Posted by: danielfee | March 25, 2012

Let the Bush Tax Cuts Expire – All of Them

As it stands now, in March 2012, the tax cuts initially enacted by George W. Bush in 2001 with a second round of cuts in 2003, are due to expire on December 31, 2012. When originally adopted, they were scheduled to sunset at the end of 2010.

 

Over the first ten years, the Bush tax cuts added between $1.3 to $2.8 trillion to the national debt, depending upon who’s numbers you choose to believe. However, after the Republicans won control of the House of Representatives and gained seats in the Senate in the 2010 mid-term elections, it was time to play let’s make a deal. The Obama administration had many priorities they wanted to accomplish during the lame duck session before the 111th Congress adjourned. They wanted: the START Treaty ratified, to end DADT (Don’t Ask Don’t Tell), an extension of the payroll tax cut, an extension of unemployment insurance benefits, a food safety bill approved, and the 9-11 first responders health bill approved which had languished in Congress for almost a decade. But nothing was moving. Everything was being filibustered in the Senate by the Republican minority because it takes 60 votes to close debate before a vote on the actual issue can be held. The Republican minority was going to become a little stronger in the next Congress; so in December 2010 it was now or never for many of these issues. The Republicans had one demand: extend the Bush tax cuts. The deal was cut and the Republicans got a 2-year extension of the Bush tax cuts which was estimated to added another $544 billion to the national debt and the filibuster log jam was broken. Obama got START, DADT, the payroll tax cut and unemployment benefits extensions, the food safety and 9-11 first responder bills, all for a few hundred billion dollar tax cuts that mostly benefited those making over $250,000 a year.

 

There are many on the liberal side who are still mad at Obama for extending the Bush tax cuts. He campaigned against them and said they needed to be ended. He even said on the campaign trail that he would not sign an extension of the cuts for the wealthiest Americans. But then he did. There are some liberals on the left who like to complain that Obama is just like Bush and every other politician who says one thing when campaigning and then does the opposite when they are in office. The conservatives on the right are happy to point out that Obama broke a campaign promise. But politicians say many things and make many promises when they are campaigning. Sometimes those campaign promises conflict with each other or sometimes, in order to move forward on multiple issues, you might have to let one or two slide for a couple of years. As I see it that was the position Obama was in after he took a shellacking (his word) in the 2010 mid-terms.

 

So now we are two years into the future. After the 2012 presidential election in November, we will be back in the same position, in a lame duck session fighting over extending the Bush tax cuts again. As Yogi Berra said, “Its de ja vu all over again.” But this time around there are some big differences. Obama will have no pending legislation that the Republicans in the Senate can filibuster. Everyone knew that not much would get accomplished legislatively during a presidential election year, so no big initiatives have been started. This will deprive the Republicans of their leverage in the lame duck session. Also, this time around the overall economy is in better condition to absorb a tax increase if the Bush tax cuts were to expire. In 2010, the economy was just starting to recover from the 2008-09 Great Recession and any tax increase would have placed somewhere between a 1% to 2% drag on GDP according to most economists. This would very likely have put the U.S. economy into a double-dip recession. The unemployment rate was starting to come down from its high of 10.2% in October 2009, but then the November 2010 report showed that it jumped up to 9.8%, a 0.2% increase from the previous month. So it appeared that it might go back over 10% again. Those that were unemployed had very bleak prospects and were in desperate need of the unemployment insurance benefit extension. Overall consumer demand was still very weak and the extension of the payroll tax cut would keep more money in the pockets of those who needed to spend it, helping boost demand. With 20-20 hindsight we can look back and say that a 2-year extension of the Bush tax cuts was overall a good deal for Obama to make in December 2010.

 

But what about in December 2012? Should Obama agree to extend them again? Win or lose, Obama should not sign-off on an extension of the Bush tax cuts again. Obama has campaigned that he believes we should allow the Bush tax cuts to expire for those making over $250,000. That would certainly be a step in the right direction, but he should allow them all to expire. Realistically, from a political stand-point, it will be an all or nothing decision. The Republicans in Congress will not agree to an extension that does not include those making over $250,000. The estimates from the Congressional Budget Office (CBO) during the last extension debate was that an extension provided to all taxpayers would cost roughly $3.3 trillion over the next ten years. But that didn’t include indexing the ATM (Alternative Minimum Tax) to inflation which typically gets done by a separate bill each year. When the ATM adjustment was taken into consideration, the estimate rose to $4.8 trillion. CBO has not yet updated their estimate since August 2010 for the upcoming debate, but it doesn’t really matter if it is $3 or $5 trillion. The bottom line is that we cannot afford to add this amount to the climbing national debt. With tax revenues at a 60-year low of 14.8% of GDP in 2009 and 2010, and estimated to drop to around 14.4% for 2011, we cannot expect the Federal government to operate at these levels when the historic norm is in the 18% to 19% range. In addition we have experienced the double whammy of higher expenditures due to the Great Recession combined with the lower revenues. At some point, these two trends have to be reversed. Revenues as a percentage of GDP need to go up and expenditures need to go down. January 1, 2013 is a good time to start doing both.

 

In 2011 Obama attempted to reach a “grand bargain” with Speaker of the House Boehner which would have cut the debt by approximately $4 trillion over ten years. But the Republicans in the House could not agree to any compromise that included a dollar of tax increase. So the opportunity for a big compromise to address both spending and revenue died in the House. However, this upcoming lame duck session Obama will have the upper hand because no action is required on the part of Congress to raise revenue or cut spending. During the debt ceiling debate and approval, Congress agreed to at least $1.2 trillion in additional budget cuts, half coming from discretionary domestic spending and the other half from defense spending. These sequesters, as they are called, would go into effect automatically unless the Congressional super committee that was appointed could come up with a better package of deficit reduction by the end of last year. Of course the super committee failed and now the automatic sequesters are set to kick in January 1, 2013. So all Obama needs to is sit back and let Congress do what they do best; nothing. The Republicans in the House are already beginning to talk about reneging on the cuts to the Defense Department’s budget that have already been agreed to. But this would require congressional action which would be subject to a presidential veto. Extending the tax cuts for the rich will also require congressional action, also subject to a veto. So if the Republicans are actually serious about reducing the debt and deficit, they will need to agree to a combined tax increase and spending reduction plan which is better than the one that will automatically start January 1, 2013.

 

Allowing the Bush tax cuts to expire will bring an end to the era of trickle down economic theory and tax policy. Allowing them to expire will clear the slate for a new discussion on tax reform. Most economists, pundits and voters on both sides have expressed that they are unhappy with the current tax policies. So why should we even consider extending the Bush tax cuts?

 

Should Obama win reelection, he will be in a position to put forth a much broader tax reform proposal which could include adjusting tax rates, eliminating deductions and subsidies, and closing loop holes. It is possible that a tax package like this might get addressed during the lame duck session after the pressure of an election is over, but don’t hold your breath. Either way, in the lame duck session or during the next Congress, the new tax reforms will be the Obama tax policy. If Congress fails to act, the default position is the Clinton tax policy, which was successful in eliminating the deficit and creating a budget surplus for a couple of years.

 

Should Obama lose reelection, it is unlikely that any sweeping tax reform will be considered during the lame duck session. At most Congress might pass another extension of the Bush tax cuts. If they do pass an extension, Obama should veto it and allow the Bush tax cuts to fade into history and make the new President and Congress address the tax issue based on todays economic conditions, not those of 12 years ago when we were running budget surpluses. George Bush argued at the time he was proposing his tax cuts that Washington was taking too much of your money as evidenced by the budget surplus and that we should return it to the taxpayer because they knew better how to spend their money. People may still try to argue this same position today, but the evidence is clear that Washington is taking in the lowest percentage of taxes to GDP in 60 years and we no longer have budget surpluses. The entire tax policy needs to be rethought in light of todays circumstances.

 

Almost every politician will say that we need to reform our tax policy. However, during this election season, if you hear any politician say that they are willing to look at tax code revisions as long as they are revenue neutral, it should tell you two things about that person. First, they are not serious about cutting the deficit or national debt because there is no way it can be done by spending cuts alone. Second, they are looking for ways to shift more of the tax burden on to you, unless you are part of the top 1%. If the tax revenues stay neutral and the tax policy and rates change, some will pay more and some will pay less. We have seen this same debate occur over and over again since the 1980’s when Ronald Reagan cut the top tax rate from 70% to 28%, ushering in the era of supply-side economics. Since then, each time the tax code has changed, the lower and middle classes have taken the brunt of additional taxation. So if you hear your congressperson, senator or presidential candidate claiming they will fix the tax code but keep it revenue neutral, then vote for the other guy.

 

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Responses

  1. Well written. You make some interesting points.

    Just a few quibbles. 🙂

    I wouldn’t say “do nothing Congress”, but rather a “do nothing Senate”.

    We can’t balance the budget by discretionary spending cuts alone, nor can we balance it with discretionary cuts along with a return to Clinton tax codes. The only way to do it is to reform Social Security and Medicare.

    During the Clinton years, it was a Republican House that led the charge on a great reduction in spending which spurred the economy. We need to reign in spending for the same reasons now. An increased economy will increase the revenues, regardless of tax rates.

    I do not believe that Obama, nor many others, will truly go after the tax loopholes and/or corporate welfare. Too much corruption. Now, some of the Tea Party element will go after those things, though.

    Thanks,

    G

    • G,
      True, everything in the Senate gets filibustered so it moves as slow as a Galapagos Giant Tortoise. But the House has not done very much either, except take vacations.
      With the exception of Clinton, we have not had a balanced budget since Eisenhower in 1957. I am not claiming that these changes would result in a balanced budget. But neither will cutting Social Security and Medicare.
      In fact Social Security has not added a dime to the national debt or budget deficit. You and I both know that the SS Trust fund has over $2 trillion in it. I know the argument from conservatives is that the money is not actually in the fund and it just has IOUs in the fund. Those IOUs are treasury bonds so what conservatives are really advocating is a government default on these bonds. But even if a default occurred it wouldn’t balance the budget. It would lower the national debt since it would wipe out trillions in bonds.
      But despite the fact that we will not get to a balanced budget in the next 10 years, we still need to increase revenues and reduce spending. Until any Republicans step forward and agrees that tax increase are to be part of the solution, then it is obvious that their whining about the budget deficit is nothing more than a ruse to gut the two programs that they have hated since their inception.
      When you look at what turned the Clinton budget surplus into the huge deficit it was primarily the 2001 and 2003 tax cuts, the Afghanistan and Iraq wars and the Medicare Part D drug benefit, all of which were passed without paying for them. Spending did have another surge at the same time that revenues were falling in 2008-09 during the great recession. So the place to start is with the things that caused the big deficits. We are moving in the right direction getting out of the recession so there will be reversals from the negative impacts in 2008-09. The cost of the wars is coming down and should be minimal if we are out of Afghanistan in 2014. So the next step is to get rid of the Bush tax cuts and then tax loopholes.
      Was that a joke about the Tea Party elements going after the tax loopholes? Everyone of those guys has signed Grover’s pledge and according to them closing a loophole is a tax increase. Their proposals have all been one sided, just cut the size of government.
      I also find it funny that Republicans now try to claim credit for Clinton’s balanced budgets. They fought Clinton at every turn. Not one Republican in the House or Senate voted for Clinton’s Omnibus Budget Reconciliation Act of 1993 (aka Clinton’s tax increase). Then when Newt became Speaker in 1995 he shut down the government because he had to ride in the back of Air Force 1 (what a crybaby way wah). Then they moved on to impeachment. Exactly what big budget balancing proposals did the Republicans put forward?
      Dan

  2. Nice post and nice banner picture 🙂

    • Thanks, the banner photo is from our trip to the Galapagos Islands

  3. You are mistaken on Social Security not adding to our debt.

    Social Security ran a $49 billion deficit in 2010, another deficit in 2011, and will continue to run deficits for the foreseeable future if steps are not taken. It had always run a surplus up to this point, and by law, those funds are “invested” in US Bonds. The money the United States receives by selling those bonds enters into the general fund and is then available to be spent by the Federal Government, which it is. The money that the government spends above and beyond the general fund becomes the Debt Held by the Public.

    However, the government also carries a debt owed on those US Bonds that are being held in the Social Security “Trust Fund”. This is part of the debt known as Intragovernmental Holdings. This is added to the Debt Owed by the Public becoming the Total Public Debt.

    No great numbers of people (I know of none) are advocating those bonds be allowed to default.

    The largest increases in government spending have taken place over the last three years and correlate with the lowest revenues as a percentage of GDP, 14.9% in 2009 to 14.4% in 2011. During GW Bush, it ranged from 16.1% in 2004 to it’s high (excluding the pre 9/11 number of 19.5% in 2001) in 2007 of 18.5%. Under Clinton, the lowest of 17.5% were when deficits were run and the highest of 20.6% in 2000 when surpluses (only surpluses if you ignore the Intragovernmental Holdings) were run.

    The key is reigning in government spending, not just for the money saved, but for the positive impact on the economy which grows the GDP which in turns increases tax revenues regardless of tax rates. Part of that was the wars, but that only amounted to $190 billion in it’s most expensive year. No small amount, but not the deciding amount either.

    The Tea Party believes that loopholes can and should be eliminated. That belief is based on any legislation eliminating a particular tax credit or deduction also contain a reduction in taxes by the same amount or more. The offsetting reduction could be expanding another deduction or credit and/or reducing marginal tax rates. The belief is we can reduce the marginal tax rates by eliminating loopholes.

    The “surpluses” were not run until 1998, three years after a Republicans took control of Congress. In 1997, the long term capital gains taxes dropped from five tax tiers of 15%, 28%, 31%, 36%, and 39.6% to just two tiers, 10% and 20%. Hello surplus.

    • G,
      We are in agreement that S.S. had run a surplus from 1983 until the last couple of years when it began paying out more than it is taking in. This is projected to be the case for the next 25 years or so. But that is the way it was supposed to work when Reagan cut the deal with Tip O’Neil which doubled the S.S. tax in 1983. It was a recognition that when the baby-boomer generation hit retirement they would overburden the system if S.S. remained as a pay as you go system. So people (like myself, a late boomer) have been paying double in order to build up the trust fund to cover the shortfall that everyone knew would occur. So far, I think we are still in agreement, correct? It is also true that the S.S. Trust fund was only permitted to invest in the safest investments, such as U.S. Treasury Bonds. It is also true that the money the United States receives by selling those bonds enters into the general fund and is then available to be spent by the Federal Government. But here is where I think we start to disagree. There seems to be an implicit assumption in your reasoning that if the S.S. Trust fund didn’t buy these U.S. bonds, the government would not have issued the bonds and spent the money. I don’t find this to be a plausible assumption when you look at the amount of deficit spending that Reagan did over his 8 years. By percentage he added more to the national debt than any other president, other than FDR. So my assumption is that the money was going to be spent and they would have just found other buyers for those bonds if the S.S. Trust fund wasn’t buying them. It is true that classifying the bonds as intergovernmental transfers made the debt increases look smaller. But unless you are suggesting that Reagan was running a scam on the American people, and that the doubling of the S.S tax was a back door way of getting more money into the general fund under the guise of building up a retirement trust fund and the intent was that the intergovernmental transfers would not be paid back in the future, then I don’t think you can say Social Security is adding to our debt. The way I view it is the S.S. Administration is a different entity from the Federal government. They invested in treasuries just like many others around the world. They have the same right to expect payment on their bonds, with interest, just as everyone else does. How they spend those funds when they redeem their bonds is not relevant to the Federal deficit. If China cashes in some of its U.S. bonds and spends those funds on infrastructure development in China, we would not say that the construction of Chinese infrastructure is adding to our debt. The S.S. Administration is doing what they are supposed to do: cash in bonds as necessary to fund retirement benefits. This does not add to the debt. The debt was already incurred when the bonds were sold and the money was previously spent. This is why I say that people who are arguing that S.S. adds to the debt and deficit and must be reformed are in effect saying that the Federal government should be able to default on these intergovernmental transfers that are secured by the bonds held in the S.S. Trust fund. True, there are not a great number of people who will say this is what they are advocating because they know it would be very unpopular. But this is what they are advocating. They want to commingle the funds and not treat the S.S. Administration the same as all other bond holders. If Social Security actually does have a problem (which I don’t think it does for at least 20 to 25 more years) then that issue needs to be addressed independent of the discussions on debit and deficit for the Federal government.
      I agree that in the last 3 years we have seen the largest increase in nominal dollars (not in percentages) of government spending and at the same time revenues have dropped to their lowest levels since they were at 14.4% in 1950. You have accurately stated the numbers, but why you chose to not include the 20.6% in 2000 I don’t understand. The increase in spending is highly correlated with the Great Recession of 2007-2009. Take a look back at the Great Depression and you will see that the outlays as a percentage of GDP were double the revenues. This is the more valid comparison to make, not the 1990’s or the mid-2000’s when the economy was being pushed into over-drive by bubbles. The goal of spending over the past 3 years was to avoid a repeat of the depression and prevent even further declines in GDP. We can look back and see that we had a -3.7% GDP in 2008 Q3, -8.9% in 2008 Q4 and -6.7% in 2009 Q1. The stimulus was passed in 2009 Q1 in Obama’s first couple of months in office. From that point, we can see in the GDP numbers, the economy began slowly turning around. I would say it succeeded in keeping us out of a full-blown depression.
      During the Clinton years, there were two major factors that resulted in the revenues increasing from 17.5% in 1992 to 20.6% in 2000. First was the 1993 tax increase and the second was the Internet bubble. A lot of wealth was created during the 1997-2000 period before it burst, and this contributed to the 20.6%, as people cashed out of their dot.com stocks. I asked before, exactly what big budget balancing proposals did the Republicans put forward? But I didn’t get an answer. You just asserted, as if it were magic, the surpluses appeared after the Republicans took control of Congress. Nice try but I am not buying it. Give me a list of their proposals that balanced the budget. I won’t give Clinton all the credit because I think Greenspan played a large part by flooding the market with liquidity because of his Y2K fears. This excess liquidity found its way into the Internet stocks and pushed revenues up to the 20.6% level. When Greenspan removed the liquidity, the bubble burst and the revenues started falling until we began building the housing bubble and hit 18.5% in 2007. Without the extra revenues from these bubbles and the lower marginal tax rates, we can see how much the actual revenue streams have dropped since they have fallen to 14.4-14.9%. Also, we can see the percentage of corporate taxes have dropped from 14.4% to only 6.6% of total revenues. Basically the extra wealth created by the bubbles was used as justification to cut tax rates. The revenues held up as long as the bubbles were inflated; as soon as they popped, the revenues collapsed. This is one of the primary reasons I think all of the Bush tax cuts should be allowed to expire. The tax discussion needs to be based on todays realities not the Internet and housing bubble eras.
      I have a concern that the Fed is fueling another mini-bubble right now, which is why the markets are as high as they are now, and which will lead people to believe that things are better than they really are. So they will push for more tax cuts and then want to be locked in for the next 10 years. I can agree with the Tea Party that loopholes can and should be eliminated. But if any legislation eliminating a particular tax credit or deduction also contains a reduction in taxes by the same amount or more, then all you are doing is running in place. The debt or deficit will not change. This is the fallacy of supply-side economics. The belief that the continual cutting of tax rates will lead to economic expansion and more tax revenues. Reagan proved this wasn’t true if you look at what happened to revenues after he passed his big tax cut in 1982; they fell. It wasn’t until he raised taxes, with the biggest tax increase ever (as of that time) in 1986, that revenues started going up again. Clinton proved in 1993 that raising taxes rates didn’t kill the economy or growth which was occurring even before the Internet bubble took hold in the late 1990’s. If you eliminate loopholes and reduce marginal rates today, then tomorrow the lobbyists will be back in the halls of Congress getting the loopholes reinstated and now we will just starting at a lower base. Revenues will fall even further and we will be in an even bigger hole. But that is what guys like Grover Norquist are looking for. It is the starve the beast strategy he has pursued for decades in order to kill off large parts of the government that he and his friends have never liked.
      Dan

  4. Would you agree that Social Security is an investment account that involves the payment of returns to previous tax payers from funds contributed by new (current) tax payers?

    If you do, then realize by simply substituting “tax payers” with “investors”, you end up with the definition of a Ponzi scheme.

    Regardless of how you look at it, the fact is that the Social Security Administration is part of the Federal Government. The US Bonds held by SS are not real economic assets. The Bonds in SS are due to be paid to the Tax Payers and the Bonds when cashed in are paid by the Tax Payers. Of course, under some circumstances, if a person dies, their benefits are subject to a 100% Estate Tax, unlike most private retirement accounts. In the words of humorist P.J. O’Rourke, “Having a government Trust Fund is exactly the same thing as not having a government Trust Fund.”

    I asserted that the surpluses began in 1998, three years after Republicans took control of Congress. In 1987, the long term capital gains taxes dropped from five tax tiers of 15%, 28%, 31%, 36%, and 39.6% to just two tiers of 10% and 15%. Hello surplus.

    Republicans began the balanced budget fight in 1995 and forced Clinton to submit five budgets before getting one that the Republicans would approve. Subsequent years yielded budgets geared even more towards balance.

    One thing I think we should be able to agree on is that there is one big complex economic world out there and we rarely know as much as we think we know, including the experts. Since there are so many variables at play at any given time, we sometimes draw conclusions based off of correlations that we perceive. The complexity of it all allows for our conclusions to be off base.

    Rather than higher marginal taxes, I’d prefer doing away with the loopholes, deductions (other than differentiating between gross and net revenues for a business), and subsidies that can then allow for lower marginal taxes for individuals and corporations. I would be willing to allow for a slightly higher, less progressive tax rate if we could reduce spending and shrink the government at the same time. All of this is for naught if we do not repeal Obamacare (if somehow found constitutional), and reform Medicare and Social Security.

    The main thing I am looking for is for our country to go back to instilling a culture of empowering the individual and personal responsibility. I believe a subculture of charity and generosity is instilled at the community level and not through government mandates or wealth redistribution plans.

    • G,
      No, I don’t agree that Social Security is an investment account that involves the payment of returns to previous tax payers from funds contributed by new (current) tax payers? You might have been able to argue this prior to 1983, but when the tax doubled and we started paying extra towards our own future benefits and building the surplus account, it undercuts this argument. However, I wouldn’t agree that it even applied pre-1983. I think a much better analogy is to compare it to how an insurance company operates. After all, what we call Social Security refers to the Old-Age, Survivors and Disability Insurance program. All insurance programs payout claims from funds that are brought in from current payees. Insurance companies, just like the S.S. Administration after 1983, will invest the excess contributions. Although the private insurance investment funds have more flexibility and can assume more risk. So ask yourself this question, when you purchase an insurance policy does that make you and investor in that insurance company? No, you are paying a premium for a future benefit if a certain event occurs. Sure you might be able to go out and buy the stock of an insurance company, if they are publicly traded, then you could become an investor, but that is a different situation. Social Security pays out benefits to only those that meet the previously defined event; you reach 65, you are a minor who has lost their parents, or you become disabled. Investors are subject to the ups and downs of market conditions, and can profit or be wiped out. There is no defined benefit. I don’t think you can substitute “tax payers” with “investors” in order to call S.S. a Ponzi scheme. I am not a fan of insurance companies, and I would like to be able to argue that all insurance programs are Ponzi schemes, but I don’t think I could honestly make that argument. The bottom line for any insurance scheme, whether it is S.S., a private health care policy or Obamacare, or your life or auto policies is that they are risk distribution programs.
      I also don’t agree with the characterization that the Social Security Administration is just a part of the Federal Government and that the U.S. bonds held by S.S. are not real economic assets. Every definition that you will find of the Social Security Administration will state in the first sentence that it is an independent agency. Of course it was established by the Federal government and could be eliminated by them as well, but it was established to operate autonomously to keep the Congress and Administration out of the day-to-day operations. Much the same as the Fed operates independently. When the Fed set up all those emergency loan programs (an estimated $7 trillions worth of programs) to bailout the banks, and other corporations, did they need to get congressional or presidential approval? No, they just did it on their own as an autonomous independent agency, even though they may have consulted with Treasury. So I don’t think you can claim, the bonds in S.S. Trust fund are due to be paid to the taxpayers and the bonds when cashed in are paid by the taxpayers, with the implication being that they are all the same taxpayers. They are not necessarily all the same, although there may be many taxpayers that fall into both camps. As I see, there has been an effort underway for many years to find a way to commingle the Social Security taxes we pay towards retirement and disability benefits, with the general taxes we pay trough FWH. The argument that the the S.S.A. is just part of the federal government is part of this strategy. Then at the end of the day the argument is that it is all just money that we owe to ourselves so why should we have to pay it back (by paying off on those bonds held in the S.S. Trust Fund). It appears that they have convinced you that it is all the same. But I prefer to hold their feet to the fire. It was sold to us as a program for a specific purpose and we paid extra into that program to cover that purpose. I expect them to fulfill that obligation. I will argue against the bait and switch tactics they want to use so that the S.S. taxes were collected can be used for a different purpose. As I said before, unless you are suggesting that Reagan was running a scam on the American people, and this was a back door way of getting more money into the general fund under the guise of building up a retirement trust fund and the intent was that these intergovernmental transfers would not be paid back in the future, then you should also want to hold the politicians feet to the fire. Don’t let them take a short cut by raiding the S.S. Trust fund to cover other spending they have already done. If that means raising the marginal tax rates so be it, but lets have an honest discussion about it. If we want to alter the S.S. program, then let’s have an honest “independent” discussion about that also.
      I don’t think your tax rates on capital gains are correct. My information shows that in 1987 the maximum capital gains rate was 28%. Reagan initially dropped it from the 28% we had in 1979-80 to 20% in 1982 through 1986. It went back up to 28% in 1987. I am not sure where you got the 5-tiers with 31, 36 and 39.6% rates. Those are Clinton’s ordinary income rates that got approved (without one Republican vote) in 1993. Even then in 1993 the maximum rate for long-term capital gains was 29.19%. That rate held until it was dropped to 21.19% sometime in 1997. It wasn’t cut to 15% until Bush. So you can’t claim the cut to a 15% capital gains rate by George W. Bush retroactively led to the surplus under Clinton.
      Budgets are always a fight between the President and Congress. So what if in 1995 as you say they forced Clinton to submit five iterations of his budgets before getting one that the Republicans would approve. As I recall 1995 was the year the Newt and the Republicans shut down the government. The Republican controlled Congress took most of the blame for that shut down and they finally came back and passed the budget. Of course the subsequent years yielded budgets proposed by Clinton geared even more towards balance and the Republicans had learned their lesson about shutting down the government. But again, what where those specific Republican programs that created the balanced budget? It sounds to me like the Republicans jumped on the bandwagon after the fact and said give us some credit too.
      Yes I do agree, that there is one big complex economic world out there and we rarely know as much as we think we know. And yes, we draw conclusions based off of correlations that we perceive and the complexity of it all allows for our conclusions to be off base. The supporters of supply-side economics prove this all the time. 🙂
      I also want to do away with the loopholes, deductions (I am open for debate on this one because I am not sure which ones you mean), and subsidies. But I am not sure that will allow for lower marginal taxes for individuals and corporations. We need to decide what level of spending we want and how we want to go about paying down the debt, then establish the marginal tax rates to meet those goals. If we want to go to war in Iran, then pass a new tax to pay for it.
      There is no doubt that Obamacare is constitutional. What is in question is, will the Supreme Court will rule that way. A recent poll showed that 75% of people thought the court would make their ruling based on politics and not the law. I have to say I am leaning that way also (but I hold out a small hope they come to the correct ruling). The reason the individual mandate should be found constitutional is that everyone is already in the health care market. So it doesn’t force someone to engage in a market that they are not already a part of. The question is how are the services going to be paid for. If you are in an accident, have a heart attack or some other emergency, you will get emergency care and not be turned away at the hospital. But will that person pay for that care out of pocket, with private insurance or are they trying to freeload on a system that guarantees them treatment. What Obamacare does is go after those who want to freeload and forces them to pay something. It either get their own insurance or pay a penalty to offset some of the cost the taxpayers incur for the treatment the uninsured receive. This sound like making people take personal responsibility. The funny thing is that in the 1990’s up to 2008, the Heritage Foundation, the Republicans in Congress and even Mitt Romney all agreed with this position. That was until one fact changed. Once Obama agreed with them and put in his bill, they changed their position.
      Dan

  5. This is only a partial answer as I’ve been at a “going away party” for me and my wife tonight and have been enjoying some fine spirits… I skimmed your post and will look up my capital gains source, but other than that will go off the top of my head…

    I understand your view of SS to Insurance, but insurance is optional and a personal choice whereas SS is mandated by law. I know you will argue that people need a retirement safety net, but if we had a better education system instilling the right values in people, government would not need to take care of these basic things for people. Those people who can’t prepare properly themselves need not be taken care of by the rest of us.

    “Independent” agencies of the Federal Gov’t? Those have a bad track record as it is… USPS going bankrupt… Fannie & Freddie were some of the main players in the housing crisis…

    I also understand that it is not the “same” tax payers often paying for their own benefits, but it is still tax payers. The whole system is a sham. I am not arguing that those who have already paid into the system not receive their benefits. I am arguing that we acknowledge that the system is not going to make it under it’s current format and needs reformed. Whether that means we designate certain funds paid back into it from the general fund, or raise the retirement age, etc. But reforms need to be made to either save the current system somewhat intact of transition away for it altogether.

    I checked my sources again on my capital gains taxes, and do see I made a mistake. Long term capital gains went from two tiers of 15% & 28% to 10% & 20%. So, the numbers are not the same (I am embarrassed by my mistake), but my point is still the same that it correlated with the surpluses.

    source = http://www.taxfoundation.org/taxdata/show/2088.html

    Regardless of the SCOTUS decision on Obamacare, I pray that the Commerce Clause is repealed during the next Administration and Congress (I know it won’t be even debated). That law can be stretched to mean anything they want it to mean. Any action I take effects “interstate commerce” to some nth degree, so the whole thing is one big massive government controlled sham that can be stretched to encompass most aspects of anyone’s life.

    I could care less what Romney, Republicans, or the Heritage Foundation liked before because I was not as informed or as engaged then as I am now. The government mandate at any level that all citizens purchase health insurance should be unconstitutional. If it is not unconstitutional, I will fight for my country to restore the freedoms we all hold dear while at the same time keeping an eye out for immigrating to a freer country. My fear is once the light of freedom in the US is extinguished, there will be no other.

    • G,
      Are you going on a trip? If so, have a great time.
      I understand that at the base of the conservative argument is their dislike (to use a mild word) of Social Security, which they have opposed since it was adopted. This position is well out of the mainstream of public opinion according to every poll. While everyone is entitled to their opinion, even to oppose very popular programs, what bothers me is the dishonest approach the Republicans use to go after a program like S.S. If we want to debate whether or not we should continue S.S. as is or change it in some way that is fine. But to claim it is adding to the debt and deficit and therefore must be cut to reduce them is simply not true. That is why I say have the S.S. debate separate from the debt and deficit debate. The tax issue debate is big enough without confusing it more with Social Security. One point on S.S., you said you were “not arguing that those who have already paid into the system not receive their benefits.” But, if you are supporting the Republicans proposal you are doing just that. I am 53, and have been paying double the amount of S.S. Tax into the system for almost 30 years. But I would be in the first group (under 55) that would be impacted by their proposed changes.
      Fannie and Freddie were not independent agencies. They were privatized decades ago. In fact they had gone public and their stocks were traded on the NYSE. So we cannot call them independent governmental agencies. The problem was that they were started as GSE’s, but after they were privatized everybody still believed they had an implicit government guarantee. Unfortunately, in the end they were proven right. Just like people believed the ‘too big to fail” banks would be backed by the government. But that is a whole new topic. Now the USPS is an independent agency, but it is subject to Congressional regulation. It is a little different from the other agencies because it is specifically provided for in the Constitution. But, Congress always has the authority to change the laws for any independent agency it establishes. Which is exactly what Congress did and those changes are causing the USPS to go bankrupt. In the lame duck session of 2006, the Republicans (who still controlled both houses until the new Congress started in Jan. 2007) jammed through a bill that mandated the USPS to prefund their retirement program in advance for a 75 years within a 10 year period. This blew a huge hole in their budget. No private business would ever do this. What do you think the we would hear from the private sector if Congress passed a law that said all business must do the same thing? Congress also does not give the USPS the authority to establish the postal rates they deem necessary to operate without a deficit. Do you think a private sector business might have a budget problem if Congress prevented them from raising their prices to cover the rising cost of things like gas? I think there is something else going on here with Congress mandating extra spending while at the same time not raising rates. I suspect that the goal is to set the USPS up for failure so that it can be privatized. But as far as operations go, I think the USPS does a remarkably good job of delivering the mail all over the country within a few days for less than $0.50.
      On the capital gains taxes, thanks for acknowledging the mistake instead of trying to BS your way through it. That is one of the reasons I like debating with you. Even though we don’t seem to agree on too much, it is nice to be able to go back and forth with enough respect for each others positions to check our own facts. I am sure you have run into bloggers out there that cannot have a civilized debate. If you find an error in my facts (not my opinions) I will to agree to acknowledge my mistake. But I disagree with your point that the cut in the tax rate correlated with the surpluses. I still don’t see how they correlate with the surpluses. We may have had even larger surpluses if the capital gains rate had stayed at the 29.19% (from The Tax Foundations 1954 to 2088 table) with all of the stock trading was happening during the Internet bubble. If you think back to that time, I doubt the little higher capital gains rate was going to slow anybody down. Even if it had, that might not have been such a bad thing if it reduced the size of the bubble.
      Wow, you “pray that the Commerce Clause is repealed during the next Administration and Congress?” I am sure you realize that would require a Constitutional amendment, since it is specified in Article I, Section 8. This is where I get confused with the arguments that conservatives make when they claim to love the Constitution and then argue against its provisions they dislike. There is no doubt that the “commerce clause” gives broad powers to the Federal government when it comes to regulating commerce. As technology has advanced and we are able to easily do business all over the country the reach of the commerce clause has grown with the expansion of business. But, that was the way the founding fathers wanted it. Hamilton argued vehemently to make it happen in order to bind the states together into a nation. We could get into a long discussion on this subject. But what you seem to be arguing for is the anti-federalist position. If that is the case you cannot claim to be supporting the Constitution when you advocate the exact opposite.
      Obamacare, doesn’t need to be stretched to some nth degree to be constitutional under the commerce clause. Here one simple example of why. In Florida we get many tourist here on vacation. Some of them will have medical emergencies. They will get treatment at one of our hospitals even if they have no means to pay. Those costs get passed on to those of that have insurance, get paid with tax dollars, or our hospitals have to raise their rates for Florida residents to cover their loss on the uninsured. So the uninsured do impact commerce, unless conservatives want to propose that we repeal all laws that require hospitals provide emergency service. I don’t think there are too many that want to live in a country like that.
      If you are concerned about your freedom, you better start paying close attention to what is a happening in Michigan. If you want a country with less Federal government control you might want to try Somalia. But if you want a country that is part of western civilization I think you will find that their health care systems are far to the left of Obamacare.
      Dan

  6. excellent post, very informative. I wonder why the other specialists of this sector don’t notice this. You must continue your writing. I’m sure, you have a great readers’ base already!

  7. Dan,

    I changed companies and relocated, so I’ve been strapped for time. I’m just getting back into a routine.

    I confess that I don’t like Social Security in it’s current form and I still think of it as a Ponzi Scheme. As to whether it adds to the national debt is a matter of perspective, in my opinion, but I understand your view on it.

    When time permits, I’ll go back through our discussion to see what, if any, further comments I have.

    Talk with you later,

    G


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