The Growing Importance of the Super Committee

The shutdown looming last week was just barely averted. The rebellious Tea Party continues to demand budget concessions whenever they can take a hostage. But the Dems are not folding anymore. Why? Maybe because of the super committee.

The super committee is charged with negotiating deficit reduction between two camps that are pretty far apart. Too many in Congress have pledged to non-negotiable positions, yet they voted themselves a loophole in the debt ceiling deal. The Congress will give the super committee recommendations an up-or-down vote, no amendments or filibusters allowed.

To many, an agreement between the members of the committee seems unlikely. Several party hardliners were appointed, including Jon Kyl, Patty Murray, Max Baucus, and Jeb Hensarling. (I don't personally know that appointees other than Jon Kyl are hardliners--I'm depending on news sources.)

I'm more optimistic. The appointees may be more partisan, but that means their compromises will have more weight with colleagues. This isn't just a warmed-over Simpson-Bowles committee or Gang of Six, that is, the same people hawking the same plan. This time, core members of the parties are doing the negotiating.

The reasons I think they will strike a deal:

• The form of the committee enhances its chance of success. Don't underestimate the ability of serious people sitting down together and talking to reach some compromises. Not all of them have to agree. Smaller groups of 2 or 3 or 4 can hammer out proposals to present to all twelve.
• Public opinion is for a deal. There is a lot of pressure on both Republican and Democratic officials to stop arguing and make some sort of deal. Republicans lost general support over the August brinkmanship. Democratic seats in the south, midwest, and west are always vulnerable when Democrats as a group drift too far left or if they are obstructionist.

So the super committee is giving tremendous cover to the rest of Congress, but only if they reach a compromise. Major pressure to do something!

I care less about the specifics of the deal than how the rest of Congress reacts to it. But I'll throw out some predictions because I always do. On spending cuts, I think they will probably come to roughly the same conclusions as Simpson-Bowles. Taxes will be harder to work through, so maybe they'll establish another super committee, maybe they won't touch it, or maybe there will be some token tax increases in this deal. The last part of this prediction covers so many possibilities that it hardly counts as a prediction.

Update 11/17/11. It now looks like the super committee will fail. Read my updated analysis.

Hollow America

I only just realized that it's terrible we've lost so much manufacturing and so many factory jobs. Of course I was aware the manufacturing was moving out of the country--I see plenty of empty factories here in Massachusetts. But I didn't see it as a problem because it seemed like people were getting new jobs. Foreign goods, like my reliable Toyota, were a great benefit, and the competition seemed good for American products. Ford cars in the 70's were crap, but they were a whole lot better by the mid-90's. So global trade looked like a win-win situation.

As for our trade imbalance, I didn't think the statistics were true. Surely we'd be having worse economical problem if we were doing that badly. I honestly thought that the metrics were missing huge software sales or other exports of intangibles like movies or financial services. Please don't roll your eyes or wonder why you should waste any more time reading my posts, but I thought that we'd be suffering like Argentina did when they'd have one of their terrible crises, and that obviously wasn't happening.

I don't know when I finally wised up and realized that the trade imbalances were THAT BAD. It's amazing that we could get away with it, and still people would loan us money and sell us oil. And they still do.

Strangely, I don't think the biggest problem is all the debt. Instead, I think it's that we no longer make enough stuff. That makes it so much harder to strengthen our finances through exports, rebuild our economy, and get people back into work. A smaller country could devalue its currency, cut way back on the imports it could no longer afford, pay its workers less, and then export the cheaper wares to other countries. We don't seem to have that option, so I don't know how we'll lift ourselves out of this hole. Suggestions, anyone? Quick, before they turn off the electricity!

Two other questions: Could we have avoided this, and how?

The dirty word in healthcare-choice

One issue that severely hampers honest debate about healthcare is acknowledgment of the tough choices to be made. To some people, choice is a loaded word because of its association with abortion. It's a word to be avoided at all costs, and sometimes it even seems that the concept is not acceptable.

For example, the controversy over Terri Schiavo's feeding tube seemed like a stand-in for something else. Most right-to-die cases don't get national attention anymore since 1990. It's normally considered a private family matter, with an established line of rightful decision-makers in case there's disagreement among the family.

No other recent case got nearly the nationwide attention that the Terri Schiavo case did. The case was superficially about a husband/guardian's fight to have his wife's wishes respected and have her feeding tube removed. But it also concerned the choice to let someone die. To pro-life/anti-abortion forces, this is not a permissible choice. So this case was a surrogate for abortion, and many of the usual pro-life forces were heavily involved (Randall Terry, the Catholic Church, the Pope, evangelical churches, and pro-life politicians in Florida and Washington DC).

 Feeding Tube

This allergy to medical choice cropped up again over the mandate in the Affordable Care Act (Obamacare) that doctors should be paid to have a discussion of end-of-life decisions with patients age 50 and over. Sarah Palin famously called these "death panels," implying that it wasn't a voluntary discussion, but a coercive decision being made by cold, calculating bureaucrats. Well, there never are any half measures by Sarah Palin.

I wonder whether conservatives truly feared that there would be such death panels, which is a bit ludicrous in a country where comatose patients are kept alive for many years. I think the real fear is the legitimacy given to choice if the government conferred payment on such end-of-life care discussions. If we can choose not to do everything always to stay alive, maybe it's because we know life isn't to be maintained at all costs, and that other considerations matter. If other considerations matter, that opens the door to choice when dealing with an unwanted pregnancy. To pro-lifers, abortion is an absolute wrong, so its distant cousins-- pulling the plug, Do-Not-Resuscitate orders, even hospice--are suspect as being steps onto the slippery slope to the total sin of abortion.

Not a dirty word everywhere

Republican Goldilocks

Not too hot, not too cold, just right.

It's so hard to find a candidate who's just right. The Republican have been trying to find and draft "President Right" since 2009. Think of all the names that have been floated: Palin, Scott Brown, Marco Rubio, Mitch Daniels, Huckabee, Trump, Cain, Bachmann, Perry. Now there's talk of drafting Christie because he maintains his bulldog demeanor in all circumstances and no one can imagine him getting flustered.

This is reminiscent of 2007 when the Republicans went through these front-runners: Fred Thompson, Guiliani, Romney, Huckabee (any others?). When they eventually decided on McCain, it was with great reluctance. I remember long-time Republicans talking about holding their noses when they voted in the primaries, and again, if less so, in the election. Just after the election, they were again complaining that McCain wasn't a real Republican, and that's why he lost. If only the Republicans knew the same sentiment is endemic among the Progressive wing of the Democratic party, and their words are practically interchangeable with the words of their prime target.

Nothing cures that longing better than giving in, going whole hog, and picking a really strong conservative candidate. So the Republicans shouldn't pick Romney. He may be more electable, but he's walking buyer's remorse. They should choose a through-and-through conservative like Perry, Cain, or Bachmann. Then they'll either win the presidential election, and they can celebrate without reserve; or there will be a rocky campaign as the candidate either flubs the message or the country rejects the extreme version of conservatism.

If the election is lost with a strong conservative at the head of the ticket, Republicans will get the lesson they need: You can nominate a candidate who is too far right. Democrats got this lesson back in 1972, and they've never forgotten. That's why Nader or Kucinich can run in the Democratic primaries, but they'll never get close to the nomination. The Democrats learned that lesson but good. No repeat needed.

In A Progressive's Dream

Update 9/29/11. You have got to watch Jon Stewart's much funnier take on the Goldilocks situation. If you watch from the beginning you'll get to enjoy some ribbing of teachers, then continue with the clips for edgier jokes about Santorum, Perry, and Brit Hume. I recommend watching the whole thing.

Update 10/24/11. I've changed my mind.  The Republicans should think long and hard, realize that they are not doctrinaire in their conservatism, and pick Romney. There is no candidate who is both "very conservative" and "intellectually coherent."  It should be possible for the Republicans to find someone who is both, just as there are people who are both kind and beautiful. But it isn't happening with the current crop of candidates. No more names are being tentatively floated. I draw the conclusion that the Republicans have gotten so extreme that they've spooked their own best and brightest. Time for some balance, guys, though it looks like it's too late for this nomination. Romney is your punishment.

The 16% Tax on Everything

You don't hear about Republican plans to roll this one back.

This is how much healthcare costs in the US, currently 16% of our GDP and on its way to becoming 20% by 2020. Compare this rate to Canada (perhaps our closest demographic match), which spends 10%, Ireland which spends 8%, and Switzerland, which is probably the Switzerland of health care, 12%.

In some ways, it's not fair to compare the US with other countries because our lifestyle is not as healthy. On the other hand, countries buying or competing with our exports don't care why we spend so much. The only thing that matters is that it makes us less competitive.

When will we start looking at trimming our healthcare costs? I can't believe it isn't time yet. The biggest impediment to reform isn't satisfaction with the current system, it's that healthcare is quite the political football.

The Republican Approach

The Republicans, who are bullish on cutting other taxes, are less sanguine on cutting medical expenditures. They have their private-sector solutions: stripping the corruption out of malpractice rewards (and taking fair higher compensation with it), letting people buy overpriced and/or fraudulent health care insurance over state lines, turning Medicaid into block grants to states, and voucherizing Medicare, so that our seniors can try to buy overpriced and/or fraudulent insurance too. Granny won't be thanking them.

The Democratic Approach

The Democrats have some plans too. One (ostrich) wing thinks Congress could  pass a single-payer system if ... er... Fox News didn't inflame the country with lies. Democratic policies have to be negotiated between near socialists like Bernie Sanders and blue-dogs like Ben Nelson. Not surprising then that the Affordable Care Act (Obamacare) is a mish-mash of what they could get through Congress before the Republicans took over the House. It's jimmied to get a good score from the Congressional Budget Office (CBO), but it'll blow up later when we're subsidizing premiums on overly-mandated health insurance and long-term care.

The Super Committee

I fear that the super committee will be skittish about cutting healthcare spending, particularly Medicare. After all, crying foul on Medicare (or death panels!) has won more elections in the last two years than it's lost. That simply means that healthcare for federal workers and Medicaid will be cut more. Considering our Congress, their staff, judges, and the executive branch use federal employee healthcare, somehow I imagine that Medicaid will suffer the most. No, I don't mean Medicaid will suffer, just those on Medicaid, those annoying free-riding poor.

By the way, we don't pay 16% for healthcare on absolutely everything. Imports from other countries don't carry same healthcare burden. But that's not especially comforting.

Establish a global budget for total federal health care costs and 

limit the growth to GDP [growth] plus 1 percent.

--One of the Simpson-Bowles debt commission's recommendations 
to reduce healthcare expenditure

Funny Moment in Class Warfare: The Jon Stewart Edition

Mitch Daniels, Republican governor of Indiana and declined Presidential candidate, was interviewed by Jon Stewart last week. Daniels generally comes off well, but he does start mouthing Republican talking points, and Jon Stewart nails him.

Mitch Daniels mentions Obama's "obsession with wealthy people," "constant bashing," and "you could confiscate all..."

Jon Stewart interrupts: "Obsession, bashing, confiscate. I can understand the language of unity, and I'm not sure that that's it... The language that you just used, and slipped into quite easily, sounded ..."

Then Daniels explains that Stewart had asked him to defend policies that weren't his own. Stewart cordially lets him off the hook, while explaining that it's hard to get a Republican like Paul Ryan on the show to answer these questions.

Jon Stewart's point, which others can use, is to show that it's not class warfare to raise taxes from a 36% rate to a 39.5% rate. But it sounded better when Jon Stewart said it. Most people would pale pretty quickly if you told them they'd have to start paying either 36% or 39.5% taxes. Democrats need a bigger plan than this.

Stuffing your money into the mattress

Probably I'm telling you something you already know, but if you put money into the stock market during most of the last 12 years, it hasn't done well. It's even worse if you bought a larger house thinking it would be a good investment and you could get some money out when you needed it.

I'm not sure how people saved for big expenses or retirement prior to the 1970's. I've heard stories of people putting money in jars and storing them in the basement.

When I started saving in the 80's, that approach seemed so antiquated. The inflation in the 70's would have cut the value of those basement dollars to less than half. In the modern, swinging 80's, you'd take your savings and buy a newfangled Certificate of Deposit (CD) or open a money market account.

Also in the 80's, it became clear that you were missing a huge opportunity if you didn't get into the stock market. The same in the 90's. The Dow soared 230% in the 80's and another 320% in the 90's.

 

Two decades is long enough to erase the old patterns of savings and entrench new ones. So everyone with some extra cash was buying stocks or mutual funds, either directly or as IRAs or 401Ks.

As the markets became less reliable after 2000, investment advisers talked about "dollar averaging," which meant that you kept investing in stocks even when you were leery, because the ups and downs would average out and the overall trend was still up. I  and many others listened to this advice. However, by dollar averaging, I probably would have done better putting my money in a mattress or in jars in the basement.

The point isn't that my money didn't grow. It's that we lost the idea of putting away enough money to tide us through. Instead, we were supposed to invest, and let our investments keep paying us back many times over.

With this mindset, we didn't need to save as much. We could spend more, we could borrow, we could buy a more expensive home and enjoy more expensive hobbies. Thrift was passe. Well, we were wrong. Now we have to relearn those old lessons of savings and thrift, as individuals, as families, and as a country. I hope we can do it.

The Political Lie Machine: Class Warfare

• Class warfare - higher taxes on the wealthy.

• Not class warfare - insulting people who get the earned income tax credit.
• Not class warfare - saying 47% or 50% or 51% of people pay no income tax.
• Not class warfare - not saying anything about the millionaires  and corporations who didn't pay any income taxes.

The conservative lie machine is geared up and smoking.

Here's something they don't tell you: the income per household of the lowest 40% in the US is $34,000.** Maybe that's why approximately half pay no income tax--because they are low on the income scale, with little to spare after they've paid Social Security tax, Medicare tax, sales tax, rent, utilities, etc. One of the few good things about our tax code is the exemption for subsistence living. I've written about this before.

So I call bullshit on class warfare, and bullshit on our entire income tax mess.

**Correction made on 10/21/11.

In Defense of my budget

I've already gotten one criticism about my budget (orally, not in the comments section):

"No plan that fits on a piece of paper is much good."

This critic, who is also a close friend, thought that the portion on reducing spending in particular was worthless. Point taken. However, it does show how much some of the areas, such as defense and medicare, would have to be cut. So my suggestions for spending cuts are only MOSTLY worthless.

The revenue side is definitely more solid. It's based on IRS data from 2009 showing the distribution of taxable income and taxes collected. The weakest part that is not being able to estimate the effect of eliminating deductions and credits.

Finally, I want to defend this budget as an exercise in facing up to the enormously scary federal budget, with its huge numbers and huge gaping hole. Don't I deserve some credit for that?

My new hero

“Citizens will either have to pay more for their government, accept less in government services and benefits, or both.” 

--Douglas Elmendorf, Director of the Congressional Budget Office and first guest of the Congressional super committee working on deficit reduction.

Sorry I didn't post on this right away, but it was my favorite moment last week. Elmendorf told the super committee the plain truth. No finger-pointing, no political games, just the stark truth. No one on the committee argued with him or tried to score points. They just listened, or so it seemed.

We are two months away from getting their recommendations, and I'm waiting with both hope and trepidation. They seem the best hope for a reasonable way forward, and I'm not seeing any other savior on the horizon.

To the committee members, work hard and get it done. A lot of us will be grateful, either immediately or eventually. God speed.

Compromise on Regulation?

This post dates from early September, and was one of those odd occurrences that I reported in Political Reboot. It seems like ages ago. It's worth a quick look for environmentalists, and haters of bureaucrats and shills for industrial polluters.

 Sept. 2, 2011

Obama is stopping implementation of regulations proposed by the EPA.

(Apologies for that sentence, but that's what it takes to put the idea into the fewest words possible. Two agents: Obama and the EPA. Two objects: proposed regulations vs. their implementation. I'm bored already.)

I'll try to rouse myself by talking about things that matter: jobs and people's health. Very few people (other than Ron Paul) want to go back to the 1960's when pollution was rampant, our rivers were poisonous to varying degrees, and there were basically no controls.

We want some regulation, but we don't want it to be the fief of bureaucrats who use miniscule test results to build up their own sense of power and importance by protecting us from an almost imaginary danger. I've intentionally put this is derisive terms because I think it's true of some regulators. On the other hand, some regulators are trying to save us from small but real threats that could kill or disable perhaps 2 out of 50,000.

Republicans are corruptly using the focus on regulation to help big industry avoid important regulation. Under the mantle of protecting small businesses from choking regulation, the repubs are trying again to allow power generators to avoid the requirement for better pollution scrubbers.

Call me skeptical, but I don't think there are many small businesses that run coal-fired power plants. But of course it would be terrible to waste this opportunity to delay pollution controls yet again. After all, eight years of avoiding updating under Bush weren't enough. I'm holding on to this article to refute the inevitable talking pointy-heads on the comment threads [alternative link, but same article].

Tax Week Finale: My budget proposal

** Warning - Depressing Assessment Ahead. You may not want to read this. **

I have a straightforward goal: I want a balanced federal budget. So I looked at our current horribly unbalanced budget (where we collect $2.2 trillion and spend $3.5 trillion) and I crunched a lot of numbers. The news is very bad, as you can expect when you are overdrawn $1.3 trillion dollars.

 Revenue

Using a baseline of no income growth since 2009, I want to increase revenue to about $2.44 trillion. Due to job losses, payroll taxes will go down. We'll need to raise $1.25 trillion in income taxes, and I'd like to do it with a flat tax. As I wrote before, I think we should tax all types of income in the same way--no special rates for different kinds of income, like the bogus 15% rate on capital gains. I decided that on principle earlier, and now it saves me a shitload of number-crunching. My numbers are based on IRS statistics for 2009. By the way, personal income taxes totaled $953 billion in 2009.

Flat Tax Scenario.  Exempting income under $25,000 (adjusted for family size), we'd need a flat tax of 25% on everything above $25,000. That's so steep that it may triple income taxes on people making around $40,000, so I won't go there.

Take Two -- Mostly Flat.  My second attempt is 18% on income between $25,000 and $100,000, then 28% on income over $100,000. And all those extra deductions that help you lower your taxable income--gone except for exemptions based on family size and disability. Under this plan, my own income tax would double. I, like everyone else, will have to take the medicine.

If you think we should raise taxes much higher on upper-income folks, perhaps to 40 or 50%, please consider that many can move out of the country, and may choose that option to escape such a high rate.

These tax increases are harsh after the marshmallow-soft taxes of Bush, but my plans for spending are even more drastic. They have to be, or taxes are going up even more. I really don't want to triple my income taxes or yours.

Spending

We have to downsize our federal spending by 30%, or $1 trillion a year. That means cuts everywhere. Let's see, cut:

• Defense by 40%.............................................$275B
• Social Security (must do it) by 15%................$105B
• Medicare/Medicaid by 20%...........................$159B
• Interest on the national debt ...........................$    0B    (Can't cut)
• Mandatory by 40% .......................................$166B    (Mandatory?)
• Discretionary by 45%.....................................$295B

• Total............................................................$1000B

Note that these are yearly amounts, not the 10-year totals that make a plan look better than it is.

Implementation

I don't know whether budget contractions and tax increases of this magnitude will send us into a depression. It's certainly a scary prospect. But barring economic cataclysm, I would do the cuts over 4-6 years, and all the taxes increases in the first year. Why? To make a bigger dent in the deficit sooner, while stretching out the job losses due to the spending cuts.
 

Lessons Learned Thus Far

Blame game.  The government, which ran up our debt so much (yes, George W. Bush, I mean you), fucked us up royally. They piled on debt and sent our economy into a tailspin, necessitating even more deficit spending. All the presidents since and including Reagan deserve a fair amount of blame, but Bush deserves the king's portion. Not to exempt Congress (which deserves equal blame with whatever president), Wall Street, businesses, lobbyists, taxpayers, and the electorate.

Burden-shifting.  I'd love to borrow good ideas for increased business tax revenue that can be implemented right away. These savings can somewhat reduce the personal income tax rates. Every $50 billion more in taxes on business (by closing egregious loop holes) gives our households approximately a 1% lower tax rate. Obama's plan has some suggestions. This is real incentive to find others.

Brackets.  The second tax bracket is at $100,000 instead of the usual $200,000 because of the $1.3 trillion pot of taxable income between $100K and $200K. Our deficit is so big that we have to capture considerable extra revenue, and it has to be done there. It's not personal, it's just mathematics.

Net worth. I don't know if this plan is politically feasible (ha ha) or economically sound. I will not be offering any kind of money-back guarantee. It may be a big mistake to come up with this plan, publish this plan, and be so painfully honest about it. If this is necessary to balance our budget, we might prefer default. But even with default, we probably can't avoid changes of this magnitude. I think I should research Argentina and find out how they handled their fiscal crisis.

Obama's plan is more optimistic about how much money can be raised by limiting deductions. His plan shows $70 billion a year, or 42% of what I aim for. I hope he's right, because that would make everything else less painful. One reason to be hopeful is that he has trained monkeys economists working on his plan. But it doesn't have a money-back guarantee either. Sorry folks.

And yes, I know this plan wouldn't have a prayer in Congress. Nothing sensible will, so why should this plan fare any better?

Update: 10/1/11. If you think this post was a waste, please read my defense. Then try doing a budget yourself and put it in the comments. I'd like to see how yours stacks up to mine.

 

Tax reform food fight

Historically, the US has a progressive income tax rate structure. Top rates on income were at one time 90%, and were 70% for many years. That sounds absurdly high now. I can't imagine why elected officials thought it was fair to take 2/3 of what you earned and leave you with less than 1/3 (except during WWII, when that rate of taxation was preferable to giving "Heil Hitler" salutes).

Now, after three decades of flattening tax brackets and increasing deductions and credits, our tax structures deserve a rethink. But the most important reason to change our tax structure is that it doesn't DO THE JOB. It doesn't fully pay for our government expenses. With our deficit and debt problems, I have no doubt that taxes have to and will go up, which shows I'm a realist and not a "conservative" Republican.

Up, Up, and Away

The thought of increasing taxes panics a lot of elected officials. (The exception is my local government. We have step increases almost every year, and propositions for further increases every four or five years. It's curious how easily these increases are accepted. However, those who don't like the tax rises can vote with their feet and move a few miles to a more suitable tax level.)

End of digression, back to panicky pols facing the prospect of increasing taxes. Most people would like to shelter themselves as much as possible from tax increases and put the burden on other folks. This natural reaction is counterproductive, because no one other than Bill Gates Sr. and Warren Buffett are volunteering to pay more taxes.

These are the usual, stereotyped positions on taxation:

• Progressives want to put the burden on the wealthy.
• The wealthy (exceptions noted above) don't want to get soaked, so they want budget cuts instead.
• Middle income folks are afraid that they look like rich folks to progressives.
• Middle income folks also don't know whom to shift taxes to, and have a sinking feeling about that.
• Low income folks are just scraping by, so don't have time or energy to organize pressure groups.

It's a giant high-school cafeteria food fight. It's already started, but isn't anywhere near its peak. Stay tuned.

On the record

Obama is on the record for letting the Bush tax cuts for those earning over $250,000 expire:

Allow the 2001 and 2003 high-income tax cuts to expire and return the estate tax to 2009 parameters. The tax cuts for those with household income above $250,000 per year passed in the Bush Administration were unfair and unaffordable at the time they were enacted and remain so today.

Good. I wanted to hear him say he's going to let the Bush tax cuts expire. I hope he does let them expire, all of them, if need be.

The December 2010 deal  keeping the tax cuts was crap. Did I neglect to say that before? Maybe, kinda, sorta. But I did feel that way starting about 2 days after the deal. I thought about the deficit hole getting bigger, and realized the deal was a mistake.

Please God, let the Bush tax cuts expire this time. Please.

Tax Fairness

Oh God, is this a sticky topic. Maybe I'll just throw some major threads against the wall:

• Everyone should be paying some tax because it represents skin in the game.
• Everyone should pay the same percentage of taxes because then they're all contributing the same relative amount.
• People who earn less struggle so much already, they don't have the means to pay as much tax as the well-off, higher earners, or rich.

Each of these views sounds good and reasonable, so it will be hard to choose between them.

Everyone should pay some tax.

• Pro: Having a stake in government, at both the paying and receiving ends, is most likely to make people care what government does, educate themselves, and vote wisely.
• Con: It's hard to determine what the minimum tax should be, particularly for low wage workers with children who barely scrape by as is.

Everyone should pay the same percentage of taxes. 

• Pro: This makes scapegoating impossible, so no particular group gets soaked. Everyone has the same stake in good government.
• Con: This country has wide disparity in incomes, with a lot of people living at or near subsistence levels. A tax rate that is easily shouldered by higher-income folks is a burden to the poor.

People who earn more should pay a higher percentage.

• Pro: The tax burden is put on those most able to afford it.
• Con: People who don't pay taxes but receive services have no stake in efficient government, because the burden falls on other people. Burden-shifting epitomizes what's terrible about the current tax code.

Not surprisingly, there still isn't a clear winner. However, when I look at our tax system, I see elements that fit these categories.

Our payroll taxes are flat taxes, and they seem to work pretty well. Everyone who works pays them, and everyone benefits (or expects to benefit) from the services they provide. They are also relatively easy to collect. The burden is low enough that most people pay without trying to weasel out. These look like good taxes to me.

In comparison, our income taxes are a train wreck. We have so many groups lobbying for particular deductions and credits that the tax code is like a subterranean cavern, or a hoarder's attic, or a junkyard, or an even more arcane, disjoint, jury-rigged, unstable, unbelievable metaphor. We have separate rates for different kinds of income: dividends, wages, short-term capital gains, long-term capital gains, rents, maybe farm income, business partnerships, etc. to infinity. The whole thing is a crazy mess.

I can't believe it, but I just talked myself into supporting a flat tax!!!!??!!

That stills leaves the problem of too much burden on those who can't afford it. The best way to handle this is to give realistic exemptions for living expenses. Allow exemptions per category: adult, child, elder, and maybe a few other special cases, but not many and as clear as possible.

I would also keep the earned income tax credit (or its equivalent) because I know too many people who really need this. I don't think the earned income tax credit creates a new problem (no stake in efficient government). The working poor still have skin in the game with payroll taxes. They also usually aspire to move up the income scale to where they will be paying income taxes.

So, that's my unexpected conclusion. Yes to payroll taxes. Yes to a flat income tax with exemptions and the earned income tax credit. No to lots of deductions and credits and different types of income. Case closed. (Or is it?)

Still in shock

Addendum: I think that maybe we'll need two tax brackets, maybe one for earnings under something like $200,000, and then you pay 50% more on earnings above that.

Update: When I crunch some numbers, I ended up with two brackets at 18% and 28%, though they could be high or low. (It's hard for me to estimate the changes in taxable income when deductions are eliminated and exemptions increased.)

Update again: I think 18% is too high for a flat tax. It takes too much from low earners who don't have very much to spare. If the bottom fifth of workers are earning only 3% of income in the country, what should their tax burden be?

NY9: Defeat of the hack

It's dangerous to write about a politics in a polity I don't have direct knowledge of. So I tread carefully into a discussion of NY9. Yesterday, the Republican candidate for the House seat won 54-46 over the Democrat in the heavily Democratic district. I won't say, as the RNC chairman did, that this election in Brooklyn and Queens "proves yet again that Obama is failing our country." Oh well, I guess that's what party chairman are paid to say. I haven't liked things coming out of the DNC chair's mouth either.

I have recent experience with unexpected special election upsets. In August 2009, Senator Edward Kennedy died, leaving his seat open. A party hack, Martha Coakley, won the Democratic nomination. Scott Brown, a moderate, won the Republican nomination. Brown got a lot of attention and support from national Tea Party groups, which have since labeled him a RINO.

So in the NY9 race, we have Weprin, a Democratic party hack who doesn't even live in the district. On the Republican side, we have Bob Turner, a conservative Catholic standard-issue Republican. I applaud NY9 for not electing the hack, and wish all other districts would elect the most sensible, moderate candidate.

Whoever picks the party's candidates, whether primary voters or party bosses, should consider this when making their choices. The election isn't going to be just a referendum on Obama. The next Congress will have a lot of work to do, but voters only get to choose from what is offered. Give them the best candidate you can, and try to decrease the deadlock in US government.

Holding my breath

I'm disappointed with Obama's plan to "fully pay for" his jobs bill. I know a taxes-only funding proposal could be just the opening bid, but it's the wrong tack even so. It's a step back from the grand bargain he reasonably offered in late July. Or was reasonableness only an opening bid in a different game?

I have little tolerance for political games, or political calculus that a proposal has to be made to satisfy the base. Obama hasn't struck me as an "appeal-to-the-base" type of guy, so I'm a little stumped as to why he did this.

This is what I'm holding my breath for: a more balanced deficit reduction plan. I want to see whether he's serious about offering realistic deficit reduction, that is, one that reflects a workable compromise among the various factions in this country. I hope he's going to be more than chief cheerleader for the Democratic negotiating team. That's a plausible role for him, but the country needs someone or some group who can be the voice of reason. I would have liked Obama to do that, but maybe it's not possible with so many people hating on him. I'll revisit this topic in a few weeks, when my thoughts have fermented a bit and there are more events to draw on.

History for Amnesiacs: The stimulus was a waste

I can't believe I have to repeat myself, but I've read too many comments like this:

"The last stimulus didn't help. Why would we raise taxes to do it again?"

If you measure the effects of the stimulus against the political promises (like employment won't go above X), you would be disappointed. But that's not much different from believing your new toothpaste is going to get the gorgeous girl to kiss you, or a business plan will play out perfectly.

In this case, the economy was sicker than economists thought. The stimulus medicine, while effective in stopping the unemployment spiral, didn't live up to all the predictions. I could blame Obama, or the provisions of the stimulus (called Porkulus in a lot of comments pages). But I'm a fact-based kind of person, so I look at this graph and say "thank God for the stimulus."

Anyone arguing that the stimulus did nothing, you better be able to refute this graph. Until someone refutes it convincingly, I call bullshit on "the stimulus did nothing."

Throw the bums out

The problem with "throw the bums out" is that voters need an alternative. It's not unlike choosing a consumer good. If Brand A stinks, Brand B just got crappy, and there's no Brand C or D, you're kind of stuck. The '06 brand alternative was the Democratic House. The '08 alternative was Obama and an even more Democratic Congress. The '10 alternative was the Tea Party. Who is happy with those alternatives now?

I know the Ron Paul people think that he's the alternative this time, but I'm not buying it for a variety of reasons.

What I hope is that maybe, finally, we'll get some centrists back. Ideally, I'd like: fiscally realistic, wanting to gradually reduce the deficit starting now; socially modern; politically open to bipartisanship. I live in Massachusetts, and I've been happy with Scott Brown, probably for the same reasons the Tea Party consider him a turncoat.

I'd like to see centrists on both the Republican and Democratic sides and especially in the House. The Democrats may think the electorate will turn to them, but they also have a lot to apologize for, the first being their avoidance of the deficit issue.

Does anyone else think this is a possibility? If centrists aren't the alternative this time, I hate to think what-on-earth will be.

Political reboot

Is that what's happening now? Everyone hit the Off button one day after the debt ceiling was passed. Now the political supercomputer is starting back up, but with some strange, unexpected new programming whirring around inside.

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I wrote that last night, and then came across this thesis:

The perception of how Washington handled the debt ceiling negotiation led to an immediate collapse of confidence in government and all the major players, including President Obama and Republicans in Congress....

We are entering a new phase of the American political dialogue that has been irrevocably shifted in a way that will prove difficult to predict.

Historically, though, this type of deep voter anger, unease, and economic pessimism leads to unstable and unpredictable political outcomes.

This is from the report by a Republican pollster. The collapse in confidence is both political and economic, and they have the potential to create a feedback loop that resembles a tornado. It's the secret knowledge that explains the odd behavior of Eric Cantor.

To show how different the political atmosphere is this week, compare it to last week's admittedly thin political news: the Repubs were floating some balloons about letting the 2% Social Security payroll tax cut lapse. Jim DeMint was blaming the nefarious media for the Tea Party's loss in standing. Same old, same old.

Now, Eric Cantor is trying to be cordial and welcoming. Take that as a weather warning, and check frequently for updates.

Photo:extremechasing.com

Post-speech score card

Obama gave an energized speech last night. He definitely seems to have grabbed the ball:

1. He wants to continue the Security Security Tax partial holiday and extend it to small businesses.
2. He wants to use a Republican state program and go national with it to help the unemployed.
3. He promises to strip back regulation that chokes small business, but only small business.
4. He wants to do a batch of infrastructure projects.
5. He wants Congress to act now, not wait 14 months until after the election.

The Republicans didn't have any ready responses today. Maybe they're stunned that he's taken the initiative on tax-cuts/regulation/small-business/job-creators away, and even started a countdown clock on them.

But Obama still has to deliver on two promises: the jobs bill itself, and the deficit reduction plan promised for Sept. 18. There will be a lot to pick apart there, since specifics are a bitch. That could very well put Obama back on the defensive.

I'll be watching the developments as closely as I watch a hurricane headed up the coast.

P.S. My opinion is still that no stimulus or policy change is going to make a big dent in the unemployment rate. I did hear some pundit quote a 1% reduction. Maybe that can be delivered, but will it be too small for the price tag?

BIG REVERSAL: (9/15/11) I made a big mistake in this post. The tone is wrong, in that it's quite partisan, too close to cheering on a political leader for a superficial good performance rather than taking a hard look at the policies. It's fine to comment on the performance, but as an analyst, not a fan.

In that light, Obama gave a very strong delivery of a plan well crafted to neutralize an opponent's arguments. At first glance, it is not greater than the sum of its parts, and each of the parts should be considered for its cost/benefit balance.

The Democratic Budget Plan

There isn't one. Don't act surprised.

Too many democrats aren't facing the budget issues. Their stance seems to be that all problems will be solved when we tax the rich and businesses at appropriate levels. This ignores the trend of the last 30 years to decrease the tax rates, but progressives are amazingly insular in their views. Worse still, they ignore the plain math involved. If they put together a budget, even if they didn't release it, it would be an enlightening exercise. But it would be harder to stay with the same talking points they've been telling their constituents.

I think the budget choices will loom large in the next election. The talk right now is jobs, joBS, JOBS, but there's no magic spell to make jobs appear. So the 2012 election, if it hinges on real issues instead of spin, will be about budget priorities and how to reduce the deficit.

The most recent elections actually had mixed results. Fiscal hawks won in the November elections, but special elections went to those who talked about protecting Medicare. So voters like fiscal conservatism in the abstract, by don't threaten their Medicare.

These results do not bode well for the next election. The message from voters is that if you talk generalities, you can win, but being specific about the pain is, well, too painful. This is the opposite of what we need. This spring, for the first time I can recall, budgets were the premier topic of political discussion. The people with the plans dominated the discussion because they were on firmer ground.

If the democrats want to be taken seriously, they need to show a plan. But if they want to get reelected, they better not talk about it, especially in House races. I wonder what they'll do? Actually, that's snark. I completely expect more of the same budget vacuum. Of course, even without producing a plan, they will get plenty of votes from their reliable constituencies, but they won't be doing the country any good by ducking the issue.

 Democratic Budget Pie Chart

Update: 9/19/11 Obama finally released a deficit reduction plan. That's about 7 months after Rand Paul. I haven't critiqued it yet, but read my budget plan.

Now I've critiqued it, and even updated this post, finally on 10/31/11. (Snow, power outages, and official town postponement of trick-or-treating are keeping the tykes from my door tonight.)

Tax Code Reform Phase One

Maybe Congress should start tax code reform with the corporate tax code--it's more out of whack than the personal income tax code. A recent article by Reuters discussed how even in a pretty good year like 2010, some large corporations paid more to their CEOs than their federal income tax. Corporations that fare well by the current tax code would love to see it stay on the back burner. That way, companies can continue lobbying for  and receiving their specific breaks while the country is distracted by other debates. Tackling the corporate tax code first is a good chance to show seriousness and test the mechanics of reform before tackling the tax code that will impact the voters more.

There maybe some drawbacks to this plan, however. We don't want the reform to kill business decision-making, especially hiring. It might be best to have a commission of the business-knowledgeable representatives figure out what is fair, then open discussion, then vote.

(An aside: I prefer commissions because they have done better work on thorny problems than the standard congressional debate and committee system. Compare the deficit commission's work, though ignored, with the mess from the healthcare reform debate.)

On the other hand, the corporate tax code is more complex. So maybe starting there is a bad idea. It might be safer to test the waters and craft compromises with the individual income tax first, building expertise and goodwill in the process (I'm an optimist, I guess). Then tackle the corporate tax code.

OK, scratch the original idea. I just hope this wasn't a total waste of your time. After all, you got a peak at my thought process.