Posted tagged ‘Bush tax cuts’

New Year, New Approaches?

January 1, 2013

Americans woke up this morning with news that the Senate had passed a bill which would avoid the nation going over the fiscal cliff.  Well, sort of.  At least not right now, unless…

The Senate bill increases taxes on those earning more than $400,000, grants a two month delay on “sequestration”, eliminates the AMT for most Americans, and a bunch of other small items.  It’s a small bandaid on a big problem.  And the House may reject it anyways, and then it might be over the cliff.

On the positive side the Senate bill does represent a step forward, albeit a very small one.  The bill completely ignores the real problems at hand.  Why do we have a deficit and why can’t we pay for it?

The deficit results from government expenditures which far exceed tax revenues.  Simple.  So how has this come about?

The deficit has resulted from mainly the Bush tax cuts, two unfunded wars, and an exploding Medicare/Medicaid policy.  All of this was known and the consequences were all clearly predictable.  Our elected officials chose year after year inaction rather than the leadership we should expect.

At the end of the day, however, the deficit is not Congress’ fault.  It is our fault for not demanding better from them.

The Bush tax cuts were tantamount to a selfish, greedy act by all Americans.  Lower taxes which were cleverly constructed in favor of the already rich played right into the average person’s preference to pay lower taxes and spend more on themselves.  No one asked what these cuts would do to the national budget.  Times were good, so let’s just enjoy them more.

The two unfunded wars represented a double pox on our homes.  First, it made it easy to avoid asking the hard questions about whether these wars were necessary.   And second, it allowed us to overlook our responsibility to someday have to pay for them.  Now it time to pay and no one thinks they have enough money to cover this obligation.

But by far the largest component of the current deficit is Medicare/Medicaid.  Since America has chosen a health care delivery system where profit rules at all levels of care, America stands alone in the world with the most expensive health care per capita, where not everyone is covered, and where the average outcomes are mediocre compared to all other modern countries.  As a result, America needs two supplementary plans to ensure coverage for the elderly and the poor, Medicare and Medicaid.  These programs are essential (in our system) and they must be paid for.

But how?

It may be possible to tweak Medicare and reduce its costs slightly.  These is, for sure, possibilities in both Medicare and Medicaid to reduce inefficiency and outright fraud (most estimates put the savings at 10-15%).  These is, however, no getting around the fact that more revenue is needed.  How about a consumption tax?

How about creating a national sales tax where the proceeds flowed to the Medicare/Medicaid bank account?  While this is probably regressive, it is no more so than eliminating the Bush tax cuts across the board and then adding necessary wage roll taxes to make up the short fall.

A national sales tax enables individuals to elect to save what little discretionary money they have or to purchase and pay a small sales tax.  Bringing more money home and then choosing how you would spend it seems to me a lot more palatable than having the extra money taken from ones pay first.

There is a big trap with this approach.  With the government armed with a national sales tax now able to pay more for Medicare/Medicaid, what will keep the providers from simply charging more?  And this is a valid worry.  But do we have a choice?

Given the current discussions, it looks inevitable that the fiscal cliff will be approached with mouse bite size measures.  America will limp along sinking slowly deeper and deeper into debt.

A bold step forward, however, would be to combine a national sales tax with a reform of the US health care delivery system.  Take the role of businesses out of providing health insurance and eliminate both Medicare and Medicaid.  Institute means tested co-pays and deductibles while keeping health care providers private businesses.  Fund the new national health care system with a national sales tax and create a medical board to oversee provider fees and services (like referencing what is available in the 15-20 countries with already better health outcomes compared to the US).

OMG.  If we did that we might have a health care system that looks like Germany, France, Canada, Japan, and many others.  Everyone would be covered, health care outcomes would be no worse and possibly better, and the per capita cost would decline.

All this is possible despite the pathetic efforts we witnessed last evening in the Senate.  It is a new year after all.

 

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Bush Tax Cuts

November 28, 2012

The Bush Tax Cuts will expire at year end.  Most reporters add, “unless Congress agrees to extend them”.  There should be by now little confusion.  The Bush Tax Cuts will expire at year end.

From what GOP and Democrat party members have said publicly, there is simply no grounds for any type of compromise.  Even more to the point, there is no politician who dislikes granting tax reductions, so if the Bush tax cuts expire, then there is ample opportunity to reduce taxes again.

The GOP position that there should be no tax rate increases is shameful and unsupportable on the basis of historical fact.  According to most economists, increasing taxes on the top 2% will have no effect upon job growth nor investment.

The GOP argues that changing the tax code deductions is a better course.  While most people would agree that the tax code is far too complicated, which deductions to eliminate has little common agreement.  If sweeping revisions were made, the resulting increased tax revenue would impact the discretionary income of the middle class more than the top 2%.

You might say, “so what, everyone will be effectively paying more in taxes”.  So let’s look at the other half of the bargain, entilements.

The largest segment (about half) of the annual deficit comes from Medicare and Medicaid expenditures (in excess of how much is collected in wage taxes).  The excess expenditures are in the range of $500 billion per year.  How can the deficit be brought under control without modifying in some manner these programs?

Democrats are divided on this subject (no modifications to a little to a lot), and it is highly unlikely any agreement amongst them will be reached in the next few weeks.  Any movement on entitlements must impact the discretionary income of the Middle Class greater than the top 2%.  Hmmm.  More taxes and more Medicare payments…  I don’t predict Democrat support without the cover of the rich paying more.

So, no movement on entitlements, no movement on taxes.  Plain and simple.  QED, Bush Tax Cuts expire.

It is also unlikely either the President or Democrat Congressional leaders will outline their ideas until January.  In January, one might anticipate Congress agreeing upon cuts in Medicare (meaning recipients would have to pay more) and Medicaid, and offsetting these increased costs with lower taxes for the Middle Class.

Hmmm, sounds like funny money.

 

The Three Shell Game?

November 26, 2012

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?

 

Bluff Or Denial

November 14, 2012

Speaking on the Senate floor, Minority leader Mitch McConnell said that the American people voted in enough Republicans to control Congress.  That means tax rates should not be raised under any conditions.  “The President knows this and he needs to leads us to a compromise”.

Hmmm.

Is this a bluff or simply a denial of reality?

Reality is that the House is controlled by the Democrats and the Senate is lead by the Democrats (without a super majority).  Reality is also that President Obama ran on a platform of shared sacrifice to reduce the deficit.  The President won 320 electoral votes (versus 200 for Romney).  The President arguably can say voters chose his approach over that of the Republicans.

Representative Paul Ryan has also said in an interview that he remains absolutely opposed to any increase in tax rates.  His position has not changed he says.

Republicans have suggested (being reasonable as they are) that tax code reform could increase tax revenues without increasing rates.  While this maybe true, no one has outlined how to make this fair.  Think about where the increased revenues might come from.

  • Mortgage interest deduction
  • State and Local tax deductions
  • Property taxes
  • Charitable deductions
  • Employer provided health care insurance

There are many more deductions, credits, and loopholes but these serve to highlight the point.  Each of these represents a far larger percent of discretionary income for the middle class than those earning more than $250,000.  In addition, the political process would be expected recognize this unfairness and ease the reform.  The net impact will be less increased tax revenue and the need for greater spending reductions.

Of course, Senator McConnell and Representative Ryan know this.  So why are they taking these public positions?

The President is proposing a 10 year debt reduction figure of $4 trillion as his target.  This is effectively about $400 billion each year.

Publicly the President is asking for $1.6 trillion in new tax revenue and would couple that with spending reductions to get his $4 trillion.  Frankly at this point in the debate the President is a little light on the side of spending reductions.  He is bordering on blindness to the systemic deficit problem of Medicare, Medicaid, and Social Security.  He actually projects about $1 trillion in savings from ending the wars in Iraq and Afghanistan as if there will be not some other war to go fight.

So the nicest dress one can put on McConnell and Ryan’s statements is that they are bluffing.  They will bluff until there can be a behind closed doors deal which protects such benefits as capital gains and dividend treatments, inheritance taxes, and a range of special interest loopholes.  They will also bluff until they can be assured the President is serious about changes to entitlements.

But danger and risk lurk everywhere.

The President holds the ace of trump.  Unless an acceptable deal can be struck, do nothing is more acceptable to the President than the GOP.  The Bush tax cuts will expire .  The new Congress can then propose ways to lower taxes (read middle class income tax rates and 2% favorites like capital gains, inheritance, etc.  The political pressure under this scenario will lie on the backs of Republicans.

So what if McConnell and Ryan are in denial?

Well unless there is a revolt within the GOP and Republicans side with a Democratic sponsored compromise, the year end will come and the Bush tax cuts will expire.  Same game.  Hmmm.

So I have one question, why aren’t the GOP proposing savings targets for the entitlements instead of insisting upon no tax increases?  I wonder whether their posturing is not really part of a much larger bluff to get Democrats identified with entitlement cuts.

That’s what’s nice about math.  You don’t have to guess.  It either adds up or it doesn’t.

 

Physical or Fiscal Cliff?

November 9, 2012

The Stock Market is dropping.  Economists are ringing their hands and predicting a jump in unemployment.  Talk coming out of Congressional leaders not only is not reassuring, it is more same old, same old.  And all this about a “cliff”?

If Congress remains deadlocked, the Bush tax cuts will expire increasing tax revenues about an estimated $400 billion.  This should cut the deficit in half.  Not bad, except…  This fiscal medicine is also anticipated to slow the economy and possibly kick it into a second recession.  Unemployment could rise to 9% again.

When you review the list of tax increases that are scheduled to happen in 2013, you can quickly conclude that not all are necessary and some are counterproductive (like the AMT).

Also on the tracks for 2013 are the “sequestration” legislation which mandates about $100 billion in spending cuts.  None of these cuts are in Medicare, Medicaid, or Social Security.  Medicare and Medicaid account for about 1/2 of the current deficit.  Sounds like we are trying to fix our deficit problem without including the real deficit driver.

There are fortunately many sensible solutions floating around Washington.  The sequestration bill resulted from two intransigent positions, no extension of debt limit and hands off entitlements.  Commonsense says debt limits are arbitrary and entitlements must be part of any path forward.  The question is just how.

Increasing tax revenues, especially on the most wealthy will provide some relief (but no ways near eliminating deficits) and just as important, the wealthy paying more (as under the Clinton years) provides morale support saying “we are all in this deficit thing together”.  This seems a no brainer.

The sequestration piece is a bit more difficult.  Defense spending should be cut but probably over more time and not without laying out entitlement cuts.  To be clear, entitlement cuts from the Federal government expenditure perspective means increased wage taxes, larger co-pays, less covered expenses, or reduced charges (or payments) from/to health care providers.  Someone has to eat the current portion being covered by the government.  The question will be who?

Timing is actually quite good.  Both Democrats and Republicans can enact reforms in the first year with the lowest level of fear about voter retaliation.  Sensible and balanced reform should offer the most backlash protection.

Hmmm.

So it seems the difference between a physical cliff and a fiscal cliff lies in whether Congress sees the deficit as a national problem requiring sacrifices from everyone.  If Congress returns to its 2011 and 2012 colors, they, like the lemmings, will be acting as if the deficit is a physical cliff.

Mitt Romney Without Spots

August 4, 2012

What would you think of Mitt Romney were he to toss over board the social conservative issues and the “save the rich” banners?  If you are for him now, would you look for someone else?  If you were not a supporter, would you give him a try?

Here’s my take.

President Obama has been an honest and dignified President. He does not inspire confidence that term 2 will be much different.

He inherited an awful situation with the economy and with foreign policy.  The Federal deficits were already baked into government accounting.  And diabolically, the GOP strategy of saying “no” to everything made compromise impossible.  The President’s term has been doomed from the start.

Unemployment and economic growth are both struggling.  Questions abound on what more could (should) President Obama have done?  Voters are left with the tough call.  Was there anything President Obama could have done?  Or, did President Obama do all that could have been done?

Along comes Mitt Romney.  He is a very successful business person who exudes executive confidence.  “President Obama has been a failure, I can fix the economy”, he says.  If one focuses only on that question, the race will be a photo finish.  There is no reason to believe President Obama will suddenly find new methods to deal with the economy or unemployment in term 2.  It will be a leap of faith to switch to Romney, but if the current President is not a sure bet, why not take a chance.

The reason to hesitate is called “baggage”.  What will America get in addition to Mitt Romney’s business acumen?

The middle class should get used to paying more for government services like Medicare as well as financing the government to a greater percent.  The gap between the rich and everyone else will continue to increase.  The top 2% and especially the top 1/2 of 1% will enjoy no less than the current Bush tax cuts and may get more.  And if you are Hispanic, a woman, or a homosexual, you can take a seat.  There will be little recognition of your humanity and no advancement of your individual rights during a Romney Presidency.

Polls indicate that this possibility is sinking in.  In key “battleground” States (Ohio, Pennsylvania, and Florida), President Obama has opened a lead.  It is still early and things could change dramatically.

But what if Romney shed his spots.  What if Romney said “I will support ending the Bush tax cuts for the wealthy.  I will invite reform of health care as a method of getting control of Medicare and Medicaid costs under control.  I will fully support equal rights for all Americans even though I will privately follow my own religious beliefs.  I will support your right to hold your religious beliefs but I will not support your right to force your beliefs on anyone else.   And, while I will trim excessive government regulations, I will promise to protect workers, rivers, air, and the outdoors.

Dreaming?  Sure, but Romney would deserve a second look if he did.

 

A Compromise We Can Live With…

July 17, 2012

Democratic leaders have told their Republican counterparts that Democrats will let the Bush Tax cuts expire and allow the automatic Defense cuts to occur unless Republicans agree to raise taxes on those earning above $250,000.  This a sound compromise but is fraught with potential adverse consequences.   It’s the economy stupid.

The compromise goes not nearly far enough towards reducing the deficit.  On the Positive side, it is a start and would result in higher tax revenues and lower government expenditures.  The compromise would also address in part the “fairness” issue with regards to those who have more, paying a larger share.

Republicans have their own plan.  Lower taxes and cut spending, just not defense spending or any other government program that helps their constituents.  That leaves Medicare, Medicaid, Social Security, and a myriad of other government safety net and basic social infrastructure programs open to big cuts.

Hmmm.  Guess who loses on this approach?

There is actually so much middle ground that it boggles the mind why a genuinely fair compromise cannot be struck.

Consider…

  • Healthcare costs are out of control.  This drives up the expenditure side of the Medicare and Medicaid equation.  Add to that the reality that Medicare and Medicaid do not collect enough revenues.  They are serving a population where baby boomers and the poor are swelling demand.
  • Defense spending is a joke.  The US spends almost 10 times as much as the next country and about as much as all other countries combined.  With a debt approaching $16 trillion, isn’t it time we reassessed our nation priorities?
  • The spread between the rich and everyone else is reminiscent of the Gilded Age.  The national debt is our national debt.   Like it or not, all Americans own that obligation.  You cannot tax “everyone else” enough, nor can you tax the rich enough to eliminate the debt.  These tax increase must be paired with serious expenditure decreases.   The debt is everyone’s.

In most of the recent budgets, Government proposes spending almost $1 trillion more than it receives in taxes.  How bright does one have to be to see that spending must be reduced and taxes must be increased?

Enter the real world.

The US economy is putting along and may actually be slowing down from an already slow pace.  What do you think might happen if consumers must pay higher taxes, or if large numbers of defense industry workers are laid off if the Defense Department’s budget is trimmed?  Now is not a great time for austerity…

The grand solution must involve across the board reforms, phased in over time, encompassing entitlements, defense, and taxes.  The grand solution, to be effective, must also include a reform of the overall health care delivery systems getting employers out of the equation and shining a light upon where medical costs really are.

This grand solution is not going to happen for matters of principle as well as the pettiest of reasons any time soon.

So, back we come to the train that is already on the tracks.  Raise taxes on everyone (by allowing the Bush cuts to expire), and allow cuts in Defense Spending to take place.

What about the economy?   Hymm.   Unless, unless… there is a son of this compromise.

What about raising taxes on those earning above $250,000 and not cutting defense spending.  Cut someplace else.  Both parties could cry about their sacrifices, both parties could claim victories too.  The impact on the economy would be negligible.  America would still be in a fix but we would have lived to die another day.