Lowenstein on Needed Tax Hikes
Roger Lowenstein had a good op-ed in Sunday's Washington Post, "Read My Lips: We Need These Taxes." I liked the way he started it:
Let's imagine an alternate universe. The U.S. government is running a large and growing deficit. Not far down the road it faces huge increases in Social Security and Medicare costs. Naturally, the candidates for president want to remedy this by raising revenue. They don't want us to bequeath bigger deficits to our children or stake our future on foreigners' willingness to keep lending us money.
But have you heard this speech? "My fellow Americans, I have a plan to raise taxes so that the budget will be closer to balance and future Americans won't have to worry about their retirement security." Neither have I.
That's the speech that should appeal to those on the Left. He lists five key tax changes he would make to help close the deficit and increase equity:
- End preferential treatment for private equity fund managers.
- Raise the cap on the payroll tax.
- Reinstate a meaningful inheritance tax.
- End unfair deductions (e.g., mortgage, health insurance).
- Repeal the Bush cuts in income and capital gains tax rates.
He acknowledges that #1 has mostly symbolic value, but I agree with him that there is no excuse for it. I have suggested #2 as part of the LMS plan, but I have reservations about it in the absence of personal accounts. Given the loopholes that already exist with the tax treatment of capital gains (e.g., taxation on realization rather than accrual and basis step-up at death), some version of #3 is justified. He has a point on #4 with health insurance. With mortgages, the equity point is less compelling, since renters presumably share in the incidence of the deductibility of interest paid by the property-owner, but the efficiency point is valid. And #5 shouldn't even be discussed as a repeal but a sunset.
It's worth pointing out, though, that we also haven't heard the complementary speech from the Right that lays out legitimate spending cuts so that the budget is balanced. Over the course of a business cycle, if taxes are bad, then deficits are worse--they are your children's taxes. Right wingers who refuse to or are unable to cut spending have very little by way of fiscal policy to recommend them for office.
As one of those
As one of those "righwingers", I agree with you about the failure to cut spending. This is one of my biggest complaints with President Bush and the Republicans in Congress....their lack of courage to reduce the size of government. I hope that before it is too late, we will have leaders in all levels of government who will have the fortitude to reduce the size of government...then and only then can we have lower taxes.
6. Tax capital gains as
6. Tax capital gains as income. The theoretical rational for not doing so has little to no real-world evidence in its favor. Doing so would not only raise revenue and (for once) favor work over ownership, but end any number of tax-driven games. Do this and #4 and most people could do their taxes in twenty minutes.
Capital Gains....
I believe in a lower capital gains rate (as opposed to ordinary income rates) only for those investments where the funds go directly into the company's coffers. Rewarding speculation where one stockholder buys the stock of another, which does exactly nothing to benefit the economy (other than making brokers richer), is counterproductive and is a gift to capital from labor. When Bill Gates' tax rate (i.e. 15% on capital gains from selling MSFT) is a third of mine when social security and medicare are added in, then something is terribly out of whack in this country.
Two problems with this speech...
Problem #1: Re.: "My fellow Americans, I have a plan to raise taxes so that the budget will be closer to balance and future Americans won't have to worry about their retirement security."
Increasing taxes to end current deficits won't do anything to achieve that objective. Current deficits are not the problem.
Evidence: Back at the start of 2001 GAO made its long term budget projection (.pdf) assuming surpluses for years to come. No recession ... no 9/11 ...no Iraq war ... no Bush tax cuts ... surpluses accumulating for 15 years!
The result: Annual deficits exceed 20% of GDP and are rocketing straight upward by the 2045-2055 period, and the 75-year projection is cut off then because govt can't continue to exist like that.
That's the same projection as today for the same reason: Medicare/Social Security/Medicaid.
Current deficit or surplus, whatever, it is dwarfed by the Big Three. Focusing on the current budget deficit in terms of "long term retirement security" is like focusing on the ice in your drink while sailing on the Titanic.
So we don't need to hear a presidential candidate talking about budget trivialities like the estate tax or hedge fund pay. We need to hear:
"Medicare/Social Security/Medicaid are on course to either increase your income taxes by 50% or sink the US credit rating to "junk" by 2030 -- just two-thirds of a home mortgage term away. And here's what we need to do about that..."
Problem #2 Re. "That's the speech that should appeal to those on the Left. "
It's easy propose tax increases that appeal to the Left. That doesn't help.
What is needed is a general public understanding of the situation so that somebody produces both tax increases that appeal to the Right and cuts in entitlement spending that appeal to the Left.
There'll be no meaningful fiscal progress until we get to that point, and 2030 is getting closer every year.
So task #1: Public education.
Excellent comment, Jim. Well
Excellent comment, Jim. Well said.
For quite a while now I've been trying to convince folks on the right that we need tax increases and folks on the left that we cannot spend the projected amounts on entitlements (and that painless healthcare "reform" won't suffice). I've had limited success convincing folks on partisan blogs, but then again they may simply too committed to believing what they want to believe.
Kent Smetters found otherwise
Since Jim has beaten me here, I'll link to his explication in 2004 of what the likely result will be of 'deficit reduction' now:
----------Quote-----------
If in response to receiving $100 billion of tax revenue through a Social Security surplus Congress decides to curry favor among its constituents by increasing spending $50 billion on paper clips, B-52s, agricultural subsidies, civil service salaries, and whatnot, and also cutting income taxes by $50 billion, then the amount added to national savings is $0. The entire mechanism of surplus-and-trust fund then is worthless, no matter how many bonds eventually accumulate in the trust fund.
....A new empirical analysis of the Social Security surplus and its historical effect on government spending ventures a conclusion on the value of the surplus. And it surprisingly lies outside what seemed the logical bounds until now: 100% of the value of the trust fund bonds on the upside, and $0 on the downside.
It is that the value of the accumulated Social Security surplus, represented by the Social Security trust fund, on national savings, is negative.
From Is the Social Security Trust Fund Worth Anything? (.pdf), by Kent Smetters, PhD., Wharton School and National Bureau of Economic Research:
~~ quote ~~
We find that there is no empirical evidence supporting the claim that trust fund assets have reduced the level of debt held by the public. In fact, the evidence suggests just the opposite: trust fund assets have probably increased the level of debt held by the public....
... each dollar of Social Security surplus appears to have actually increased the debt held by the public in the past by $1.76.
[~~quote~~]
-------------endquote-----------
It doesn't matter what they say
-- the Dems are gonna take it this year. Take a look at today's markets for a clue.
Landslide coming in November.
Minnesota Mom -- did you
Minnesota Mom -- did you know that the average stock market returns under democratic presidents has been 50% higher then under republican presidents.
Just to demonstrate, yesterday the S&P 500 fell below where it was when Bush took office. Bush is in real danger of being only the third president over the last century to leave office with the market below where it was when he took office -- the other two were Hoover and Nixon.
Yes the markets are a problem for the Republicans
Many equities hit multi-year lows yesterday.