The Ben Bernank will be giving a press conference today. This is the first that a Fed Chairman has ever given. Probably a good thing, but I don’t actually expect him to say anything that isn’t already known by Fed “Watchers”. The Caesar Rodney Institute has a new post on S&P’s downgrade of their opinion of America’s future debt obligations (Note: They did not downgrade America’s debt, just issued a warning about the future).
So, how will the “tax the rich” thing work out:
The top 10% of all households by income have an effective Federal income tax rate of 19% and pay 70% of all Federal income taxes. (The effective tax rate on the bottom 50% of households is 2.6% and they pay approximately that proportion of all Federal income taxes.) If the effective tax rate on the top 10% is raised to 50%, the revenue generated would eliminate the projected FY12 Federal deficit of $1.2 trillion and reduce the gross debt by 8%. But taking away 50 cents of every dollar earned by these households will certainly take away their incentive to continue to generate income and curb their ability to save.
Even worse, to pay the additional tax will require removing invested capital from their investments. Less investment capital means less job growth — or worse, job contraction. With 20% of Delawareans income coming through federal transfer payments (social security, medicare, medicaid, unemployment, etc.), reducing private sector employment to pay our current bills will just raise the need to pay future bills. This is what they call a downward cycle.
It is not time to hassle over whom is to blame for our predicament. Both Republicans and Democrats have dug this hole, as have entitlement addicted citizens from all walks of life. Driven by constituents, politicians tend to vote for spending programs and against taxes to pay for that spending. Citizens are happy to go along for the ride. Their individual votes become claims against the total income earned by all people in the country.
Should every senior receive free medical benefits regardless of ability to pay? Should folks receive unemployment benefits for more than a year? Should Federal tax write-offs subsidize the building of McMansions? Everyone has to share in the expenditure cuts. After looking at 200 years of U.S. fiscal history, economist John Wallis concluded that “there is no substantial evidence to suggest that tinkering with the revenue structure will change the size of government.”
It has been discouraging and alarming to see the herd mentality of “getting something for nothing” that has gradually surged over the past ten years. Thanks go to S&P for telling us that the emperor has no clothes…
Lots of folks are simply saying let’s go back to the 1998 tax rates. Rates that are still way lower than the 1950, 1960, 1970 rates. The free riders are not the entitlement recipients, the free riders are the ones who cheer for expensive wars but can’t stand paying a dime in new taxes. I support what we do in Iraq, but we should pay for it not borrow for it.
Let’s not be to charitable about “it’s hard to say who to blame” for this mess. Let’s blame whoever it was that cut taxes to historic lows then launched two wars on borrowed money. Let’s blame whoever it was that added a $200 billion Medicare Part D drug entitlement without a penny put aside to pay for it. Let’s blame whoever it was that took a balanced budget and turned it into a string of huge deficits.
Just because we’re Republicans doesn’t mean we can’t face up to facts. Let’s not be the Party of OJ Simpson. Somebody killed our fiscal life. All the forensic evidence points to us. We are the Party that was handed complete control of Congress and the White House along with a balanced budget. We left it in shambles. We were too busy experimenting with economic theories to do the math.
There’s no hard data connecting lower tax rates to job growth or GDP. That’s just an oft repeated theory nothing more, nothing less. A convenient mantra to rationalize paying less tax. In fact, the evidence points the other way. 22 million new jobs under the 1990′s higher rates, but almost 0 new jobs after eight years of historic lower tax rates. It was just a theory. It did not pan out. So why keep repeating it?
The only real evidence of any consequence, is the zero deficit in 2000 under the old rates, then tax rates get chopped and we piled on $5 trillion in new debt. Same in 1980. In 1980 the debt was less than $1T, after years of lowering rates, debt was near $3T. National debt tripled under Reagan.
This revenue problem is greater, more manageable, more urgent than the spending problem. Because there simply are no trillions of dollars of fat to cut. Not unless you want to relinquish our role as SuperPower or collapse the American Dream of a decent life for all Americans. Look at last month. Tea Party was rightly on the warpath about our $1.5 trillion deficit. For all the furor, they managed to wrestle $50 billion to the ground.
The “addiction” to entitlements might seem like an addiction to those who don’t need Social Security or Medicare or Medicaid. But to the vast majority of Americans old age insurance and health care are not “addictions”, it’s what keeps them alive and not hungry with a decent roof over their head. Entitlements are what distinguishes the United States from the third world. Taking care of America’s poor is not the problem here. We can afford to be a first world nation. The problem is simple: We cut taxes too much in the early 2000′s.
You are correct about means testing. That would help. But we need to go back to the way things were before this mess got started. Before we started being all about economic theory and no math. We exceeded the parameters of the Laffer Curve by about 10%.
Regarding the adverse impact on wealthy investors, surely you must know many wealthy investors. Did they behave much differently in 1999 than they did in 2004? Or for that matter were investors, people interested in making money, any less motivated in 1950 than they were in 1970 or 2010? You know darn well money makers thrive on ideas, opportunities, invention not on tax rates. Steve Jobs and Bill Gates and the rest all made their way just fine under the old rates. As did Cisco and Intel and all the rest of that great inventive revolution.
This is an emergency. No more fancy theories. No more Capitalist extremism. Just get the tax rates back to where they were in the good old days. To paraphrase President Reagan:
Mr. Republican, tear down this ideology.