This Marine may have no regrets but he lost his limbs for what? So Obama can lose the entire Middle East because he lacks a cohesive plan to retain American influence.
Obama is all intellect and no passion. He may be cool but his results are chilling. (See 1 below.)
---
Were Osborne a doctor he would suggest allowing the patient to heal thyself. What a novel thought. If only politicians were that smart. (See 2 below.)
---
Our son was here for the holiday and he asked me whether our nation would make it through these difficult times.
I told him no president since Wilson,not even Reagan, had asked Americans to buckle down, to tighten their belt and do what was necessary. Carter asked us to wear a sweater and turn the thermometer down a notch. Ford told us to buy American. That's about it.
Obama is all intellect and no passion. He may be cool but his results are chilling. (See 1 below.)
---
Were Osborne a doctor he would suggest allowing the patient to heal thyself. What a novel thought. If only politicians were that smart. (See 2 below.)
---
Our son was here for the holiday and he asked me whether our nation would make it through these difficult times.
I told him no president since Wilson,not even Reagan, had asked Americans to buckle down, to tighten their belt and do what was necessary. Carter asked us to wear a sweater and turn the thermometer down a notch. Ford told us to buy American. That's about it.
Johnson and GW told us we could fight wars and pay for them with someone Elsey's blood but not our cash.
I know Obama will not so this is why we need to throw him out and replace him with someone else. That said, the person we replace him with not only must lead us but also must force us to be what we have not been for almost a century - prudent.
Since I have doubts that Obama will be beaten, though I pray he will, and do not know who will succeed him if he is beaten, I was unable to answer my son with any conviction.
I wish I had confidence Americans were still a 'can do' people and I want to believe we are but I see little evidence that we are prepared to sacrifice. Sure we want the wealthy to sacrifice, in fact we want them to do all the heavy lifting, so the 99% can continue to sit on their duffs, complain, beg and destroy.
I am on record stating I expect a year end rally because I believe Europe's stronger nations will eventually stitch something together for the time being but I doubt it will hold because they too must demand sacrifice and Europeans seem unwilling if Greek riots, as well as those in Spain and Portugal, are representative of the general mood.
The America I grew up in and the Americans I mostly grew up with and know are 'can do' people. We proved we were and there is plenty of evidence to support that view. We grew up in a family structure that mostly insisted we learn, do our homework, take life somewhat seriously, get a job and be responsible for ourselves. We grew up with an education system that offered a core curriculum, ie. history, math,literature etc.. We grew up in a society not infected by the Politically Correct virus. We grew up in a society that respected authority. We grew up in a society that was patriotic and more cohesive. We grew up in a nation whose border's were secure.
We also grew up in a tainted society in terms of segregation so not all was just, sweetness and light and then the political structure decided we could lose a war, that maybe should not have even been fought, under the mistaken belief there would be no repercussions because it was 'over there.' The stains of Viet Nam linger to this day and still manifest themselves in subtle but powerful ways. We now have a president who believes losing wars builds national character and wins friends and respect world wide. How pathetic and naive.
I wish I could have answered my son in a resounding affirmative and not with a lot of qualifications but he deserved an honest answer and I was too uncertain to give him one .
Mohamed A. El-Erian has other issues that he presents regarding the economics of our problems. His biggest concern is that the politicians are driving the car, have no road map and seem to taking us over a cliff. (See 3 below.)
Former Sen. Gramm's speech at Hillsdale College about former President Reagan. (See 3a below.)
---
It is all very long and even more taxing. (See 4 below.)
Dick
-------------------------------------------------------------------------------------------------------------
1)The Psychological Foundation of Obama’s Political Problems
Justin Frank
In June 1985, Flora Lewis wrote in the New York Times that then-President Ronald Reagan said he had pounded the walls in frustration over the hostage crisis in Beirut. Given what we know about Reagan, it's not hard to believe that he would resort to such measures to express his rage.
Now try to imagine Barack Obama similarly venting his frustration at the Republicans taking his agenda hostage for political gain. Hard to visualize, isn't it?
That's no accident. Since being elected president, Obama has consistently displayed a cool demeanor, one that has confounded many of his former supporters. His detachment has led many to think that he is oblivious, disinterested, even frightened of direct confrontation. The latest instance has been his passive observation of the failure of the Super Committee, which has spurred pundits and politicians from both sides of the aisle to accuse him of lacking the fire to be president. MSNBC news host Chris Matthews, once one of the president's biggest fans, recently placed direct blame for the country's malaise on the President's lack of emotional leadership. “There's nothing to root for,” he complained.
The fact that the President has failed to address, hands-on, such a critical problem should make us realize that his reluctance to take charge is not a cognitive issue, but a psychological one. It's not that Obama doesn't understand what he ought to be doing—it’s that the structure of his personality won't allow him to constructively address the problem.
This is where psychoanalysis can be of benefit. By recognizing Obama’s behavior patterns we can illuminate the unconscious thought processes that might be influencing them. Fortunately, one needn’t treat Obama as a patient to undertake a thorough analysis of him. After all, there is plenty of public material available—not least, his autobiography Dreams From My Father—from which to sketch an outline of the President’s personality using a technique called “applied psychoanalysis.”
First, some psychological preliminaries. The President's detractors are suggesting that he doesn't feel enough passion or emotion. But a basic tenet of psychoanalysis is that everyone has rage. The question is what one does with that rage, and why.
On a psychoanalytic level, Obama is someone who tries to disconnect himself from fury through intellectual exertion and by strenuously trying to keep matters in clear focus. He doesn’t simply contain his rage or hold it inside his mind; he dissociates–a psychoanalytic term for disconnecting thought from feeling. This allows him to operate in a purely intellectual state, protected from the disruptive influences of excessive passions.
The 1789 French Revolutionary saying, “The tongue is the enemy of the neck," describes the approach Obama has always lived by. He turns a blind eye to his own rage; he seems almost sleepwalking when others would be screaming. This is not simply a matter of the president’s public persona pushing aside the private, enraged one. It is a profound ability to disconnect himself from feeling the full force of his own rage.
Ultimately, this is an expression of his fear of abandonment. In fact, what appears as detachment is the latest manifestation of a long history of removing himself from the fray in idiosyncratic ways. Growing up as a mixed-race child of two broken homes, and living in two dramatically different countries, Barack Obama learned to survive by carefully noticing everything around him while at the same time not allowing himself to feel the full emotional impact of his experience.
He dealt with loss without protest. He didn't complain when his mother abandoned him to pursue her passion for anthropology on far-flung expeditions, or when she removed him from the home of his stepfather in Jakarta when he was ten. Instead, Obama focused on surviving by getting along. He pursued inclusion relentlessly, even when circumstances repeatedly cast him in the role of the outsider.
It's not an accident that one of the strategies he developed to maintain his membership in groups was to keep his mouth shut. Indeed, his autobiographies show that he was repeatedly taught as a child to keep his feelings to himself. His stepfather Lolo told him regularly never to complain if he were hurt or in trouble. His high school basketball teammates reinforced that message some years later. And so by keeping careful and cautious watch of his surroundings, he learned to be at home in different groups, easily shifting from one to the other.
This kind of dissociation is at the core of some his greatest political strengths. It helped him become intellectually nimble, and acutely alert to his surroundings. It's only by adapting this kind of psychic position his entire life that Obama was able to easily joke at the White House Correspondents Dinner while knowing there was an active mission underway to kill Osama bin Laden.
But assuming this perpetually peripheral role has also taken a lasting toll. The anxiety of not belonging has grown to occupy an ever-greater part of his psyche. He writes in Dreams From My Father that when, as an adult, he was walking through the most dangerous parts of Chicago late at night, the greatest fear he had was the fear of not belonging. But now there is a new tension, between his need to belong and the demands of standing up for what he believes. The former is driven by his related fears of not belonging and being abandoned; the latter carries the risk of alienating others irrevocably.
In material reality, his concern with alienating conservatives is wholly unproductive: it is unlikely that he can be more hated by the Tea Party than he already is. Nonetheless, he continues to relentlessly pursue compromises with Republicans that will never happen. Indeed, so concerned is he with his own degree of belonging that he jeopardizes the sympathies of those who actually have felt a natural and authentic connection to him. Whatever other political and personal advantages it confers, Obama's observational caution doesn’t give jobless participants in “Occupy Wall Street” or Wisconsin’s striking public employees the sense that he is concerned.
Again, it's not that the President lacks passionate emotions. Indeed, given the onslaught of personal provocations doled out by his political competitors, his stores of rage are sure to be filling up. But the question of what will happen with that anger will likely be closely bound with his reelection campaign in 2012. Previously, he has found an outlet for aggression on the campaign trail: The only times he has felt comfortable being truly rhetorically confrontational are when he's standing behind a teleprompter or a podium and before a cheering audience.
There are hints of this campaign persona in the unusually blunt talk coming from the president recently, as when he warned that there “will be no easy exit ramps” for Congress as it tries to escape painful spending cuts. But it remains to be seen whether this is merely a temporary ventilation of Candidate Obama, or a more lasting change in the psychology of the President.
Of course, Obama's detachment is a pattern, and patterns aren't broken easily. In ordinary circumstances it might take years of analysis for someone so well defended to express his anger fully. As President neither he nor our nation can afford the psychoanalytic time that takes.
In the meantime, he will likely fail to see the greatest irony of his current position. As sensitive he is to group dynamics, as the President of the United States, he is now the sole member of an exclusive group of one. And he's going to need to push through his fears in order to avoid joining the only other group available to him—that of the ex-presidents.
Justin A. Frank, MD is a psychoanalyst, clinical professor of psychiatry at George Washington Medical Center, and the author of Obama on the Couch.
-------------------------------------------------------------------------------------------------------------
2)A daring idea to fix the economy: try doing less
The best thing the Government can do to restore growth is to stop imitating Labour, and get out of the business of running things.
By Janet Daley
Gosh, what a parcel of goodies George Osborne is about to present to us in his Autumn Statement. Already promised last week were a government programme to underwrite the mortgages of first-time buyers, as well as a nifty £200 million “green deal” to encourage families to insulate their homes. Then there was a billion-pound subsidy to employers who give young people work experience that will lead to jobs. And who knows what more bounty is to follow in the speech itself?
Now where have I seen the like of this beneficence before? Oh yes – it was under Gordon Brown. As Chancellor (and then later when he was Prime Minister, through his half-hearted proxy Alistair Darling), Mr Brown would stand at the Dispatch Box and shower us with government spending projects. There were injections of cash into house-building, and grants for scientific research, and God knows how many initiatives to create “training” and engineering apprenticeships. All that micro-management: new “start-up” schemes and “one-stop shop” outreach services funded by this department and that department, and then re-packaged and re-announced so that they sounded less tired and predictable.
Maybe you thought we had got past this. Not just because additional public spending is now supposed to be anathema, but because the myth of government activism – the idea that intervention by the state is the answer to every economic and social problem – had been definitively routed. Apparently not: Mr Osborne and, we must assume, his boss still seem to believe that any unacceptable national situation must require direct action from them.
Or maybe they don’t believe that at all. Perhaps they just lack the political courage to admit that, in our present crisis, the best thing that the Government can do is to get out of the business of running (or subsidising, or initiating, or incentivising) things altogether – not just in the interests of saving money, but because the effects of such interference are counter-productive. What the economy is suffering from is not an insufficiency of overweening, fussy, bureaucratic initiatives that inevitably unleash an avalanche of unintended consequences, but a lack of cash in the hands of people who might spend it in ways that would actually create wealth and stimulate (in the proper sense of the word) economic growth.
If ever there was a time for radical proposals by a governing party, this is it. Rather than the imitative, mealy-mouthed shuffling of dollops of money from one departmental scheme to another, in what will inevitably look like panic in the face of rising youth unemployment and disappointing growth figures, what we need is a display of real insight and nerve.
Under black economic skies, political battle awaits 19 Nov 2011
Paradoxically, it is in times of crisis that the public (especially the British public, who are peculiarly brave about these things) are most receptive to audacious pronouncements and drastic remedies. Knowing that a situation is genuinely parlous makes people more inclined to accept what seems like necessary risk-taking, especially if it is presented to them with honesty and conviction.
Couldn’t we have a statement, then, of what most struggling voters know to be true: the economy is failing because people cannot (or are afraid to) spend money. It is no use offering to “underwrite” mortgages for first-time buyers who may not be in a position to repay them. Nor will bribing employers to take on young trainees help firms to expand: if they cannot increase their turnover, they will not be able to retain those fledgling staff. The effectiveness of both these programmes relies on precisely the kind of economic recovery that they are designed to stimulate. If that stimulus fails, the recipients of this state largesse will be left high and dry.
What the economy needs is more customers who are willing and able to buy. What the state needs to do is to give those potential customers more disposable income to spend. To this end, it has tried printing more money. Unfortunately, most of that cash ended up sitting in bank vaults instead of circulating through the system. In fact, the only way to encourage more spending without increasing personal debt is to let people keep more of what they earn in the first place, and to make sure that they are not being overcharged for necessities like fuel and energy. Certainly there will be a few nods in this direction, with a widely predicted freeze on fuel duty and a proposal to hold down increases in rail fares. But such tiny ameliorations in the cost of living are unlikely to make a dramatic impact on most people’s lives.
Instead of finding new, ingenious ways to use your money that might give a brief appearance of nibbling at the edges of problems such as unemployment and property prices, the state needs to withdraw from hyperactive job-creation and mortgage-lending, and become much more vigilant in ensuring competition in the productive parts of the economy. The deregulation of the 1980s and 1990s would be coming in for much less criticism now if it had not funked the matter of competitiveness: nationalised industries too often gave way to private monopolies and cartels. If people are taxed less and fleeced less, they will be happy to stimulate the economy in the good old-fashioned way.
As David Cameron used to say before he took fright: we need a smaller state that does less and spends less. Mr Osborne used to say that, too, in terms that were at least as stark as any Tory backbencher. Maybe a generation of Treasury officials who came of age under the Brown Terror got to him with the electrodes. Or else, his role as election campaign manager for the Conservatives is conflicting with what should be his better judgment as head of the nation’s finances. After all, it should be his function as Chancellor to tell his party’s political strategist that voter-appeasing initiatives are unaffordable, and that economic reality must take precedence. Presumably, Mr Osborne would have had to carry on that argument with himself. (If he did, we know which side won.)
There is an urgent need now to rethink the whole relationship between government and populace while there is still the possibility of discussion. In Britain, Europe and America, the questions are remarkably similar. Can a free-market economy support an infinitely growing state? We will have to choose, quite soon, between liberty and the “security” of a society in which government controls the levers of economic life. Washington politicians are getting a terrible drubbing for failing to resolve their implacable differences over the size of the state (to the extent that they are unable to agree a federal budget). The US national debate may seem rough and ready to European ears – but at least they are engaging in the real argument.
-----------------------------------------------------------------------------------------------------------
3)When economic ‘unthinkables' become reality
Pacific Investment Management Co. CEO and Co-CIO Mohamed A. El-Erian says recent turbulence in the financial markets is “not just normal volatility. … [I]t’s “unsettling.”
By BRIAN CALLE
When the chief executive of a global investment firm that manages assets in the neighborhood of $1.4 trillion calls current economic goings-on "unsettling," it is probably wise to take heed. That's precisely what Pacific Investment Management Co. CEO and Co-CIO Mohamed A. El-Erian told an audience of more than 200 people at the Big Canyon Country Club in Newport Beach. This is "not just normal volatility," he said referring to recent turbulence in the financial markets, it's "unsettling."
I know Obama will not so this is why we need to throw him out and replace him with someone else. That said, the person we replace him with not only must lead us but also must force us to be what we have not been for almost a century - prudent.
Since I have doubts that Obama will be beaten, though I pray he will, and do not know who will succeed him if he is beaten, I was unable to answer my son with any conviction.
I wish I had confidence Americans were still a 'can do' people and I want to believe we are but I see little evidence that we are prepared to sacrifice. Sure we want the wealthy to sacrifice, in fact we want them to do all the heavy lifting, so the 99% can continue to sit on their duffs, complain, beg and destroy.
I am on record stating I expect a year end rally because I believe Europe's stronger nations will eventually stitch something together for the time being but I doubt it will hold because they too must demand sacrifice and Europeans seem unwilling if Greek riots, as well as those in Spain and Portugal, are representative of the general mood.
The America I grew up in and the Americans I mostly grew up with and know are 'can do' people. We proved we were and there is plenty of evidence to support that view. We grew up in a family structure that mostly insisted we learn, do our homework, take life somewhat seriously, get a job and be responsible for ourselves. We grew up with an education system that offered a core curriculum, ie. history, math,literature etc.. We grew up in a society not infected by the Politically Correct virus. We grew up in a society that respected authority. We grew up in a society that was patriotic and more cohesive. We grew up in a nation whose border's were secure.
We also grew up in a tainted society in terms of segregation so not all was just, sweetness and light and then the political structure decided we could lose a war, that maybe should not have even been fought, under the mistaken belief there would be no repercussions because it was 'over there.' The stains of Viet Nam linger to this day and still manifest themselves in subtle but powerful ways. We now have a president who believes losing wars builds national character and wins friends and respect world wide. How pathetic and naive.
I wish I could have answered my son in a resounding affirmative and not with a lot of qualifications but he deserved an honest answer and I was too uncertain to give him one .
Mohamed A. El-Erian has other issues that he presents regarding the economics of our problems. His biggest concern is that the politicians are driving the car, have no road map and seem to taking us over a cliff. (See 3 below.)
Former Sen. Gramm's speech at Hillsdale College about former President Reagan. (See 3a below.)
---
It is all very long and even more taxing. (See 4 below.)
Dick
-------------------------------------------------------------------------------------------------------------
1)The Psychological Foundation of Obama’s Political Problems
Justin Frank
In June 1985, Flora Lewis wrote in the New York Times that then-President Ronald Reagan said he had pounded the walls in frustration over the hostage crisis in Beirut. Given what we know about Reagan, it's not hard to believe that he would resort to such measures to express his rage.
Now try to imagine Barack Obama similarly venting his frustration at the Republicans taking his agenda hostage for political gain. Hard to visualize, isn't it?
That's no accident. Since being elected president, Obama has consistently displayed a cool demeanor, one that has confounded many of his former supporters. His detachment has led many to think that he is oblivious, disinterested, even frightened of direct confrontation. The latest instance has been his passive observation of the failure of the Super Committee, which has spurred pundits and politicians from both sides of the aisle to accuse him of lacking the fire to be president. MSNBC news host Chris Matthews, once one of the president's biggest fans, recently placed direct blame for the country's malaise on the President's lack of emotional leadership. “There's nothing to root for,” he complained.
The fact that the President has failed to address, hands-on, such a critical problem should make us realize that his reluctance to take charge is not a cognitive issue, but a psychological one. It's not that Obama doesn't understand what he ought to be doing—it’s that the structure of his personality won't allow him to constructively address the problem.
This is where psychoanalysis can be of benefit. By recognizing Obama’s behavior patterns we can illuminate the unconscious thought processes that might be influencing them. Fortunately, one needn’t treat Obama as a patient to undertake a thorough analysis of him. After all, there is plenty of public material available—not least, his autobiography Dreams From My Father—from which to sketch an outline of the President’s personality using a technique called “applied psychoanalysis.”
First, some psychological preliminaries. The President's detractors are suggesting that he doesn't feel enough passion or emotion. But a basic tenet of psychoanalysis is that everyone has rage. The question is what one does with that rage, and why.
On a psychoanalytic level, Obama is someone who tries to disconnect himself from fury through intellectual exertion and by strenuously trying to keep matters in clear focus. He doesn’t simply contain his rage or hold it inside his mind; he dissociates–a psychoanalytic term for disconnecting thought from feeling. This allows him to operate in a purely intellectual state, protected from the disruptive influences of excessive passions.
The 1789 French Revolutionary saying, “The tongue is the enemy of the neck," describes the approach Obama has always lived by. He turns a blind eye to his own rage; he seems almost sleepwalking when others would be screaming. This is not simply a matter of the president’s public persona pushing aside the private, enraged one. It is a profound ability to disconnect himself from feeling the full force of his own rage.
Ultimately, this is an expression of his fear of abandonment. In fact, what appears as detachment is the latest manifestation of a long history of removing himself from the fray in idiosyncratic ways. Growing up as a mixed-race child of two broken homes, and living in two dramatically different countries, Barack Obama learned to survive by carefully noticing everything around him while at the same time not allowing himself to feel the full emotional impact of his experience.
He dealt with loss without protest. He didn't complain when his mother abandoned him to pursue her passion for anthropology on far-flung expeditions, or when she removed him from the home of his stepfather in Jakarta when he was ten. Instead, Obama focused on surviving by getting along. He pursued inclusion relentlessly, even when circumstances repeatedly cast him in the role of the outsider.
It's not an accident that one of the strategies he developed to maintain his membership in groups was to keep his mouth shut. Indeed, his autobiographies show that he was repeatedly taught as a child to keep his feelings to himself. His stepfather Lolo told him regularly never to complain if he were hurt or in trouble. His high school basketball teammates reinforced that message some years later. And so by keeping careful and cautious watch of his surroundings, he learned to be at home in different groups, easily shifting from one to the other.
This kind of dissociation is at the core of some his greatest political strengths. It helped him become intellectually nimble, and acutely alert to his surroundings. It's only by adapting this kind of psychic position his entire life that Obama was able to easily joke at the White House Correspondents Dinner while knowing there was an active mission underway to kill Osama bin Laden.
But assuming this perpetually peripheral role has also taken a lasting toll. The anxiety of not belonging has grown to occupy an ever-greater part of his psyche. He writes in Dreams From My Father that when, as an adult, he was walking through the most dangerous parts of Chicago late at night, the greatest fear he had was the fear of not belonging. But now there is a new tension, between his need to belong and the demands of standing up for what he believes. The former is driven by his related fears of not belonging and being abandoned; the latter carries the risk of alienating others irrevocably.
In material reality, his concern with alienating conservatives is wholly unproductive: it is unlikely that he can be more hated by the Tea Party than he already is. Nonetheless, he continues to relentlessly pursue compromises with Republicans that will never happen. Indeed, so concerned is he with his own degree of belonging that he jeopardizes the sympathies of those who actually have felt a natural and authentic connection to him. Whatever other political and personal advantages it confers, Obama's observational caution doesn’t give jobless participants in “Occupy Wall Street” or Wisconsin’s striking public employees the sense that he is concerned.
Again, it's not that the President lacks passionate emotions. Indeed, given the onslaught of personal provocations doled out by his political competitors, his stores of rage are sure to be filling up. But the question of what will happen with that anger will likely be closely bound with his reelection campaign in 2012. Previously, he has found an outlet for aggression on the campaign trail: The only times he has felt comfortable being truly rhetorically confrontational are when he's standing behind a teleprompter or a podium and before a cheering audience.
There are hints of this campaign persona in the unusually blunt talk coming from the president recently, as when he warned that there “will be no easy exit ramps” for Congress as it tries to escape painful spending cuts. But it remains to be seen whether this is merely a temporary ventilation of Candidate Obama, or a more lasting change in the psychology of the President.
Of course, Obama's detachment is a pattern, and patterns aren't broken easily. In ordinary circumstances it might take years of analysis for someone so well defended to express his anger fully. As President neither he nor our nation can afford the psychoanalytic time that takes.
In the meantime, he will likely fail to see the greatest irony of his current position. As sensitive he is to group dynamics, as the President of the United States, he is now the sole member of an exclusive group of one. And he's going to need to push through his fears in order to avoid joining the only other group available to him—that of the ex-presidents.
Justin A. Frank, MD is a psychoanalyst, clinical professor of psychiatry at George Washington Medical Center, and the author of Obama on the Couch.
-------------------------------------------------------------------------------------------------------------
2)A daring idea to fix the economy: try doing less
The best thing the Government can do to restore growth is to stop imitating Labour, and get out of the business of running things.
By Janet Daley
Gosh, what a parcel of goodies George Osborne is about to present to us in his Autumn Statement. Already promised last week were a government programme to underwrite the mortgages of first-time buyers, as well as a nifty £200 million “green deal” to encourage families to insulate their homes. Then there was a billion-pound subsidy to employers who give young people work experience that will lead to jobs. And who knows what more bounty is to follow in the speech itself?
Now where have I seen the like of this beneficence before? Oh yes – it was under Gordon Brown. As Chancellor (and then later when he was Prime Minister, through his half-hearted proxy Alistair Darling), Mr Brown would stand at the Dispatch Box and shower us with government spending projects. There were injections of cash into house-building, and grants for scientific research, and God knows how many initiatives to create “training” and engineering apprenticeships. All that micro-management: new “start-up” schemes and “one-stop shop” outreach services funded by this department and that department, and then re-packaged and re-announced so that they sounded less tired and predictable.
Maybe you thought we had got past this. Not just because additional public spending is now supposed to be anathema, but because the myth of government activism – the idea that intervention by the state is the answer to every economic and social problem – had been definitively routed. Apparently not: Mr Osborne and, we must assume, his boss still seem to believe that any unacceptable national situation must require direct action from them.
Or maybe they don’t believe that at all. Perhaps they just lack the political courage to admit that, in our present crisis, the best thing that the Government can do is to get out of the business of running (or subsidising, or initiating, or incentivising) things altogether – not just in the interests of saving money, but because the effects of such interference are counter-productive. What the economy is suffering from is not an insufficiency of overweening, fussy, bureaucratic initiatives that inevitably unleash an avalanche of unintended consequences, but a lack of cash in the hands of people who might spend it in ways that would actually create wealth and stimulate (in the proper sense of the word) economic growth.
If ever there was a time for radical proposals by a governing party, this is it. Rather than the imitative, mealy-mouthed shuffling of dollops of money from one departmental scheme to another, in what will inevitably look like panic in the face of rising youth unemployment and disappointing growth figures, what we need is a display of real insight and nerve.
Under black economic skies, political battle awaits 19 Nov 2011
Paradoxically, it is in times of crisis that the public (especially the British public, who are peculiarly brave about these things) are most receptive to audacious pronouncements and drastic remedies. Knowing that a situation is genuinely parlous makes people more inclined to accept what seems like necessary risk-taking, especially if it is presented to them with honesty and conviction.
Couldn’t we have a statement, then, of what most struggling voters know to be true: the economy is failing because people cannot (or are afraid to) spend money. It is no use offering to “underwrite” mortgages for first-time buyers who may not be in a position to repay them. Nor will bribing employers to take on young trainees help firms to expand: if they cannot increase their turnover, they will not be able to retain those fledgling staff. The effectiveness of both these programmes relies on precisely the kind of economic recovery that they are designed to stimulate. If that stimulus fails, the recipients of this state largesse will be left high and dry.
What the economy needs is more customers who are willing and able to buy. What the state needs to do is to give those potential customers more disposable income to spend. To this end, it has tried printing more money. Unfortunately, most of that cash ended up sitting in bank vaults instead of circulating through the system. In fact, the only way to encourage more spending without increasing personal debt is to let people keep more of what they earn in the first place, and to make sure that they are not being overcharged for necessities like fuel and energy. Certainly there will be a few nods in this direction, with a widely predicted freeze on fuel duty and a proposal to hold down increases in rail fares. But such tiny ameliorations in the cost of living are unlikely to make a dramatic impact on most people’s lives.
Instead of finding new, ingenious ways to use your money that might give a brief appearance of nibbling at the edges of problems such as unemployment and property prices, the state needs to withdraw from hyperactive job-creation and mortgage-lending, and become much more vigilant in ensuring competition in the productive parts of the economy. The deregulation of the 1980s and 1990s would be coming in for much less criticism now if it had not funked the matter of competitiveness: nationalised industries too often gave way to private monopolies and cartels. If people are taxed less and fleeced less, they will be happy to stimulate the economy in the good old-fashioned way.
As David Cameron used to say before he took fright: we need a smaller state that does less and spends less. Mr Osborne used to say that, too, in terms that were at least as stark as any Tory backbencher. Maybe a generation of Treasury officials who came of age under the Brown Terror got to him with the electrodes. Or else, his role as election campaign manager for the Conservatives is conflicting with what should be his better judgment as head of the nation’s finances. After all, it should be his function as Chancellor to tell his party’s political strategist that voter-appeasing initiatives are unaffordable, and that economic reality must take precedence. Presumably, Mr Osborne would have had to carry on that argument with himself. (If he did, we know which side won.)
There is an urgent need now to rethink the whole relationship between government and populace while there is still the possibility of discussion. In Britain, Europe and America, the questions are remarkably similar. Can a free-market economy support an infinitely growing state? We will have to choose, quite soon, between liberty and the “security” of a society in which government controls the levers of economic life. Washington politicians are getting a terrible drubbing for failing to resolve their implacable differences over the size of the state (to the extent that they are unable to agree a federal budget). The US national debate may seem rough and ready to European ears – but at least they are engaging in the real argument.
-----------------------------------------------------------------------------------------------------------
3)When economic ‘unthinkables' become reality
Pacific Investment Management Co. CEO and Co-CIO Mohamed A. El-Erian says recent turbulence in the financial markets is “not just normal volatility. … [I]t’s “unsettling.”
By BRIAN CALLE
When the chief executive of a global investment firm that manages assets in the neighborhood of $1.4 trillion calls current economic goings-on "unsettling," it is probably wise to take heed. That's precisely what Pacific Investment Management Co. CEO and Co-CIO Mohamed A. El-Erian told an audience of more than 200 people at the Big Canyon Country Club in Newport Beach. This is "not just normal volatility," he said referring to recent turbulence in the financial markets, it's "unsettling."
El-Erian's address Nov. 17 was a diagnosis of current economic woes, their causes and general observations about what might create laudable economic growth and quell global markets.
What concerns El-Erian and his colleagues at Newport Beach-based PIMCO are what the company terms "unthinkables," those worst-case scenarios of economic upheaval. Some "unthinkables" became reality in the third quarter of this year, El-Erian observed, such as the United States losing its AAA credit rating and U.S. policymakers flirting with a technical default.
Many of the problems are political, some are social. But the problems have been a long time coming and recent social discontent manifested through global social movements further highlights challenges facing the global economy.
What concerns El-Erian and his colleagues at Newport Beach-based PIMCO are what the company terms "unthinkables," those worst-case scenarios of economic upheaval. Some "unthinkables" became reality in the third quarter of this year, El-Erian observed, such as the United States losing its AAA credit rating and U.S. policymakers flirting with a technical default.
Many of the problems are political, some are social. But the problems have been a long time coming and recent social discontent manifested through global social movements further highlights challenges facing the global economy.
El-Erian identified politicians and policymakers as major barriers for economic growth. He noted that American society has "transferred enormous power to the politicians and policymakers." And unfortunately, "politicians are driving." He said it is like policymakers are driving the car without a map on an "unfamiliar road and all of us are sitting in the back seat." "They haven't told us where we are going" nor have they provided a "vision for the U.S. economy." Instead the politicians are "arguing amongst themselves;" there is "no clarity." His observations exemplify broader public angst towards policymakers and politicians at virtually all levels of government.
BAILOUT FALLOUT
The PIMCO chief discussed some government policies that have led to increased social discontent, most notably when he called United States bank bailouts a form of "socialism." The bailouts were sold to the world promising to "restore growth and employment," he said, but "neither occurred." This is one source of social unrest in the U.S. because, as El-Erian has noted, previously, it is the perception of the public that government "privatized massive gains and socialized massive losses." Growing numbers of people throughout the world are beginning to "believe the capitalist system is not fair."
In addition, knee-jerk government efforts at economic intervention have largely failed at a time when long-term, multi-year planning and vision are necessary. "The West," he said, has been unable to grow its way out of this recession "despite massive stimulus." He listed a number of "impediments" such as the depressed housing market, labor market problems and structural, long-term unemployment, as well as limited access to credit.
Trouble spots
Two areas El-Erian highlighted as being particularly troublesome are "unhealthy balance sheets" of government and homeowners, and youth unemployment. He said that the "unhealthy balance sheets are dictating the future of Europe, possibly the U.S., too," a dangerous economic proposition. Also, unemployment rates for those between the ages of 16 to 19 are staggering. "That scares us the most," he said, because when young people are unemployed for long periods of time they run the risk of becoming unemployable.
For a substantial U.S. economic recovery, El-Erian says the nation needs its economic "Sputnik moment" – a societal coming together for a "common purpose" and shared vision. "We need our political system to come together and understand that we have structural problems, and we need a multiyear plan" to address them. "Social movements pull the parties further apart" at a time when "coming together is necessary."
For Europe, El-Erian, like many scholars, contends that Germany is the key. "Europe needs its moment of truth," he said. "Germany is the most powerful country. They have the checkbook, and they must act before things will get better." He said that Germany should make one of two decisions: either decide all 17 eurozone countries are a fiscal union and in solidarity, pay for the other countries (much like the German reunification solidarity tax used to rebuild Eastern Germany) or not pay, and move towards a "smaller, less-imperfect union." From El-Erian's view, one of those must occur to solve the challenges in Europe.
SPEND, CHINA, SPEND
Finally, he said, the Chinese government could take measures to encourage spending by its middle class, which he said has the capacity to spend but not the will. If China changed policies to encourage spending "it will open up a huge market."
For the individual investor, El-Erian called for "general defense and selective offense," as well as "intellectual agility."
While global volatility amplified by social, political and economic unrest in the United States and abroad has made for "unsettling" times, these challenges are not insurmountable.
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3)Reaganomics and American Character
By Phil Gramm (CURRENTLY vice chairman of the investment bank division of UBS, Phil Gramm served as a member of the U.S. House of Representatives from Texas’s sixth congressional district from 1979-1985, and as a U.S. Senator from Texas from 1985-2002. Prior to his career in public service, he taught economics at Texas A&M University from 1967-1978. Sen. Gramm earned both his B.A. and doctorate degrees in economics from the University of Georgia.)
The following is adapted from a speech delivered at Hillsdale College on October 3, 2011, during a four-day conference on “Reagan: A Centenary Retrospective,” sponsored by the College’s Center for Constructive Alternatives.
What was the American economy like in the decade prior to the Reagan presidency? The 1970s, for a myriad of reasons, were not a happy time. They featured a combination of stagnation and inflation, which came to be called “stagflation.” The inflation rate peaked at just over 13 percent, and prime interest rates rose as high as 21-and-a-half percent. Although President Jimmy Carter did not use the exact words, a malaise had certainly set in among Americans. Many wondered whether our nation’s time had passed. A Time magazine headline read, “Is the Joyride Over?” Did we really need, as Jimmy Carter told us, to learn to live on less?
Ronald Reagan did not believe America was in decline, but he did believe it had been suffering under wrongheaded economic policies. In response, he offered his own plan, a program for creating economic freedom that came to be known as Reaganomics. Of course, most of Reaganomics was nothing new. Mostly it was the revival of an older understanding that unlimited government will eventually destroy freedom and that decisions regarding the allocation of scarce resources are best left to the private sector. Reagan explained these old ideas well, and in terms people could understand.
But there was also a new element to Reaganomics, and looking back, it was a powerful element and new to the economic debate. It was the idea that tax rates affect a person’s incentive to work, save and invest. To put it simply: lower tax rates create more economic energy, which generates more economic activity, which produces a greater flow of revenue to the government. This idea—which came to be known as the Laffer Curve—was met with media and public skepticism. But in the end, it passed the critical test for any public policy. It worked.
To be sure, there were a couple of major impediments to the economic success of Reagan’s program. First, the Federal Reserve Bank clamped down on the money supply in 1981 and 1982, in an effort to break the back of inflation, and subsequently the economy slipped into the steepest recession of the post-World War II period. Second, Soviet communism was on the march, the U.S. was in retreat around the world, and President Reagan was determined to rebuild our national defense as part of a program of peace through strength. All of these factors worked strongly against Reagan in the battle to revive the American economy. Nor was it a forgone conclusion that his program would get through Congress. We shouldn’t forget that it was a tough program. For example, it eliminated three Social Security benefits in one day: the adult student benefit, the minimum benefit, and the death benefit. Reagan’s program represented a dramatic change in public policy.
With his great skill in communicating ideas, Reagan got his program through Congress. And despite Fed policies and large expenditures for national defense, his program succeeded. I don’t want to bore you with statistics, but I will have to present some to make my case. Most importantly, I hope I will succeed in demonstrating what a difference good policies make to the average citizen.
The evidence is, I think, overwhelming: the Reagan program, when fully implemented in 1983, ushered in a 25-year economic golden age. America experienced very rapid economic growth and only two minor recessions in those 25 years, whereas there were four recessions in the previous 12 years, two of them big ones.
What exactly did Reagan do? For starters, he cut the top tax rate from 70 percent to 28 percent. And yes, high income earners benefitted from these cuts. But as I used to say in Congress, no one poorer than I am ever hired me in my life. And despite lower rates, the rich ended up paying a greater share: In 1979, the top one percent of income earners in America paid 18.3 percent of the total tax bill. By 2006, the last year for which we have reliable numbers, they were paying 39.1 percent of the total tax bill. The top ten percent of earners in 1979 were paying 48.1 percent of all taxes. By 2006, they were paying 72.8 percent. The top 40 percent of all earners in 1979 were paying 85.1 percent of all taxes. By 2006, they were paying 98.7 percent. The bottom 40 percent of earners in 1979 paid 4.1 percent of all taxes. By 2006, they were receiving 3.3 percent in direct payments from the U.S. Treasury.
In the 12 years prior to the Reagan program, economic growth averaged 2.5 percent. For the following 25 years, it averaged 3.3 percent. What about per capita income? In the 12 years prior to the Reagan program, per capita GDP, in real terms, grew by 1.5 percent. For the 25 years after the Reagan program was implemented, real per capita income grew by 2.2 percent. By 2006, the average American was making $7,400 more than he would have made if growth rates had remained at the same level as they were during the 12 years prior to the Reagan program. A family of four was making $29,602 more. During the 12 years prior to Reagan, America created 1.3 million jobs per year. That number is pretty impressive compared to today’s stagnant economy. But during the Reagan years, America added two million jobs per year. That means as of 2007 there were 17.5 million more Americans at work than would have been working had the growth rates of the pre-Reagan era continued.
Inflation, which had been 7.6 percent for the previous 12 years, fell to 3.1 percent. Interest rates plummeted. The average homeowner in America had a monthly mortgage payment of $1,000 less as a result of the success of the Reagan program. Poverty, which had grown throughout the 1970s despite massive increases in anti-poverty programs, plummeted despite cuts to these programs. The poverty level fell from 15 percent to 11.3 percent. These results are tangible evidence that government policy matters.
This is not to say that no mistakes were made. In order to secure lower tax rates, it became good politics to raise the number and amount of income tax deductions, thereby removing about 50 percent of Americans from the tax rolls. In my opinion, that was a mistake, and I think we are suffering for it today. I believe everyone should pay some income taxes. Nevertheless, the net result of the Reagan program was good for all Americans.
So how does the Reagan recovery compare to the recovery going on today? In sum, this is the most disappointing recovery of the post-World War II period by a large margin. I don’t think people understand what an outlier this recovery period is. If the economy had recovered from this recession at the rate it recovered from the 1982 recession, which was roughly the same size in terms of unemployment, there would be 16.3 million more Americans at work today—in other words, all those who say they are unemployed plus almost 60 percent of “discouraged workers” who have dropped out of the labor force. If real per capita income had grown in this recovery at the same rate it grew during the Reagan recovery, real per capita income would be $5,139 higher today. Both the Reagan program and the Obama program instituted dramatic changes. One program worked. The other is failing.
In the end, government policy matters. The truth is, Americans are pretty ordinary people. What is unique about America is an understanding of freedom and limited government that lets ordinary people achieve extraordinary things. We have been getting away from that view recently, but if we can get back to that understanding, which was Reagan’s, our nation will be fine.
Let me conclude by saying that the argument I am making is not just about money or GDP. It’s an argument about character.
If you want to see the effect of bad government policy on character, simply turn on the news and see how Greek civil servants have been behaving recently. They are victimizers behaving like victims. Greek government policies have made them what they are. But what made Americans who we are is a historically unprecedented level of freedom and responsibility. The real danger today is not merely a loss of prosperity, but a loss of the kind of character on which prosperity is based.
I occasionally hire a man to do bulldozer work on my ranch. He doesn’t know a lot about foreign policy, but he knows a lot about the economics of the bulldozing business. In his freedom to pursue that business and to be the best he can be at it, he’s the equal of any man. He’s proud, he’s independent, and he knows his trade as well as anybody else in America knows theirs. That’s what America is about. For me, today’s battle, as it was in 1980, is not just about prosperity or goods and services. It’s about freedom, and it’s about the kind of character that only freedom creates.
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4) It’s All Very Taxing
By Howard Marks
The issue is simple: the U.S. government generally spends more than it brings in . . . and recently, a lot more. For years Congress was willing to serially raise the federal debt ceiling and monetize the deficit. But this past summer, some legislators balked. When the early August deadline for an increase in the ceiling arrived, our elected officials kicked the can down the road, but less far than usual. They created a Congressional supercommittee with unprecedented power to propose solutions, and they designed automatic spending cuts in case no proposal won approval.
With the committee working under a November 23 deadline to find ways to reduce the federal deficit by $1 trillion-plus over the next decade, and with a presidential election less than a year away, the subject of taxes is all over the headlines and likely to remain there. Thus I've decided to provide a background piece on the issues.
What form will the deficit-cutting action take? In fact, the possibilities fall into only four categories:
• cut discretionary spending,
• reduce expenditures on entitlements,
• cut waste and fraud, or
• increase tax revenues.
Given the magnitude of the problem, the limited number of potential solutions, and the differences between the parties on the subject, there's already debate regarding the fourth of those listed above. Democrats generally feel tax increases should be part of any solution, and Republicans often insist that while they're open to overhauling the tax code, total taxes must not rise.
What's Fair is Fair
This memo got its start as an excuse for me to write about one of my greatest pet peeves: the so-called "fair share."
Ask your typical Democrat or liberal about the idea of increasing taxes on upper-bracket earners, and what will they say? In my experience, the answer's always the same: "We're not out to soak the rich. We just want them to pay their fair share." We've seen it over and over for years. For example:
"Were [the politicians levying taxes on Americans] seeking to redistribute wealth, to recast society along more egalitarian lines? Or were they simply trying to ensure that rich people paid their "fair share"? The answer, predictably, is both. . . .
"If poor and middle class Americans were going to be asked [by President Roosevelt], of necessity, to shoulder much of the fiscal burden, then they needed assurance the rich were paying their share. . . .
"No one made the case more succinctly than Rep. Cordell Hull, legislative father of the 1913 income tax. 'I have no disposition to tax wealth unnecessarily or unjustly,' he explained in his memoirs. 'But I do believe that the wealth of the country should bear its just share of the burden of taxation and that it should not be permitted to shirk that duty.' "
("Soaking the Wealthy: An American Tradition" The Wall Street Journal, January 29-30, 2011)
The rhetoric remained unchanged in the late twentieth century:
" 'We will lower the tax burden on middle class Americans,' [Bill Clinton] pledged in 1992, 'by asking the very wealthy to pay their fair share.' " ("The Middle-Class Tax Trap" The New York Times, April 17, 2011)
More recently, President Obama carried on the tradition.
"I will veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans or biggest corporations to pay their fair share." (The New York Times, September 20, 2011)
And here's another reference from just a month ago:
"In proposing a 5 percent surtax on incomes of more than $1 million a year to pay for job-creation measures sought by President Obama, Senate Democratic leaders on Wednesday escalated efforts to strike a more populist tone and to draw Republicans into a confrontation over how much affluent Americans should pay to help others cope with a struggling economy. . . .
" 'It's interesting to note that independents, Democrats and Republicans and even the Tea Party agree it's time for millionaires and billionaires to pay their fair share of taxes,' [Senate Majority Leader] Reid said Wednesday."
(The New York Times, October 6, 2011)
But what is the fair share? How is it to be determined, and by whom? When Senator Reid says, "it's time for millionaires and billionaires to pay their fair share," he implies they haven't been doing so thus far. How does he know? What's the standard? If there's an objective standard for one's fair share, why does it only seem to be those from the left side of the political spectrum who say it's not being paid? And if there isn't an objective standard, how can the fair share be determined? The truth is, fairness is almost entirely in the eye of the beholder, and "get them to pay their fair share" seems like just another way to say "raise their taxes."
There's probably only one element of fairness that's beyond discussion: those with higher incomes should pay more in taxes. After that, everything is up for grabs.
• For example, we have a progressive system of taxation, meaning that higher earners don't merely pay more in terms of dollars; they generally pay a higher percentage of their incomes in taxes. Most people agree that this is fair. But is it? Why should success be penalized through greater taxation? And if the tax rate for those who earn more should be higher, how much higher? Should the top marginal tax rate be double that applicable to lower-income taxpayers? Triple? What's fair?
• Are some forms of income more desirable to society and thus deserving of taxation at lower rates?
• And should we encourage certain expenditures by making them deductible from taxable income?
The fairness of all of these things is subject to discussion and disagreement. They come under the heading of tax policy.
Is Taxation Progressive? Progressive Enough?
Under the U.S. system, people in higher income brackets pay tax at higher rates. (However, Mark Twain said, "All generalizations, including this one, are false." For an exception to the generalization above, see the discussion of the "Buffett Rule" on page 5.) In large part, the question of fairness primarily surrounds whether the higher rates are high enough.
Talk about "the eye of the beholder." There's evidence on both sides of this debate:
• The top 1% of U.S. taxpayers pay 38% of all individual federal taxes. The top 10% pay 70% of all taxes, the top 25% pay 86%, and the top 50% pay 97%.
• That leaves the bottom 50% of all taxpayers paying only 3% of the total.
• About half of Americans pay no federal income tax, and almost 25% pay no federal taxes at all.
• The average federal income tax rate for the top 1% of Americans is 23% (and for the top half it's 14%), while the average rate for the bottom half is 3%.
Notwithstanding the rhetoric, there's no doubt about the fact that America's top earners are taxed more heavily than the rest. On the other hand, they pay at lower rates than they used to (when I was a boy the top marginal rate was 94%), and it seems progressivity has declined.
". . . the effective federal tax rate, including payroll taxes, for the wealthiest 0.01 percent of earners fell to 31.5 percent in 2005, from 42.9 percent in 1979 [for a decline of 26.6%], according to data from the Congressional Budget Office. Over the same time, effective rates for taxpayers in the center of the range fell to 14.2 percent, a decrease of just 4 percentage points [or 22.0%]." (The New York Times, September 21, 2011)
Total revenues from income taxes have declined in the U.S. – they "are at a historical low of 15.3 per cent of the gross domestic product, compared with a postwar average of 18.5 per cent" (Financial Times, September 25) – and they've declined more for top earners than for the rest. This is because of both specific rate cuts that have been enacted and the fact that the rates applied to dividends and capital gains – which clearly flow more to people in the upper income brackets – have declined relative to the rates on salaries and wages.
On average, higher earners absolutely do pay a higher percentage than those who earn less. But the decision as to whether the differential is just right, too little or too great is highly subjective and certainly a valid topic for debate.
Righteous Income
In the U.S., different types of income are taxed at different rates, suggesting some are considered more virtuous than others. For example, profits on investment assets held for more than a year, so-called "long-term capital gains," are taxed less than "ordinary income" such as salaries and interest. This has been the case for so long that we consider it the norm, and what we're used to often becomes the baseline for "fairness."
Long-term capital gains are taxed at reduced rates because of a judgment that long-term investment in things like securities, companies and real estate is beneficial for the economy and should be encouraged. Right now, the top tax rate on long-term investment profit is less than half that on short-term gains and ordinary income. And in recent years, the taxes on dividends have been reduced to similar levels, in part to mitigate double taxation of corporate profits but also because of a judgment that the equity investments that give rise to dividends are good for our society.
Is it appropriate to tax profits on long-term investments at rates below those on other forms of income? Certainly we should encourage investment, but there's no consensus that the tax code is the place to do it. Some foreign jurisdictions don't tax capital gains at all, while others tax them at the same rate as all other income.
What about interest? Why are dividends taxed at preferential rates and interest at ordinary rates? The explanation may lie in the fact that interest is deductible for corporations, while dividends aren't. Interest is paid out of pretax income, while in theory dividends are paid out of after-tax income – although the existence of corporate deductions and credits means dividends may, in fact, be paid out of income that hasn't been taxed by the U.S. Alternatively, the difference in tax treatment may be the result of a desire to encourage investment in "risky" equities rather than "safe" debt. But some companies' dividends are no doubt safer than some other companies' interest payments, so this distinction is questionable. If the goal is to encourage risk bearing, is dividend versus interest the right criterion?
While on the subject of gains from investments, it's interesting to note that, not long ago, dividends were included with interest under the rubric "unearned income." This pejorative phrase implied that income on capital, not requiring labor, was less virtuous than that stemming from labor, so-called "earned income." Thus unearned income – primarily dividends and interest – was taxed more heavily than wages.
But now things have turned 180 degrees, and returns on capital are taxed at lower rates than wages. It's worth noting that the Democrats – commonly considered the party of labor – controlled the government for much of the period 1928 to 1980, when earned income was favored. On the other hand, the Republicans – the party of those with capital to invest – have been in control more of the time since 1980, and the taxation of returns on capital has declined in relative terms. The definition of virtuous income that should be encouraged through lower taxes clearly is subjective, impermanent and subject to change with the winds of politics.
One debate that has arisen recently surrounds the so-called "Buffett Rule." For the last few years, Warren Buffett has been speaking about the fact that he pays a smaller percentage of his income in taxes than does his secretary. Presumably this is because his income consists primarily of long-term capital gains and very little of salary, bonus and interest.
(As an aside, it should be noted that Buffett's lower tax rate, while not unique, is far from the norm. According to The New York Times of September 24, "The number of people who fall under the Buffett Rule is quite small, only 60,000" out of 450,000 taxpayers who make over $1 million. "And the amount of revenue that would be generated [by the Buffett Rule] over the next 10 years is equally small – just $13 billion. . . .")
Buffett's tax status is a function of policy choices made by the people who wrote our tax laws. According to The New York Times of September 21, "President Obama's proposal for a new tax on millionaires . . . would counteract decades of tax reductions for most Americans that have given the wealthy the most benefit. . . ." Do we consider these decisions appropriate in principle and Buffett's just an extreme case? Or do we want to change things so returns on capital are less favored and big earners can never pay overall taxes at lower rates than those who earn less? (And, as an aside, are all long-term profits truly beneficial to society? How, for instance, does society benefit when someone buys a bar of gold?)
Deductions, Loopholes and Tax Incentives
Speaking of gold, in "All That Glitters" on that subject, I quoted from a speech by Mississippi state legislator "Soggy" Sweat that showed his ability to simultaneously praise and condemn whiskey with equal conviction. Outdoing Soggy, depending on who's talking, Washington politicos use the three very different terms above to describe the same thing: offsets to taxable income.
The drafters called them deductions: provisions that reduce the net income on which taxes are levied. Critics call them loopholes, suggesting there's something underhanded about those provisions. And politicians use the laudatory-sounding term tax incentives to describe tax code provisions that reduce tax revenues in order to encourage certain behavior. It all depends on your point of view.
Let's take a look at one of the most popular deductions: interest on mortgages. For as long as I can remember, interest on home mortgages has been treated as a desirable expenditure that should be encouraged. Because home ownership is considered part of the American dream, the tax code subsidizes it by reducing the after-tax cost for those who borrow to buy homes (and are able to itemize rather than take the standard deduction). While everything else may be arguable, certainly this seems fair. But is it?
• Are homeowners more virtuous than renters? If mortgage interest is deductible but rent isn't, we're requiring renters to subsidize owners. Is that appropriate?
• On average, homeowners are from the middle and upper income brackets. Is it fair that poorer renters provide a benefit for richer owners?
• And is it desirable that those able to buy more expensive homes should get more of a subsidy than those consigned to cheaper ones?
As with the taxation of dividends, judgments on these matters change over time. Until 1987, there was no limit on the amount of mortgage interest that could be deducted. If you could afford to own ten homes with multiple million-dollar mortgages on each one, taxpayers would collectively share the cost by reducing your income taxes due. Today interest is deductible on only a maximum of $1.1 million of debt, and only on first and second mortgages, and only on a primary residence and a second home. So the tax treatment of owners of many homes and more expensive homes has become less generous. But it's still better than that of renters. Is that proper?
What about the tax deductibility of charitable donations? As I travel the world visiting with clients, I see that two things about the U.S. are quite uncommon: (a) Americans give a lot of money to charity and (b) donations to charity are deductible in calculating taxable income. Everyone tells me the latter is the main reason for the former. In particular, these things are part of the explanation for the existence of the many private, non-state-supported colleges and universities in the U.S., the best of which are so good at least in part because of their significant donor-provided endowments. For example, Harvard and Yale are only half as old as England's Oxford and Cambridge, but they benefit from endowments that are far larger.
Part of this is true because legislators decided at some point to subsidize non-profits by encouraging contributions through the tax code. That's certainly understandable. And yet, changes were made in recent years to limit upper-bracket taxpayers' use of deductions in order to ensure that they pay some minimum tax rate.
What about the unevenness of the subsidy? The cost of giving $1 to charity is reduced by the amount of taxes it saves the donor, which is equal to $1 times the person's tax rate. So today, speaking simplistically, it costs a top-bracket taxpayer 65 cents to give a dollar to charity, while it costs a bottom-bracket taxpayer 85 cents. Is that fair? Should the bigger earner receive a greater reward for a dollar of philanthropy than someone who can afford it less easily? And should those who aren't inclined to give to charity be required to subsidize those who are?
Finally, what about state and local taxes, the third of the significant deductions? Here tax deductibility isn't due to a decision to encourage people to pay non-federal taxes, but rather to cushion the effect of being taxed in multiple jurisdictions. Texas, Florida and five other states have no personal income tax, California has a heavy one, and someone living in Manhattan pays tax to both New York State and New York City. Deductibility on the federal tax return somewhat evens out the burden and ensures that (a) the states get first crack at taxing income and (b) the federal government can only tax what's left, in line with federalist principles.
This raises a number of questions. Is the deductibility of state and local taxes fair? As with other deductions, the key question is "fair to whom?" Some people pay more state and local taxes than others, meaning they get greater deductions than others. As a result, while a person with a given income who lives in a high-tax state pays higher total taxes, he or she pays less federal tax than someone in a low-tax state. Is that fair?
Further, what all of this means is that by providing more benefits to its residents (or at least spending more money, whether beneficially or not), a high-tax state creates a deduction for its residents and thus reduces the federal government's total tax take. Is this right? Should the federal government subsidize spending on the part of high-tax states? That is, should residents in low-tax states bear part of the expenses of high-tax states? There's nothing simple about these matters.
While the source of an exemption rather than a deduction, what about interest on "municipal bonds" issued by states, counties, cities and local agencies. This is exempt from federal taxation, under the legal doctrine that the federal government mustn't tax the operations of the states. ("The power to tax is the power to destroy," one of our great Supreme Court decisions held.) But here again, we're talking about a federal benefit (in the form of a lower cost of capital) for the biggest-spending local governments and their citizens, and a tax break for people who lend to them.
And what about property taxes? These are deductible without limitation. Thus the owner of a mansion – or ten mansions – receives more of a tax benefit than a low-income earner. And it's another subsidy for homeowners versus renters. Is this right, or should it be changed?
To date, it has been deemed fair for state and local income tax to be deductible on federal tax returns. But is this immutable? Sales tax used to be deductible, too (meaning the buyer of a Rolls Royce got assistance from the federal government). Now it's not. More fair?
What if the deduction for state and local taxes and the exemption for muni interest were ended? This would increase the cost of financing for state and local governments and most impact the highest-spending states, potentially requiring higher taxes causing people to move away. This would reduce those states' revenues and require them to raise taxes further (and drive away still more taxpayers) in a painful cycle. And are those states profligate or just burdened (like California by a substantial low-income population) or natural-resource-poor (lacking Texas's oil)?
So even in "small" matters like the tax deductibility of mortgage interest, charitable donations, and state and local taxes, there are lots of difficult questions. While on their face the deductions seem fair to homeowners, philanthropists and residents of high-tax states, they're simultaneously penalizing renters, non-donors and residents of low-tax states (as well as taxpayers in low tax brackets and those without enough deductions to itemize).
How about the biggest exclusions of all: employer-provided health care and the deferral of taxation of contributions to pension plans? In both cases, those receiving these employer-paid benefits enjoy a substantial benefit not shared by those not fortunate enough to participate. For instance, is it fair that many better-paid workers get thousands of dollars a year in untaxed health-care benefits, while other workers enjoy no such subsidy?
Fairness turns out to be quite an elusive concept.
Reasons for Increasing Taxes
As U.S. leaders wrestle to reduce the budget deficit in the coming months and years, spending cuts are a certainty. But the question of whether taxes should be increased is sure to be hotly debated. A number of justifications for doing so are advanced:
• Some people want wealth to be redistributed throughout society by taxing the rich and giving to the poor. They want the government to do more for those who are less fortunate (or less able), and that means having the rest pay for it.
• There's an argument that for the deficit solution to be equitable, all citizens should contribute to it. Though some government spending benefits all citizens alike, such as national defense, national parks and the administration of justice, much spending disproportionately benefits lower earners, in the form of public education and transportation (which are supported by the federal government), unemployment insurance, food stamps, Medicare and Medicaid, etc. Thus the effect of the coming spending cuts will fall more heavily on the poor. Some argue that since they receive less in benefits and are therefore less likely to experience their loss, the wealthy should share the burden of reducing the deficit through increased tax payments.
• As opposed to the ideological arguments reviewed above, tax increases are among the limited number of possible contributors to deficit reduction listed on page 1. Thus, in the simplest terms, we can cut more from the deficit if we tax more (all else being equal).
• The ultimate practical point is that spending cuts alone won't do much to eliminate the deficit.
• Viewed another way, promises of entitlements have been in place for decades, people have relied on them, and those promises have to be kept. This is clearly impossible without increased taxes and/or exploding deficits.
Is redistribution a valid goal? To some people, it is part of the process of helping every citizen in the "pursuit of happiness." To others, it's akin to socialism and contrary to the American ethic in which rewards follow ability and hard work.
Should everyone contribute to deficit reduction, including bigger earners through the biggest tax increases? Or should the savings come primarily through sacrifices on the part of those who to date have been the primary beneficiaries of excessive government spending? I have no doubt that we'll see fireworks on these topics.
Reasons for Not Increasing Taxes (or for Lowering Them)
Before concluding that the above points are persuasive, you should consider the equally numerous arguments to the contrary.
• Many believe our massive deficit stems from a government (and an entrenched army of government employees) willing and able to spend all available cash (and more). A bureaucracy will always find uses – many of them wasteful – for available revenues. Thus the only solution is to "starve the beast": only tax cuts and restraints on borrowing will force the government to limit spending.
• It is argued that by decreasing the after-tax proceeds from a dollar earned, tax increases reduce people's incentive to work, and thus cut into a nation's overall productivity. From 1974 to 1979, Britain's top marginal rate was 83% (although with a 15% surcharge on interest and dividends, it could rise to 98%). I remember reading about a banker who took time off without pay to paint his house. Society benefits when each of us does the things we're best at. But if a banker who earns $20,000 a month only gets to keep $3,400, he's better off forgoing a month's salary to avoid paying a painter who gets $5,000 a month.
• Research into the "elasticity of taxable income" (ETI) shows that "when marginal tax rates go up, the amount of reported incomes goes down," suggesting higher taxes do reduce productivity. (The Wall Street Journal, March 30, 2010). Of course, it's also possible that when rates go up, the incentives for failing to report income also go up. Thus part of the ETI effect could come from under-reporting, as opposed to reduced effort.
• Taking the above a step further, the "Laffer curve," named after economist and presidential adviser Arthur Laffer, posits that by discouraging work (and thus reducing incomes), raising income tax rates actually reduces income tax collections. Thus, by increasing taxable income, rate reductions bring revenue gains.
• Last but especially timely is the classic Keynesian argument that raising taxes and thus reducing after-tax incomes shouldn't be done at a time when the economy is weak and spending should be encouraged, not inhibited.
For me the bottom line – the real reason why many people don't want rates to go up – is that they don't want to pay more taxes. I think people tend to "vote their pocketbooks," meaning many people with incomes to tax will vote for the candidate who promises lower taxes. But the economic theories discussed above certainly lend validity and even nobility to the pursuit of higher after-tax income . . . and the fact that their supporters are self-interested doesn't make them wrong. Finally, for whichever reason, a good portion of the electorate buys these arguments. And The New York Times reported on November 2 that "Americans for Tax Reform, a taxpayer advocacy group . . . says that 41 senators and more than 235 House members have pledged in writing to oppose all tax increases."
Topics in the News – Income Inequality
One of the outstanding characteristics of the U.S. economy at this time is the rising dispersion between incomes. The percentage of total income going to higher earners has been increasing dramatically, whether because of (a) the rising importance of education and technological literacy or (b) the movement of work offshore, the declining availability of blue-collar jobs and the reduced power of private-sector unions to garner wage gains. And given the pattern of tax cuts and the special treatment given to income on capital, the tax system has magnified the divergence.
A recent report from the Congressional Budget Office provided dramatic evidence of the divergent trends in income. It outlined the percentage gain in average inflation-adjusted after-tax income of various income groups between 1979 and 2007:
• Top 1% of the population in terms of income: 275%
• Next 19%: 65%
• Middle 60%: 40%
• Bottom 20%: 18%
According to the CBO:
• The share of income going to higher-income households rose, while the share going to lower-income households fell.
• The top fifth of the population saw a 10-percentage-point increase in their share of after-tax income.
• Most of that growth went to the top 1 percent of the population.
• All other [quintile] groups saw their shares decline by 2 to 3 percentage points.
An October 26 article in The New York Times reported the following conclusions:
". . . the report said government policy has become less redistributive since the late 1970s, doing less to reduce the concentration of income.
" 'The equalizing effect of federal taxes was smaller' in 2007 than in 1979, as 'the composition of federal revenues shifted away from progressive income taxes to less-progressive payroll taxes,' the budget office said.
"Also, it said, federal benefit payments are doing less to even out the distribution of income, as a growing share of benefits, like Social Security, goes to older Americans, regardless of their income. . . .
"Also cited as factors contributing to the rapid growth of income at the top [in addition to federal tax and spending policies] were the structure of executive compensation; high salaries for some 'superstars' in sports and the arts; the increasing size of the financial services industry; and the growing role of capital gains, which go disproportionately to higher- income households."
The implications for tax discussions are obvious. Upper earners have moved further ahead relative to lower earners, and tax policies have contributed to this trend. For those who think progressivity should be bolstered, income should be redistributed, and those most able to pay should contribute more heavily to solving the deficit problem, upper-bracket earners make a most attractive target.
Topics in the News – The Sputtering Economy
In early 2011, there was a growing consensus that the U.S. economy was on an upward trajectory – that recovery had taken hold. Reported growth in GDP was accelerating. Orders, sales and profits were strong. Cash was piling up in corporate coffers. The Fed gave increased thought to increasing interest rates to cool off the economy and prevent the rekindling of inflation.
But in the summer it was reported that the economy had cooled, and earlier estimates of GDP were revised downward. A possible double-dip recession became the topic of the day. At the same time, an unseemly political confrontation regarding the U.S. federal debt ceiling exposed a flawed, unconstructive political system at work; produced a downgrade of long-term Treasury debt on the part of Standard & Poor's; seemed to take us to the brink of a default; and sapped confidence at all levels.
Despite the economy's weakness, further government aid for the economy has been rendered untenable by widespread negative feelings about the stimulus programs of 2007-08 and the popular view that the government took care of Wall Street but not Main Street, combined with the nearness of the next presidential election. Especially with stimulus unlikely, government actions that discourage growth should be viewed skeptically.
In the U.S. – just like in Greece and elsewhere in Europe – the answer to problems of excessive deficit and debt can be summed up in one word: austerity. Everyone's after debtor nations to practice austerity; that is, to spend less and tax more. The problem is that such behavior will reduce citizens' incomes, discourage consumer spending and slow or reverse economic growth. While on paper austerity will cut deficits, it may actually add to them by reducing government tax collections. In this way, it would necessitate further borrowing.
There's no doubt that, along with spending cuts, tax increases would have a detrimental impact on the prospects for economic recovery. Thus even people who are open to tax increases may not want them to be effective until the economy is out of danger. As the Financial Times put it on October 29, "Many households are so badly overleveraged that a balanced federal budget would ruin them."
But our economic problems aren't just cyclical. There are worrisome secular trends, many surrounding the scarcity of new jobs, the movement of manufacturing overseas, and the low level of business investment in the U.S. The best cure for our cyclical and secular difficulties would be growth based on industrial expansion. This would put people to work, support increases in spending, reinvigorate the housing sector, increase tax revenues and shrink the deficit. But for this to happen, we need (a) tax rates that allow successful entrepreneurs to retain a substantial percentage of the resulting profits and (b) confidence that the tax system won't be made more confiscatory after they've made their investments. At the present time, the latter, in particular, is very much lacking.
Topics in the News – Flat Tax
It's interesting to note that writers of tax law have two main routes to a given revenue total: low rates without deductions, exemptions and credits, or high rates with them. To date they have chosen the latter course. An article in The Wall Street Journal of January 29, 2011 marked down this choice to pure politics:
"Why did [Roosevelt's high tax rates] last so long . . . beginning their long steady decline only during the Kennedy administration? . . . In part to fund the Korean conflict and the Cold War, but also to grease the skids of modern politics. Lawmakers were able to blunt the effect of high statutory rates by handing out tax preferences to their friends, constituents and contributors. Steep rates preserved the appearance of progressivity (and, to be fair, some of the reality), while supplying politicians with their stock in trade: favors."
There are periodic calls for lower "flat" income tax rates and the elimination of deductions and other wrinkles, and we are hearing them today. The main goal is tax simplification. I commend this. (I have to admit that I, with my MBA in accounting, stopped being able to understand my own tax return decades ago.) But of course we cannot convert to a flat tax system without altering people's relative taxes. A change would require sweeping policy decisions.
Flat tax proposals are often accompanied by calls for a national sales, consumption or "value added" tax on spending, such as many other nations have. The problem here is that those with low incomes spend most or all of their earnings on life's necessities, and as incomes rise, people gain the possibility of spending less of their incomes and saving more. Thus sales taxes tend to take a higher percentage of income the lower one's income. That's why, in contrast with progressivity, sales taxes are described as "regressive."
Last month, Republican presidential candidate Herman Cain announced his "9-9-9 plan," which features a flat 9% income tax rate, 9% national sales tax and 9% business tax. Let's take a look at it. The Tax Policy Center is a non-partisan joint venture of the Urban Institute and Brookings Institution. The St. Petersburg Times's politifact.com summarized the results of the TPC's analysis as follows: "83.8 percent of tax filers would get a tax increase . . . compared with current tax policy. On the other hand, most of the tax filers who make more than $1 million would get a tax cut . . . about 95.4 percent of this high income group."
Would it be right to make poor people pay income tax at the same rate as rich people and pay a higher percentage of their incomes in a national sales tax? Anything's fair game, I guess, but if the TPC's analysis is correct, this plan would represent a step away from progressivity and further skew after-tax income toward the wealthy. Yet we're likely to hear a lot more about flat tax during the coming campaign. When confronted with complex problems, people often welcome simple solutions.
Topics in the News – Political Posturing
A Democratic politician I know decided not to run for president in 2008 because he expected a rising tide of populist rhetoric to be required. He was right: classist speech rose substantially. And the rise continues unabated.
Democrats tend to lean toward bigger entitlement programs, greater governmental involvement in the economy, deficit spending, progressive taxation and income redistribution. These things are in contrast to Republicans' averred traditions of small government, individual self-sufficiency, free markets, balanced budgets and tax reduction. At the present time, with the economy performing poorly, Democrats are glad to describe Republicans' laissez faire policies as having contributed to joblessness and economic hardship. With difficulty more prevalent than prosperity today, populism – appealing to disadvantaged economic classes based on claimed inequities – represents a compelling brand of politics.
Thus in recent months we've increasingly heard Democratic politicians sneer at "millionaires and billionaires" (see Senator Reid on page 2), an epithet aimed at a group that's supposedly been getting away with something. (In the past, I seem to recall, it was instead a group most people wanted to be part of.) To date, the preferred Republican label for people with money has been "job creators," although this line of defense may be tough to maintain in the current climate.
The Financial Times of October 29 carried an article headlined "Obama takes high-risk stance against the rich." It described a decision to emulate Roosevelt's Depression-era rhetoric and point an accusing finger at the Republicans as the party of wealth.
"Throwing out the standard presidential playbook dictating an aspirational approach to centrist voters, the White House is cementing a message that strikes at wealth and privilege.
" 'There is surging sentiment among voters that the economy is weighted towards the wealthy,' said a senior White House official.
"The White House strategy will make the 2012 election a generational test of the Republican push of the last three decades for cutting taxes, in ways their critics say have been constantly skewed towards the highest earners."
However, the article goes on to say Republicans may respond in kind to this tactic, joining in support of the common man rather than standing up for wealthier supporters:
". . . Republicans are tweaking their public message, with the hardline [H]ouse majority leader, Eric Cantor, recently acknowledging the need to address the rich-poor gap.
"Mitt Romney, the frontrunner in the race to challenge Barack Obama in 2012, has taken to saying that he is standing up for the 'middle class' because the rich 'can look after themselves.' "
With candidates in both parties competing to sound less pro-wealth, top earners and their supportive tax policies should expect to be rhetorical targets in the coming election. Whether this will extend to Republican candidates dropping their resistance to tax increases remains to be seen.
The Ultimate Worry: Tyranny of the Majority
The elements that contributed importantly to America's success included economic aspiration, upward mobility and a tax system that encouraged labor and risk-taking. In short, we all could get rich. As a result, both those with money and those hoping to make money were attracted to the idea of low taxes. This made tax reduction a very popular theme over the last few decades.
But when people without money start to believe they can't make money, there's little to keep them from taking it from those who have it. This represents a threat to our way of life.
As I've written before, I was very impressed when, as a young man, I heard an interesting explanation for America's economic progress relative to Great Britain: "When the worker in Britain sees the boss drive out of the factory in his Rolls Royce, he says ‘I'd like to put a bomb under that car.' When the worker in America sees the boss drive out of the factory in his Cadillac, he says ‘I'd like to have a car like that someday.' " This tale says a lot about how we achieved our success . . . and also about what we'd better retain if we want to keep it.
The truth is, in a democracy, the lower-earning majority is perfectly capable of voting to confiscate the wealth of the minority. A lot of people have written about this and associated threats to our system:
" 'If Sparta and Rome perished,' asked Rousseau in his Social Contract, 'how can any state hope to live forever? The Body Politick, like the body of a man, begins to die as soon as it is born; it contains the seeds of its own destruction.' " (Financial Times, October 29)
" 'When men get in the habit of helping themselves to the property of others,' warned the New York Times in 1909, 'they are not easily cured of it.' " (The Wall Street Journal, January 29, 2011)
"Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon." (Winston Churchill)
"As Margaret Thatcher famously said, the problem with socialism is that sooner or later 'you run out of other people's money.' " (New York Post, January 12, 2011)
The risk is exacerbated today by the fact (as noted earlier) that about half of all Americans pay no federal income tax. This makes me wonder whether our democracy can make good decisions about taxation when half the people are outside the system.
Obviously, it's tempting to many to increase taxes on the rich, seeing it as a harmless way to enhance the welfare of the many at a small cost to the few. But the damage to the U.S.'s success machinery could vastly outweigh the sums confiscated from those who are targeted. The "fair share" taken from upper bracket earners has to be kept as small as possible if the tax system is to benefit all of our society. The coming debate over tax increases will be very important in this regard.
There can be no easy solution. Social programs and tax policies have been put in place that will combine with demographic and income trends to create challenging conditions. "The Middle-Class Tax Trap" (The New York Times, April 17, 2011) outlined the consequences:
"[Consider] the 'current law baseline,' a Congressional Budget Office projection in which the Bush-era tax rates aren't renewed in 2012, the Alternative Minimum Tax (which is supposed to hit only the rich but increasingly bites into middle-class paychecks) isn't indexed for inflation, and Medicare payments to doctors are slashed 20%.
"With these changes, the deficit drops away in the next 10 years, and more important, it stays manageably low for the decades after that. . . .
"This is how the 'current law baseline' cuts the deficit: Thanks to inflation and bracket creep, its tax code generally subjects more and more Americans to rates that now fall only on the wealthy.
"Today, for instance, a family of four making the median income . . . pays 15% in federal taxes. By 2035, under the C.B.O. projection, payroll and income taxes would claim 25% of that family's income. The marginal tax rate on labor would rise from 29% to 38%. Federal tax revenue, which has averaged 18% of G.D.P. since World War II, would hit 23% by the 2030s and climb ever higher after that.
"Such unprecedented levels of taxation would throw up hurdles to entrepreneurship, family formation and upward mobility. . . .
"They could have ugly political consequences as well. Historically, the most successful welfare states (think Scandinavia) have depended on ethnic solidarity to sustain their tax-and-transfer programs. But the working-age America of the future will be far more diverse than the retired cohort it's laboring to support. Asking a population that's increasingly brown and beige to accept punishing tax rates while white seniors receive roughly $3 in benefits for every dollar they paid in (the projected ratio in the 2030s) promises to polarize the country along racial as well as generational lines.
"The Republican vision for entitlement reform, President Obama said last week, would lead to a "fundamentally different America" than the one we inhabit today. He's right: asking the elderly to pay more for their health care, as [Representative] Paul Ryan proposes to do, would transform the American social contract, and cause no small amount of pain.
"But what Obama doesn't acknowledge is that the alternative path could lead to a different country as well – a more stagnant and balkanized society, in which our promise to the elderly crowds out the fundamental promise of America itself." (Emphasis added)
Will we keep the promise of entitlement programs or cut them back? Given the prominence of entitlements in the U.S. budget, in large part it comes down to that.
Over the last 80 years, politicians in the U.S. created entitlement programs that we cannot afford. Likewise, to varying degrees citizens throughout the developed world have been given promises their governments can't keep. That a day of reckoning would arrive is not news – credible observers have warned of our current problems for decades – but few politicians have been willing to fall on the sword of unpopular solutions.
Whatever action is taken now, it will not be pain-free. The unpayable debts run up in the past will have to be dealt with. And as for the future, there are only three possibilities: the promises will have to be scaled back, the tax burden will have to grow, and/or the deficits will have to be permitted to increase. If nations are to limit deficits – and it seems they may be forced to – there is no alternative to the first two of these. This fundamental truth will constitute a major portion of the public debate in coming years.
Tax policy consists of deciding who to take from (and how much) and who to give it to. There are no easy answers. We should all throw our support behind the common good and not just our individual interests.
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BAILOUT FALLOUT
The PIMCO chief discussed some government policies that have led to increased social discontent, most notably when he called United States bank bailouts a form of "socialism." The bailouts were sold to the world promising to "restore growth and employment," he said, but "neither occurred." This is one source of social unrest in the U.S. because, as El-Erian has noted, previously, it is the perception of the public that government "privatized massive gains and socialized massive losses." Growing numbers of people throughout the world are beginning to "believe the capitalist system is not fair."
In addition, knee-jerk government efforts at economic intervention have largely failed at a time when long-term, multi-year planning and vision are necessary. "The West," he said, has been unable to grow its way out of this recession "despite massive stimulus." He listed a number of "impediments" such as the depressed housing market, labor market problems and structural, long-term unemployment, as well as limited access to credit.
Trouble spots
Two areas El-Erian highlighted as being particularly troublesome are "unhealthy balance sheets" of government and homeowners, and youth unemployment. He said that the "unhealthy balance sheets are dictating the future of Europe, possibly the U.S., too," a dangerous economic proposition. Also, unemployment rates for those between the ages of 16 to 19 are staggering. "That scares us the most," he said, because when young people are unemployed for long periods of time they run the risk of becoming unemployable.
For a substantial U.S. economic recovery, El-Erian says the nation needs its economic "Sputnik moment" – a societal coming together for a "common purpose" and shared vision. "We need our political system to come together and understand that we have structural problems, and we need a multiyear plan" to address them. "Social movements pull the parties further apart" at a time when "coming together is necessary."
For Europe, El-Erian, like many scholars, contends that Germany is the key. "Europe needs its moment of truth," he said. "Germany is the most powerful country. They have the checkbook, and they must act before things will get better." He said that Germany should make one of two decisions: either decide all 17 eurozone countries are a fiscal union and in solidarity, pay for the other countries (much like the German reunification solidarity tax used to rebuild Eastern Germany) or not pay, and move towards a "smaller, less-imperfect union." From El-Erian's view, one of those must occur to solve the challenges in Europe.
SPEND, CHINA, SPEND
Finally, he said, the Chinese government could take measures to encourage spending by its middle class, which he said has the capacity to spend but not the will. If China changed policies to encourage spending "it will open up a huge market."
For the individual investor, El-Erian called for "general defense and selective offense," as well as "intellectual agility."
While global volatility amplified by social, political and economic unrest in the United States and abroad has made for "unsettling" times, these challenges are not insurmountable.
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3)Reaganomics and American Character
By Phil Gramm (CURRENTLY vice chairman of the investment bank division of UBS, Phil Gramm served as a member of the U.S. House of Representatives from Texas’s sixth congressional district from 1979-1985, and as a U.S. Senator from Texas from 1985-2002. Prior to his career in public service, he taught economics at Texas A&M University from 1967-1978. Sen. Gramm earned both his B.A. and doctorate degrees in economics from the University of Georgia.)
The following is adapted from a speech delivered at Hillsdale College on October 3, 2011, during a four-day conference on “Reagan: A Centenary Retrospective,” sponsored by the College’s Center for Constructive Alternatives.
What was the American economy like in the decade prior to the Reagan presidency? The 1970s, for a myriad of reasons, were not a happy time. They featured a combination of stagnation and inflation, which came to be called “stagflation.” The inflation rate peaked at just over 13 percent, and prime interest rates rose as high as 21-and-a-half percent. Although President Jimmy Carter did not use the exact words, a malaise had certainly set in among Americans. Many wondered whether our nation’s time had passed. A Time magazine headline read, “Is the Joyride Over?” Did we really need, as Jimmy Carter told us, to learn to live on less?
Ronald Reagan did not believe America was in decline, but he did believe it had been suffering under wrongheaded economic policies. In response, he offered his own plan, a program for creating economic freedom that came to be known as Reaganomics. Of course, most of Reaganomics was nothing new. Mostly it was the revival of an older understanding that unlimited government will eventually destroy freedom and that decisions regarding the allocation of scarce resources are best left to the private sector. Reagan explained these old ideas well, and in terms people could understand.
But there was also a new element to Reaganomics, and looking back, it was a powerful element and new to the economic debate. It was the idea that tax rates affect a person’s incentive to work, save and invest. To put it simply: lower tax rates create more economic energy, which generates more economic activity, which produces a greater flow of revenue to the government. This idea—which came to be known as the Laffer Curve—was met with media and public skepticism. But in the end, it passed the critical test for any public policy. It worked.
To be sure, there were a couple of major impediments to the economic success of Reagan’s program. First, the Federal Reserve Bank clamped down on the money supply in 1981 and 1982, in an effort to break the back of inflation, and subsequently the economy slipped into the steepest recession of the post-World War II period. Second, Soviet communism was on the march, the U.S. was in retreat around the world, and President Reagan was determined to rebuild our national defense as part of a program of peace through strength. All of these factors worked strongly against Reagan in the battle to revive the American economy. Nor was it a forgone conclusion that his program would get through Congress. We shouldn’t forget that it was a tough program. For example, it eliminated three Social Security benefits in one day: the adult student benefit, the minimum benefit, and the death benefit. Reagan’s program represented a dramatic change in public policy.
With his great skill in communicating ideas, Reagan got his program through Congress. And despite Fed policies and large expenditures for national defense, his program succeeded. I don’t want to bore you with statistics, but I will have to present some to make my case. Most importantly, I hope I will succeed in demonstrating what a difference good policies make to the average citizen.
The evidence is, I think, overwhelming: the Reagan program, when fully implemented in 1983, ushered in a 25-year economic golden age. America experienced very rapid economic growth and only two minor recessions in those 25 years, whereas there were four recessions in the previous 12 years, two of them big ones.
What exactly did Reagan do? For starters, he cut the top tax rate from 70 percent to 28 percent. And yes, high income earners benefitted from these cuts. But as I used to say in Congress, no one poorer than I am ever hired me in my life. And despite lower rates, the rich ended up paying a greater share: In 1979, the top one percent of income earners in America paid 18.3 percent of the total tax bill. By 2006, the last year for which we have reliable numbers, they were paying 39.1 percent of the total tax bill. The top ten percent of earners in 1979 were paying 48.1 percent of all taxes. By 2006, they were paying 72.8 percent. The top 40 percent of all earners in 1979 were paying 85.1 percent of all taxes. By 2006, they were paying 98.7 percent. The bottom 40 percent of earners in 1979 paid 4.1 percent of all taxes. By 2006, they were receiving 3.3 percent in direct payments from the U.S. Treasury.
In the 12 years prior to the Reagan program, economic growth averaged 2.5 percent. For the following 25 years, it averaged 3.3 percent. What about per capita income? In the 12 years prior to the Reagan program, per capita GDP, in real terms, grew by 1.5 percent. For the 25 years after the Reagan program was implemented, real per capita income grew by 2.2 percent. By 2006, the average American was making $7,400 more than he would have made if growth rates had remained at the same level as they were during the 12 years prior to the Reagan program. A family of four was making $29,602 more. During the 12 years prior to Reagan, America created 1.3 million jobs per year. That number is pretty impressive compared to today’s stagnant economy. But during the Reagan years, America added two million jobs per year. That means as of 2007 there were 17.5 million more Americans at work than would have been working had the growth rates of the pre-Reagan era continued.
Inflation, which had been 7.6 percent for the previous 12 years, fell to 3.1 percent. Interest rates plummeted. The average homeowner in America had a monthly mortgage payment of $1,000 less as a result of the success of the Reagan program. Poverty, which had grown throughout the 1970s despite massive increases in anti-poverty programs, plummeted despite cuts to these programs. The poverty level fell from 15 percent to 11.3 percent. These results are tangible evidence that government policy matters.
This is not to say that no mistakes were made. In order to secure lower tax rates, it became good politics to raise the number and amount of income tax deductions, thereby removing about 50 percent of Americans from the tax rolls. In my opinion, that was a mistake, and I think we are suffering for it today. I believe everyone should pay some income taxes. Nevertheless, the net result of the Reagan program was good for all Americans.
So how does the Reagan recovery compare to the recovery going on today? In sum, this is the most disappointing recovery of the post-World War II period by a large margin. I don’t think people understand what an outlier this recovery period is. If the economy had recovered from this recession at the rate it recovered from the 1982 recession, which was roughly the same size in terms of unemployment, there would be 16.3 million more Americans at work today—in other words, all those who say they are unemployed plus almost 60 percent of “discouraged workers” who have dropped out of the labor force. If real per capita income had grown in this recovery at the same rate it grew during the Reagan recovery, real per capita income would be $5,139 higher today. Both the Reagan program and the Obama program instituted dramatic changes. One program worked. The other is failing.
In the end, government policy matters. The truth is, Americans are pretty ordinary people. What is unique about America is an understanding of freedom and limited government that lets ordinary people achieve extraordinary things. We have been getting away from that view recently, but if we can get back to that understanding, which was Reagan’s, our nation will be fine.
Let me conclude by saying that the argument I am making is not just about money or GDP. It’s an argument about character.
If you want to see the effect of bad government policy on character, simply turn on the news and see how Greek civil servants have been behaving recently. They are victimizers behaving like victims. Greek government policies have made them what they are. But what made Americans who we are is a historically unprecedented level of freedom and responsibility. The real danger today is not merely a loss of prosperity, but a loss of the kind of character on which prosperity is based.
I occasionally hire a man to do bulldozer work on my ranch. He doesn’t know a lot about foreign policy, but he knows a lot about the economics of the bulldozing business. In his freedom to pursue that business and to be the best he can be at it, he’s the equal of any man. He’s proud, he’s independent, and he knows his trade as well as anybody else in America knows theirs. That’s what America is about. For me, today’s battle, as it was in 1980, is not just about prosperity or goods and services. It’s about freedom, and it’s about the kind of character that only freedom creates.
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4) It’s All Very Taxing
By Howard Marks
The issue is simple: the U.S. government generally spends more than it brings in . . . and recently, a lot more. For years Congress was willing to serially raise the federal debt ceiling and monetize the deficit. But this past summer, some legislators balked. When the early August deadline for an increase in the ceiling arrived, our elected officials kicked the can down the road, but less far than usual. They created a Congressional supercommittee with unprecedented power to propose solutions, and they designed automatic spending cuts in case no proposal won approval.
With the committee working under a November 23 deadline to find ways to reduce the federal deficit by $1 trillion-plus over the next decade, and with a presidential election less than a year away, the subject of taxes is all over the headlines and likely to remain there. Thus I've decided to provide a background piece on the issues.
What form will the deficit-cutting action take? In fact, the possibilities fall into only four categories:
• cut discretionary spending,
• reduce expenditures on entitlements,
• cut waste and fraud, or
• increase tax revenues.
Given the magnitude of the problem, the limited number of potential solutions, and the differences between the parties on the subject, there's already debate regarding the fourth of those listed above. Democrats generally feel tax increases should be part of any solution, and Republicans often insist that while they're open to overhauling the tax code, total taxes must not rise.
What's Fair is Fair
This memo got its start as an excuse for me to write about one of my greatest pet peeves: the so-called "fair share."
Ask your typical Democrat or liberal about the idea of increasing taxes on upper-bracket earners, and what will they say? In my experience, the answer's always the same: "We're not out to soak the rich. We just want them to pay their fair share." We've seen it over and over for years. For example:
"Were [the politicians levying taxes on Americans] seeking to redistribute wealth, to recast society along more egalitarian lines? Or were they simply trying to ensure that rich people paid their "fair share"? The answer, predictably, is both. . . .
"If poor and middle class Americans were going to be asked [by President Roosevelt], of necessity, to shoulder much of the fiscal burden, then they needed assurance the rich were paying their share. . . .
"No one made the case more succinctly than Rep. Cordell Hull, legislative father of the 1913 income tax. 'I have no disposition to tax wealth unnecessarily or unjustly,' he explained in his memoirs. 'But I do believe that the wealth of the country should bear its just share of the burden of taxation and that it should not be permitted to shirk that duty.' "
("Soaking the Wealthy: An American Tradition" The Wall Street Journal, January 29-30, 2011)
The rhetoric remained unchanged in the late twentieth century:
" 'We will lower the tax burden on middle class Americans,' [Bill Clinton] pledged in 1992, 'by asking the very wealthy to pay their fair share.' " ("The Middle-Class Tax Trap" The New York Times, April 17, 2011)
More recently, President Obama carried on the tradition.
"I will veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans or biggest corporations to pay their fair share." (The New York Times, September 20, 2011)
And here's another reference from just a month ago:
"In proposing a 5 percent surtax on incomes of more than $1 million a year to pay for job-creation measures sought by President Obama, Senate Democratic leaders on Wednesday escalated efforts to strike a more populist tone and to draw Republicans into a confrontation over how much affluent Americans should pay to help others cope with a struggling economy. . . .
" 'It's interesting to note that independents, Democrats and Republicans and even the Tea Party agree it's time for millionaires and billionaires to pay their fair share of taxes,' [Senate Majority Leader] Reid said Wednesday."
(The New York Times, October 6, 2011)
But what is the fair share? How is it to be determined, and by whom? When Senator Reid says, "it's time for millionaires and billionaires to pay their fair share," he implies they haven't been doing so thus far. How does he know? What's the standard? If there's an objective standard for one's fair share, why does it only seem to be those from the left side of the political spectrum who say it's not being paid? And if there isn't an objective standard, how can the fair share be determined? The truth is, fairness is almost entirely in the eye of the beholder, and "get them to pay their fair share" seems like just another way to say "raise their taxes."
There's probably only one element of fairness that's beyond discussion: those with higher incomes should pay more in taxes. After that, everything is up for grabs.
• For example, we have a progressive system of taxation, meaning that higher earners don't merely pay more in terms of dollars; they generally pay a higher percentage of their incomes in taxes. Most people agree that this is fair. But is it? Why should success be penalized through greater taxation? And if the tax rate for those who earn more should be higher, how much higher? Should the top marginal tax rate be double that applicable to lower-income taxpayers? Triple? What's fair?
• Are some forms of income more desirable to society and thus deserving of taxation at lower rates?
• And should we encourage certain expenditures by making them deductible from taxable income?
The fairness of all of these things is subject to discussion and disagreement. They come under the heading of tax policy.
Is Taxation Progressive? Progressive Enough?
Under the U.S. system, people in higher income brackets pay tax at higher rates. (However, Mark Twain said, "All generalizations, including this one, are false." For an exception to the generalization above, see the discussion of the "Buffett Rule" on page 5.) In large part, the question of fairness primarily surrounds whether the higher rates are high enough.
Talk about "the eye of the beholder." There's evidence on both sides of this debate:
• The top 1% of U.S. taxpayers pay 38% of all individual federal taxes. The top 10% pay 70% of all taxes, the top 25% pay 86%, and the top 50% pay 97%.
• That leaves the bottom 50% of all taxpayers paying only 3% of the total.
• About half of Americans pay no federal income tax, and almost 25% pay no federal taxes at all.
• The average federal income tax rate for the top 1% of Americans is 23% (and for the top half it's 14%), while the average rate for the bottom half is 3%.
Notwithstanding the rhetoric, there's no doubt about the fact that America's top earners are taxed more heavily than the rest. On the other hand, they pay at lower rates than they used to (when I was a boy the top marginal rate was 94%), and it seems progressivity has declined.
". . . the effective federal tax rate, including payroll taxes, for the wealthiest 0.01 percent of earners fell to 31.5 percent in 2005, from 42.9 percent in 1979 [for a decline of 26.6%], according to data from the Congressional Budget Office. Over the same time, effective rates for taxpayers in the center of the range fell to 14.2 percent, a decrease of just 4 percentage points [or 22.0%]." (The New York Times, September 21, 2011)
Total revenues from income taxes have declined in the U.S. – they "are at a historical low of 15.3 per cent of the gross domestic product, compared with a postwar average of 18.5 per cent" (Financial Times, September 25) – and they've declined more for top earners than for the rest. This is because of both specific rate cuts that have been enacted and the fact that the rates applied to dividends and capital gains – which clearly flow more to people in the upper income brackets – have declined relative to the rates on salaries and wages.
On average, higher earners absolutely do pay a higher percentage than those who earn less. But the decision as to whether the differential is just right, too little or too great is highly subjective and certainly a valid topic for debate.
Righteous Income
In the U.S., different types of income are taxed at different rates, suggesting some are considered more virtuous than others. For example, profits on investment assets held for more than a year, so-called "long-term capital gains," are taxed less than "ordinary income" such as salaries and interest. This has been the case for so long that we consider it the norm, and what we're used to often becomes the baseline for "fairness."
Long-term capital gains are taxed at reduced rates because of a judgment that long-term investment in things like securities, companies and real estate is beneficial for the economy and should be encouraged. Right now, the top tax rate on long-term investment profit is less than half that on short-term gains and ordinary income. And in recent years, the taxes on dividends have been reduced to similar levels, in part to mitigate double taxation of corporate profits but also because of a judgment that the equity investments that give rise to dividends are good for our society.
Is it appropriate to tax profits on long-term investments at rates below those on other forms of income? Certainly we should encourage investment, but there's no consensus that the tax code is the place to do it. Some foreign jurisdictions don't tax capital gains at all, while others tax them at the same rate as all other income.
What about interest? Why are dividends taxed at preferential rates and interest at ordinary rates? The explanation may lie in the fact that interest is deductible for corporations, while dividends aren't. Interest is paid out of pretax income, while in theory dividends are paid out of after-tax income – although the existence of corporate deductions and credits means dividends may, in fact, be paid out of income that hasn't been taxed by the U.S. Alternatively, the difference in tax treatment may be the result of a desire to encourage investment in "risky" equities rather than "safe" debt. But some companies' dividends are no doubt safer than some other companies' interest payments, so this distinction is questionable. If the goal is to encourage risk bearing, is dividend versus interest the right criterion?
While on the subject of gains from investments, it's interesting to note that, not long ago, dividends were included with interest under the rubric "unearned income." This pejorative phrase implied that income on capital, not requiring labor, was less virtuous than that stemming from labor, so-called "earned income." Thus unearned income – primarily dividends and interest – was taxed more heavily than wages.
But now things have turned 180 degrees, and returns on capital are taxed at lower rates than wages. It's worth noting that the Democrats – commonly considered the party of labor – controlled the government for much of the period 1928 to 1980, when earned income was favored. On the other hand, the Republicans – the party of those with capital to invest – have been in control more of the time since 1980, and the taxation of returns on capital has declined in relative terms. The definition of virtuous income that should be encouraged through lower taxes clearly is subjective, impermanent and subject to change with the winds of politics.
One debate that has arisen recently surrounds the so-called "Buffett Rule." For the last few years, Warren Buffett has been speaking about the fact that he pays a smaller percentage of his income in taxes than does his secretary. Presumably this is because his income consists primarily of long-term capital gains and very little of salary, bonus and interest.
(As an aside, it should be noted that Buffett's lower tax rate, while not unique, is far from the norm. According to The New York Times of September 24, "The number of people who fall under the Buffett Rule is quite small, only 60,000" out of 450,000 taxpayers who make over $1 million. "And the amount of revenue that would be generated [by the Buffett Rule] over the next 10 years is equally small – just $13 billion. . . .")
Buffett's tax status is a function of policy choices made by the people who wrote our tax laws. According to The New York Times of September 21, "President Obama's proposal for a new tax on millionaires . . . would counteract decades of tax reductions for most Americans that have given the wealthy the most benefit. . . ." Do we consider these decisions appropriate in principle and Buffett's just an extreme case? Or do we want to change things so returns on capital are less favored and big earners can never pay overall taxes at lower rates than those who earn less? (And, as an aside, are all long-term profits truly beneficial to society? How, for instance, does society benefit when someone buys a bar of gold?)
Deductions, Loopholes and Tax Incentives
Speaking of gold, in "All That Glitters" on that subject, I quoted from a speech by Mississippi state legislator "Soggy" Sweat that showed his ability to simultaneously praise and condemn whiskey with equal conviction. Outdoing Soggy, depending on who's talking, Washington politicos use the three very different terms above to describe the same thing: offsets to taxable income.
The drafters called them deductions: provisions that reduce the net income on which taxes are levied. Critics call them loopholes, suggesting there's something underhanded about those provisions. And politicians use the laudatory-sounding term tax incentives to describe tax code provisions that reduce tax revenues in order to encourage certain behavior. It all depends on your point of view.
Let's take a look at one of the most popular deductions: interest on mortgages. For as long as I can remember, interest on home mortgages has been treated as a desirable expenditure that should be encouraged. Because home ownership is considered part of the American dream, the tax code subsidizes it by reducing the after-tax cost for those who borrow to buy homes (and are able to itemize rather than take the standard deduction). While everything else may be arguable, certainly this seems fair. But is it?
• Are homeowners more virtuous than renters? If mortgage interest is deductible but rent isn't, we're requiring renters to subsidize owners. Is that appropriate?
• On average, homeowners are from the middle and upper income brackets. Is it fair that poorer renters provide a benefit for richer owners?
• And is it desirable that those able to buy more expensive homes should get more of a subsidy than those consigned to cheaper ones?
As with the taxation of dividends, judgments on these matters change over time. Until 1987, there was no limit on the amount of mortgage interest that could be deducted. If you could afford to own ten homes with multiple million-dollar mortgages on each one, taxpayers would collectively share the cost by reducing your income taxes due. Today interest is deductible on only a maximum of $1.1 million of debt, and only on first and second mortgages, and only on a primary residence and a second home. So the tax treatment of owners of many homes and more expensive homes has become less generous. But it's still better than that of renters. Is that proper?
What about the tax deductibility of charitable donations? As I travel the world visiting with clients, I see that two things about the U.S. are quite uncommon: (a) Americans give a lot of money to charity and (b) donations to charity are deductible in calculating taxable income. Everyone tells me the latter is the main reason for the former. In particular, these things are part of the explanation for the existence of the many private, non-state-supported colleges and universities in the U.S., the best of which are so good at least in part because of their significant donor-provided endowments. For example, Harvard and Yale are only half as old as England's Oxford and Cambridge, but they benefit from endowments that are far larger.
Part of this is true because legislators decided at some point to subsidize non-profits by encouraging contributions through the tax code. That's certainly understandable. And yet, changes were made in recent years to limit upper-bracket taxpayers' use of deductions in order to ensure that they pay some minimum tax rate.
What about the unevenness of the subsidy? The cost of giving $1 to charity is reduced by the amount of taxes it saves the donor, which is equal to $1 times the person's tax rate. So today, speaking simplistically, it costs a top-bracket taxpayer 65 cents to give a dollar to charity, while it costs a bottom-bracket taxpayer 85 cents. Is that fair? Should the bigger earner receive a greater reward for a dollar of philanthropy than someone who can afford it less easily? And should those who aren't inclined to give to charity be required to subsidize those who are?
Finally, what about state and local taxes, the third of the significant deductions? Here tax deductibility isn't due to a decision to encourage people to pay non-federal taxes, but rather to cushion the effect of being taxed in multiple jurisdictions. Texas, Florida and five other states have no personal income tax, California has a heavy one, and someone living in Manhattan pays tax to both New York State and New York City. Deductibility on the federal tax return somewhat evens out the burden and ensures that (a) the states get first crack at taxing income and (b) the federal government can only tax what's left, in line with federalist principles.
This raises a number of questions. Is the deductibility of state and local taxes fair? As with other deductions, the key question is "fair to whom?" Some people pay more state and local taxes than others, meaning they get greater deductions than others. As a result, while a person with a given income who lives in a high-tax state pays higher total taxes, he or she pays less federal tax than someone in a low-tax state. Is that fair?
Further, what all of this means is that by providing more benefits to its residents (or at least spending more money, whether beneficially or not), a high-tax state creates a deduction for its residents and thus reduces the federal government's total tax take. Is this right? Should the federal government subsidize spending on the part of high-tax states? That is, should residents in low-tax states bear part of the expenses of high-tax states? There's nothing simple about these matters.
While the source of an exemption rather than a deduction, what about interest on "municipal bonds" issued by states, counties, cities and local agencies. This is exempt from federal taxation, under the legal doctrine that the federal government mustn't tax the operations of the states. ("The power to tax is the power to destroy," one of our great Supreme Court decisions held.) But here again, we're talking about a federal benefit (in the form of a lower cost of capital) for the biggest-spending local governments and their citizens, and a tax break for people who lend to them.
And what about property taxes? These are deductible without limitation. Thus the owner of a mansion – or ten mansions – receives more of a tax benefit than a low-income earner. And it's another subsidy for homeowners versus renters. Is this right, or should it be changed?
To date, it has been deemed fair for state and local income tax to be deductible on federal tax returns. But is this immutable? Sales tax used to be deductible, too (meaning the buyer of a Rolls Royce got assistance from the federal government). Now it's not. More fair?
What if the deduction for state and local taxes and the exemption for muni interest were ended? This would increase the cost of financing for state and local governments and most impact the highest-spending states, potentially requiring higher taxes causing people to move away. This would reduce those states' revenues and require them to raise taxes further (and drive away still more taxpayers) in a painful cycle. And are those states profligate or just burdened (like California by a substantial low-income population) or natural-resource-poor (lacking Texas's oil)?
So even in "small" matters like the tax deductibility of mortgage interest, charitable donations, and state and local taxes, there are lots of difficult questions. While on their face the deductions seem fair to homeowners, philanthropists and residents of high-tax states, they're simultaneously penalizing renters, non-donors and residents of low-tax states (as well as taxpayers in low tax brackets and those without enough deductions to itemize).
How about the biggest exclusions of all: employer-provided health care and the deferral of taxation of contributions to pension plans? In both cases, those receiving these employer-paid benefits enjoy a substantial benefit not shared by those not fortunate enough to participate. For instance, is it fair that many better-paid workers get thousands of dollars a year in untaxed health-care benefits, while other workers enjoy no such subsidy?
Fairness turns out to be quite an elusive concept.
Reasons for Increasing Taxes
As U.S. leaders wrestle to reduce the budget deficit in the coming months and years, spending cuts are a certainty. But the question of whether taxes should be increased is sure to be hotly debated. A number of justifications for doing so are advanced:
• Some people want wealth to be redistributed throughout society by taxing the rich and giving to the poor. They want the government to do more for those who are less fortunate (or less able), and that means having the rest pay for it.
• There's an argument that for the deficit solution to be equitable, all citizens should contribute to it. Though some government spending benefits all citizens alike, such as national defense, national parks and the administration of justice, much spending disproportionately benefits lower earners, in the form of public education and transportation (which are supported by the federal government), unemployment insurance, food stamps, Medicare and Medicaid, etc. Thus the effect of the coming spending cuts will fall more heavily on the poor. Some argue that since they receive less in benefits and are therefore less likely to experience their loss, the wealthy should share the burden of reducing the deficit through increased tax payments.
• As opposed to the ideological arguments reviewed above, tax increases are among the limited number of possible contributors to deficit reduction listed on page 1. Thus, in the simplest terms, we can cut more from the deficit if we tax more (all else being equal).
• The ultimate practical point is that spending cuts alone won't do much to eliminate the deficit.
• Viewed another way, promises of entitlements have been in place for decades, people have relied on them, and those promises have to be kept. This is clearly impossible without increased taxes and/or exploding deficits.
Is redistribution a valid goal? To some people, it is part of the process of helping every citizen in the "pursuit of happiness." To others, it's akin to socialism and contrary to the American ethic in which rewards follow ability and hard work.
Should everyone contribute to deficit reduction, including bigger earners through the biggest tax increases? Or should the savings come primarily through sacrifices on the part of those who to date have been the primary beneficiaries of excessive government spending? I have no doubt that we'll see fireworks on these topics.
Reasons for Not Increasing Taxes (or for Lowering Them)
Before concluding that the above points are persuasive, you should consider the equally numerous arguments to the contrary.
• Many believe our massive deficit stems from a government (and an entrenched army of government employees) willing and able to spend all available cash (and more). A bureaucracy will always find uses – many of them wasteful – for available revenues. Thus the only solution is to "starve the beast": only tax cuts and restraints on borrowing will force the government to limit spending.
• It is argued that by decreasing the after-tax proceeds from a dollar earned, tax increases reduce people's incentive to work, and thus cut into a nation's overall productivity. From 1974 to 1979, Britain's top marginal rate was 83% (although with a 15% surcharge on interest and dividends, it could rise to 98%). I remember reading about a banker who took time off without pay to paint his house. Society benefits when each of us does the things we're best at. But if a banker who earns $20,000 a month only gets to keep $3,400, he's better off forgoing a month's salary to avoid paying a painter who gets $5,000 a month.
• Research into the "elasticity of taxable income" (ETI) shows that "when marginal tax rates go up, the amount of reported incomes goes down," suggesting higher taxes do reduce productivity. (The Wall Street Journal, March 30, 2010). Of course, it's also possible that when rates go up, the incentives for failing to report income also go up. Thus part of the ETI effect could come from under-reporting, as opposed to reduced effort.
• Taking the above a step further, the "Laffer curve," named after economist and presidential adviser Arthur Laffer, posits that by discouraging work (and thus reducing incomes), raising income tax rates actually reduces income tax collections. Thus, by increasing taxable income, rate reductions bring revenue gains.
• Last but especially timely is the classic Keynesian argument that raising taxes and thus reducing after-tax incomes shouldn't be done at a time when the economy is weak and spending should be encouraged, not inhibited.
For me the bottom line – the real reason why many people don't want rates to go up – is that they don't want to pay more taxes. I think people tend to "vote their pocketbooks," meaning many people with incomes to tax will vote for the candidate who promises lower taxes. But the economic theories discussed above certainly lend validity and even nobility to the pursuit of higher after-tax income . . . and the fact that their supporters are self-interested doesn't make them wrong. Finally, for whichever reason, a good portion of the electorate buys these arguments. And The New York Times reported on November 2 that "Americans for Tax Reform, a taxpayer advocacy group . . . says that 41 senators and more than 235 House members have pledged in writing to oppose all tax increases."
Topics in the News – Income Inequality
One of the outstanding characteristics of the U.S. economy at this time is the rising dispersion between incomes. The percentage of total income going to higher earners has been increasing dramatically, whether because of (a) the rising importance of education and technological literacy or (b) the movement of work offshore, the declining availability of blue-collar jobs and the reduced power of private-sector unions to garner wage gains. And given the pattern of tax cuts and the special treatment given to income on capital, the tax system has magnified the divergence.
A recent report from the Congressional Budget Office provided dramatic evidence of the divergent trends in income. It outlined the percentage gain in average inflation-adjusted after-tax income of various income groups between 1979 and 2007:
• Top 1% of the population in terms of income: 275%
• Next 19%: 65%
• Middle 60%: 40%
• Bottom 20%: 18%
According to the CBO:
• The share of income going to higher-income households rose, while the share going to lower-income households fell.
• The top fifth of the population saw a 10-percentage-point increase in their share of after-tax income.
• Most of that growth went to the top 1 percent of the population.
• All other [quintile] groups saw their shares decline by 2 to 3 percentage points.
An October 26 article in The New York Times reported the following conclusions:
". . . the report said government policy has become less redistributive since the late 1970s, doing less to reduce the concentration of income.
" 'The equalizing effect of federal taxes was smaller' in 2007 than in 1979, as 'the composition of federal revenues shifted away from progressive income taxes to less-progressive payroll taxes,' the budget office said.
"Also, it said, federal benefit payments are doing less to even out the distribution of income, as a growing share of benefits, like Social Security, goes to older Americans, regardless of their income. . . .
"Also cited as factors contributing to the rapid growth of income at the top [in addition to federal tax and spending policies] were the structure of executive compensation; high salaries for some 'superstars' in sports and the arts; the increasing size of the financial services industry; and the growing role of capital gains, which go disproportionately to higher- income households."
The implications for tax discussions are obvious. Upper earners have moved further ahead relative to lower earners, and tax policies have contributed to this trend. For those who think progressivity should be bolstered, income should be redistributed, and those most able to pay should contribute more heavily to solving the deficit problem, upper-bracket earners make a most attractive target.
Topics in the News – The Sputtering Economy
In early 2011, there was a growing consensus that the U.S. economy was on an upward trajectory – that recovery had taken hold. Reported growth in GDP was accelerating. Orders, sales and profits were strong. Cash was piling up in corporate coffers. The Fed gave increased thought to increasing interest rates to cool off the economy and prevent the rekindling of inflation.
But in the summer it was reported that the economy had cooled, and earlier estimates of GDP were revised downward. A possible double-dip recession became the topic of the day. At the same time, an unseemly political confrontation regarding the U.S. federal debt ceiling exposed a flawed, unconstructive political system at work; produced a downgrade of long-term Treasury debt on the part of Standard & Poor's; seemed to take us to the brink of a default; and sapped confidence at all levels.
Despite the economy's weakness, further government aid for the economy has been rendered untenable by widespread negative feelings about the stimulus programs of 2007-08 and the popular view that the government took care of Wall Street but not Main Street, combined with the nearness of the next presidential election. Especially with stimulus unlikely, government actions that discourage growth should be viewed skeptically.
In the U.S. – just like in Greece and elsewhere in Europe – the answer to problems of excessive deficit and debt can be summed up in one word: austerity. Everyone's after debtor nations to practice austerity; that is, to spend less and tax more. The problem is that such behavior will reduce citizens' incomes, discourage consumer spending and slow or reverse economic growth. While on paper austerity will cut deficits, it may actually add to them by reducing government tax collections. In this way, it would necessitate further borrowing.
There's no doubt that, along with spending cuts, tax increases would have a detrimental impact on the prospects for economic recovery. Thus even people who are open to tax increases may not want them to be effective until the economy is out of danger. As the Financial Times put it on October 29, "Many households are so badly overleveraged that a balanced federal budget would ruin them."
But our economic problems aren't just cyclical. There are worrisome secular trends, many surrounding the scarcity of new jobs, the movement of manufacturing overseas, and the low level of business investment in the U.S. The best cure for our cyclical and secular difficulties would be growth based on industrial expansion. This would put people to work, support increases in spending, reinvigorate the housing sector, increase tax revenues and shrink the deficit. But for this to happen, we need (a) tax rates that allow successful entrepreneurs to retain a substantial percentage of the resulting profits and (b) confidence that the tax system won't be made more confiscatory after they've made their investments. At the present time, the latter, in particular, is very much lacking.
Topics in the News – Flat Tax
It's interesting to note that writers of tax law have two main routes to a given revenue total: low rates without deductions, exemptions and credits, or high rates with them. To date they have chosen the latter course. An article in The Wall Street Journal of January 29, 2011 marked down this choice to pure politics:
"Why did [Roosevelt's high tax rates] last so long . . . beginning their long steady decline only during the Kennedy administration? . . . In part to fund the Korean conflict and the Cold War, but also to grease the skids of modern politics. Lawmakers were able to blunt the effect of high statutory rates by handing out tax preferences to their friends, constituents and contributors. Steep rates preserved the appearance of progressivity (and, to be fair, some of the reality), while supplying politicians with their stock in trade: favors."
There are periodic calls for lower "flat" income tax rates and the elimination of deductions and other wrinkles, and we are hearing them today. The main goal is tax simplification. I commend this. (I have to admit that I, with my MBA in accounting, stopped being able to understand my own tax return decades ago.) But of course we cannot convert to a flat tax system without altering people's relative taxes. A change would require sweeping policy decisions.
Flat tax proposals are often accompanied by calls for a national sales, consumption or "value added" tax on spending, such as many other nations have. The problem here is that those with low incomes spend most or all of their earnings on life's necessities, and as incomes rise, people gain the possibility of spending less of their incomes and saving more. Thus sales taxes tend to take a higher percentage of income the lower one's income. That's why, in contrast with progressivity, sales taxes are described as "regressive."
Last month, Republican presidential candidate Herman Cain announced his "9-9-9 plan," which features a flat 9% income tax rate, 9% national sales tax and 9% business tax. Let's take a look at it. The Tax Policy Center is a non-partisan joint venture of the Urban Institute and Brookings Institution. The St. Petersburg Times's politifact.com summarized the results of the TPC's analysis as follows: "83.8 percent of tax filers would get a tax increase . . . compared with current tax policy. On the other hand, most of the tax filers who make more than $1 million would get a tax cut . . . about 95.4 percent of this high income group."
Would it be right to make poor people pay income tax at the same rate as rich people and pay a higher percentage of their incomes in a national sales tax? Anything's fair game, I guess, but if the TPC's analysis is correct, this plan would represent a step away from progressivity and further skew after-tax income toward the wealthy. Yet we're likely to hear a lot more about flat tax during the coming campaign. When confronted with complex problems, people often welcome simple solutions.
Topics in the News – Political Posturing
A Democratic politician I know decided not to run for president in 2008 because he expected a rising tide of populist rhetoric to be required. He was right: classist speech rose substantially. And the rise continues unabated.
Democrats tend to lean toward bigger entitlement programs, greater governmental involvement in the economy, deficit spending, progressive taxation and income redistribution. These things are in contrast to Republicans' averred traditions of small government, individual self-sufficiency, free markets, balanced budgets and tax reduction. At the present time, with the economy performing poorly, Democrats are glad to describe Republicans' laissez faire policies as having contributed to joblessness and economic hardship. With difficulty more prevalent than prosperity today, populism – appealing to disadvantaged economic classes based on claimed inequities – represents a compelling brand of politics.
Thus in recent months we've increasingly heard Democratic politicians sneer at "millionaires and billionaires" (see Senator Reid on page 2), an epithet aimed at a group that's supposedly been getting away with something. (In the past, I seem to recall, it was instead a group most people wanted to be part of.) To date, the preferred Republican label for people with money has been "job creators," although this line of defense may be tough to maintain in the current climate.
The Financial Times of October 29 carried an article headlined "Obama takes high-risk stance against the rich." It described a decision to emulate Roosevelt's Depression-era rhetoric and point an accusing finger at the Republicans as the party of wealth.
"Throwing out the standard presidential playbook dictating an aspirational approach to centrist voters, the White House is cementing a message that strikes at wealth and privilege.
" 'There is surging sentiment among voters that the economy is weighted towards the wealthy,' said a senior White House official.
"The White House strategy will make the 2012 election a generational test of the Republican push of the last three decades for cutting taxes, in ways their critics say have been constantly skewed towards the highest earners."
However, the article goes on to say Republicans may respond in kind to this tactic, joining in support of the common man rather than standing up for wealthier supporters:
". . . Republicans are tweaking their public message, with the hardline [H]ouse majority leader, Eric Cantor, recently acknowledging the need to address the rich-poor gap.
"Mitt Romney, the frontrunner in the race to challenge Barack Obama in 2012, has taken to saying that he is standing up for the 'middle class' because the rich 'can look after themselves.' "
With candidates in both parties competing to sound less pro-wealth, top earners and their supportive tax policies should expect to be rhetorical targets in the coming election. Whether this will extend to Republican candidates dropping their resistance to tax increases remains to be seen.
The Ultimate Worry: Tyranny of the Majority
The elements that contributed importantly to America's success included economic aspiration, upward mobility and a tax system that encouraged labor and risk-taking. In short, we all could get rich. As a result, both those with money and those hoping to make money were attracted to the idea of low taxes. This made tax reduction a very popular theme over the last few decades.
But when people without money start to believe they can't make money, there's little to keep them from taking it from those who have it. This represents a threat to our way of life.
As I've written before, I was very impressed when, as a young man, I heard an interesting explanation for America's economic progress relative to Great Britain: "When the worker in Britain sees the boss drive out of the factory in his Rolls Royce, he says ‘I'd like to put a bomb under that car.' When the worker in America sees the boss drive out of the factory in his Cadillac, he says ‘I'd like to have a car like that someday.' " This tale says a lot about how we achieved our success . . . and also about what we'd better retain if we want to keep it.
The truth is, in a democracy, the lower-earning majority is perfectly capable of voting to confiscate the wealth of the minority. A lot of people have written about this and associated threats to our system:
" 'If Sparta and Rome perished,' asked Rousseau in his Social Contract, 'how can any state hope to live forever? The Body Politick, like the body of a man, begins to die as soon as it is born; it contains the seeds of its own destruction.' " (Financial Times, October 29)
" 'When men get in the habit of helping themselves to the property of others,' warned the New York Times in 1909, 'they are not easily cured of it.' " (The Wall Street Journal, January 29, 2011)
"Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon." (Winston Churchill)
"As Margaret Thatcher famously said, the problem with socialism is that sooner or later 'you run out of other people's money.' " (New York Post, January 12, 2011)
The risk is exacerbated today by the fact (as noted earlier) that about half of all Americans pay no federal income tax. This makes me wonder whether our democracy can make good decisions about taxation when half the people are outside the system.
Obviously, it's tempting to many to increase taxes on the rich, seeing it as a harmless way to enhance the welfare of the many at a small cost to the few. But the damage to the U.S.'s success machinery could vastly outweigh the sums confiscated from those who are targeted. The "fair share" taken from upper bracket earners has to be kept as small as possible if the tax system is to benefit all of our society. The coming debate over tax increases will be very important in this regard.
There can be no easy solution. Social programs and tax policies have been put in place that will combine with demographic and income trends to create challenging conditions. "The Middle-Class Tax Trap" (The New York Times, April 17, 2011) outlined the consequences:
"[Consider] the 'current law baseline,' a Congressional Budget Office projection in which the Bush-era tax rates aren't renewed in 2012, the Alternative Minimum Tax (which is supposed to hit only the rich but increasingly bites into middle-class paychecks) isn't indexed for inflation, and Medicare payments to doctors are slashed 20%.
"With these changes, the deficit drops away in the next 10 years, and more important, it stays manageably low for the decades after that. . . .
"This is how the 'current law baseline' cuts the deficit: Thanks to inflation and bracket creep, its tax code generally subjects more and more Americans to rates that now fall only on the wealthy.
"Today, for instance, a family of four making the median income . . . pays 15% in federal taxes. By 2035, under the C.B.O. projection, payroll and income taxes would claim 25% of that family's income. The marginal tax rate on labor would rise from 29% to 38%. Federal tax revenue, which has averaged 18% of G.D.P. since World War II, would hit 23% by the 2030s and climb ever higher after that.
"Such unprecedented levels of taxation would throw up hurdles to entrepreneurship, family formation and upward mobility. . . .
"They could have ugly political consequences as well. Historically, the most successful welfare states (think Scandinavia) have depended on ethnic solidarity to sustain their tax-and-transfer programs. But the working-age America of the future will be far more diverse than the retired cohort it's laboring to support. Asking a population that's increasingly brown and beige to accept punishing tax rates while white seniors receive roughly $3 in benefits for every dollar they paid in (the projected ratio in the 2030s) promises to polarize the country along racial as well as generational lines.
"The Republican vision for entitlement reform, President Obama said last week, would lead to a "fundamentally different America" than the one we inhabit today. He's right: asking the elderly to pay more for their health care, as [Representative] Paul Ryan proposes to do, would transform the American social contract, and cause no small amount of pain.
"But what Obama doesn't acknowledge is that the alternative path could lead to a different country as well – a more stagnant and balkanized society, in which our promise to the elderly crowds out the fundamental promise of America itself." (Emphasis added)
Will we keep the promise of entitlement programs or cut them back? Given the prominence of entitlements in the U.S. budget, in large part it comes down to that.
Over the last 80 years, politicians in the U.S. created entitlement programs that we cannot afford. Likewise, to varying degrees citizens throughout the developed world have been given promises their governments can't keep. That a day of reckoning would arrive is not news – credible observers have warned of our current problems for decades – but few politicians have been willing to fall on the sword of unpopular solutions.
Whatever action is taken now, it will not be pain-free. The unpayable debts run up in the past will have to be dealt with. And as for the future, there are only three possibilities: the promises will have to be scaled back, the tax burden will have to grow, and/or the deficits will have to be permitted to increase. If nations are to limit deficits – and it seems they may be forced to – there is no alternative to the first two of these. This fundamental truth will constitute a major portion of the public debate in coming years.
Tax policy consists of deciding who to take from (and how much) and who to give it to. There are no easy answers. We should all throw our support behind the common good and not just our individual interests.
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