Posted by: danielfee | August 19, 2012

America is not Greece


America is not Greece, but it could become as troubled as Greece if the Republicans win the election in November. Now that Willard “Mitt” Romney has selected Wisconsin Representative Paul Ryan as his Vice Presidential running mate, one of the main focuses between now and election day will be about government taxation and spending policies. As the Chairman of the House Budget Committee, Paul Ryan has been the primary author of the last two budgets, generally referred to as the “Ryan Budget”, which were passed by the Republican-controlled House of Representatives. However neither of those budgets went anywhere in the Senate. The Ryan Budgets are very similar to the economic policies that are outlined in Romney’s 59-point plan for turning the economy around. Both are proposing a huge government austerity program to cut domestic spending and more tax cuts which are tilted towards the wealthy and corporations. What is really odd is that the party which has been accusing President Obama of bringing a European-style government to America is openly advocating for bringing a European economic model to the United States. They have accused Obama of spending like the Greeks, but an analysis by the Wall Street Journal Market Watch show that under Obama the annualized growth in federal spending has increased by only 1.4% per year, the slowest pace since the 1950’s. Under George W. Bush the annual growth rate was 8.1% and under the conservative icon Ronald Reagan it was 8.7%. What Romney and Ryan seem to be counting on is that most voters will have no understanding of what is actually happening in Europe, Greece in particular, and the fact that the austerity programs they have implemented in response to their budget crises has put them back into a recession or made their existing recession even deeper.

Greece’s financial problems began during the worldwide recession of 2008. This is one similarity they have with America. In the 14 years prior they had an expanding economy, and during the 2001 to 2007 period it grew at an average rate of 4.11%. Greece joined the euro in 2002, and since then the amount of general government revenues as a percentage of their GDP has been significantly lower, ranging from 4% to 6% below the average of the other EU countries. Like the U.S., Greece has a progressive tax system which ranged from a bottom rate of 0% pre-crisis on income below 12,000 euro to 45% for income over 100,000 euro. The biggest problems that Greece faced were corruption and tax evasion, which was exceeding 40% in both 2005 and 2006. The finance minister has estimated that approximately 15,000 people, out of 5 million workers in the country, owe around 37 billion euros in taxes. To put that in perspective, the expected tax revenues for 2012 are 52.7 billion euro. It is estimated that there are over 10,000 Greek-owned off-shore companies and 20 billion euros held in Swiss bank accounts by Greeks. Off-shoring and Swiss bank accounts are something Mr. Romney has first-hand experience with, which may explain why he sees the similarity between Greece and America. On this point he may be correct, because the U.S. does have a problem with a small percentage of the very wealthy sheltering their income through off-shore companies and Swiss bank accounts. The only difference is we call it tax avoidance, because the wealthy have succeeded in modifying our tax laws, while the Greeks call it tax evasion. But the result is the same; the amount of government revenues are reduced which leads to bigger budget deficits. As a result of their spending exceeding the amount of revenue they actually collect, the Greeks are forced to borrow the difference in the market at very high interest rates.

One major difference between Greece and the U.S., which needs to be pointed out up front, is that since joining the euro Greece doesn’t control their own currency, whereas the U.S. does and the U.S. dollar is still the reserve currency of the world. This creates a vastly different situation between Greece and the United States, whereas of this week, the interest rate on the Greek 10-year bond is at 26.18% and the U.S. 10-year bond is at 1.54%. So it costs the Greek government 17 times more to borrow and they are forced to go to outside sources such as the IMF and ECB to borrow. Whereas the U.S. can borrow from its own central bank if there is weak demand for the U.S. bond from other investors, which doesn’t appear to be the case since the interest rates have been driven so low. The American government is still seen as one of the safest investments in the world. Greece is seen as the riskiest investment in the world.

So why are Mitt Romney, Paul Ryan and the Republicans making the argument that the United States might become just like Greece unless they get elected? That is a hard one to figure out unless you recognize that it is projection on their part. I am not suggesting that the interest rate on the U.S. bond will shoot up to 26% if Romney is elected; although they will rise no matter who gets elected because they are at all time historical lows and must move back towards historical averages. However, what I am suggesting is that if Romney-Ryan are elected they will impose Greek-style tax and austerity policies upon the American people.

The Greeks really had no choice with their tax and budgeting policies. The troika, of the International Monetary Fund (IMF), European Commission (EC) and European Central Bank (ECB) are dictating to Greece what their tax and budget policies will be as a condition of the loans they are receiving. These conditions included significant changes to the tax system, which began to occur in 2010. They effected both individuals and corporations and were described as “a broadening of the tax base and the elimination of deductions and exemptions.” If that sounds kind of familiar, it should, since it is the same rhetoric that Mr. Romney has used on the campaign trail. But what did it mean in actuality in Greece? It meant that Greek corporate tax rates which had already dropped from 40% in 2000 to 24% for 2011, would be further reduced by 1% each year until they reach 20%. It meant the VAT (Value Added Tax), which is a regressive tax hitting the consumer, will increase from 19% to 23%. It meant that capital gains on the sale of shares acquired before the end of 2010 would be tax exempt and that as of 2011 they will be taxed at a rate of 20% if held less than 3 months and 10% if sold in the 4th through 12th month after acquisition. But if they are held for at least 12 months there will be no tax. It meant the elimination of the deductibility of some expenses and modification of the thresholds for tax rate brackets for individuals, which results in more lower and middle-income Greeks being pushed into the next higher tax bracket, thereby widening the base.

Another of the conditions imposed on Greece by the troika are cuts in government spending and the size of the government. These cuts are directed primarily at the welfare state, which is the Greek social safety net that includes their social security, universal health care and pension systems. In theory these cuts were needed to reduce the percentage of the Greek GDP that was being spent on the welfare state. However for the year 2009, which was the most recent data available to the troika as they were imposing these conditions, Greece was spending 28% of its GDP on social protection expenditures. That was less than the United Kingdom’s 29.1%, Italy’s 29.8%, Germany’s 31.3%, and France’s 33.0%. So Germany, who is widely considered to be the best run country and the economic model that other EU counties should follow, was spending a significantly higher percentage than Greece. Since the troika-imposed austerity measures have been implemented, the amount in the Greek 2012 budget for social security, universal health care and pensions is now at 31.9% of GDP. It has gone up by 3.9%, but at least Greece’s percentage of spending looks more like Germany now. Maybe if they impose some more austerity, they will match France in a couple more years. Of course the problem is that as they are forced to cut the size of government, more Greeks become unemployed and are put into the pension pool. As the economy continues to shrink by an estimated 7.1% for 2012, meaning a further reduction in GDP, more people will be pushed into the welfare programs for survival and as this occurs the percentage spent on welfare will rise again. It is a self-reinforcing downward spiral that is being imposed on Greece if they want to continue borrowing to fill their budget gap. But what choice do they have since the first condition imposed by the troika was to cut corporate tax rates and broaden the personal tax base? In other words, they have been forced to tax those who have more less and tax those who have less more, and cut funding to those social safety net programs that the poor depend on.

So if the tax changes and austerity programs that have been implemented are not achieving the goal of reducing the budget deficits and ending the recession, then what is left that Greece can do to prevent a default? Also, what motivation would the troika have for continuing to prop up the Greek government with additional loans? By now it is obvious to everyone that more austerity and shifting the tax burden won’t achieve the goal. What’s left is the third major condition that was imposed by the troika; privatization of Greek assets. On privatization they set an ambitious goal of raising 50 billion euros in revenue. This years budget target was set at 3 billion, but has been slashed to just 300 million because it appears that only two deals can be completed before the end of the year, the sale of the state lottery and former international broadcasting center for the 2004 Olympics. The sale of the state lottery should be a major red flag to everyone. Why would a government that is strapped for revenues sell off a revenue generator like the state lottery? The obvious answer is that they wouldn’t unless they are forced to in order to stave off an immediate default. Why would the troika want to force the sale of a Greek state asset that is a revenue generator? Shouldn’t they want the Greek government to receive these revenues so they can pay back their loans? The obvious answer is they want to transfer the stream of future revenues directly to themselves. They also want to force the sale of as many Greek state-owned assets as they can in order to recoup as much as possible before they allow Greece to default when they cut them off from the next loan installment. Should they succeed, when Greece leaves the euro zone, which at this point I am certain they will sooner or later, they will be left with cupboards bare just like Old Mother Hubbard. It would be very difficult for Greeks to rebuild their country if all their assets have been sold off. Unfortunately this is the type of situation that leads to violent political unrest.

So how would the Romney-Ryan plan result in America looking more like Greece? If you listen to the Romney-Ryan rhetoric about cutting corporate taxes, lowering the tax rates and broadening the tax base, and cutting unsustainable government spending (aka imposing austerity) this more closely matches the reality of what has happened in Greece. As the saying goes, the devil is in the details, and it requires digging into the plans that Romney and Ryan have made public so far. Mitt Romney’s 59-point plan is short on details, but now that he has fully embraced Paul Ryan and his budget by making him the VP candidate, we have some more details to look at and how it might impact the American economy. Both the Romney 59-point plan and the Ryan budgets proposed to make the Bush tax cuts permanent. Then both also proposed to implement even more tax cuts which total somewhere between $4 to $5 trillion dollars over the next ten years. They pledge to lower the corporate tax rate from 35% to 25% and lower the marginal tax rates for everyone while broadening the tax base. Romney’s proposal is to reduce the marginal tax rates by another 20%, which would bring the top rate down to 28% from 35% and the bottom rate down to 8% from 10%. While this may be an across-the-board tax cut, it is heavily weighted towards providing a much bigger cut for those at the top. The Ryan Budget plan called for collapsing all of the tax rates into just two brackets of 10% and 25%, so those in the bottom bracket would receive no tax cut and those in the top would see a 10% decrease in their top marginal rate.

You might ask yourself, if we keep the Bush tax cuts and then cut tax rates some more, won’t that just increase the budget deficit and national debt even more? Of course it will. But both the Romney and Ryan plans proposed to make all of these additional tax cuts while at the same time making them revenue neutral. Haven’t the Republicans been saying ever since Obama was elected that we must cut spending to reduce the deficit? Yes they have. In fact they almost caused the United States to default in 2011 because the House Republicans would not agree to increasing the debt ceiling without significant budget cuts. Those would be the $1.2 trillion in cuts that are scheduled to go into affect on January 1, 2013 that they are now trying to undo, or at least just undo the Defense Department portion of those cuts. So how can the Republicans cut tax rates again, keep them revenue neutral and decrease the budget deficit all at the same time? They can’t unless the austerity measures (spending cuts) are even bigger than they pledged so far or somebody’s actual net taxes go up even with the lower rates. How would someone’s taxes go up if their tax rate is being cut? This would be accomplished by eliminating deductions which would disproportionately effect the bottom 95% of tax payers.

A study prepared by the non-partisan Tax Policy Center looked at what would need to be done in the way of elimination of deductions in order to offset the revenues lost by the additional Romney tax cuts. Applying the elimination of deductions first to the top brackets and then working their way down the tax brackets in order to keep the system as progressive as possible, they concluded that those making under $200,000 per year would see a reduction in their after-tax income (aka a tax increase) of 1.2%, while those making over $1,000,000 per year would net an after-tax income increase (aka a tax cut) of 4.1%. So in aggregate the entire proposal might be revenue neutral, but if you are in the middle or lower tax brackets your taxes will be going up to neutralize the effective tax cuts for the top 5%. The Ryan Budget follows the same pattern, but with just two tax brackets of 10%, which would apply to the first $100,000 of a married couple’s income ($50,000 for singles) and a 25% rate for all income above that level. The benefits of these additional tax cuts would accrue even more to the wealthiest Americans. Plus under the Ryan simplified plan, capital gains, stock dividends and interest income would not be taxed at all. Since the top income earners like Mitt Romney earn most, if not all, of their income through investments which are taxed at capital gains rates, their new tax rate would be zero. Talk about giving someone an incentive not to work! But the Ryan Budget plan is even more radical. On top of these changes he proposed to repeal the estate tax, so this income that was taxed at 0% can be passed on to the next generation at 0%. He also proposed to repeal the corporate tax (make the corporate tax rate 0%) and replace it with a value added tax (VAT) which he cleverly calls a “business consumption tax.” But despite its name, the full amount of the VAT would be collected from the consumer at the retail business. VAT’s are a very regressive form of taxation because those earning less have to spend all of their income for life’s necessities, therefore all of their earnings are subject to taxes. But those at the very top spend only a fraction of their total income, which means that the rest is put into savings and investments which won’t pay the VAT tax, nor will they pay any tax on the capital gains, stock dividends and interest earned by these untaxed savings. It should also be noted that all of the proposed budget cuts in the Ryan plan are not being done to reduce the budget deficit, but rather to off-set the cost of these new tax cuts. So it appears that deficit reduction is not the real goal of the Romney and Ryan plans.

In summary, the Romney-Ryan plans propose to cut corporate tax rates just like Greece. Lower the tax rates and broaden the base, just like Greece. Eliminate the capital gains tax, just like Greece. Lower government revenue as a percentage of GDP and impose harsh austerity measures (cuts in government spending) on welfare and entitlement spending, just like Greece. If they are successful at implementing their proposals, will it bring the percentage of the U.S. GDP which is spent on entitlements into line with those of Greece? Well first we need to know what percentage of GDP the United States actually spends on its entitlement programs. According to the conservative Heritage Foundation think tank, the entitlement spending for 2012 is 9.7% of GDP. Say what? It is only 9.7%? Sorry Mr Romney and Mr Ryan. No matter how hard you try to spin it, or implement tax and austerity policies like Greece’s, America is not Greece.


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