Why All of Us Should Want the President to Break His Promise on Taxes
April 8th, 2010 . by economistmom
Debt Held by the Public Under CBO’s March 2010 Baseline and CBO’s Estimate of the President’s Budget (Percentage of gross domestic product) - from CBO, “An Analysis of the President’s Budgetary Proposals for Fiscal Year 2011″
All of my readers know how I feel about the Bush tax cuts. I’ve never liked them–not from day one. They were too costly, too skewed to the rich, and did too little to make the tax system more efficient. I disliked them even more as a Democratically-controlled Congress during the Bush Administration couldn’t muster the courage to let them expire as scheduled when challenged by the Republican charge of “the largest tax increase in American history.” But the final kick in my stomach was when a new president who campaigned on the “change” we could believe in promised to continue the same tax cuts that he himself criticized as being fiscally irresponsible and yet not his fault.
So of course I want President Obama to break his stupid campaign promise to extend the Bush tax cuts for all households with incomes below $250,000. The tax cuts are still unaffordable (CBO shows that even the <$250K portion would cost $2.2 trillion over ten years–all but around $400 billion of the full complement of Bush tax cuts), would still go mostly to the rich (high income households “march” through all the lower tax brackets after all and hence get the highest dollar benefit of lower-bracket rate reductions, and they also benefit the most from the lower rates of taxation on capital income), and would still do nothing to broaden the tax base to make the system more efficient.
But I submit that even people who love the Bush tax cuts and believe in “supply-side economics” (even the extreme Laffer-curve view) and sympathize or even participate in the “tea party movement” and just generally like low taxes (or dislike taxes in general) should want President Obama to break his campaign promise.
Why?
Because many of these same people who like low taxes also claim to not like the large budget deficits we’re running now or the unsustainable fiscal path that lies way out in front of us… and because President Obama has also promised to get the deficit down to a “sustainable” level of around 3 percent of GDP in five years. But the President’s own budget, which includes the deficit-financed extension of those “middle-class” Bush tax cuts (that $2.2 trillion worth), isn’t consistent with such a low deficit. CBO says that under the President’s budget, the deficit would be 4.3 percent of GDP in 2015–a level considered unsustainable because it exceeds the typical rate of economic growth. That’s why the President’s budget also proposed a fiscal commission that would recommend policies (by the end of this year) to help squeeze out the remaining 1 to 1.5 percent of GDP difference.
Most of that gap will have to be filled with new revenues, because within the next five years there’s hardly any hope of reducing the deficit by cutting spending. Cuts in discretionary spending are too small to make much difference. Cuts in mandatory spending via the big entitlement programs aren’t going to happen soon–both because that’s politically infeasible and because on health reform we will barely be getting started in five years (and will really just be figuring things out as we go along).
So when the President says he wants to get the deficit down to 3 percent of GDP by 2015, most of the heavy lifting will have to come from higher taxes–and I mean higher taxes other than the higher taxes on the rich that the President already proposes in his budget and that were already included in the health reform bill. And these additional higher taxes will have to come despite the President’s promise to not raise taxes on those households with incomes under $250,000.
Enter the very nice new analysis of the Tax Policy Center, in a paper called “Desperately Seeking Revenue.” Len Burman, the TPC’s former director (now at Syracuse University’s Maxwell School), cited this work in recent testimony before a Ways and Means subcommittee. Table 2 in the “desperate” paper shows that the Administration’s budget proposals (on both the spending and revenue sides of the budget) fall $534 billion short of the Administration’s 3 percent of GDP deficit goal in 2015. (In contrast, current law, which assumes all the Bush tax cuts expire as scheduled at the end of this year, would fall just $40 billion short of the goal.) Table 3 shows how marginal tax rates (the tax rates on the next dollar of income earned–those that affect economic incentives) would have to be increased in order to reduce the deficit to that 3 percent of GDP goal in 2015. If after the Bush tax cuts are first extended (as assumed in the Obama Administration’s “policy baseline”), then all marginal tax rates are raised proportionately to get us to 3 percent of GDP deficits in 2015, the top marginal rate would rise from its current 35 percent rate to 48 percent. On the other hand, if only the top two marginal tax rates–those affecting primarily households above $250,000–can be adjusted to achieve the deficit goal, then the top marginal rate would have to rise from 35 percent to 77 percent (and the second highest rate would rise from 33 percent to 72 percent). The larger the population exempt from the tax increase, the more the marginal rate has to rise on those left to pay the higher tax.
Table 7 in the “desperate” paper shows that the strategy of limiting deficit-reducing tax adjustments to the top two tax brackets is a highly progressive one. Compared with either current law where all the Bush tax cuts expire as scheduled (and where revenue is a little short of the 3 percent of GDP deficit goal) or current policy with all of the Bush tax cuts extended (and where revenue is way short of the deficit goal), the “Obama dual promise” strategy raises average tax burdens significantly for only the top 1 to 5 percent of households and reduces or holds steady the tax burdens on all others.
But I’m going to step out of character and sound like a supply-sider for a minute here, and argue that despite having this very steeply progressive distributional pattern, the “Obama dual promise” tax policy would not necessarily be a “good deal” for even the vast majority of households not in the top 1 to 5 percent–because of that 77 percent top marginal tax rate. Having that pattern of marginal tax rates that rises so steeply at the top (go back to Table 3, bottom panel, last column on the right)–with rates of 10, 15, 25, 28, 72.4 and 76.8 percent–would create huge disincentive effects on labor supply and saving. See, all economists are “supply siders” in a sense, because we all believe that marginal tax rates affect economic decisions at the margin. Not all economists, however, are radical, right-wing, “Laffer-esque” supply-siders who believe that increasing tax rates lead to decreases in revenue. But that is because for most of U.S. history, we haven’t had marginal income tax rates high enough to worry about the Laffer curve theory. Some empirical work on this (done decades ago by my dissertation advisor, Don Fullerton, in fact), has indicated that the revenue-maximizing tax rate is far above our current highest rates of 30-40 percent–in fact, in the…70-80 percent range. Hmmm.
Why did the “supply siders” of the 1970s and 80s worry about high marginal tax rates? The theory was that high rates were so stifling to economic growth that if you reduced these tax rates, the benefits to the economy would “trickle down” from the rich people enjoying the tax cut down to the middle-class people who would get employed by the growing companies the rich people were investing in.
In theory, “trickle down” can work in a negative way, too. If marginal tax rates are raised to prohibitive, other-side-of-Laffer-curve levels, then the labor supply and saving of the rich are reduced, overall economic growth is reduced, and employment and wages–economy wide and throughout the income distribution–suffer. And on top of that, revenue falls (because we’re on the wrong side of the Laffer curve), which raises the government deficit, reduces national saving, and in turn reduces economic growth. And the effects of economic growth, particularly on the down side, are very broadly distributed.
I know it must seem odd that I would pull out this supply-side argument as a reason why even middle-class and lower-income households should hope the President doesn’t keep his “no middle-class tax increase” promise. But I’m saying so because it’s just not good or sustainable tax policy to rely on such a huge increase in taxes on such a small percentage of the population to fund a cause (deficit reduction) that would otherwise have large and broadly-distributed benefits.
I get back to my position that the easiest way to stick with current-law baseline revenue levels (which get us close to the 3 percent of GDP deficit goal) is to stick with current law, where all of the Bush tax cuts expire as scheduled at the end of this year. No taxes would need to be reformed, and in fact no tax legislation would need to be passed and signed! Of course, a better way would be to stick to current-law revenue levels by reforming the tax system–broadening the tax base to make it more efficient so that marginal tax rates would not even have to come up and we could still raise more revenue to achieve our deficit goal. But people (regular people and policymakers) seem to forget that if we let the Bush tax cuts expire, in the “worst” (or laziest) case we just go back to Clinton-era tax policy, which really isn’t so bad. In fact, if you go back to the “desperate” paper and Table 3, the first two columns on the left in the bottom bank show marginal tax rates if the Bush tax cuts expire (those Clinton-era tax rates of 15, 28, 31, 36, and 39.6 percent), and if those rates are raised proportionately (and just a little) to achieve the 3 percent of GDP deficit goal. The marginal rates in that “break tax promise, keep deficit promise” scenario are 15.5, 28.9, 32.0, 37.1, and 40.9. I would argue that this structure of tax rates would be much better for our economy as a whole than the “Obama dual promise” rates that go up to that Laffer-esque 77 percent at the top and yet are barely lower at the bottom and middle.
So this is just a different argument I’m making for why the Bush tax cuts should be allowed to expire and why President Obama’s campaign promise on taxes needs to expire, too.
“Most of that gap will have to be filled with new revenues, because within the next five years there’s hardly any hope of reducing the deficit by cutting spending. Cuts in discretionary spending are too small to make much difference. Cuts in mandatory spending via the big entitlement programs aren’t going to happen soon–both because that’s politically infeasible and because on health reform we will barely be getting started in five years (and will really just be figuring things out as we go along).”
I simply don’t understand why this argument continues to get made unless is it just a rationale for doing what you want to do/think we should do, that being raising taxes.
Let’s take it on its face. First I’m going to start with the (in my view false) premise that 3% in a nearly full employment, low inflation economy (as the President and the CBO project in the back half of the decade) is a reasonable number. It’s not because we should be at the floor for deficits at that point but let’s leave that aside. If you use the CBO numbers, the gap in GDP is about 1.5% or let’s call it $200 to $250 billion. The President’s budget freezes discretionary spending at its post-stimulus levels which is a substantial increase over the pre-recession levels. Bringing spending back to pre-recession levels even allowing for some inflation would reduce that $200 to $250 billion nut materially.
But far more irritating to me personally is the argument on entitlements. Somehow, people who lean left (including Diane) want to argue that the reason we can’t touch entitlements is that it’s politically unfeasible; yet, somehow, raising taxes (in some cases massively) is politically feasible. I know that liberals wish this to be true but there is no way politically that the Bush tax cuts on “the middle class” are going to expire before 2015. As a standalone bill, it couldn’t pass the Congress. Indeed, it’s not clear that Congress won’t extend all the Bush tax cuts at this point. Politics is a sword that cuts both ways and no solution is going to be politically easy.
Finally, as to the argument that we can’t reform Medicare and Medicaid because we just added a trillion in spending to healthcare, that’s perhaps the most insulting argument I’ve ever heard. Hey, we made a bloated program bigger so now we can’t save any money in it….it is also the issue with HCR. We are saving money in Medicare (maybe) but if we do we’re just going to spend it somewhere else.
Lastly, as to the contention that the Bush tax cuts favored the wealthy, would some liberal somewhere please provide some nonbiased data to support that claim. If you look at effective tax rates from the CBO from 2000 to 2006, rates declined across the board but declined the most at the bottom of the income scale and least at the top as a percentage of the initial rate
http://www.cbo.gov/publications/collections/tax/2009/effective_rates.pdf
Please note that these numbers include all taxes. If you look just at the income tax, the data is hard to compare because the bottom two income quintiles have negative tax rates.
Dispensing with the critique, we do need to solve the problem and taxes need to be part of the answer but only part of it. The only solutions that can work will be solutions that every constituency hates in roughly equal parts. This will mean cutting everywhere including entitlements and increasing taxes. I’ve posted elsewhere how I think we could get to zero (the right target in my view in a low inflation, full employment economy).
Stop for a moment to consider what would happen if an “all tax” solution to the problem were actually passed whether of the type Diane favors or the type she doesn’t. Such a solution is not politically stable even if it could happen. Pass that large a tax increase, Dems get voted out on a repeal platform and presto changeo, tax increase is repealed.
No, the only real solution is a solution that everyone hates because that’s the only solution that has a hope in heck of being stable.
EM,
I’m sure everyone here is well meaning and concerned for their Country’s future, but please consider that a sovereign government that issues it’s own currency (such as the US) is never revenue constrained in its abilty to spend in its own currency. All of this concern about the concept of ‘fiscal sustainabilty’ in the US here, though I believe comes with the best intentions, is unwarranted. A complete knowledge of the US Treasury and Monetary operations will dispell anyone of such concerns.
From Prof. Bill Mitchel’s “Fiscal Sustainability 101″:
“A sovereign government faces no solvency issues. It also does not have to go through the logic that restricts a household – that logic runs like this – if we spend more than our income now, we have to borrow…. That is the logic that the users of the currency have to consider every day. They have to finance every $ they spend and so planning is required to ensure they don’t “blow their credit cards”! But that logic doesn’t apply to a sovereign government.” More here.
Resp,
*SIGH*
Matt, please don’t even try. Sure, we can spend as much as we want in nominal dollars as long as we’re willing to devalue the currency through inflation. If there were no inflation issue, the government should simply pay each and every citizen a trillion dollars a year and presto the poverty problem is solved.
Very simply, I am a fiscal conservative (balanced budget focused). The government must cut spending by a % across the board - no exceptions until revenues = expenditures. For example, I work for DoD and they can more than afford to see their budget reduced and it won’t adversly affect our security (regardless of what the alarmists say). It will have the affect of getting them to focus on what is essential to our secuity (must have vs like to have).
Next, we must go to a flat income tax with no deductions. Forbes championed this until his near-sighted fellow Republicans went off on him during his failed bid for the President.
Surrounding all of this is the notion of “PAYGO” any increase in spending must come with an offset.
If we do all of this, then we can stop driving each other crazy with discussions of tax cuts, every election cycle. I will be happy to have a tax cut but what will I have to give up to get it? That is the question that should always be raised when someone brings up the topic.
Finally, if you amortize our 12.4T debt over 30 years. It comes out to nearly $60B a month. Total interest alone over the 30 year period is equal to $10T to $12T.
It is imperative that we get our fiscal house in order. We are not going to grow ourselves out of this one.
Steve,
Sigh all you want and set up strawman arguments, I never said give everybody a trillion dollars.
The points MMT makes are that there is no solvency issue (which btw David Walker himself has admitted!), the issuance of Treasury securities is not “borrowing” for a sovereign it is a reserve drain, and we have a lot more options on how much we tax and spend.
MMT fully realizes that excessive fiscal transfers from the govt to non-govt sectors can increase the general price levels if there is not enough supply to meet demand.
Steve, there are people out there actually claiming we cannot “afford” things when 18% of our workforce is un/under-employed, can you not see the irony?
Resp,
What are these options that you claim we have?
I’m not interested in conceptual arguments about whether or not we can print money (we can) or whether printing money has consequences (it does). If you don’t like Diane’s solution (as I do not), propose a different one or simply argue we should do nothing.
As I’ve said many times before, my preferred solution is.
1. Let the Bush and Obama tax cuts expire.
2. End all industry specific preferences in the tax code
3. Cut military spending by $100 billion
4. End SS and Medicare payments to people who have a net worth greater than $500,000.
5. Freeze the balance of the Federal budget (in aggregate not by line item)
Those five steps will produce a balanced budget within 5 years and they are not radical in any sense.
Like those or hate them. Give me a solution to the problem. I infer from your argument, you don’t actually think we should care about debt and we can continue to spend all we want and never worry about the future cost. If this is not the case, please correct me and tell me what you want to do. Saying there are more options is obvious; picking one among them is hard.
500k is not a lot of wealth for someone who has just retired at 65.
But raising the retirement age is some that should be done.
Do “industry specific preferences” cover the tax deductibility of mortgage insurance?
The real problem is that politicians just can stop spending other people’s money. It is just easier to do that rather than tell special interest groups NO!
Bill,
It’s not a question of how much it is, it’s a question of whether people should use their own money in retirement until they run out before taking money from other people. Also, 500k would be the min threshhold. The mean net worth for the top 20% of senior HHs is almost 1 million dollars, roughly 5x the mean for the total population. The median for all senior hh’s is 200k, well about the 70k for all citizens and yet we consistently transfer money from the (relatively) poorer to the (relatively) richer.
Steve,
I’ll assume you know the Govt does not actually “print” money any more, that the Treasury spends by having the Fed electronically credit the reserve account of the lawful recipient of Federal spending. The perjorative “printing money” phrase is left over from the old gold standard days, we left that system in 1971.
I dont have any proposals to “balance the budget” other than to propose the Treasury simply stop issuing Treasury Securities entirely, as that reserve drain is no longer needed to support monetary policy now that the Fed (since late 2008) can pay interest directly on reserve balances; they should just accrue a debit balance in the treasury’s account at the Fed. Its operationally the same thing.
More importantly, specific proposals for turning the economy around based on operational reality are out there, some from Warren Mosler, declared candidate for US Senate in Connecticut (Dodds seat) and someone who understands the operational reality of Federal fiscal and monetary policies, can be found here.
Resp,
Steve: Just for clarification, my recommendation is NOT that we close the gap entirely on the tax side, but that for the Administration’s short-term deficit reduction goal of 3% of GDP by 2015, you can’t do it without doing at least most of it on the tax side. The value of doing whatever you can sooner is that it immediately saves on the compounding interest. Over the longer term, of course we have to have entitlement reform and greater budgetary discipline on the spending side of the budget (and it is indeed more a spending-side than tax-side challenge), but none of those entitlement reforms will be very easy or very quick. We actually “know” a lot more right at this moment about how to raise revenue efficiently (without just jacking up marginal tax rates at the top) than we know about how to provide adequate health care services at a reasonable cost. That doesn’t mean we don’t need to be working on all fronts though, as diligently and wisely as possible. I actually like your list just fine and don’t see any fundamental disagreement between us.
Steve,
I think your list is a sensible ideological compromise (among other such potential compromises). One question:
2. End all industry specific preferences in the tax code
My guess is that you are not (or not fully) including tax expenditure subsidies from the consumer side — e.g., mortgage interest deduction (construction/housing industry & other home-related industries such as kitchen appliances, related services, etc.), tax exemption of employer provided health insurance, tuition tax deduction/credit (education industry), cash-for-clunkers kind of stuff, etc. etc. Why not eliminate all tax expenditure subsidies for purchases of particular categories of products/services? And if we want to subsidize purchases of something because of positive externalities — e.g., promoting renewable energy and conservation — we can do so via more explicit subsidy on the spending side, subject to the associated scrutiny every year rather than continuing on auto-pilot as entitlement spending disguised as lower taxes.
Brooks,
I would be fine/prefer the elimination of tax expenditure subsidies if and only if rates were adjusted to keep total receipts in line. My concern about ending subsidies per se is that this would constitute a fairly massive tax increase of which I am not supportive. This is a philosophical view with which I suspect you disagree.
I think my thinking is also somewhat political. Like Diane I think, the let the cuts expires seems a far more palatable solution than taking on all of the interests represented by taking on all of the subsidies.
Diane,
Fair enough. I guess my sense is we are doing basically nothing on the expenditure side between now and 2015 other than grandfathering into the baseline the “stimulus” spending. That seems fairly unbalanced from my point of view. I didn’t see anything in your post, nor have I heard much on the topic of spending other than a desire to adjust entitlements in the long run.
I also strongly believe that we are going to have one good shot at this so I resist the notion of doing the taxes now and the spending later as I infer from your post. My sense is we need to take the time to give everyone a bitter pill to swallow rather than taking the medicine a little bit at a time. I get the point about compounding but, a sustainable solution is worth a lot more than an unsustainable one over the long run.
If you get a chance, I would appreciate an analytical look that you’ve seen of how the Bush tax cuts were “for the rich”. All the IRS and CBO data I look at seems to argue the opposite and yet this theme of Bush tax cuts for the rich is one of the most commonly repeated things on the web (at least on political websites).
By contrast, the Reagan tax changes actually raised taxes on the less well off on a relative and absolute basis.
Matt,
I checked the link and it affirms my point of view that you (and your candidate) do not believe the deficit matters. If this is the case, why shouldn’t the government just give people money instead of going through the difficulty of passing it through the states or creating $8/hour jobs (that is below the minimum wage in some states btw).
What neither you nor your candidate answer is why the government issues bonds in the first place. It clearly doesn’t need to given the philosophy to which you subscribe. As to Chairman Bernanke’s quote (not linked on the website), I rather imagine he was describing an operational approach rather than a philosophical one, but, without the quote, we’ll never know.
If you are aspiring to convince the regulars here that the deficit and the debt don’t matter, you may be better served to try a different forum as you will not likely have much success here.
Steve,
I did say why the Treasury issues bonds, the main reason is to drain excess reserve balances from the banking system that if left there, would cause banks to bid down the Fed Funds Rate to a point lower than the Feds target policy rate. This is just normal historic monetary operations at the Fed. and Treasury.
I dont think I would perhaps convince folks here who are heavily invested in the current paradigm/view of “debt” and deficits. Rather I would hope to present readers of EMs blog here an alternative analysis that is based not on dogma and pure politics, but instead on centuries of basic dual entry accounting methodologies and true operational realities; that unfortunately escape many economists who specialize in other areas and policymakers.
I appreciate EM’s intellectual honesty in allowing comments on her blog here. If you or anyone else have questions for candidiate Mosler, I suggest just post them to his websites and he usually answers them.
Resp,
Steve,
Re: I would be fine/prefer the elimination of tax expenditure subsidies if and only if rates were adjusted to keep total receipts in line.
As I’ve explained before in all sorts of ways, that statement is, substantively speaking (leaving aside the politics of it borne of conceptual misunderstandings), exactly the same in every way as if you had been talking about explicit “spending” subsidies that did the exact same thing as all those tax expenditure subsidies, and if you had said: “I would be fine/prefer the elimination of spending on subsidies if and only if rates were adjusted to reduce revenue by the amount of reduced spending.” But I think I’ve exhausted all the ways it’s possible to explain and illustrate the above. Basically, your statement is the exact substantive equivalent of saying you oppose spending less on anything unless the savings go entirely to lower tax rates (rather than to other incremental spending or to deficit-reduction). Which you wouldn’t say, since you want deficit reduction, and I presume you don’t have a particular problem with reducing spending on subsidies as part of that effort, which means you have contradictory positions. You favor doing X to achieve a particular goal, but oppose doing Y to achieve the same goal, even though X and Y are substantively the exact same thing in every way. But there’s probably no sense going up and down and around this topic again. Suffice to say, as I’ve said before, if you favor reducing/eliminating a given subsidy or set of subsidies or all subsidies to reduce deficits, you should favor doing so just as much regardless of which form the subsidy takes — explicit spending or tax expenditure — if either way they do the same thing in the same way with all the same effects on behavior, bank accounts, everything and everybody, because there is no substantive difference resulting from an entirely inconsequential, non-substantive difference in the flow of dollars and the labels. That said, as I’ve also said before many times, because the misunderstanding I’ve tried to correct is so widespread, there may be a reason to prefer one form over the other for political reasons, and that should lead one to favor explicit subsidies, subject to annual review as part of the discretionary budget and seen more for what they are, over tax expenditure form in which these subsidies are entitlements on auto-pilot and are mistaken as resembling lower tax rates and are called “tax cuts” when enacted/increased/expanded.
Re: the let the cuts expires seems a far more palatable solution than taking on all of the interests represented by taking on all of the subsidies.
That’s certainly plausible. But if people were seeing things for what they are, they would see that choosing to raise tax rates in lieu of reducing tax expenditure subsidies is the substantive equivalent of raising tax rates in lieu of reducing spending (specifically, reducing spending on subsidies).
Brooks,
Fortunately for everyone, I’m not taking this argument up again.
Steve,
Oh, I have no desire to go over this again either. But it’s really not like we have competing arguments or different perspectives. I was just trying to help you understand something but I haven’t succeeded.
If Diane or someone else wishes to try explaining it to you, perhaps there is some way other than my variety of explanations and illustrations that will succeed.
Brooks,
Peace be with you. I hope things are going well. I do understand your point but I feel like you, that I have been unable to make you see mine.
On the substance of the solution, I think we are pretty aligned but very far away I imagine from what the “fiscal responsibility commission” is going to produce, assuming it produces anything.
Diane, an informative and excellent post, thanks.
Steve,
On the point I’m making, either you see the correctness of my point or you don’t, so if the point of yours to which you refer is your dispute of my point or of some aspect thereof, any such point would be incompatible with mine and incorrect and so it wouldn’t be possible (or correct) to see any validity in it and also in my point.
If the point of yours is different and unrelated to the validity of my point, I don’t know what such point you’ve made that I haven’t shown understanding of. If it’s your point that differences in tax structure can viewed as a sort of tax expenditure (vs. a baseline of a different tax structure) benefiting some people — I’ve shown an understanding of and agreement with that point from the start.
Anyway, no sense going on much more about the nature of our past conversations on this topic. But it really shouldn’t be mistaken as competing arguments on the point I’m making that could both be valid, nor mistaken as just two different perspectives. It’s like I’ve laid out a basic algebraic equation that is simply correct, whether one sees it as such or not.
$500k
“It’s not a question of how much it is, it’s a question of whether people should use their own money in retirement until they run out before taking money from other people.”
So, I’ve been paying into SS for 30+ years (so how is it other peoples money?) and have a house worth about 500k. Say its paid off (I bought it 20 years ago), I retire and how do I eat? Oh, yeah, how do I pay property taxes on that inflated house value?
Now, on the other hand people that bought a new car every 3 years didn’t pay their house off so they have even less money and I should give up SS for them?
Why should anypone save money? The rational thing is to spend it now.
Bill,
Sure, spending all your money is rational if you want to be captive to the government in terms of how much money you have in retirement. Your choice of course.
I hate to be the bearer of bad news but you haven’t been “paying in” to social security for 30 years. You have been paying SS taxes for 30 years. No account with your name on it, no legal obligation for the government to pay you in the future. I’ve been paying SS taxes for 25 years now and, in my retirement plan, it’s in at exactly zero because that’s what I expect to get.
As to your 500k house, let’s look at two alternatives. In alternative A, you keep your house, people pay taxes to give you money and, upon your death, your house passes to your heirs. If your house is the bulk of your estate, your estate pays no Federal estate tax and the house passes to your heirs, who, probably not needing a house, sell the house and pocket the 500k.
In alternative B, you sell your house now, use the proceeds to finance your own retirement (for a period of time at least) and leave less to your heirs, maybe nothing.
In both cases, your house is sold, it’s only a question of when so there’s no net impact there. The only impact is whether you spend your own money or you spend other people’s money to finance your retirement. That’s it. You basically are arguing that you have a right to spend other people’s money in your retirement because you paid SS taxes for a period of time.
And in effect, you’re arguing that your fellow citizens should give you money so you can pass that money to your heirs. I simply don’t get why the government should do that or why you should ask that of your fellow citizens.
And all of this is before you get to the equity of robbing from the relatively poor to give to the relatively rich.
Brooks,
I know that’s how you see it which is what is so frustrating to me ; )
Steve,
Well, if for some reason you still think there’s a substantive (even ideological) difference between (1) you handing me $10 while I simultaneously hand you $3, and (2) you handing me $7 — and that’s essentially what my point is all about (the substantive equivalence of those two) — I’m afraid I can’t do anything to mitigate your frustration.
I want you to know, by the way, that I hope these comments of mine are not coming across to you as snarky in tone, which isn’t my intent. I’m just speaking to you directly, but with respect.
” no legal obligation for the government to pay you in the future.”
You are mistaken - there is a legal obligation for the goverment to pay. It’s just a legal obligation the government can change when they get the votes to do so.
It is also a legal obligation I think they should change but not to the extent you seem to think.
I’d push back the retirement age.
Steve,
“it’s in at exactly zero because that’s what I expect to get.
Why do you not expect the Treasury to be able to change the numbers in your bank account up by a couple of thousand dollars on a certain day of the month? What would prevent this? If your current checking account balance was $7500 and by law you get $2000 Social Security per month, some data entry clerk will simply make the “7″ change to a “9″ (Reserve Accounting>>debit:Treasury Account/credit:Steve’s Account), that is literally how it works…why would this not be possible? Please run thru your version of the accounitng for me, I’m trying to understand your sequence of events and where the transaction accounting would fail…
Resp,
Theres a large body of literature on S.S. financing and I think many estimates is just an adjustment to CPI payment growth is tied to, and raising the age should make the program more or less solvent. You may have to raise the tax by a percentage or so. Its Medicare financing that is the major issue.
I do strongly disagree with the suggestion that we should deny payments to 500,000. It threatens the long term political stability of the program, which is politically popular precisely because everyone is entitle to it. It is for that reason alone its not really seen as any sort of welfare program. I also think the biggest lobbying groups that would protect S.S., would fight any proposal of the sort tooth and nail to ensure that such a proposal is never passed, because they understand political risks and consequences.
Political viability is something that we in our country need to take better account of, you can’t balance the budget by cutting non discretionary spending. You probably can’t get away with cutting military spending by a margin of 100 billion (20% of the military budget).
I think the most viavble tax cuts will come.
1. Letting Bush tax cuts expire
2. A Small consumption tax probably need to be placed. It may be politically difficult to place such a tax in the U.S., I think carbon/greenhouse gas consumption tax would be ideal.
3. Permanently exiting Iraq, and Afghanistan.
4. Really fix medicare, which likely cannot be done by President Obama. Until the system actually enters crisis.
@Economics Student,
Go to school here.
Resp,
People worried about the debt/deficit are still operating under the gold-standard myths that no longer apply to the US’s non-convertible fiat currency as evidenced by Japan’s example & real-world Federal Reserve operations:
from Nobel laureate economicist Krugman http://www.nytimes.com/2010/04/09/opinion/09krugman.html
“For example, in 1946, the United States, having just emerged from World War II, had federal debt equal to 122 percent of G.D.P. Yet investors were relaxed, and rightly so: Over the next decade the ratio of U.S. debt to G.D.P. was cut nearly in half, easing any concerns people might have had about our ability to pay what we owed. And debt as a percentage of G.D.P. continued to fall in the decades that followed, hitting a low of 33 percent in 1981 [(note that the late 1970s & early 80s were recessionary, ie, significantly paying off your debt is bad for the economy)]
So how did the U.S. government manage to pay off its wartime debt? Actually, it didn’t. At the end of 1946, the federal government owed $271 billion; by the end of 1956 that figure had risen slightly, to $274 billion. The ratio of debt to G.D.P. fell not because debt went down, but because G.D.P. went up, roughly doubling in dollar terms over the course of a decade. The rise in G.D.P. in dollar terms was almost equally the result of economic growth and inflation, with both real G.D.P. and the overall level of prices rising about 40 percent from 1946 to 1956.”
From this thread: Why RonPaul,Ayn Rand, Deficits,Greenspan/Bernanke vs. Keynes,Friedman?
Deficits were bad on gold-standard but are now good on non-convertible currency as long as the country issues it’s own currency(the opposite of countries like Greece that use someone elses currency the EURO) & production is increased to offset any inflation (hence why Japan with their 220%+ debt has negative inflation[deflation](about 0% inflation) for the past 20 yrs while still having 3%+ GDP growth & about 4% unemployment & 0% real interest rates)
http://www.kathylien.com/site/wp-content/uploads/2009/03/debt.jpg
US inflation is 1% to 2% for the previous months, & NEGATIVE -0.3% to 0.9% for 2009 despite US record debt/deficits. Furthermore,
Japan is at 220% debt (more than TWICE the debt of US which is only about 80% debt) for the past 20 yrs, has mostly deflation (inflation was negative -0.3% to 1.3% inflation (usually about 0% inflation) for the past 20 yrs.), almost 0% interest rates, GDP growth of about 3%) which shows that inflation is not caused by gov deficits as long as production increases more than the money supply (see modern economics link in my sig)
1) U.S. Current Low Inflation Rates|Monthly&Yearly Chart,Graph
2) Japan Historical 0% Inflation Rates
Note that both Friedman & Keynes based their theories back when the world was still on the gold-standard so now that we’re on a non-convertible fiat currency, we have economicist Mosler & others with real-world banking experience & business expereince (in addtion to banking, Mosler also is running a gov economic growth program in the US Virgin Islands at the request of the gov) combining both Friedman’s & Keynesian theories with real world operations/data/evidence/ –where money supply(Friedman) is increased or regulated by gov deficit spending(Keynes but with more tax cuts ) while increasing production to reduce/offset inflation.. note that Mosler advocates MORE TAX CUTS for the middle-class/elimination of payroll taxes. Gov deficits/spending add to the private sector money supply to fund capital for increased employment & taxation is just to uphold value/demand for the dollar & siphon off excess currency to curb inflation & reduce gov deficits(money supply) if inflation is too high… taxation is not used to fund gov deficits nor gov spending so arguments of “robbing Peter to pay Paul/gov robs from private sector” do not apply
Everyone is familiar with inflation being too much supply of money but not enough supply of goods/services without realizing that the reverse is also true that increasing the supply of goods/services reduces inflation.. it’s the ratio of money supply to goods/services, not just the money supply that determines inflation. Taxation/gov spending is used along with interest rates to increase/decrease the money supply to equal increased production/increased employment…
Click here for info & UPDATED Economics Site of the most accurate evidence-supported of economicst/bank CEO MoslerEconomics.com - http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds — The 7 Deadly Innocent Frauds of Economic Policy
Bill,
There’s no account with your name on it. Somebody else will pay in order for you to receive. That’s how the system works. Full stop.
Pushing back the retirement age is a worse solution, both from an efficiency and an effectiveness perspective. It’s inefficient because some people will take other forms of assistance instead. It’s ineffective because it penalizes people with need and leaves people who have no need still receiving money.
I’ve yet to hear the government interest in subsidizing transferring wealth from one generation to another. That’s all a non means-tested SS and Medicare system is.
@EconomicsStudent, SS is a transfer payment just like welfare. Universality is wasteful. Almost every program the Federal government offers is not available to everyone and somehow they all seem to survive quite nicely. So why will SS cease to exist if it’s not available to all? There’s no backup for that argument. The real argument is that receiving welfare carries a stigma for the recipient and the recipients of SS don’t want to admit it’s the same as welfare. Too bad for them because it is.
I’d like you to explain to the person making $40,000 why they (and their employer) should pay about $6,000 a year to a person who has more wealth than they are ever likely to see. I just don’t get liberals. They are fine with taxing the rich but god forbid we reduce the benefits of the rich. It just doesn’t make any sense.
You make assertions as if they are fact. For example…
“You can’t balance the budget by cutting nondiscretionary spending.” That’s an assertion and it’s simply false. Of course, you CAN do so, you just don’t want to do so. Please be honest enough to admit the difference between an assertion, a preference, and a fact.
Your response is that of a typical liberal…raise taxes and cut defense. Such a solution will be very difficult to sustain because a plurality of the country will oppose and attempt to repeal it. I would say the same thing about an “all spending” solution. Neither is likely to be stable because it will be opposed by half the country either way. No, the only possible solution is an everyone loses solution. That way the opposition will be universal as will the support.
As to fixing Medicare, there are really only two possible directions, price and quantity. Which one are you planning on cutting. My solution cuts quantity (at least quantity the government pays for by reducing eligibility). The only other way to cut quantity is to ration care/procedures. Good luck with that.
The alternative is, of course, to cut price. I look forward to your efforts to cut doctor pay.
Matt,
There’s nothing that stops the treasury from doing this. As I pointed out, there’s nothing that stops them from giving me a trillion dollars a month. However, what happens after that is the problem.
You see, if the treasury gives everyone money, there’s more money and prices go up for everyone…that’s inflation and that’s what happens when the treasury creates money from nowhere. No thanks.
I don’t know what stage of your life you were in in the mid and late 70s but I have no interest in returning to that state of affairs.
Cordially,
Bill,
One more thing. There actually is no legal obligation. There’s a law and at some point you may become eligible for payment. A legal obligation that existed today would be an agreement between you and the government that they would pay you money at some point in the future…like an annuity. The government would then have to fulfill this obligation or pay you a penalty. That’s a contractual obligation. What you have is a law that doesn’t apply to you today and may be changed in the future.
That’s just not a legal obligation. The only legal obligation the government has today is to pay people who qualify today. The government makes no forward promises to you or me or anyone else even though they like to write your SS statement as if they are doing so.
Steve,
You bring up the Trillion $ strawman again, you know, if I were to take the same approach with your policy recommendations, I would say that we could just euthanize all senior citizens and then the social security/medicare “fiscal sustainabilty” issues would just go away. But I am a rational person and I know that is not what you would ever advocate for, just as I would never advocate giving people $T.
I am just trying to get you (not just you but also others here) to understand the accounting identities that simply dictate the country’s fiscal reality: From Dean Baker: ‘That the trade deficit (X-M) is equal to the sum of public and private savings (T-G)+(S-I). This identity means that if the United States is running a trade deficit, then the sum of public and private savings must also be negative. That has to be true — it is an identity. It’s just like 2 + 2 = 4. It is always true.’
Once you understand this you will see that a fiscal deficit in an environment of a large trade deficit and collapsing private credit is nothing to be concerned about, it is just an accounting relationship that develops due to current macro policies and there is no solvency issue as you yourself and Mr Walker have admitted. IMO the deficit should be much larger than it is now due to tax cuts, but the Democrats seem incapable of conceiving this policy due to their false belief that the US govt spending is somehow revenue constrained.
In an environment like we are in now, it should be the govts DUTY to replace the loss of private savings by implementing massive tax cuts, I would start with the abolition of the FICA taxes as the most progressive approach (bottom-up).
For anyone to advocate fiscal “austerity” (ie balanced budget/pay-go) in this current environment is to by accounting definition DOOM the US citizens into a kind of meager/serf-like condition that we see in a large part of our population currently. US citizens become poorer as due to the equation above they cannot save due to the taxes they have to surrender to balance the budget.
Steve, I sense in your writings a resentment that all of your FICA taxes that you are paying now are “going” to senior citizens who are enjoying that income, but that when you get there, you get “screwed” and there wont be anything there for you. You certainly have the right to be concerned and I bet that you are concerned not just for yourself but in a patriotic way for fellow countrymen in your same poistion. Your concerns, again I believe that come with the best intentions, are misguided. When you get there, the govt WILL be able to credit your bank account for the $2k per month. If this leads to a large fiscal deficit, it will be due to no other reason than the US still runs a large trade deficit and private credit creation is still non-existant, an accounitng identity.
Resp,
Matt,
My point about a trillion dollars is the more money you create, the more inflation you get. It’s that simple.
To your point about private savings, private savings aren’t down. Private investments are down and investments carry risk. Hence, government should not replace them because sometimes you lose when you take risk.
Matt, you act as if there’s a choice about whether to pay for what the government provides or whether we should just print money forever instead. As I said before, you’re not going to convince me (or I suspect anyone else) that the print money solution makes sense.
Nah, I’m not resentful about SS and FICA, I’m just reasonable about it. I don’t resent paying FICA taxes today. I do quite well and FICA is a small portion of my tax burden. What I do resent is the argument that says that people who are not well off should make payments to people who are well off. That’s what is being done today in FICA (if you maintain the fiction that FICA taxes are only for SS which is the common way this argument is driven).
As to your concern about fiscal doom, let me just make two points. First, we need to address the problem over the course of 5 to 10 years, not tomorrow. Second, you are simply trading one doom for another. Suppose for example, the US government stopped collecting taxes entirely and just printed the money (or used computers to credit it to use your language). Well, the budget deficit isn’t a problem but now we have pretty substantial inflation to deal with. If you want to make the poor poorer, runaway inflation is the best way to do it.
I understand you believe my concerns to be misguided as I believe your lack of concern to be. You never answer the question about the inflationary impact of simply creating money via the Fed or by putting any sum of money in my checking account without collecting it from somewhere first. Until you do, your perspective cannot be taken seriously (at least by me).
End SS and Medicare payments to people who have a net worth greater than $500,000.
$500k is pretty low, especially for someone supporting a spouse and possibly others. You can wipe that out in 6 months of hospitalization.
Furthermore, this formulation further advantages government retirees with inflation-indexed defined benefit plans. Anyone with a $20,000 per year pension of that type has more than $500k of net worth in the pension alone, and that net worth would not be seen by your attempt at means testing.
The solution will be to make the Medicare option so inferior that only the poor will use it. Just like the public schools in Washington DC.
AMT,
I don’t agree. I’d let people buy in to Medicare with their own money if they want to. Medicare’s cost/beneficiary is about 10k. I don’t think that’s unreasonable.
As to the point about pensions, it’s true but maybe we’d need to think about a way to value the pensions in pv terms to equalize. The broader point is that you can’t keep transferring money from the young to the old when the old are wealthier than the young. In particular, you can’t transfer money to the wealthy and, relative to the people paying the taxes, a net worth of 500k is quite wealthy.
As to fixing Medicare, there are really only two possible directions, price and quantity. Which one are you planning on cutting…
From a look at how the Massachussetts plan is working, and what it portends for the national one that is based on it.
“From a look at how the Massachussetts plan is working”
Hmmm. The link didn’t link.
http://www.kaiserhealthnews.org/Columns/2010/April/040810Capretta.aspx
a net worth of 500k is quite wealthy.
It is if you are working and earning enough to live on. It’s not if you have no source of income other than this 500k. Then you are near the poverty level unless you spend the money down much faster than any competent financial adviser would recommend. You can’t buy much of an inflation-protected income for $500k.
But AMT, the alternative is someone else gives you money to artificially prolong how long your 500k lasts. Why should someone else do that when the someone else has a lot less money than you do?
It’s not a question of absolute values, it’s a question of flowing money from one group of citizens to another. Remember 500k notionally is the floor. Once you go below it, you are eligible for support. I just don’t get why you should be when you are above it. You’re not ineligible forever just for as long as you net worth stays above the threshold.
Prolonging how long your retirement funds last is exactly what Social Security is supposed to do. Workers have always provided for those beyond their working years. SS makes it dependable. That dependablility is one of the reasons continuing a separate balance sheet for SS makes sense.
The fact is that even if taxes are never raised to cover our longer lives, the next generation’s benefits will extend their retirement funds by more than this generation’s (in terms of today’s buying power).
So someone can pay into SS, with no concern about who is getting benefits now, simply counting on getting the money back later.
Remember 500k notionally is the floor. Once you go below it, you are eligible for support. I just don’t get why you should be when you are above it. You’re not ineligible forever just for as long as you net worth stays above the threshold.
This proposal encourages irresponsible behavior by retirees. Spend as rapidly as possible until you reach $499k, then stop. That way you maximize your government benefits. Any real proposal would need to be far more difficult to game than this. That means a highly complex look-back system and an arms race in strategies such as Medicaid has evolved. I don’t like the looks of this at all.
You’re certainly entitled not to like it. It is, in my view, more responsible than raising the retirement age and targets the money on the people who have need as opposed to the people who have age.
Arne, you’re wrong about the future of SS. It is a worse deal for today’s retirees than for the last generation and an even worse deal for current workers.
There is, in reality, no separate balance sheet for SS. It’s just money like any other government money. SS money is coming out of general revenues this year and will do so most every year in the future.
Although looking at ROI on insurance is potentially misleading, for a median worker SS provides a better return than any low risk investment. Turns out it was better for his parents, but so what?
I understand, but do not agree, with the notion that SS funds are just another pot of tax money, but it most certainly has its own balance sheet.
Although looking at ROI on insurance is potentially misleading, for a median worker SS provides a better return than any low risk investment.
False.
Today’s and future workers are going to take a $16 trillion loss on their Social Security contributions, as per the Social Security Trustees.
Social Security used to give a better-than-market return on contributions. The reason why today’s and future workers will take such a big loss is exactly because prior generations received a $16 trillion above-market gain (over the federal bond rate) on contributions. Which was a net transfer from the generations to follow, who will not be reimbursed for it.
The great howling mistake made over and over by those who say they want to “preserve” Social Security, because it has been such a success until now, is not realizing that that Social Security is already dead and gone. Nobody can preserve it, it is gone and cannot be brought back.
How different is Social Security going forward, compared to the past?
Imagine that until today SS had given its participants $32 trillion less than it actually has — making all past participants $16 trillion poorer on a lifetime basis, instead of that much richer — do you imagine it would still be as popular as it is? (Could such a program even have ever been enacted?)
That is the future of Social Security — and how different its future is from its past, both functionally and politically.
BTW, FDR explicitly promised that SS would give participants as a whole the market return (federal bond rate) so it is not so “misleading” to consider — it was an explict promise made when creating the system.
And in the days when Social Security was giving participants so much more than they paid into it, this was praised over and over by its advocates as its great strength!
For instance, Paul Samuelson praising Social Security as “A Ponzi Scheme That Works” in Newsweek, 1967:
So don’t suddenly get shy about considering ROI. Social Security’s advocates were never shy about it iin the past.
The closed goup unfunded obligation is not the same thing as a “loss”.
One of the overlooked benefits (not included in ROI analyses) is the reduction in support supplied to ones parents. Another is the fact that the market does not provide inflation adjusted lifetime annuities. ROI analyses just ignore that value. Even so, a median earner working 40 years and retired for 20 will get a return higher than the rate the trust fund receives.