Old question: Who benefited the most from tax cuts?

Back in 2012, one of the issues was who benefited the most from the Bush tax cuts. Dems said the rich did. Repubs said it was everyone. Now, finally, here's a graph that shows who benefited: (Click on the graph to enlarge.)

Image: nytimes.com

Look at the left-most 10% of the graph and see that rates declined much more steeply for higher incomes than for lower. This graph is based on effective tax rate and includes payroll taxes.

Low-wage workers are more affected by changes in payroll taxes and much less by income tax rate cuts. It's the opposite for high-income earners. Since the Bush tax cuts lower income taxes, but not payroll taxes, low-income workers saw little benefit. This was also shown by figures on how the end of the tax cuts would affect different earners. Again, lower-income workers would see less of an increase by percent (about 4%). Higher income earners would see a 8% increase.

Here's another interesting tax-related graph: Who gains from tax breaks--those credits, deductions, and exclusions that lower our tax bills. This graph shows the actual shares of these tax breaks and how much accrues to different segments from the lowest 20% to the highest 0.1%. The biggest winners (in light blue) are the 80-99% of top earners. However, look at the share that the top 0.1% (in dark blue) get. An excellent aspect of the graph is that the areas (dark brown, tan, light blue, etc.) directly represent the actual share of the money. You could imagine them as stacks of bills given to the groups.

Image: theatlantic.com

However, this isn't just a give-away of tax dollars to the well-off. Higher earners pay much more of taxes than do lower earner. They also pay marginal rates (currently running 38%) that are much higher than tax rates on lower earners. If exclusions came down, marginal rates probably should too.

Countdown to capitulation

So it's Sunday afternoon, and the GOP are still trying to get something (I don't know what) for the junk cards they hold in their hand. (For those you need a recap, the Bush tax cuts expire on January 1, and to a lesser extent the sequester starts.  The GOP would like to stop both, but they didn't win the presidency or the Senate, so that scrapped their plan.)

Today, the Dems refused to give the GOP the index that will allow Social Security payments to grow more slowly. The GOP will be lucky if the Dems give them a fig leaf. The GOP may have to totally capitulate and allow all the tax increases now scheduled for those earning over $250,000. Capitulation is what they did earlier this year on the 2% Social Security tax holiday.

Some conservatives are calling for letting all the tax hikes take place. This is a brave position since it won't be popular with people getting smaller paychecks. In the meantime, Democrats have been promising in two presidential campaigns to maintain those lower tax rates for the 98%. If the Republicans don't go along, they will likely be seen as the enemies of the common man at worst, or hard-nosed realists at best.

The GOP hasn't resisted the 'common man' pressure before, so I don't predict it happening now. But you never know. This is a strange time for the GOP, being on the brink of the first tax increases for over 15 years, in the era that has brought us Norquist, Rove, and the Tea Party populism.

Maybe the GOP will try something new--hard-nosed fiscal conservatism. But my money is on capitulation. I won't know how complete until we see non-core issues such as estate tax, tax rates on incomes between $250 - 400K, unemployment insurance extensions, and low income credits.

Throw in the cards, save the chips for the next round

Image: apowerpoint.blogspot.com

Correction 12/31/12. According to this article, the GOP wants to keep the sequester, and the Dems want to delay it until 2015. When I wrote that the GOP wanted to avoid the sequester, it was based on their presidential campaign stance, which was against cuts in defense spending. I remain in favor of the sequester.

Note: I first described on Dec. 22 (in comments on this post) that the GOP would end up capitulating. They're getting closer.



Update 1/1/13 9PM. The final timeline for capitulation is nearly certain now.  

Quick Capitulation - Tonight

The House is going to vote this hour on whether to amend the Senate-negotiated deal. They need 217 votes to pass an amendment of $330 billion in spending cuts added onto the Senate bill (a package from someone's files, no doubt). 

Any Republican who doesn't vote for the amendment has a target on his back and can expect a primary challenge. However, maybe enough Republicans will have the courage to defy the pack, and defeat the amendment. If so, the Senate bill as is will be (or should be) voted on and pass.

Drawn out Capitulation - Thursday

 

If the amendment passes, presumably the amended bill will also pass. Then it will sit untouched in the Senate--a piece of political theater that won't be going on the road.  The House will be forced to act on the Senate bill without amendment.

Outcome -- Slighter Quicker Capitulation

That didn't take long at all. Almost all of the House voted to debate the Senate bill without amendment. The Senate bill passed 257-167, with 85 GOP and 172 Dems voted yea. 

 

Short: Tax increases for everyone!

Here's a good article outlining why the GOP should let the country go over the fiscal cliff. This is the reason in one sentence:

"Republicans will never be able to build a political case for less spending if most Americans are insulated from the cost of that spending."

That's a very "tough love" approach, and maybe it's the right one. I've been thinking about political gamesmanship and leverage, but this is first principles. If people want it, they should pay for it.

Of course the article makes it sound like Obama invented deficit spending. It doesn't mention Bush cooking the books, keeping wars off-budget, or anything like that. However, the article points out that extending the Bush tax cuts was a terrible thing to do in 2010, and maybe it handed the election to Obama.

Perhaps I should check whether the author, Avik Roy, told Romney that extending the Bush tax cuts is a terrible idea. Hold on a minute...

Well, no, he didn't suggest this until  Dec. 22. In fact, during the GOP convention, Roy wrote that the GOP wasn't wrong to resist tax increases, but deserves "a meaningful proportion of the blame for the fiscal situation that Obama inherited and then made worse."

This is another lesson that everyone wants tax cuts on their watch, and no one wants to be the grinch or deliver the bill. However, it also makes me want to go over the fiscal cliff in order to find out if people are really willing to pay the full cost of government. I want to know that!

How much government do I really want?

Image: mollygalbraith.com

Postscript. Of course, there may be some important reasons not to go over the cliff, like we really don't need to push our economy into another recession quite yet. Let's think about the greater good, not just partisan advantage, OK? Do I know the best course. Uh... no. So maybe it's best to be cautious. A bit of a cliff now, and more later this year if we don't have a tummy ache recession.

The high price of taxes in GOP fairy land

Boehner is finally just barely admitting that taxes are going up. His latest offer allegedly supports tax rate increases on those with incomes over $1 million. But, for his agreement, Boehner also requires cuts in the big entitlement programs (SS, Medicare, Medicaid).

Boehner is still is living in the alternative reality where tax increases might not happen, so he needs a huge payoff to actually allow the tax increases. Meanwhile in the real world, everyone else knows that the tax increases are coming. It's already in the law, and it doesn't require anyone's permission, no more than rain needs permission to hit the ground after it starts falling.

Nuns can fly, but taxes can't rise, in GOP land

Image:zaiusnation.blogspot.com

I almost feel sorry for Boehner because he's in a ridiculous position. He has to try to conjure something out of nothing. The 'nothing' here is the GOP's ability to prevent tax increases, which I keep saying is non-existent. Yes, the GOP has NO CHANCE to prevent these tax increases.

I don't know how large I have to type this information to get the GOP to wake up to this reality. Nothing seems to work. Various GOP congressmen talk about how they've been suckered into raising tax before for spending cuts that never materialize. Sure, my GOP friends, don't ever vote that way again. But realize that you're not being asked for your vote on this. It's coming with no vote needed.

Some Republicans are trying to get their colleagues to consider bills that will extend the tax cuts for some (such as the under-$250,000 crowd), but to no avail yet.  Actually, maybe it's one lonely Republican, Tom Cole (R-OK).

Boy, it's going to be fun watching the GOP when these inevitable tax increases hit. We should have a stopwatch (or calendar) on them to see when the denial finally ends. Maybe the heads of half the GOP will explode.

As they used to say on the countdowns, T minus 15 days and still no realism in sight for the vast majority of Republicans.

Update 12/26/12. Here is evidence of what I surmised, that the GOP didn't understand the inevitability of tax increases. According to a Wall Street Journal insider article, Boehner asked what he gets for agreeing to a $800 billion revenue increase. Obama's reported response:

"You get nothing. I get that for free."

That is harsh, but it's the truth. If Boehner expected any major concession, it shows that he didn't understand the negotiating positions. It's no wonder that they couldn't reach a deal with one party blind to the lay of the land.

Rant: GOP tying themselves in knots

I'm so tired of how the GOP is trying to avoid the inevitable. This article talks about two (or is it three?) scenarios that the GOP in Congress could use to avoid voting for a tax increase on the highest 2%.

THEY NEED 2 DIFFERENT WAYS TO AVOID THIS?????

If you don't want to vote for a tax increase, just admit it and let the Bush tax cuts expire. Boom, no vote and the problem is solved. "Buuuuut, then we look like we don't care that taxes went up on everyone..." they seem to whimper. OK, so vote on something that can pass and prevents the taxes for going up on everyone. "But that breaks the tax pledge solemn commitment to our constituents and blah blah blah blah..."

The GOP congressmen are also whining about Obama playing hardball and zero-sum games (horrors) just when they're [finally] trying to be bipartisan.

Frankly, I'm so fed up that I don't care if we go over the fiscal cliff, EVEN THOUGH THAT'S IMPORTANT, because I can't stand the GOP whining. I would love to be able to hibernate until mid-January and wake up to the definitive answer to "did they or didn't they?" Unfortunately, I need to work, eat, and maintain my human relationships, so hibernation isn't an option, damnit!

The bottom line is that I'll be trying to ignore all the weasly, intricate, obscure, legalistic positions that the GOP takes as it tries extract itself from its own labyrinth. I won't be analyzing those GOP positions. I'll just be waiting for the end. That is all.

/rant

Photo of Boehner and congressional GOP leadership

Image: coverbooth.com

Best Line: "Right now, [Boehner] is hoping to lead his fractious GOP to an orderly surrender" -- Dana Milbank. So true. I wish Boehner success.

Extra. I found this tax-vote-avoidance method a few days ago. It's worth reading, but I'm not looking at any others. None, I tell you!

"You really should take Simpson-Bowles"

During the campaign, the GOP complained that Obama really should have supported Simpson-Bowles deficit reduction report. They made this earnest suggestion while not supporting S-B themselves, but it was just perfect for the Dems.

Of course it's chutzpah to tell your opponents what positions they should take, but not really surprising. Simpson-Bowles is the ugly girl with a great personality and much more good sense than all the boys and girls combined. Someone should be bringing her to the senior prom negotiating table, but not ME. She's just not right for me, because I need a girl with lower revenue requirements than 21% of GDP and a real overhaul of Medicare. Besides, if I bring Simpson-Bowles as an opening at negotiations, the end point is going to be much worse than S-B when negotiations are finished. [Odd that this problem wasn't on the radar when various GOPers remarked that Obama should have embraced S-B.]

A few conservatives, such as this editor at Town Hall, are bucking this logic and pushing for the GOP to make S-B as their first serious offer. Currently, that's the outsider's position because the leadership isn't close to doing that.They're still in the faux outrage phase, "flabbergasted" that Obama as victor is less conciliatory than he was in August '11 or during the debates.

Well, it looks like no one will take the sensible ugly girl to the prom. Instead, they'll be acting like adolescents, jumping off the fiscal cliffs, maybe shutting down government over debt ceiling increases, and trying the make hay with whatever opportunities they have.

When it comes to the end of the Bush tax cuts, the truth is that no one has to do anything. They fade into the sunset all on their own. Each side will blame the other--"We wanted to save them, but those other scoundrels just wouldn't cooperate"--but neither will sacrifice a high card to prevent the tax rises. They will, however, try like hell to pin the blame on the other guys.

The next real choke point will when we hit the debt ceiling in March, but there is also the funding bills for the government which will start in the spring, if I remember correctly from 2011. Maybe some smart young senator or Congressman will ask Simpson-Bowles to one of those lovely events. Maybe she'll be the date for the entire Gang of Six, and she'll finally achieve the popularity she deserves.

Call me already--you know you need me!

Image: dontwannahearit.com

Screw the "greater good"

That appears to be the position of the leadership of both parties. Neither party wants to risk the blame for the pain of budget cuts, so they're both saying "You first." 

• The GOP is essentially making the same proposal that they did throughout 2011, but with a little more tax collected from high earners. For this paltry sacrifice, they want all their proposed spending cuts from the Ryan budget enacted.

• The Dems want the top rate to rise, partially to humiliate the GOP with their tax pledges. When it comes to additional spending cuts, the Dems are making the paltry offerings.

It looks like without a presidential election to force them into good behavior, our politicians revert to spoiled partisan children. They want what they want, and the other guys will just have to give in.

Look at last year. A 2% tax increase was at stake, and the GOP caved after trying to get concessions for 2 months. Now a 4% tax increase is looming, but neither side is willing to bargain. Perhaps the threat needs to be bigger, like a full government shutdown, before these bitter opponents stop grandstanding.

By the way, I'm not talking about just the GOP. The Dem offer is at the same level of blind stubbornness as the GOP position is. Did we just reelect this brats? I'm afraid so.

 Man the trenches!

Image: wattwork. blogspot.com

Extras. The Ryan budget cuts: broadly outlined without specifics (p.64). A thumb guide to the stages of negotiations.

Short: Your cost share of the fiscal cliff

How much will you have to pay if Congress doesn't work out a deal on taxes before the end of the Bush tax cuts on Jan. 1, 2013? Prognosticators and economists have been warning us for awhile that it would pitch the US economy back into recession. I hope Congress can reach a deal, but in case it doesn't, how bad will it be?

A cut of about 4% for most people

We're probably losing the Social Security 2% tax holiday anyway, so the end of the Bush tax cuts means an extra 2% loss for most of us. That's not as bad as I feared.

Worse will be the job losses if we tip into recession. I'd like to avoid that if we can. The most plausible way is to minimize the cuts for the lower and middle class --preferably just the 2% paycheck cut from reinstating the full Social Security tax.

The effect on the upper income earners... I don't know what it will do to the economy. I'm curious to find out, but also a bit fearful.

Image: gobankingrates.com

Sources:
Readable numbers from MarketWatch.
More numbers, still fairly readable, from Yahoo News.
Scenarios from BankRate, including which pieces will hurt different groups the most.

Bad news for spending cuts

The results of this election, with Obama reelected and more Dems in the Senate, point to a harder line by the Dems against spending cuts. This is regrettable, because our government has grown too large, spending too high a percentage of our GDP and crowding out other parts of the economy.

Sometimes the electorate shows its displeasure by voting in a government that will cut expenditures. That happened in Massachusetts when we passed a 2.5% cap on property tax increases (Prop 2 1/2). However, on a national level, it's never worked--the spending cuts have never materialized.

We need spending cuts more than ever, but the GOP, the side that pushed hardest (if only recently) is weakened by this election. Spending cuts will be more anemic because of this. I'm noting this likelihood, not bemoaning it. Government almost always misses the perfect balance, and the outcomes if the Republicans won a sweep would probably have been worse.

So this new government won't be great on spending cuts. I hope they do enough. If not, I hope the public forces them to do more. I'm expecting to be disappointed, but preferably not so disappointed that I think we should have gone with the Republicans this time.

We'll see. I've known that adjusting the budget wasn't going to happen in one iteration, but will evolve over many cycles. I hope to see a strong start to entitlement reform and trimming the scope of government. But more than that, I'm glad that we won't be seeing the Bush tax cuts made permanent.

It's too bad that we have to settle for such mediocre results from our government, but that seems to be the price of democracy.

Image: catosdomain.com

Negotiations at the edge of the fiscal cliff

This will be an unsourced piece, and unfortunately, that means I'll be doing that reviled job called punditry. But I've actually been pretty pleased with some bits of my own punditry, so here goes.

Congress and President Obama have 7-9 weeks to work out a deal prior to the expiration of the Bush tax cuts. When these tax cuts end, almost all the paycheck earners in America will have some nasty news, hence there is HUGE incentive for both parties to strike a deal. (For those who need a review: The GOP wants to keep all the tax cuts. The Dems want to end the tax cuts for the highest earners.)

Obama has issued a veto threat, but he won't have to veto anything. The Senate won't be passing anything the prez can't sign. Boehner is pretending he won't budge, but he surely will due to the huge incentive I mentioned above. There is also the recent history, which includes Dems and GOP negotiating the August 2011 debt deal and the GOP caving on the Social Security tax cut extension.

So there will be a deal, either before the end of the year or early in January. It might be a deal to extend the tax cuts a few months as serious negotiations take place, but there will be something. The exact form of the deal I can't predict. However, I definitely predict that Dems will include sunset provisions or other provisions that don't take effect yet, but require additional votes. This will provide Dems with leverage that is so valuable. The Dems will also try to reduce GOP leverage by including automatic debt ceiling increases without a vote.

I predict some very disappointed Republicans/conservatives. This is an easy prediction because the Dems have a lot of leverage, and the GOP is in a very weak position.

Elections have consequences

Image: dailykos.com

By the way, the sequester issue is not nearly as major because Obama has a fair amount of control over the timetable for parceling out the sequester cuts. He can make them tougher or gentler as he needs for his negotiating position. He's already announced that they will start off gentle, especially on defense contractors. Again, this is a leverage advantage for the Dems.

Update 11/17/12. There are so many angles on this, that I forgot a few that I wanted to mention. The deal will come out of the Senate, and the House will reluctantly pass amid much gnashing of teeth and perhaps some vomiting. In this way, the House will continue its tradition of NO COMPROMISE, that  is, passing dozens of grandstanding bills before caving to the deals worked by some senators. Sigh. I'm tired of these children--maybe we should abolish the House.

Rant: This election is important!

With the primaries over, the election news is mired in trifles even more than before. That stinks because this election is important, but not for the talking point reasons that the GOP intones (pregnant pause) "THIS IS THE MOST IMPORTANT ELECTION IN OUR HISTORY BECAUSE WE NEED TO STOP AMERICA GOING DOWN THE SOCIALIST PATH." There's a grain of truth in that pile of horseshit, but the GOP isn't going to separate it for you.

The grain of truth is that there are a hell of a lot of fiscal issues facing the next Congress. The GOP is trying to avoid the sequester of defense funding it agreed to just last August by cutting social programs. I will bet anyone that there won't be an agreement passed on that issue. But that's just the beginning. The Bush tax cut expire again at the end of the year. They blew quite a hole into the budget, plugged (if you can call it that) with borrowed money. Then the recession and a large Dem spending splurge made the deficit even worse. (Where is all that money going?) The only action that has decreased the deficit is the sequester that the GOP are trying to undo. However, the Dems haven't presented themselves as the champions of fiscal prudence either. It's insane that with such important decisions to be made, we have news cycles devoted to:

• Romney's dog on the top of his car.
• Obama eating dog meat in Indonesia.
• Is Obama a traitor? 
• Is Romney a wuss for not defending Obama as a non-traitor?

This dreadful list will only get longer. (Yesterday, Romney said he deserves credit for the resurrection of the auto companies.)

Oh God, this is like the South Park episode where Stan refused to vote for a school mascot because the choices were 1) a giant douche, 2) a turd sandwich. Only after 20 minutes into the episode did I realize that it was a metaphor for most of our elections. Dems and Repubs--turd sandwich or giant douche? Our pick.

So, why could this election possibly matter if the choice is a douche or a turd sandwich? Because that's not the actual choice. The choice is Republicans who have little respect for government slashing the federal budget in many places, but especially where it hurts Democratic constituencies the most. The alternative is Democrats indiscriminately protecting as much as they can. Pick your poison, or try to balance them so that neither gains too much power.

 Graphic: thevine.com.au

Short: Midwestern good sense and our deficit

I'm not the only one who likes to look at how we got to where we are. This sensible, very short and humble editorial looks at the Bush tax cuts. With one timely quote and one poignant contrast, the author captures a moment when we made a big mistake. Take a minute to read it.

Update 9/23/14. The original link was busted. In case that happens again. I'll quote from the editorial.

How did we get into the mess of having deficits of $1.5 trillion?

Norm Orenstein, of the conservative American Enterprise Institutes, reminds people he and others said at the time that the cuts in capital gains taxes were going to be a huge drain on federal revenues... This was in and around 2000-2002. Says Orenstein: 'Guess what, it was a huge drain on federal revenues.' [Note: it should say 'Norm Ornstein.']

But we continued to cut taxes...

Here's the poignant contrast:

Another surprise: the report reminded people that Allen Greenspan was saying paying down all our debt would have negative economic implications, would hurt growth.

Who should we have followed--Ornstein or Greenspan? Oh, the regret!

 

Decision Dilemma: In light of Obama's weak SOTU

I'm not sorry to admit that I didn't watch the State of the Union speech. I can't stand long speeches full of lies and never-to-be-kept promises. Last year's SOTU was a major disappointment, showing Obama was out of touch, so I dreaded this one.

I saved myself from an hour of distasteful labor, and figured I'd read the reviews afterward. So, what did I read:

• Andrew Sullivan said that there were too many tax deduction--(one for every color of initiative I suppose).
• A bunch of forgettable partisan stuff (which I've forgotten).
• Obama never mentioned the deficit, as though it doesn't exist.

My heart sinks. I want Obama to embrace Simpson-Bowles and dare Congress not to pass it. So with this air of disappointment (self-inflicted), I search through the transcript, looking for his proposals for deficit reduction. This is typical:

When Americans talk about folks like me paying my fair share of taxes, it's not because they envy the rich. It's because they understand that when I get tax breaks I don't need and the country can't afford, it either adds to the deficit, or somebody else has to make up the difference - like a senior on a fixed income; or a student trying to get through school; or a family trying to make ends meet.

So deficit-reduction will be accomplished by raising taxes on the wealthy. The already-agreed $200 billion per year, out of a $3+ trillion dollar budget, is all the spending cuts that Obama envisions.

A Candidate with Scissors

I'm serious about reducing the deficit. I think we have only a limited time left to do it before our debt service eats up too much of our economy. I'd like the largest part of deficit reduction (maybe 80%) to come from spending cuts. Why? To give people more money that they can control directly. To reduce waste and low priority spending.

So I start wondering if I need to support Romney to get any spending cuts. If I remember correctly, he has some fairly definite plans to drop federal employment by attrition, hiring one person for every ten who leave. I wonder about the other consequences if Romney were to be elected. There's the Supreme Court, the question on whether he would curb the crazy overreach plans of the Republicans in Congress. I think he would.

I'm beginning to think I might vote for Romney, though I'm glad the vote is a long ways off. I'll get a better measure of his intentions based on whom he chooses for VP and how he campaigns for the general election. I remember how MikeR, an occasional commenter at the Atlantic, challenged readers to support whoever would effect the most deficit reduction, even if it was Michele Bachmann. I was never going to go as far as that crazy lady, but Romney meets the sanity test, so he's a possibility. I realize some of the risks, but I'll be considering Romney if that's what it takes to reduce the federal budget in this country.


Then I remember-- Romney will maintain the Bush tax cuts. Those ridiculous 15% tax rates on capital gains and dividends will carry on, probably without a sunset next time. No matter that the deficit is as high as it is. That decides it. Obama is more serious about cutting the deficit because he'll take a scissors to those tax cuts. It's not the only fiscal change we need, but it's a major chunk of it. I'm back to supporting Obama.

Tax Advice for Obama

No, I'm not giving advice to Obama's on his personal income tax return. I'm looking ahead to the end of 2012 when the Bush tax cuts are ending. For a change, Obama can grab the initiative and propose tax reform before the cuts expire.

The legislation shouldn't come from Nancy Pelosi or the left side of the Democratic party. It should come centrists. If they aren't available in Congress, Obama's team will have to draft the tax reform.

Tax reform is necessary but dangerous. If you're honest about tax reform, and your opponent isn't, they can demagogue the issue and cost you critical votes at the next election.

What are the chances that the Republicans won't behave that way? Zero. So we are destined to see no reform proposals or just the vaguest outlines. Then, after the election, the lame ducks will be sorting out mess. They'll probably scream, moan, and grandstand their way to a one-to-two-month extension. Sigh.

One risk in the next election

In case you haven't noticed, my biggest concern throughout this blog has been the deficit, and it's my focus still in my thinking about who I favor in the 2012 election. There is a scenario that especially scares me: one-party domination.

In the last decade, the worst economic moves have been made when one party had control over the presidency, the House, and the Senate:

• Bush tax cuts - responsible for a large part of our deficit
  
• Stimulus bill - an unfocused mixture of reasonable spending and money-down-the-hole projects
  
• Obamacare - a too-big answer to a real problem
  

At the 2012 election, we are facing the possibility of all three bodies in Republican hands. (I don't see the Democrats recapturing the House, and they have a better than 50% chance of losing the Senate.)

That worries me because I recall what the Republicans did last time they held the triple crown. We can't afford more Bush-type tax cuts, but I don't trust newly elected Republicans to see it that way. Many Republican candidates are promising major tax cuts already.

Although the Republicans have been stalwarts on balancing increased spending with revenue (or revenue gimmicks), we've seen before how quickly they abandon all that good sense when they direct the deficit spending. As painful as gridlock and obstruction may be, at least there is one good result: less spending and no big tax cuts.

To prevent one-party domination, I'll be voting for a Democratic president and a Democratic senator, even if I kind of like the Republican. We need elected officials who will block the stupidity of a thundering herd of partisans. In 2009, it was a herd of Democrats and the Senate blocked some of their excesses. In 2013, it's likely to be Republicans, so we'll need as Democratic a Senate as possible, and a Democratic president as insurance if the Senate fails.

Update 1/31/12. Read how I reevaluate after a weak SOTU address.

Tax Cut Delusion Syndrome

The dogmatic belief that tax cuts are the solution to most macroeconomic problems in the US (doesn't necessarily apply to other countries), including, but not restricted to:

• Stagnant economy
• High unemployment
• Recession
• Banking crisis
• Deficit reduction
• Surplus reduction

This condition persists even after mathematical intervention.
Treatments: Unknown
Cause: <free feel to speculate>

The Unbearable Debt Deal Quantified

As I wrote before, the wily Dems managed to get the Republicans to agree defense spending cuts that they now find unpalatable. Republicans are looking for ways to avoid those cuts.

• One way is for the House, Senate, and whatever president we have in 2013 to agree not to make those defense cuts. That's a pretty big stretch. It won't happen if Obama is re-elected. Even with a Republican president, Democratic senators could block moves to void the defense cuts.

• Another way is for the super committee to agree on another plan that the House, Senate, and president all accept.

The Republicans are now in the weaker position:

• They want to reduce the defense spending cuts.
• They want to maintain Bush tax cuts, which are worth $3.7 trillion over 10 years.
• They have no leverage for either of these goals.

The Democrats are now in the stronger position:

• They have largely accepted cuts to Medicare that are capped at 2% a year.
• The debt ceiling deal protected Social Security and Medicaid from cuts.
• They have leverage using defense spending cuts and the expiration of the Bush tax cuts at the end of 2012.

Despite their weak negotiating positions, the best offer from the Republicans is:

• $250 billion higher tax revenues through limiting deductions if...
• Tax rates are frozen at below Bush tax rates.

It's no wonder that the Dems aren't agreeing. They hold a lot more leverage now, and the Repubs' offer is paltry. Republicans only seems serious about deficit reductions when social programs pay the price. They can dish out the austerity, but they can't take it. We'll have to see if they'll threaten a government shutdown by holding up appropriations next year. As far as I can see (for what that's worth), that is the only leverage they will have until after the election.

The debt ceiling fight was the historic crisis that prompted me to start this blog. If looks even more historic now. It's quite a reversal for the Republicans. I wonder if that's the price they paid for playing chicken, and which Democrat was responsible for that advantageous outcome.

 Who dunnit?

Despite this apparent win for the Democrats, the 2012 election is still up for grabs. I'm not going to predict which party is going to win, or which party is able to spin this to their advantage. So often, it has been the Republicans, so I won't count them out.

Obama's budget plan - FAIL

Obama unveiled his job plan with a great rhetorical performance on Sept. 8, and promised a deficit reduction plan for Sept. 19. The job plan didn't live up to its roll-out, and neither does the deficit reduction plan.

Now, I have to admit my bias, in case you haven't figured it out from my blog so far. I'd like to see a balanced budget within ten years, so I'm going to be critical on anything substantially less than that. I'm going to be on the lookout for funny numbers. Obama's plan triggers some of my alarms.

Obama has debt maxing out at 77% of GDP. That's odd, because I thought it was 100% already and heading higher. He counts only public debt, not what government owes to itself (SS and Medicare funds, probably federal reserve money too).

Cuts are modest at best:

• $257 billion from mandatory spending, mostly cuts in agricultural subsidies
• $248 billion from Medicare
• $73 billion from Medicaid
• Various other small cuts: post office, federal pension contributions, raising certain fees
• $1 trillion savings from not having wars
• Total $1.5 trillion above the $1 trillion in the August debt deal

These are ten year numbers. Divide everything by 10, then tell me that cutting $25 billion per year from Medicare is going to be enough savings.

Even the best part of the plan, tax reform, is less than it appears. Obama plans to let Bush cuts expire for >$200,000 people and reduce deductions for them. That will bring in about $1.1 trillion. The plan also closes various other loopholes for a total of $1.5 trillion.

The reform plan includes talk about "measures to broaden the tax base." This is a current Republican talking point. Perhaps Obama is trying to defuse it, but his use is somewhat misleading. A few more households may be taxed due to closing loopholes in personal income tax. Most of the broadening will be from cutting business tax loopholes. Not a bad idea, and actually a good critique on "broadening the tax base."

This plan will appeal of the left wing of the party, but probably not many others. Having even more people heading to the edge of a party isn't a good prescription for the country, and I doubt that it'll save Obama's reelection prospects. I don't see signs that his "Pass the bill" demands appeal to moderates or independents. It looks like Democrat grandstanding, which is no more charming than Republican grandstanding.

That's too bad, since both the jobs bill and this plan have some good, specific ideas. It's too bad Obama felt he had to go big, but didn't have enough high-quality options to offer.

I can add this budget plans to the other ones I didn't like, such as Rand Paul's and Paul Ryan's. This is better than those, but not as good as Simpson-Bowles, which is the best I've seen so far.

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.

 

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.