The Three Shell Game?

The Fiscal Cliff continues to be the focus of much political talk.  The GOP, however, is now putting forward speakers who suggest a willingness to increase tax revenues without increasing marginal tax rates.  This type of talk is a day late and a dollar short.

The GOP has argued that entitlements must be on the table.  Most liberals take the opposite position.  That is the makings of impasse right there.  But wait there’s more.

The President is calling for “balanced cuts”.  This is interpreted to mean increased tax revenues, especially with the wealthy paying more, and decreased government spending, with maybe some changes to Medicare and Medicaid.  If so, why no compromise and why not now?

The top 2% are worried about their marginal tax rate and also their current favorable capital gains and interest/dividend rates.  The more wealthy one is, the more these rates influence how much tax one actually pays.  So here’s the game.

The top 2% (especially the top 1/2 of 1% who make the largest donations to both parties) want to see changes in income tax exclusions, deductions, and credits.  Keep the rates the same, collect more tax revenue because deductions are reduced. Hmmm. What’s wrong with that if it could deliver the same amount of increased revenue?

Trickery, like in the three shell game.

The game operator moves the shells quickly and you must guess under which shell is the bean.  In the no tax rate increase game where tax revenues increase because deductions etc are reduced, one shell is labeled “write new deductions quickly”.  The second shell carries the label “marginal tax increases are worth more than deductions”.  The third shell sports the words “protect low tax rates on capital gains and dividend/interest at all cost”.

If the game operator gets his way, the bean will end up under “write new deductions quickly” shell.  The wealthy will wring their hands and lament the loss of deductions even though these losses will impact their discretionary income in a minor way.

The fiscal cliff drama is about keeping the economy growing while taking a step towards deficit reduction.  There is another problem, as large a systemic problem as the debt/deficit, in the form of widening income/wealth distribution.  Simply said the very wealth are getting wealthier faster than all those earning less.

Revising the marginal tax rates (and preferably, raising the capital gains and dividend/interest tax rates) will help the deficit struggle while simultaneously slowing (if not narrowing) the growth in income distribution spread.

Why do I continue to think Congress is playing the three shell game?

 

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