The President has released his budget. The overall picture is probably best understood by looking at the chart below (Source: Office of Management & Budget Historicals & Forecast). This budget includes a freeze on discretionary non-security spending, higher taxes on wealthy Americans, reduced itemized deductions, a “financial crisis responsibility fee” paid by banks, higher taxes on companies doing business outside the U.S., higher carried interest taxes on private equity, and higher taxes on oil & gas firms. Even with these “assumptions”, the Administration projects a persistently large and growing deficit throughout the decade. The chart shows something else as well: tax revenues are near their long-term average, but spending reaches new and higher levels relative to GDP.
Digging into the numbers, by 2016, discretionary spending will only be 10% of total spending and defense will be 19%. That leaves another 71%, which is mandatory entitlement spending (and interest). Entitlements include Medicaid, Medicare, Social Security, and much higher benefits for Federal employees compared to private sector counterparts. Although entitlements might be a great benefit when the country can afford them; eventually, the global capacity for US debt will require very tough choices. And the choices are: raise taxes substantially (displacing business investment leading to reduced productivity and a lower standard of living), cut entitlements (potentially reneging on promises made to existing beneficiaries), or allow the Federal debt to keep on growing (a.k.a., Japan) at whatever rates the market (China) will bear.
Bad choices all. But, the longer we wait, the worse the situation becomes…
So the challenge is – how to properly fund these entitlements.
And the choices are: raise taxes substantially (displacing business investment leading to reduced productivity and a lower standard of living)
First of all, the no-brainers: The taxable wage cap has to come off Social Security. And taxes for Social Security and Medicare need to apply to all income including investment income, not just wages. Okay, those are the easy fixes.
The theory that cutting taxes creates more business investment and jobs sounds really attractive.
Problem is, it’s wrong. Business taxes and upper-income taxes are at an all time low since 2001, so by your theory equities and jobs should be booming right now. But equities have been flat for a decade, wage growth is non-existent, and new jobs aren’t being created. We can’t afford to run this tax-cutting experiment any longer.
– When taxes are too high for the times, cutting them can provide a jolt to the economy (see: Reagan, Ronald).
– When taxes are a bit low, raising them to be ‘just right’ for the times can create a decade-long boom (see: Clinton, Bill).
– When taxes are just right, cutting them can crash your economy for decades (see: Bush, GW).
Raising capital gains and dividend taxes does not displace business investment. Actually it is the opposite. It makes companies and individuals AVOID the tax by re-investing money in their company rather than taking it as income or profit. The drop in job creation and wage growth is correlated with the capital gains and dividend cuts in 2001 (starting with the cuts in 1997, really).
cut entitlements (potentially reneging on promises made to existing beneficiaries)
NOW you’re talking. It’s time for a means test. And I don’t mean cold-hearted Reaganesque slicing and dicing retirees making $25K vs. 35K, or making retirees refuse to take part time jobs because it would reduce their benefits.
I mean a means test that would eliminate benefits for John McCain and Mike Castle and Pete du Pont.
No, Social Security and Medicare is not a savings account that you pay into and withdraw from later. It is a promise from the young to the old that we will not forget them in their need. Key word being NEED.
Social Security and Medicare are taxes paid by the young to make sure that the social fabric stays whole so business and families can prosper during their prime.
By that standard, the McCains and Castles and Pete du Ponts already got everything they could possibly ask for out of Social Security and Medicare by the time they became eligible.
“The theory that cutting taxes creates more business investment and jobs sounds really attractive.
Problem is, it’s wrong.”
“The theory that cutting taxes…”
Funny, I didn’t mention any theory regarding tax cuts. What post are you reading?
“Raising capital gains and dividend taxes does not displace business investment. ”
Obviously, you’ve never invested your own capital in someone else’s company — which is where most investment comes from. No return on investment then no investment.
“By that standard, the McCains and Castles and Pete du Ponts already got everything they could possibly ask for out of Social Security and Medicare by the time they became eligible.”
You could add to this list Sens. Carper & Kaufman.
Truth is that you lay out a lot of liberal dogma, but since you remain anonymous; you “respond” to points that aren’t in this post; and you provide no facts, debating you is rather pointless.
Funny, I didn’t mention any theory regarding tax cuts.
Okay, I’ll connect the dots for you and anybody else who doesn’t get it: We are living inside a nine-year old tax cut experiment. It failed. It is time to raise the taxes that are too low, and cut the taxes that are too high.
Letting the failed tax cuts expire (in your language, “raising taxes”) will increase rather than suppress business investment. It will put us on the right direction to the status quo ante. Which was pretty good.
Obviously, you’ve never invested your own capital in someone else’s company — which is where most investment comes from. No return on investment then no investment.
And most jobs growth comes from people reinvesting in their own companies. Especially small business. And when you create a job, you create a CUSTOMER and investments suddenly start producing returns again. Funny how that works.
The rewards will go to those investors who risk their money on ventures that do NOT guarantee a return. We have gotten into so much trouble by trying to engineer the risk out of finance. If investors are sitting around waiting for guarantees, they deserve nothing.
Obviously, you’ve never invested your own capital in someone else’s company — which is where most investment comes from.
I was talking about how the capital gains/dividend rate inflluences a company’s decision to reinvest profits rather than distribute them as income.
An executive who decides to take money out of his company as income and invest it in another company is one cynical SOB.
I’m not sure anybody really knows exactly what makes the economy tick. The dangerous ones are the people who say they do know.
I was a deep fervent believer in low income tax means more of everything good, until – laid right before my very eyes – was the comparison of the higher income tax 1990’s to the lower tax 2000’s. Or the lower tax 2000’s to the higher tax 1950’s. The conclusion; the real driver of prosperity is technology – not tax rates.
We are in a techno-lull at the moment. The PC Laptop Internet Cellphone HiDef Wifi world from the early 1990’s had everything humming. In the 1920’s it was cars, radios and such. The greatest prosperity boom, 1950’s – 1960’s, was fed by Government policy. Federal Housing Administration FHA loans, GI Bill, National Interstate and Defense Highways Act of 1956 (the vision of conservative GOP President Eisenhower) – America was off to the races. Building suburbs, universities, pouring concrete superhighways to connect it all together. Public and private sector synergy. Those FHA houses needed everything. Washing machines, DuPont nylon, TV’s, sofas. It was the Mother of Booms. American families liberated by Social Security Medicare for our elders, unemployment compensation, all the other good things we invested in. Not only were we more prosperous than ever, material well being fed a new sense of American Justice and Civil Rights.
Amazingly, the prosperity of the 50’s-60’s came after WWII deficits even greater in proportion to GDP than today. Seemed hopeless at the time. But prosperity boomed, investment thrived, debt was paid – all done with much higher tax rates than now. (No global competition sure helped too.)
The Great Tax Experiment – starving the public sector to feed the private sector has not worked as well as the old tried and true ways. The idea that public-private is a rivalry, rather than a partnership is misguided ideology. Now we’re out of kilter. Not just fiscally, but morally. The cult of the individual, the idea that National Wealth is not to be shared is morally wrong. It defies our Christian heritage.
We are already prosperous. The next boom is coming. Maybe somebody at DuPont or in a little garage will invent super solar, wireless electricity, cars without engines. Who knows. But we are primed for something great. It’s right around the corner. Maybe we should look into the old tax system. See what the elders of the Great Generation knew that we might have forgotten.