Californification of Washington

[Tani Coyote]

I made a long post on one of the healthcare threads that might be worth repeating here. It addresses some of the spending/tax increase concerns raised on this thread.

Spoiler :

...But here's a perspective from the resident tax wonk's end.

I'm fairly certain that if this bill didn't pass, then no health bill would have passed before the November elections. The reconciliation/Senate bill was the Democrats' only shot.

My primary worry is that there is no way for us to get future Congresses and Administrations to commit to any of the meager cost-side provisions of the bill. Previous Congresses have shown no inclination towards reducing entitlements of any kind; there is no reason to believe that future Congresses will be any different. The probability that the provisions of this bill become another unfunded entitlement is exceedingly high.

By forming a new entitlement, we risk seriously burdening ourselves by choosing an unsustainable package of fiscal policies and taxes. Federal tax revenues are consistently around 19%-21% of GDP; given that this situation already produces consistent deficits there is little chance that the current tax structure will be able to handle the new subsidies**. This implies that there will be a push for a new major tax. It'll either be the ones in the bill (focused on insurance packages and payroll taxes), or perhaps a VAT. You aren't going to squeeze much more than 1-2% of GDP out of the income tax system even if you raise taxes on the rich, the poor and everyone in between. Further, any tax increases you use to pay for this bill are revenue options that you can't use for deficit reduction.

We know that if something can't go on forever, it'll stop. But at the rate we're going, with a jump in Federal expenditures from its historical 23% of GDP to 26%, we're in for a harder landing than we otherwise would. The last fifty years or so, we've seen a tax share of GDP of about 19% and an expenditure share of about 21%; the resulting average 2% of GDP deficit could be absorbed by economic growth, and the debt/GDP ratio never exploded upward. But to raise Federal expenditures to 26% of GDP, which appears to be the new equilibrium, we would need to find 3% of GDP in new taxes to offset the rise in spending. This cannot come from the current income tax system and most would argue that it should not come from the payroll tax system. So we'll need new taxes, which will inevitably introduce yet more distortions in the marketplace and reduce economic efficiency. We'd be trading a bit of efficiency for a bit of equity. That tradeoff might be worth it, but it should be acknowledged that the tradeoff is real and the loss in efficiency may be substantial. Would it be substantial enough to knock us off of our 2.1% long-term real growth rate? We'll see.

An additional problem is that the projected growth of Medicare and Medcaid point to a fiscal path that is unsustainable. That is, even without a new insurance subsidy, we'd have to make very hard decisions over the next ten years about provider reimbursement, payment rates, and the like. Adding a new entitlement only accelerates this burden.

I hope this hasn't sounded too fatalistic/pessimistic/reactionary/whatever. I'd like to think that I'm far more sane than the screaming heads on the far right. But these are my concerns, and nothing in either the Administration's announcements or Congress's actions addressed them satisfactorily.

**These deficits have historically not been a problem: they have usually been less than GDP growth, so at the current menu of taxes and spending we can just about grow our way out of a potential debt crisis. Holding the world's reserve currency has helped as well, but should not be used as a cruch.

Interesting stuff, Integral. How do you think a national sales tax and/or a Georgist-style land tax would impact revenues? If they were levied, do you think it would be wise to cut income taxes back a bit to lessen the overall burden(this also increases personal choice/responsibility with how money is spent, as a bonus)?

 

[JohnRM]

There are only three viable options for the future of this country. None of them are particularly appealing or easy to work with.

1) Work within the Democratic Party to re-tool it with new, youthful, energetic leaders who can work past the political nonsense and achieve results for the nation. There will have to be term-limit pledges by these individuals so they don't worry more about saving their job than helping the country. The Republican Party is thoroughly screwed and irrecoverable, from my point of view.

2) Establish a third major party. Laughable given that both Democrats and Republicans have fixed the electoral process to exclude any other choice. But, if it were somehow possible to create a centrist party that welcomes moderate Republicans, independents, and moderate Democrats, that would probably be best.

3) Leave the system, entirely. I don't even know what this would look like. It would probably look like some back-woods, survivalist, Ted Kaczynski-type hell-hole. But, of course, the government would probably come around to force you back into the fold again anyway, or wipe you out.

 

[orrery]

Conclusion: Let's pool all our money into one giant pot and try to find something agreeable to us all.

more funding for Z-Machine

 

[civ_king]

1) I would suggest going with the YDA (Young Democrats of America)

2) a) not happening b) if it happened it would win as the other parties would fail or it would collapse

3) Please no

 

[illram]

I think one issue, maybe the most important one, is the majority of people in office are not actually working in the public interest, they are working to keep their job.

As this is a problem inherent in human nature, I am not really sure we'll ever overcome it.

 

[Integral]

Interesting stuff, Integral. How do you think a national sales tax and/or a Georgist-style land tax would impact revenues? If they were levied, do you think it would be wise to cut income taxes back a bit to lessen the overall burden(this also increases personal choice/responsibility with how money is spent, as a bonus)?

I'm going to ramble a bit, so if any of this is unclear don't hesitate to point out flaws or ask for clarification.

Let's start with my claim that you can't squeeze much more out of the current tax system. That observation is motivated by the fact that despite hundreds of changes in the Federal income/payroll tax code over the past sixty years, revenues have averaged 18.5-19% (depending on your measure) of GDP. At most, I think, you could raise the top marginal rates enough to squeeze out 22% of GDP; after that, the disincentives of higher taxes will kick in in earnest. Recall from my last post that we will need about 26% of GDP in revenues to fund the Federal government under the current set of proposals.

This implies that if we're serious about balancing the budget, we'll need new taxes. I can think of four places they could come from: currently untaxed benefits, Pigovian measures, sales, and land. Let's look at each in turn.

By "currently untaxed benefits", I mean the elephant in the budget room: health insurance is currently not taxed. This has various unsavory effects on incentives in the healthcare market, but more importantly for our purposes it also means that there's a large chunk of change (upwards to $250bn annually) in "claimable" tax revenues. Over the next ten years, the pressure on politicians to take advantage of those revenues will be enormous. The big obstacle is the unions, as they have (in general) negotiated lucrative health insurance packages and will fight to keep those benefits untaxed. (This option maxes out at about 2% of GDP)

Second, we can look at Pigovian taxation or, equivalently for our purposes, cap-and-trade programs on carbon emissions. That could raise upwards to $100bn-$150bn annually and would actually lessen some distortions in the energy market. (That's upwards to 1% of GDP) [EDIT: I'm criminally unclear here; what I'm referring to under this category is strictly "green" taxes, and loosely externality-correcting taxes.]

Third, a national sales tax or VAT. I think that there will be a serious policy proposal either from the Administration or a high-profile Congressman within the next three budget cycles to enact a VAT. Republicans will fight this tooth-and-nail; they've historically been almost obsessively opposed to Federal-level sales taxes. I've not worked out the general equilibrium effects of such a tax (though the partial equilibrium effects are well-known). A later post will explore this more deeply.

I've not seriously considered a domestic land tax, as it would be politically difficult to implement and I don't know if it could raise that much in revenues.

More thoughts to come later...

(and I haven't even touched entitlement spending growth yet!)

(JH/Womp/other wonks: stop me if I'm getting too off track. )

 

[Patroklos]

There are enormous long-term fiscal problems our politicians need to address. However, the Republicans’ conservative base demands adherence to the no-tax pledge, while liberal Democrats demand that their representatives prevent cuts in spending for domestic programs. These hardened (and polar) positions greatly narrow the possible grounds for problem-solving.

I am conservative, and if it were me I would cut the deficit in two and take care of half of it with tax hikes, half of it with spending cuts from entitlement programs.

I would take care of the debt with cuts from non entitlement programs.

 

[Bei1052]

Why should the primary beneficiaries of government get a free ride?

If I understand you correctly, you're trying to point out that states which lean Republican get more federal funds then states which lean Democrat? If so, that's through no fault of the state. The only reason it's that way is because of retirees who migrate to Republican leaning states and collect SS and Medicare.

Because liberals don't pay taxes?

As a percentage of their income and in absolute dollars, Republicans/conservatives pay more in taxes than do Democrats/liberals. In general, the majority of the burden of paying for all those programs Democrats/liberals are fond of don't fall on themselves, but rather someone else. Which, I guess, would explain why they don't mind them.

('Cuz I'm lazy)

 

[orrery]

More funding for Z-Machine you mindless clueless politic swine!

 

[Patroklos]

If I understand you correctly, you're trying to point out that states which lean Republican get more federal funds then states which lean Democrat? If so, that's through no fault of the state. The only reason it's that way is because of retirees who migrate to Republican leaning states and collect SS and Medicare.

Most of the military is located in red states too.

Thats not what he is refering to though. He is under some illusion that the rich benefit from government more than the poor. He has never been able to prove this to even the most slight degree, but it is part of his personal mythology so let him be.

 

[Karalysia]

As a percentage of their income and in absolute dollars, Republicans/conservatives pay more in taxes than do Democrats/liberals. In general, the majority of the burden of paying for all those programs Democrats/liberals are fond of don't fall on themselves, but rather someone else. Which, I guess, would explain why they don't mind them.

Considering the Republicans reap the majority of the benefit then its only fair they pay their due, after all we provide enough Welfare for the Wealthy.

 

[Cutlass]

If I understand you correctly, you're trying to point out that states which lean Republican get more federal funds then states which lean Democrat? If so, that's through no fault of the state. The only reason it's that way is because of retirees who migrate to Republican leaning states and collect SS and Medicare.

This wasn't a state thing: The individual people who benefit the most from the government are the rich. So why should they get a free ride when it comes to paying taxes?

 

[Patroklos]

See? Predictable as always.

 

[Cutlass]

I suppose we're above that average then... our household income is 6 figures(dunno the exact number, it's somewhere between 150-200K for my father and however much for my mother, a manager at Wal-Mart). The small business itself makes about 750K, I think it was...

I'm not sure, since parents are rather hesitant to share financial info for some reason.

In Nevada, we don't have state taxes(we get our revenue from casinos), but nonetheless, he did say that when you put all the taxes he pays together, he ends up having given up about half his paycheck... probably more like 40%, but still high.

Then again, he praises Bachmann, calls Obama a socialist, and says that the Democrats are spending our - as in, my and my sister's - fortunes away... so who knows if he's a little batty despite his business successes.

OK. Your parents are caught in the middle. Warren Buffet pays 17% of his income in taxes. He has said so. He has also said that he has that rate without attempting to maximize the deductions that he takes to minimize his tax bite. The working poor, of course, pay taxes, but not the federal income tax. Who makes up the difference? The middle class. So yes, your parents can be paying greatly over the national average because of the way the system is designed.

That said, the nation as a whole pays closer to my estimate, federal, state, and local combined taxes.

Wouldn't the loss of deductions possibly hurt many people, if only for the short term until they could adjust?

Yes. But who do most of those deductions benefit? Answer: The most under taxed segment of the population, which is the very wealthy. Also, some of those tax expenditures provide perverse incentives that we would be better off without. Like the mortgage one.

Cutting expenses is obviously the main thing that needs to be focused on, given that it is the root of the problem. If cut enough, any tax raises could be negligible.

True. However, easier said than done. Social Security, depending on who you listen to, can have a permanent fix with relatively small adjustments. Health care, to again quote Walker "If there's one thing that could bankrupt America it's out-of-control health care costs." And you've just witnessed what the war is like to do anything about those costs. As Integral keeps pointing out, the fiscally responsible lost this battle, even if the socially responsible won it. There's a whole war to be fought on the subject in coming years.

And no one really has the heart for that war.

Walker is a budget hawk. He says we should have Universal Health Care, at least partially. If someone is a budget hawk, and as clued in as he is, says UHC, I personally believe him.

For "discretionary spending", everyone knows there is plenty to cut there. But no one is willing to take on the fight to do it. And all of the discretionary spending taken as a whole will not balance the budget.

 

[Integral]

An addendum on taxes: at the higher end of the income scale, your tax burden is largely determined by whether you are earning wage income or capital income.

A self-employed individual in the mid- to high-tax brackets can pay upwards to 40-50% in taxes and have close to a 50% marginal rate (marginal: 25% to 33% income tax, 2.9% or 15.4% payroll tax, 5% state sales tax, local taxes, etc can quickly reach 50%). If you're making primarily capital income, you're paying 15% on that, nothing in payroll on the margin (those come out of earned income), and the same sales/local tax mix. Buffet might not be paying much, but that doesn't generalize to the median "rich household".

Buffet's tax situation doesn't mean that the rich are undertaxed, it means that labor is overtaxed relative to capital.

 

[civ_king]

taxing Capital at 25% could make lots of money for the Fed

 

[Cutlass]

Again, keep the terms straight. In US politics, when you say "the Fed", that refers to the Federal Reserve, not the federal government. And the Fed does not collect taxes.

That said, If I was writing the income tax laws, I would say that income tax is payed on all income from all sources at the same rate. (or possibly something a little more complex, but only after careful study.) So if your tax bracket is X to Y, then all of your income from all sources is taxed at the rate that corresponds to that bracket. Wage, salary, bonus, interest, dividends, capital gains, gifts, lottery, whatever.

I want to put a million tax lawyers and accountants out of work.

 

[Tani Coyote]

See? Predictable as always.

Well actually, in a way, Cutlass is correct. I hate to sound like a dirty Commie, but without the government, the rich could only keep what they could physically protect. The government provides the necessary means for the rich - and everyone else, for that matter - to keep what they earn, to make sure everyone stays accountable in contracts and deals, etc. Therefore, everyone should pay into it.

I'm an advocate for getting as close to a flat tax as possible, by the way, so don't lump me in with "they make more, therefore they should pay more as a percentage" crowd. I would also want this flat tax to be conditional: the wealthier individuals only get flatly taxed if they invest a set amount of money into business expansion/charity/providing jobs/etc, or just spend it even(as this spending helps keep people in work). Better they spend the money than the government.

OK. Your parents are caught in the middle. Warren Buffet pays 17% of his income in taxes. He has said so. He has also said that he has that rate without attempting to maximize the deductions that he takes to minimize his tax bite. The working poor, of course, pay taxes, but not the federal income tax. Who makes up the difference? The middle class. So yes, your parents can be paying greatly over the national average because of the way the system is designed.

As the saying goes: too rich to qualify for welfare, too poor to pay for x... well, we don't really satisfy that(we can afford a fairly nice living regardless of the taxes; my mother once said we're upper-middle class, but she's quite batty too), but I would say that applies to a great deal of people.

So obviously I'm all for reform of the system. Everyone should pay the same percentage, ideally, though the poor should obviously have some sort of exemption that keeps it from burdening them, and the wealthy should have to invest/spend a fair deal of their money to qualify for flat taxes...

...Kinda makes it a different form of progressive taxation though, doesn't it?

That said, the nation as a whole pays closer to my estimate, federal, state, and local combined taxes.

We are upper-middle income, yes... doesn't change the fact that, as a proportion, we do in fact get screwed over like the rest of the middle. Just because we can't see signs of a problem doesn't mean it's not there.

Yes. But who do most of those deductions benefit? Answer: The most under taxed segment of the population, which is the very wealthy. Also, some of those tax expenditures provide perverse incentives that we would be better off without. Like the mortgage one.

For the very wealthy, any deductions should be centered on investments into new business expansions... or even just simple spending. Better than hoarding it all, and better than the government having to take it from them.

Walker is a budget hawk. He says we should have Universal Health Care, at least partially. If someone is a budget hawk, and as clued in as he is, says UHC, I personally believe him.

Even after leaving my far-right phase, I was divided on universal healthcare. What convinced me that it was for the better good was no moral viewpoints, but simple economic ones. The sad thing is, economics is very common sense(at least from what I've learned about it), yet so people actually have that common sense. Simple logic says that saving every young person's life creates decades of potential labor out of that person, same as not executing people left and right; potential labor that can be exploited when necessary is saved up. The moral arguments just are the icing on the cake.

Course, then there's the issue of what to do with the elderly - who aren't really valuable for most jobs, unless it's very simple, labor-free tasks such as pushing buttons - on a government plan... that's a bit more of a gray area, where compassion and logic will do battle. So long as these people saved up when they were younger, however, and private plans(regulated so they can't cut them off) are kept, however, I think they should be fine. Plus, I'm sure there'd be some way to get them to contribute to society, meaning the government has an obligation to keep them alive(never mind the argument that the gov't has to look out for its citizens' well-being).

For "discretionary spending", everyone knows there is plenty to cut there. But no one is willing to take on the fight to do it. And all of the discretionary spending taken as a whole will not balance the budget.

Doesn't help everybody has a different definition of "discretionary", either...

I dunno why, but I'm suddenly thinking of all those right-wing types who will talk about how the government isn't supposed to provide jobs... and then turn around and tell unemployed people to join the army. Whatever happened to "scaling back the size of government"?!

The military is the gem of right-wing hypocrisy, without competition.

An addendum on taxes: at the higher end of the income scale, your tax burden is largely determined by whether you are earning wage income or capital income.

A self-employed individual in the mid- to high-tax brackets can pay upwards to 40-50% in taxes and have close to a 50% marginal rate (marginal: 25% to 33% income tax, 2.9% or 15.4% payroll tax, 5% state sales tax, local taxes, etc can quickly reach 50%). If you're making primarily capital income, you're paying 15% on that, nothing in payroll on the margin (those come out of earned income), and the same sales/local tax mix. Buffet might not be paying much, but that doesn't generalize to the median "rich household".

Buffet's tax situation doesn't mean that the rich are undertaxed, it means that labor is overtaxed relative to capital.

...You just reinforced my thoughts of how messed up our taxation system is. It really does squeeze small businesses. All we need now is a mandate for all businesses to provide health insurance, something big business will protest on its face, but loooove in reality...

..Wait. Didn't something along those lines get passed with the bill? Or am I misreading it?

taxing Capital at 25% could make lots of money for the Fed

Capital gains, you mean? Damnit! Why is everybody trying to take away the easy ways for me to make money?

 

[Tani Coyote]

That said, If I was writing the income tax laws, I would say that income tax is payed on all income from all sources at the same rate. (or possibly something a little more complex, but only after careful study.) So if your tax bracket is X to Y, then all of your income from all sources is taxed at the rate that corresponds to that bracket. Wage, salary, bonus, interest, dividends, capital gains, gifts, lottery, whatever.

That would make things a bit easier, I would imagine. More efficient taxation scheme for sure.

I imagine that means the rates of tax would be dropped however, in response to rates rising in other categories? That way that nasty 33% or whatever doesn't get applied to everything else... ouuuch.

 

[Cutlass]

That would make things a bit easier, I would imagine. More efficient taxation scheme for sure.

I imagine that means the rates of tax would be dropped however, in response to rates rising in other categories? That way that nasty 33% or whatever doesn't get applied to everything else... ouuuch.

Yeah, you can adjust both the rates and the brackets so that it doesn't hit the people on the bottom too hard.