has cost Americans trillions of dollars in wages, savings, housing wealth, retiremnts and pensions -- and where ratings agencies are part of the 'game' on us to promote wall street profit -- it is a bad time to be telling us fair minded people to be fair and pay more taxes.

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  3. I find it interesting that by most accounts the anti-tax Tea Party demographic makes about 50-100k a year. They gain little to nothing by opposing tax increases to those making over $250,000 a year. But they do! It appears they are mostly politically aware and well educated (despite charcterizations as otherwise). They understand that America depends on private business to provide new jobs. My impression is that they believe that renewing prosperity at home and locally starts with those who hire (small business). Not Wall Street. Not the government. The way we are working isn't working. I get the sense they understand that pleasure is not satisfaction. Satisfaction comes from investing in core values. Core values result in a long term benefit as opposed to short term gratification. You cannot 'give' people core values. Delayed gratification is a result of core values and it is hard work. Candidate Obama woke up Hope and Change -- but he has not delivered. What is happening politically right now is an awakening of that fact.

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  4. Raising the individual marginal tax rate will essentially be raising taxes on Sub-S companies (small businesses)—they’ll essentially be paying more taxes than bigger corporations. The liberal obsession to stick it to the “rich” will be detrimental to job growth wherein depends the tax revenue to fund all those “rainbow and unicorn” programs Obama promised. You didn’t mention that capital gains taxes would also increase January 1st. The last thing anyone would want, unless you’re a Democrat, is to tax capital formation during a weak economy.

    “They want voters to forget that the top marginal rate is already near historic lows, and that as recently as the 1950's and 1960's, top income tax rates were much, much higher, for a long time over 90%, and then for another long time at 70%.”

    Comparing tax rates from one time period to another is like comparing apples to oranges. During the high marginal tax rates of the 1950’s, there were no massive entitlement programs like Medicare and Medicaid, there was no federal funding for public education, and the tax code was simpler and smaller (14K pages in the tax code compared with roughly 55K now). Would you like to go back to that? BTW, we had three recessions during the decade of the 1950’s. No thanks. It was the supply side tax cuts by JFK (from 91% to 70%) that gave us the prosperity that LBJ and others piggy-backed on later. I wish that the Democrat party had more JFK’s and less Nancy Pelosi drones.

    As far as the deficit is concerned, stop spending and start cutting. Period.

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  5. Thanks for dropping by, VH. I always appreciate your comments. Here are my questions for you:

    What spending would you cut? How much would those cuts save? And why wouldn't those cuts lead to even more weakening in the economy?

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  6. Ideally, I would like to see federal spending cuts across the board—no program, department, or entitlement would be excluded from cuts or reform. I understand that you will disagree with many of these suggestions. This is just a short list:

    --Terminate or transfer to state governments programs and agencies involved in agriculture, education, housing, and transportation. This will eliminate wasteful bureaucracy.

    --Reform Social Security by adding a system of private accounts. If it works in Sweden, it can work here too.

    --Impose a statutory cap on the annual growth in federal outlays. Many states already are constrained in this manner. The Feds should be too.

    --Convert Medicaid from an open-ended matching grant to a block grant. This will force cost control.

    --Medicare enrollees should be means-tested for a risk-adjusted voucher with which they would be able to purchase the health plan of their choice.

    --Sell excess federal assets, including buildings, land, and inventory.

    --End the missions in Iraq and Afghanistan.

    --Recall troops in South Korea, Europe, and Japan. These rich countries can defend themselves using their own resources, people, and treasure.

    --Cancel the V-22 Osprey program.

    --Renounce the foreign policy of “nation building.”

    -- Privatize passenger rail, the United States Postal Service, air traffic control, the nation’s seaports, federal electric utilities.

    --No more schemes like Cash for Clunkers, Cash for Caulkers, Cash for Homes, Cash for Appliances.

    --No more deficit spending in the likes of “stimulus” plans.

    --Break up and eliminate Fannie Mae and Freddie Mac and sell off their assets.

    There are many places to cut and to reform in the federal budget. Everything should be on the table at this point.

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  7. "How much would those cuts save? And why wouldn't those cuts lead to even more weakening in the economy?"

    I've read that federal spending could be brought down to 15-16% of GDP over 10 years by disciplined belt tightening. Needless to say, the less our federal government outlay is, the less tax burden we will face in the future. (I hope.) Less taxes paid to the feds means that those resources are put to productive use in the private sector where they belong.

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  8. Thanks for your list, VH. I appreciate that you did not spare the Defense Department. Although if your plan were implemented and war breaks out between North and South Korea, we might think it would have been cheaper for us to keep our troops there. Also of course when you cancel a defense contract or discharge military personnel, you would be contributing to unemployment, at least in the short term.

    Social Security, Medicare and Medicaid all need some reforming, but since they are funded by payroll taxes, not income taxes, and since those trust funds are all solvent at least for the time being, cutting those programs doesn't do anything for the deficit. Transferring programs to the states also would just increase taxes at the state level. So I doubt that all of your cuts would change the deficit picture all that much. But even it they did reduce the deficit substantially, there would still be a substantial disruption in the economy. It's not like the private sector suddenly expands every time you lay off teachers or reduce farm subsidies, or cancel infrastructure projects. Sometimes that just adds to unemployment, and forces farms into foreclosure, and sometimes the private sector becomes even less productive when we cut back on infrastructure. You want to dismantle (or force increased fares for) the rail system, increase the cost of air traffic control, and presumably cut a lot of the road and bridge building and other stimulus projects, you are going to find that it take people longer to get to work, and adds a lot of other costs to operating a business.

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  9. North Korea can hardly feed its own people and they mull around in the dark every single night. I doubt South Korea with their elite American made F-15K’s, strategically placed land mines, one of the largest standing armed forces in the world, and advanced military resources have much to worry about from North Korea. And it’s not as if the American Navy is going anywhere. North Korea invading South Korea would be a suicidal endeavor for N. Korea. It’s time to leave. And as long as the private sector is thriving, absorbing discharged military personnel will go as smoothly as it did after WWII. Keynesian economists predicted that unemployment would soar and that the economy would tank with returning soldiers. They were dead wrong.

    Whether Social Security, Medicare and Medicaid are funded by payroll taxes and not income taxes is irrelevant when at base their outlays in benefits cause greater and greater general fund deficits. The Social Security trust fund is currently full of IOU’s because politicians from both parties have borrowed from it to fund other government projects. (Technically, the SS trust fund is “solvent” due to intergovernmental borrowing accounting and not because the SS trust fund is sitting on a stockpile of cash that it divvies out to beneficiaries each month.) Medicare costs rise faster than inflation every year and with the looming demographic change due to occur when Baby Boomers start to retire in droves, it is very easy to predict the fiscal outcomes.

    Transferring programs to the states would force states to make tough choices and to find innovative solutions because state taxpayers will be sensitive to possible tax increases. It’s easier for the federal government to OK billions on “bridges to nowhere” when they can earmark it to an obscure bill and when it’s unclear on who exactly will foot the bill.

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  10. “It's not like the private sector suddenly expands every time you lay off teachers or reduce farm subsidies, or cancel infrastructure projects. Sometimes that just adds to unemployment, and forces farms into foreclosure, and sometimes the private sector becomes even less productive when we cut back on infrastructure.”

    I’m assuming this roughly relates to stimulus programs. One of the problems with what Milton Friedman called “pump the prime” programs is that those public sector jobs created by “stimulus” packages depend upon the tax revenue generated in the private sector in the medium and long run. No private sector growth means that those public sector jobs funded by the Recovery Act, for example, go away soon enough. My question to those that advocate big government stimulus is what happens if we get weak private sector growth for 10 years? Then what? How are we going to pay for all those teachers and repaved roads? The American Recovery and Reinvestment Act of 2009 was all borrowed funds that has to be paid back (with interest) by taking resources from the productive private sector; the less resources the private sector has, the less economic growth we will have.

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  11. If only California had a candidate like NJ Gov. Chris Chritie:

    http://www.nj.com/news/index.ssf/2010/09/gov_christie_to_propose_pensio.html

    Like Dan Dimmico, CEO of NUCOR said: he hasn't laid off workers in decades. Instead, when times are tough everyone takes a cut. It's just too logical.

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  12. How can the far left and the far right be so out of touch with the rest of us? Both extremes are so well educated (if you ask them). Yet they don't see. Most of us who have a passion for politics (left and right and middle) have waited a lifetime to see an electorate with burning desire to make change in Washington. Well, as many of us have predicted in the last year, it's here. It's not smiley Hope and Change -- it is more accurately pissed off Change. Greater than ever; and the more Progressives make fun of Tea Party supporters (whoever that amibuous term includes -- I admit I don't know -- but I do think it is true grass roots -- and they are not big money from the established right) the more hot things get. The established Republicans have already felt the heat. The left is next.

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  13. KEY -- as I have said here more than once -- the left should have embraced the Tea Party early on as their own. They have much in common. In fact, the Dems need "a Tea Party" if not "THE Tea Party". I am baffled at the resitance.

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  14. A U of C law professor is under siege for complaining that the tax increase for the 'super rich' are going to hurt more than the President thinks. Interesting assertion, and a wild ride of responses. He originally posted it on an econ blog 'Truth on the Market' but pulled it after things got vicious.

    As I ahve said before I’m willing to pay a bit more, but would like some responsible spending on the other side.

    http://delong.typepad.com/sdj/2010/09/todd-henderson-we-are-the-super-rich.html

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  15. This guy was either incredibly brave or incredibly stupid, and probably a bit of both. I'm not surprised he pulled the post. I understand his assertion that he doesn't feel super rich. But he still protests too much, because what is going to happen when the Bush tax cuts on those making over 250K expire (but if the cuts on those making less are continued) is that this family will be paying 39% income tax instead of 35% on their income above $250k. If he is making $300,000 (he says he is only a bit over the 250 threshold), that would mean he is going to pay a whopping $2000 additional in income taxes, and probably less because his deductions will be worth a bit more, and overall probably still less than he was paying during the Clinton era.

    The fact is that Americans pay a smaller share of their income than most other comparable countries. We also have the largest military on earth by far, which consumes a huge share of government expenditures. Perhaps one reason we are unhappy with government is because we are actually getting less in services than people in other comparable countries. And that is because we are paying less than they are, and also because much of what we do pay goes to the military.

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  16. You make good points. But you fail to comment on my own points. Namely, the surprising hatred from the left to a thoughtful family's opinion and that an some of us think the government is incapable of spending our money wisely (including his and my own opinion of defense spending).

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  17. It seems to me that you, the law professor and I agree more than we disagree; hard work, family, education, over coming ourselves, looking out for others, etc. The man stated an opion. That's okay. That's wy we discuss and then vote. I was disappointed in the responses and impressed with the way he laid out ten points in defense (even if I don't agree with all of them).

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  18. His main point -- if you take $2000 dollars from his family who is on a tight budget, you may be taking the same amount from smaller businesses he currently engages. That isn't hard to understand. I have done the same thing with money allocation as my income has decreased for the last decade. He and I think we can spend our money in a better way than the government. It is a valid argument -- even if we don't agree.

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  19. The thing we have to get over is this idea that we spend money more wisely or more efficiently than the government. Sure, we can always find some government program that is wasteful. And we can see tangibly right in front of us the benefit of spending even a few thousand dollars on ourselves, while we don't always see the benefit of the money we send to Washington to spend collectively on our behalf. But how can we say that if I spend my money on a new car or a vacation, that is "better" than if the government spends it on a new road or a new school or the Coast Guard or a courthouse. It is really comparing apples and oranges. What these U of C economists are really saying (and I know, since I had to listen to a lot of them), is that they want to privatize almost all functions of government. Personally, I have no wish to be responsible for hauling my own garbage. I resent the fact that I have to pay Blue Cross exorbitant premiums for my employee's health insurance, and I would much rather pay more in taxes so that the government could just provide Medicare for everyone. I like sidewalks and libraries and fire departments. I appreciate that courts and public schools are free, and I actually think we could improve most such public facilities by spending even more money on them and we would probably be better off. If you travel around the world, you will see that the places with high taxes are generally much more pleasant places to visit than the places with no functioning government and few public services.

    As far as all the hostile comments, that reflects some class resentment, does it not? And upping the law professor's and his doctor wife's taxes might go some way toward reducing that.

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  20. This is a very nice answer. You are good!

    I am supportive of all the government programs you listed. As a dad of a daughter who has had cancer and a son of a mom who has had a stroke and three bouts of hydrocephlous in the last six months due to failed shunts and was wronfully denied further care I also find myself as mad as hell at insurance monopolies -- in particular Medicare and Blue Cross. I just sat in front of a US Administrative Law Judge (Steven Chaffin) representing my mom against Attorney Melissa Berner, Medicare and Anthem Blue Cross. The Department of Health and Human Services allows appeals to that level. Both Medicare and Blue Cross control costs to them by denying care. It is a frightening system to be in a fight with.

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