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Can We Do the Non-Crazy Thing with the Bush Tax Cuts?

December 1st, 2010 . by economistmom

deficit-pig-eating-bush-tax-cuts

I am no longer going to “let the perfect be the enemy of the good.”  I am no longer going to try to talk people into seeing that the “right” thing to do with the Bush tax cuts would be to let them all expire.  (The even “righter” thing would have been to never have enacted them in the first place.)  I am just going to urge the policymakers to avoid doing something with the Bush tax cuts that seems totally contradictory to the fiscal policy goals–both shorter-term and longer-term–that they claim to have.  In other words, let’s try to avoid doing something with the Bush tax cuts that seems totally crazy given what we say our fiscal policy goals are for both adequately supporting the (still fragile) short-term economy and better encouraging economic growth by reducing the deficit over the longer term.

The fiscal policymaking in this town seems totally schizophrenic right now.  What a juxtaposition to have President Obama’s deficit-reduction commission release its final report while the Administration “negotiates” with Congress on whether all of the Bush tax cuts, or just most of them, should be permanently extended (and deficit financed).  The media has been reporting that whether the bulk of the Bush tax cuts will be extended or not is not the issue–it is whether the upper-bracket ones benefitting only the rich will be included as well, and what constitutes “rich.”  (That floor may be moving up all the way to $1 million.)

Let’s remember that the permanent extension of “just” the “middle-class” Bush tax cuts, as President Obama has proposed, would add about $2.2 trillion to the debt over the next ten years–without interest costs and without the associated extension of Alternative Minimum Tax relief.  Such extension would preserve the full value of Bush tax cuts for 97-98 percent of households while continuing to give the largest dollar value of tax cuts to those above the $250,000 threshold.  (That’s because those in the upper tax brackets have income that passes entirely through the lower brackets.)  Extending the upper bracket cuts along with the rest would raise the ten-year cost to close to $3 trillion (again, without interest).  So the Administration and Congress are debating over whether we should commit to over $2 trillion, versus closer to $3 trillion, in deficit-financed Bush tax cuts.

Meanwhile, the President’s fiscal commission has recommended that federal revenues be increased as part of a package of policy changes that would get deficits down to economically sustainable levels by 2015 and beyond.  Yes, it’s a package that is heavier on the spending-cut side than on the tax-increase side.  Yes, it’s a tax proposal with a Republican-oriented goal of keeping marginal tax rates low, in fact, lower than Reagan-era tax rates.  But the revenue increases come from broadening the tax base in ways that reduce tax preferences for higher-income households more than lower-income ones, preserving or even increasing the overall progressivity of the tax system while making the tax system more efficient.  And the central message on tax policy from all of the various commissions, task forces, and study groups that have reported recently is pretty simple:  beyond the next couple years, we need more revenue, not less.

That’s why I think it’s crazy to be arguing about which portions of the Bush tax cuts should be permanently extended.  The first-best debate should be over whether to extend any of them at all, because whether it comes to our short-term tax policy needs (stimulate demand in the economy) or our longer-term tax policy needs (raise more adequate revenue in pro-growth ways), the Bush tax cuts are far from the best (even tax) policy to address those needs.  Note that today the President’s own fiscal commission echoed the Bipartisan Policy Center’s call for a payroll tax holiday as a far more effective way to use tax cuts to stimulate the economy in the short-term.  (See page 43 in the final commission report.)  But if letting them all just go away is off the table, the second-best (but still “non-crazy”) debate should be whether we should be even considering letting the then-Bush-soon-to-be-Obama tax cuts go on for longer than the next couple years.  And we should be talking seriously about whether we will continue to play the charade of “expiring tax cuts that never expire,” or if we can start making hard and better choices and honoring our other promises (like the one about reducing the deficit) that are contradictory to our bad habits on expiring tax cuts.

I think most Americans who are paying attention to today’s fiscal policy news are probably shaking their heads and/or cussing and/or laughing in a dark-humor sort of way.  It seems both ridiculous and tragic that our leaders can proclaim their intent to get our fiscal house in order out of one side of their mouths, while arguing to keep (forever) their favorite piece of the fiscally-reckless and economically-ineffective Bush tax cuts out the other.   They are so busy screaming at each other from their (sticky, embedded) corners that they can’t see the common ground between them.

So I make one open wish today, regardless of how politically-unrealistic I’m told this wish is: that policymakers could consider doing at least the “non-crazy” thing with the Bush tax cuts and stop proposing that any of them be permanently extended.  Instead of frantically trying to “decouple” the high-end Bush tax cuts from the “middle-class” ones, we should be thinking about the best way to eventually “decouple” ourselves from all of them.

_______________________________

**UPDATE, 2:30 pm:  note the latest news about an anticipated House vote on Thursday on the extension of the “middle-class” Bush tax cuts and Steny Hoyer’s somewhat “delirious” (crazed?) presentation of the issue to the press.  I think he’s catching his own schizophrenia on the issue, when he says: “Why am I laughing?…And the answer to that is, I do not know.”  ;)

108 Responses to “Can We Do the Non-Crazy Thing with the Bush Tax Cuts?”

  1. comment number 1 by: Country Thinker

    Although I generally disagree with you, I appreciate that there are many (including Alan Greenspan) who do. But where I specifically disagree is on the payroll tax holiday. Short-term tax cuts get treated more like a year-end bonus than a pay raise. Typically they get saved, not spent. That’s what happened to Bush’s tax rebates - only fifteen percent got spent.

    The tax holiday I do support, however is on the double-tax on overseas profits. Companies are sitting on over a trillion (or some extraordinarily large figuer) overseas, and I’d rather see it come back here than stay overseas for good.

  2. comment number 2 by: AMTbuff

    I would welcome a permanent extension of current policy (including AMT relief) not because it makes fiscal sense, which it does not, but because it would end the nonsensical use of a “current law” baseline that bears no relationship to reality.

    “Permanent” extension will not turn out to be permanent, as we all know. The fight over permanence is actually a fight over the baseline for the next tax increase. Establishing one baseline that both sides accept as THE baseline is far preferable to continuing the current situation in which each side uses a different baseline.

    Will this happen? Will both sides concede that taxes are going up in 2013 regardless of “permanence”? Will they agree to stop making partisan arguments based on a baseline that either doesn’t approach balance or includes tax rates far above current levels? I very much doubt it.

  3. comment number 3 by: Gipper

    I’m very, very surprised that Obama has not moved to cut this Gordian Knot by simply putting Simpson-Bowles tax plan on the table?

    I know the lame-duck Congress doesn’t have time to consider Simpson-Bowles. But Obama should be changing the subject by ignoring the Bush Tax Schedule and proposing one that’s superior.

    Lowering rates and eliminating deductions clouds the issue of whether “taxes have gone up.” It gives Republicans wiggle room to negotiate with Obama.

    Negotiating on the basis of whether or not to extend Bush tax cuts is waving a bloody shirt sure to incite conflict. This seems so sensible that I believe that Obama is simply welcoming this conflict because he’d rather see the old tax schedule reinstated and dare the Republicans to refuse the raise the debt ceiling.

  4. comment number 4 by: Arne

    I would welcome no action on tax cuts. The “current law” baseline would become the reality.

  5. comment number 5 by: Name: Mark

    You fail to recognize that it is the government’s money until they agree that you can have some, and how much, but then only until you die – at which time the question will be revisited.

  6. comment number 6 by: Douglas Hopkins

    Am I the only one In America who cares that the debate on tax reform is being guided by an intellectually dishonest misrepresentation of our existing tax policies? America’s tax revenue policies are grotesquely skewed in favor of the already rich. Our vaunted Progressive Tax Policies are a Myth. The only way “nearly 50% of the public pays no taxes” is if you close your eyes, hold your nose and pretend that employment taxes aren’t taxes.

    There are two questions we should be asking. 1. Is it right for us to continue taxing the middle class at higher rates than we tax the wealthy? 2. Is there a more effective tax structure we could use which would allow us to normalize tax rates between the working class and the investment class without stifling economic growth? Having examined the problem carefully, I assert the answers are respectively, and firmly, NO! and YES!

    But so long as political insiders control reform efforts, they will neither ask those questions nor attempt to answer them.

    The debate about a minor change in marginal tax rates is a sideshow that obscures the greater problem. We will not achieve meaningful reform by tinkering with our broken system - we need to open our eyes to the real underlying inequities and implement structural changes in our treatment of investment income and wealth.

    See Re-thinking Investment Income Taxes
    at http://www.2pctsolution.com/?p=411

  7. comment number 7 by: SteveinCH

    Douglas,

    What data are you looking at to support your claim. 50 percent of the public (roughly) has zero or negative income tax liability but a far lower percentage has negative total tax liability.

    However, the Federal tax code is sharply progressive and has become more so over the last 30 years. Do you have data that says otherwise? If so, I’d be interested to see it.

    According to the CBO, what I have said is factually correct.

    http://www.cbo.gov/publications/collections/tax/2009/effective_rates.pdf

  8. comment number 8 by: SteveinCH

    And as to your solution, there’s the small problem of measuring (and auditing) wealth.

  9. comment number 9 by: theroguehog

    Can anyone say “class envy”? Jealous of the rich much?
    I am sick to death of the finger-pointing at the rich. 60% of the population pay 100% of the taxes. How about EVERYBODY pays their fair share? How about instead of RAISING taxes, they actually make some substantial cuts? Maybe the billions that are funneled to foreign countries that freakin hate us could be cut off. Let ‘em stand on their own two feet. How about firing about 100000 government workers?Part of Obama’s solution is to freeze the military pay? Really?

    This crap isn’t hard.

  10. comment number 10 by: Arne

    Steve, the results are as good as the assumptions.
    “Corporate income taxes are attributed to
    households according to their share of capital income” is a debatable assumption.

  11. comment number 11 by: ingenii

    “And the central message on tax policy from all of the various commissions, task forces, and study groups that have reported recently is pretty simple: beyond the next couple years, we need more revenue, not less” Lets make it simple for you. Fact: Raising taxes lowers GDP. Fact: Government revenue has historically been 19% of GDP. Connect the dots, higher taxes mean lower GDP and LESS revenue for the government. If your stated point is to increase government revenue, then you should be supporting LOWER taxes to increase GDP instead of supporting failed policies of income redistribution. That would be the “crazy” thing to do.

  12. comment number 12 by: Sick

    Shouldn’t we be more worried about cutting spending? The government spending is where the real waste is and needs to be addressed. Raising taxes by getting rid of Tax cuts does nothing to eliminate waste in government.

  13. comment number 13 by: Joe

    Extension of the tax cuts does NOT add to the debt. Profligate government spending adds to the debt.

  14. comment number 14 by: Jason

    “Let’s remember that the permanent extension of “just” the “middle-class” Bush tax cuts, as President Obama has proposed, would add about $2.2 trillion to the debt over the next ten years”

    I think your approach is fundamentally flawed. Taxing people *less* does not add anything to the debt over any amount of time, just as losing 1% of my salary does not, by necessity, force me into debt. Debt is created by spending beyond one’s means.

    I would elaborate, but I think others have made the point very well.

  15. comment number 15 by: Idahoan

    Let’s do something really crazy…let me keep more of my money! The way it works now; I work for it and the government spends it on ‘program’ that I don’t support and which seem to have very little value. The more I have the more I spend or save. Both are good for the economy. ID.

  16. comment number 16 by: Mike

    Economics is a science with theories supported by evidence and objective studies..right? It is nice that the author is an economist. Economic policy must be based on a consensus of leading economists with solid evidence cited to back their recomendations and not by ignorant politicians with ulterior motives. As a physician, I would hate to follow guidelines for treatment of specific conditions based on political opinions instead of blinded prospective clinical studies.

  17. comment number 17 by: jdowling

    “we need more revenue, not less” really? How about less government, or less giving away billions to corrupt foreign gov “aid” or spending billions making more people dependant on the fed gov for their daily needs. How about we start supporting the American people instead of every other country. How about letting me keep the money that I bust my @$$ for day in and day out instead of handing it out like crack for those that just chose to live off the rest of us?

  18. comment number 18 by: detroitjoe

    why is it that every time the American working class gets a tax cut, it’s fiscally irresponsible… but when the federal reserve lends millions of our dollars to oversea banks and corporations, and we spend billions of dollars on wars across the globe, somehow this can be justified as fiscally responsible… can somebody explain this to me?

  19. comment number 19 by: detroitjoe

    tax cuts cannot “cost” anything, the only thing that “cost” anything is what the government spends BEYOND the tax dollars they have already taken from us, like on endless wars of aggression, bailouts of banks and foreign interests, ENDLESS WARFARE & WELFARE FOR ALL!!!

  20. comment number 20 by: Frank Gart

    Total BS article. Taxes are already terrrible. I pay over 50% of my income in sales, property, income (state & federal), Medicare, Social Security, excise, and every other tax under the sun. The problem is the government spends too much and is terribly inefficient at what it does.

  21. comment number 21 by: detroitjoe

    i’m sorry, i meant that the federal reserve lends TRILLIONS of our dollars… my mistake

  22. comment number 22 by: Animaphone

    I have an idea:
    Let’s stop throwing hundreds of billions of dollars away on military technology that the military itself states that we’ll never use. The F-35 alone could save us 500 billion over 50 years if we scrap the project now, which the military would do if Lockheed Martin and Boeing and company weren’t in control, which they are, completely.

  23. comment number 23 by: Nancy

    When will the middle class learn–we do not have a vested interest in reducing the tax bills of the wealthy. We’ve been sold a false bill of goods by vested interests.

  24. comment number 24 by: HarryinLA

    This woman claims to be an Economist? I see nothing more than another loud mouth knee jerk liberal. Tax cuts are what is needed to kick start this anaemic economy. Busineses as well as the general public have no idea what their tax rate will be next year. In the case of business it is no wonder no one is hiring at this time. Why should they when business has no idea what their costs will be come January 1. A thriving economy will more than pay for the costs of these tax cuts if and when it ever happens. As far as this woman goes put her in the same category as Obama’s economic experts and that is Worthless.

  25. comment number 25 by: kidfromnyc

    Lets get real we need to stop tax cuts period,my kid /son will not be able to find work no less pay this chunk of cash in the future and he has a college degree from a IVY league school.ow is the time for a 15% across the board
    income tax on everybody,no deductions would be a good start

  26. comment number 26 by: itsmymoney

    whether all of the Bush tax cuts, or just most of them, should be permanently extended (and deficit financed).

    I don’t understand what it means to “deficit-finance” a tax cut. It’s my real, hard-earned money, in my pocket. If it stays in my pocket, no one needs to finance it.

  27. comment number 27 by: bjrubble

    I’m with you, Idahoan! Let us know when your state sends back the $2.7 billion in farm subsidies it’s collected over the past 15 years. (http://farm.ewg.org/region.php?fips=16000)

    “Fiscal discipline” is unmasked for the simple selfishness it is by proponents’ inability to stick to their guns when it’s their own ox being gored.

  28. comment number 28 by: Mark B.

    This article is absolute rubbish. Why do those who worked harder, did better, created, redesigned, improved, found a niche pay more to a goverment that is like a teenager with a credit card. If you keep trying to penalize the rich for the benfit of the poor only two things can happen and both end the gravy train. (1) The rich will transplant and take their money with them or (2) You will completely wipe out the rich over time. They don’t make money in a bad economy either. How about a flat tax for all - the poorest to the richest? 15% - no complicated tax laws and easy compliance.

  29. comment number 29 by: Arne

    Looks like someone linked to this post from a right-wing echo chamber.

  30. comment number 30 by: Jim

    Nice acknowledgement by Professor Brad DeLong =

    DLM is, of course, 100% correct

    http://delong.typepad.com/sdj/2010/12/diane-lim-rogers-applies-the-soft-bigotry-of-low-expectations-to-the-us-congress.html

  31. comment number 31 by: realist

    It’s always the government’s money and letting the person who earns it (you) keep a reasonable amount of it is the government being generous… remember that. It USED to be that taking over 10% of someone’s income historically was evil. Most of us pay over 50% with all fees and taxes and that’s not enough for these thieves.

    The funny thing is that this is about control and power. Even basic high school economics teaches about optimal revenue for monopolies (which the government is BY FORCE). Once you start charging over the optimal amount for something revenues go down even for monopolies like the government. We are already past that point, even with the “Bush” tax “cuts”.

    It’s obvious that we have another socialist writing this article. Socialism doesn’t work because to force people to give up their prosperity always ends up in voilence and death. Or at the least passive agressivism in that the productive people don’t see the value in working hard anymore.

    Central planning like is implied in this article is always way more inefficient than a stable self running system– you can mathematically prove it.

    It’s sad, but we are about 1/2 the way into “Atlas Shrugged” and anyone who thinks it will end up differently is deluded.

  32. comment number 32 by: Napoleon

    How cute. A self described “economist” without rudimentary knowledge of economic terms.

    PRO TIP:

    Tax cuts CAN NOT add to the deficit.
    They CAN SUBTRACT from revenue.
    Only SPENDING CAN ADD to a deficit.

  33. comment number 33 by: peggy

    I hear so many saying that the super rich shouldn’t have their taxes raised. Alright then, how about ENDING ALL THE WARS AND OCCUPATIONS that our nation is involved in and reducing by at least 50% the Department of Defense budget. That by itself would lower our government spending enough so that we could have money to improve infrastructure, education and etc. Let’s be honest here, please!

  34. comment number 34 by: Failing_Experiment

    Alright — so let them expire. Let us see businesses restrict their hiring/spending/etc. Let us see thousands/millions of middle class barely scraping by in this still down economy go into foreclosure, and cut their spending to pay the federal government. Lets see businesses shut their doors once again, and spike unemployment. We can then use the extra tax income to pay for the new unemployment claims. Cover bank losses, etc.

    This article assumes that if you give the federal government more money it will run more efficiently, and actually pay of their debt. Really? How often has it done this? And, what if letting the reduced tax rate expire isn’t enough — we still run at a deficit.

    The single best way to reduce the deficit is to cut spending. Our politicians haven’t figured this out yet. I’m also not optimistic that giving them more money will magically awaken them to this principle. I believe that they’ll merely view it as an increased credit limit, and spend up to it further increasing our overall debt.

    However, if the Republicans wanted to secure a victory next election — they’d let them expire, but push it on the Democrats. Obama can’t have a perceived tax increase on the middle class, and if he does it almost secures his loss next election.

    Want increased federal revenue? Cut government programs to a level that would be equivalent to “higher taxes.”

  35. comment number 35 by: Chris

    Admittedly, I’m too simple minded to even comment. However, Ecomom, rather than let expire one of the few things that may ease some tension, how about the accountability of the federal government? Do think your ownership in GM will profit you at all? Did you ask to be an owner? Do you think free health care for illegals is merited?

    Point is, our government flat out wastes our money, and you wish for exactly whom to pay for it? Nothing will change in DC until Americans agree to change DC! Atlas has shrugged mom, and you aren’t listening. You can put a monkey in a silk suit, but you still have a monkey.

  36. comment number 36 by: trickledown

    The Bush tax cuts were to have a trickle down effect . In stead it helped large companies send jobs and business over seas, and put more money in the hands of those who were supposed to be helping at home.
    While congress is putting everything else on hold a lot of families will no longer even have unemployment.

  37. comment number 37 by: Innocent

    Okay the problem is this article is both correct and wrong. It is correct that the tax cuts should expire if spending is not brought into line. However by the same token the reason the economy is not faltering is you have the Keynesian economic model working on both ends of the equation right now. Because of the lowered taxes more people have money and because the government is spending as much as it is more revenue is being generated than normally would.

    However you are only looking at one side of the equation here , tax cuts, rather than looking at the entire fiscal picture which creates a highly biased article.

    We are all freaked out that Health Care was 18% of GDP but no one talks about the enormous amount of money spent on Government that makes Health Care look tame in comparison. Last year between Local, State, and Federal the total amount of spending the USA did on Government was $6.5 Trillion!!! Our GDP was $14.1 Trillion. I am sorry but that means 46% of our economy rotated around the Government in some way shape or form.

    While you may be upset at the Tax Cuts and the fact that they ‘Did not work’ The truth is that they did work if you actually went back and looked at the GDP growth after they were enacted. The problem that hit was not that the tax cuts were not ‘working’ rather that we hit a huge Speed bump that had been looming for 12 years ( or longer if you examine all the underlying factors ) due to the credit swaps.

    There are literally hundreds of research papers showing that ‘tax cuts’ stimulate economies and for you to so dismiss them so easily seems an indicator that you are ignorant on the subject and have an agenda that you are pushing.

    Nevertheless you are correct that given the lack of fiscal responsibility in cutting spending ( which I would not suggest in a down economy either ) we are sort of SOL.

    The only sane way to bring everything back together is wait for GDP to get to a Stable growth rate and then actually modify both taxes and spending to compensate.

    Sane Government spending should not be 46% of our economy.

  38. comment number 38 by: Failing_Experiment

    Peggy,

    You’re missing the point. If we cut defense spending, and divert it to other social programs we didn’t really cut anything from the budget. It was just shifted around.

    As to the defense budget…sure, it is large, but not 50% large. The combined social programs take up far more, and also can sprinkle in the interest on our debt.

    Cuts across the board should be made with the intent of paying off debt. The federal government is no different than your average household that is drowning in debt. Though, one of the major differences is that the federal government can force others to pay off their debt. I wish I had that power.

  39. comment number 39 by: Chris

    I actually agree with the author. These tax cuts didn’t provide jobs for the past decade, nor did they keep us from falling off the cliff, financially. It is pretty disingenuous that when Bush first wanted them, we had a budget surplus, which he said we could afford them….then as the economy tanked after 9/11, he said that we needed the tax cuts to spur growth. Problem is, that didn’t happen. There was no provision that only those people who create jobs get the tax cuts. Those with huge bank accounts make more than they spend. If you want to rebound the economy, you don’t give more money to people who hoard it. We’ve seen that with the tarp funds with banks, They were given money in order to loan to small businesses. They didn’t do it. Instead, they hoarded it. Tax cuts for economic stimulus are the same thing. Only those that will spend the additional dollars in their pocket will help the economy.

  40. comment number 40 by: Foreclosure Guy

    I’m amazed at the number of people who still cling to the out-dated, disproven “starve the beast” theory of national finances. If you don’t collect the revenue, spending does NOT come down to stay in line with revenue. Spending continues, only is debt-funded.

    And before everyone starts shouting to “end foreign aid” and “waste, fraud, and abuse”, you should know even conservative republicans in congress know that those categories are extremely tiny and will make almost no noticable impact on the overall deficit picture. The US spends less of a percentage of it’s GDP on foreign aid than any other civilized nation. That is not the answer. The answer, dear readers, as much as you DON’T WANT TO SWALLOW IT, is that medicare, medicaid, SS, and defense (including the “special” appropriation bills for the wars that are NOT included in the annual announced Pentagon budget, but are instead included in other spending measures so as to mask their true size) collectively take up 70+% of the budget. And guess what? No one is willing to cut that. Senior citizens and tea partiers will scream bloody murder is you try to cut them off of socialized European-style medicare. Hawks will scream bloody murder if you dare suggest we cut any defense spending, because if we don’t have bases in 129 nations around the world and keep weapons being manufactured in congressmen’s home districts, the terrorists win.

    If you really, actually, honest to god want to tackle this thing, you are going to have to make painful, painful decisions. Foreign aid is not a painful decision, and it’s only a drop in the bucket. Let go of your fantasy that ending foreign aid is somehow going to balance the budget. Now tell me: are YOU, personally, willing to have your social security reduced, right here, right now? Are you willing and able to pay grandma’s medical bills when her medicare gets severely reduced? If not, then you are not a deficit hawk, you are a hypocrite.

  41. comment number 41 by: Failing_Experiment

    Foreclosure Guy,

    People may believe that “starving the beast” works, and it does…if they stop spending. What happens is that they don’t. But, handing them more money could end up making them feel like they have more money to blow, and put us in the exact same situation. Now, if they told the American people that taxes were going to increase, and at the same time significantly cut spending — that would most likely have a good overall effect.

    The problem is people hate to love their social programs. Sure, everyone wants budget cuts, but not to their federal perks. So, it is constantly attacking defense, foreign aid, etc — anything and everything except their social programs (education included).

    Personally, am I willing to cut SS and medical perks (the entire lot of them)? Yes, but I am also relatively young, and still have time to set money aside to retire on. And the medical situation…well, I’ve always been under the belief that if I don’t have the money for it, I’m not going to ruin the livelihoods of myself and/or family to pay for it. It merely is prolonging the inevitable…but, in some regards I’m quite heartless.

  42. comment number 42 by: peggy

    “Failing…Experiment”: I am fascinated that you have chosen to declare that infrastructure and education are “social programs”. Wow, where did you learn that? At some private school that has its very own Dictionary? As for the DoD, their budget has been on the rise, dramatically, for over ten years and it doesn’t even include our current Occupations, so yes, if it was cut by 50% we’d still have plenty of soldiers.
    To those who lump SS and Medicare into the budget issues: get real. They are funded by a totally separate tax, taken right out of folks’ paychecks and have never been part of the regular budget so leave it alone.

  43. comment number 43 by: Foreclosure Guy

    Peggy:

    Just because they’re funded by a seperate tax, doesn’t mean that tax is covering all their expenses. Those seperate taxes you mention do NOT cover total expenditures on those programs, so they are also deficit financed. I suppose the confusion is, we shouldn’t speak of “balancing the budget” as much as “reducing the deficit”, which would most definately include SS and medicare.

  44. comment number 44 by: trotterpm

    I guess depending what your politics are; the truth is that lowering taxes helps raise tax revenue. To an armchair economist like mom here, that seems absurd. It is however pretty well established historical fact. not going to site statistics, but I will give you some quotes.

    The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income. The result is that the sources of taxation are drying up; wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people.
    -Harding, Hoover, and Coolidge Treasury Secretary Andrew Mellon

    Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits… In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.
    -President John F. Kennedy

    At some point, additional taxes so discourage the activity being taxed, such as working or investing, that they yield less revenue rather than more. There are, after all, two rates that yield the same amount of revenue: high tax rates on low production, or low rates on high production
    -U.S. Representative Jack Kemp (R-NY)

    The reality is whatever politicians do, people actively avoid paying taxes. The more money you make, the more incentive you have to find tax havens or simply move to a country with a lower tax burden, rather than grow your business here in the US. Sure there are other factors, but look at china. Corporate tax rates top off at %25. Here in the US it tops at %38. China’s economy is growing at nearly double the rate of the US.

    Bottom line, raising taxes does not equate to more revenues for government, because it assumes that people like paying taxes. It won’t increase revenues, it won’t stimulate economic growth, and it won’t help out any Americans, rich or poor. It will just make this country less attractive place for business.

  45. comment number 45 by: peggy

    okay, Foreclosure Guy, what about my other points. Please respond with something other than “cut SS & medicare”. I did mention other issues, which no one wants to touch. We are budgeting way more than 50% in our budget for present and past military actions…..

  46. comment number 46 by: ingenii

    We can certainly cut military spending as soon as the Europeans raise their spending as a % of GDP on military. For decades now, Europe has passed the buck for security of the Western world to the US so they could focus more of their own budgets on financing the social welfare programs that are presently bankrupting them.

  47. comment number 47 by: Foreclosure Guy

    Peggy:

    I’m not arguing your point on defense spending because I agree with you (as you may note in my original post). What I am saying, is that that alone is not enough. First, the numbers simply don’t add up. Cutting defense is a priority, but it’s not enough by itself. More cuts have to be made in other places.

    Secondly, in a political environment where, even if you disagree with them, you must acknowledge other people with other opinions also have to exist in your nation, you must compromise with them. In order to get neocon hawks to agree to large defense cuts, you must agree to “meet them in the middle” so to speak and be willing to agree to cutting things that you care about, also. It isn’t a hard choice to simply declare that you want to cut something that you don’t care about (many people choose foreign aid; you choose defense). You also have to take hits yourself if you’re willing to vote to impose them on others.

    And we don’t have to wait for the Europeans to get their defensive act together, ingenii. We just leave. If they care enough, they’ll learn to defend themselves. You can’t let them dictate the terms of our providing their defense. It’s like a man-child still living in his parents basement; you can’t talk him into growing up, you have to throw him the hell out of the house.

  48. comment number 48 by: Morgan K Freeberg

    trotterpm nailed it.

    Anyone who talks about tax cuts costing something or causing deficits, deserves to be banished to the oblivion of “I can’t hear you la la la.” Deficits are caused by spending money you do not have and can not collect. Period.

  49. comment number 49 by: Biff

    CUT SPENDING. And when I say that, it means cutting the only spending that matters-military and entitlement. Cut Social Security to the bone. Cut Medicare to the bone, (add access fees and restore and enlarge the donut hole). Cut VA pensions and VA services. Cut government pensions. Cut military spending. If you are unwilling to cut the areas where we are running our deficit, you either are not serious-are not adequately informed, or you need to increase revenue to offset spending in these specific areas. How few of those shouting on this forum ever write anything remotely valid! Cutting expenses for NPR might make you feel better, but it overall effect is that of peeing in the ocean. Please people-minimally inform yourselves so that you can offer an opinion with the slightest shred of validity and usefulness.

  50. comment number 50 by: Rob in CT

    “I guess depending what your politics are; the truth is that lowering taxes helps raise tax revenue”

    Economic growth leads to more tax revenue, sure. Cutting taxes does not necessarily lead to economic growth, however. The Bush tax cuts were billed as something to stimulate economic growth and failed to do so. The vaunted growth in the 80s wasn’t actually that impressive compared to other decades. Tax cuts are not magical things that always increase GDP.

    Everybody likes tax cuts, of course, ’cause who likes paying taxes? But they can be deeply irresponsible policy (unless, of course, every dollar you reduce in revenue is also cut out of spending).

    That said, sure the bigger problem is spending. Personally, I’d do a mixture of 2/3 spending cuts and 1/3 tax increases and shoot to be in the black within 10 years, and then stay there until the debt is under control. The cuts have to come from the big boys of the budget, of course: military, medicare/medicaid and social security. I’d personally take a freaking axe to the military budget. I’m sure others would prefer to target SS and Medicare… deals could be made there, if people were really interested in getting it done.

    Instead, the politicians dance around pretending that “earmarks” or “waste” are categories that will actually make an impact. Oh, but here have a tax cut! Please.

  51. comment number 51 by: don

    Some truth to the post, but I agree that government spends too much on social programs and the military (calling it “Defense” is quite a joke).

    Consumption of medical services by the aged is too high, but so is consumption of energy by Joe Sixpack. If all he can do is spend on bigger SUV’s, more miles driven per capita, more eating at restaurants, and bigger houses (with attendant bigger energy costs), then I say take his money away from him. But we should go to taxing consumption and away from taxing income. The worse we make the income tax, the closer we come to setting up a national VAT. Then maybe we can also get some Pigou taxation to discourage socially harmful consumption.

  52. comment number 52 by: Arne

    This guys says one thing. http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates

    This guy says the opposite. http://www.huppi.com/kangaroo/L-taxcollections.htm

    Morgan K “I can’t hear you la la la.” Freeberg (comment 49) will never know which one is correct, because Morgan can only hear one side.

  53. comment number 53 by: peggy

    Thanks, Foreclosure Guy. I appreciate your thoughtful response.

  54. comment number 54 by: Harry Kuheim

    Ridiculous logic in this article. Reduce spending and lower taxes accordingly is the answer.

  55. comment number 55 by: GeorgeP

    Sometime I wonder if people really pay attention to how our government spends our tax dollars. With a economy that’s hardly on a roll, you are saying that letting these tax changes expire and revert back to the way they use to be is ok. These same guys who pay little or no attention to the will of the people they serve. These same guys who think that the gasoline driven car is obsolete and battery driven cars are theway of our future. These same guys who think they can control the climate and what we put in our mouths to eat everyday. This same guys who have spent trillions of our dollars trying to solve poverty in this country and they haven’t solved a thing. It’s still there only $17,000.000,0000 spent since LBJ’s War on Poverty. They have spend our tax dollars like a drunken sailor and they want more. An that is what this will be is more money for them to waste on programs that don’t work. Diana if you want to give more feel free or better yet just take that same amount and flush it down the toilet . Either way it will be wasted and won’t matter. I know you must think I’m a millionaire and that is the reason I object to letting these taxcuts laps. I’m not and I’m lucky if I make $45,000.00 a year (before taxes are taken out) so I have nothing really to gain by objecting to seeing these taxcuts revert back to the old rates. I just see the waste and the control these people in Washington put appond us and the businesses in this country. No thanks I can spend my money as wisely as these bunch of power drunken people in Washington.

  56. comment number 56 by: Daniel

    It’s just ridiculous.. Americans everywhere seem to think taxes are so evil that we need to decrease them constantly. Does everyone truly believe that this action has no consequences? A year from now we’ll be so far under debt that there is an extremely high likelihood that the dollar will collapse catastrophically and the entire country.. the world superpower.. will collapse along with it. This is not me being conspiratorial or spreading doom. This is reality. If we don’t begin to pay off the debts, I am telling you that in the year 2011, we will be in a world of hurt so far beyond the most recent recession, and most likely even worse than the GREAT DEPRESSION.

    All of our lives will be ruined next year due to the actions of reckless politicians and the short-sighted Americans egging them on.

  57. comment number 57 by: Brooks

    AMT

    If you’re interested http://economistmom.com/2010/11/can-we-fix-it-yes-we-can/#comment-18035

  58. comment number 58 by: DoubleDutchPolitics

    Breaking News, Democrats have called the Republicans bluff…Harry Reid just said they will hold 2 votes!! One for the middle class and one for the wealthy.

    http://www.doubledutchpolitics.com/

  59. comment number 59 by: Brooks

    Here’s a no-brainer political strategy for Obama and the Democrats…and I agree with Diane that it would be smarter economics as far as stimulus is concerned:

    Instead of continuing to make the argument that it’s better to have lower projected deficits by all of of the dollars related to extending the tax cut at higher income levels…

    Present to the public a choice between extending the tax cut for that high income OR a getting a temporary payroll tax reduction/holiday (heck, you could even use most for that payroll tax reduction and some for deficit-reduction and say the middle class is getting more of both instead of rich folks ending up with that money).

    Am I missing something, or is that the political no-brainer I think it is?

  60. comment number 60 by: Samuel

    This is not just about the money. This is really about what kind of country we are going to have. At the present time the wealthiest Americans control the corporations, the lobbies and the government, federal and state and most likely local. They have managed to change laws and remove regulations that have made it even easier to accumulate vast amount of money. The money is power and the whole situation has turned into greed. Granted that this is nothing new in this country. It has always been a battle to maintain a balance to keep capitalism in check so it doesn’t diminish democracy. At the present time our individual votes are becoming more worthless every day. We vote and tell our elected officials what we want. They turn around and take their orders from the corporate world. Even the Supreme Court has now given the Corporations the right to donate excessive amounts of money under the guise of free speech. They are also allowing foreign donations to our election process. This decision is wrong.

    These tax cuts and/or rebates have already caused us to borrow from other country, mostly China, to give what will amount to $1 trillion by the time the debt is paid. Since corporate America has used loopholes to take their corporate headquarters to tax havens like the Bahamas they end up paying no taxes. This means the super wealthy who hold the executive positions are getting higher salaries and bonuses. Their income has increased over 800% in the past 10 years. This migration of wealth has bankrupt our country. We can’t afford Social Security, Medicare, Healthcare, better education, the rebuilding of out national infrastructure or anything else we need as a society. Our grocery bills have more than doubled in the past three years. The debacle on Wall Street and in the banks has caused a major worldwide recession.

    This is clearly class warfare with the uppermost part of our society greedily taking it all for themselves. They have declared war on us this time. What they don’t understand is in the end they will lose. There are people losing their houses and everything they have worked for. They can’t feed their families. People are truly suffering, not only in this nation but throughout the world as a result of the greed, power and money these people have usurped. They will either destroy everything or find themselves in the midst of a revolution, either a peaceful one with a new and equitable tax structure, or a bloody horrifying all out revolution. They are in control. They need to give back the money, accept fair taxes, and allow the country to stand up and move forward. “We the people” can accept nothing less. It is in the hands of the wealthy to decide this outcome and they need to start giving back now. We are very close to the edge.

  61. comment number 61 by: Brooks

    Just as a note, there’s an important difference between “temporary” extension and “permanent” extension, and it’s more than just the idea that “temporary” ostensibly limits the damage.

    With 60 votes de facto required these days to get anything through the Senate, I’d much rather have a “temporary” extension that requires legislation to extend it than have a “permanent” extension that requires legislation to end it.

    Gridlock can be a good thing if it prevents extension of a bad thing. It won’t always be the case — if there’s one thing that generate bipartisanship it’s fiscal irresponsibility — but there’s always the chance we’d get gridlock either because some number actually wanted to be responsible or because enough of one party wants to play politics with the issue, at least enough to only extend some of a bad thing instead of all of it.

  62. comment number 62 by: Brooks

    Samuel,

    Re: This is clearly class warfare with the uppermost part of our society greedily taking it all for themselves.

    What do you mean “taking”? If the top tax rates are not increased, whose money are high income-earners “taking”, and from whom are they “taking” it?

  63. comment number 63 by: AMTbuff

    >Just as a note, there’s an important difference between “temporary” extension and “permanent” extension

    I disagree. Tax reform of some sort is likely within 4 years. No promises beyond that mean much.

  64. comment number 64 by: Carolyn

    1. There is too much envy and hatred of “the rich”.
    2. Would someone please give a good definition of what “rich ” is and why you hate or envy “them.”
    3. There should be no tax at all on any estate of anyone who has died. They have already paid their taxes.
    4. Who is best to decide how much money is to be taken from the “rich” and given to the “poor.”
    5. What are 5 reasons that there are and always have been “the poor.” (Even Jesus said the poor will always be with us.”
    6. How much responsibility does each citizen of this country have for the welfare of all?
    7. Are we or are we not a capitalist country or are we a communist country? As in establishing a dollar amount each will have regardless of work don/
    8. Without hurting elderly who are not and cannot be in the work force there must be some places to cut spending. and let’s not hurt our environment either.
    9 and back to this - who is entitled to money other people have worked for and why?

  65. comment number 65 by: sabbur

    trotterpm…..and I quote

    “I guess depending what your politics are; the truth is that lowering taxes helps raise tax revenue. To an armchair economist like mom here, that seems absurd. It is however pretty well established historical fact. not going to site statistics, but I will give you some quotes. ”

    You will not cite statisitics….let me

    2000 Total receipts (money stolen from taxpayers) = $2.025 Trillion
    2001 Total receipts (money stolen from taxpayers) = $1.991 Trillion
    2002 Total receipts (money stolen from taxpayers) = $1.853 Trillion
    2003 Total receipts (money stolen from taxpayers) = $1.783 Trillion
    2004 Total receipts (money stolen from taxpayers) = $1.880 Trillion

    Directly from Office of Managment and Budget.

    And if you compare the “inflation-adjusted” numbers for reagan, you see that his tax cuts also did not increase revenue. Inflation did.

    It is definitely not an “established fact”. Go do some research.

  66. comment number 66 by: Michael

    The even “righter” thing would have been to never have elect George Bush.

  67. comment number 67 by: Name: Mark

    They are talking about deficit reduction on the backs of the same people they just robbed. There is no way I will accept any compromise on anything from this administration until he starts accomplishing giving something to the people who voted for him. I’m sick of his bipartisan bull shit. There are stories all over out there that Obama is admitting he is a Blue Dog and a DLC NEW Democrat. I sure as hell didn’t vote for that, and that sure as hell isn’t how he ran.

  68. comment number 68 by: Brooks

    AMT,

    I’m just saying that it’s better to have a situation in which bad policy ends by default (expiring automatically, absent new legislation) rather than requiring new legislation to end that bad policy, because it’s tougher than ever to get stuff enacted, with 60 Senate votes required so often and with so much partisanship.

  69. comment number 69 by: coberly

    Mom

    i agree about the schizophrenia. but then you spoil it all by proposing more of the same: lets balance the budget with a payroll tax holiday?

    i keep hoping you and Concord will see the light: we can solve the deficit problem, now and in the future only when we make up our minds to pay for what we want and need, and not rely on some voodoo economics to bail us out.

    that means that the workers need to continue to pay for their own Social Security.. it won’t cost them enough more for them to even notice.

    and everyone needs to pay for their own Medicare… and that won’t cost any more than any other way of paying for their own medical care… which they will have to do anyway.

    and all of us need to accept an approximately 3% increase in our tax rate (return to pre-Bush) to pay for the deficit created by the tax cuts that were supposed to pay for themselves but didn’t.

    as for the general policy of deficit spending to end the recession… i am not sure that will work any more, but if we are going to try it we need to put the money where it will be spent, not give tax cuts to people who already have more money than they are willing to invest.

    but the bottom line is that we, all of us, need to face up to paying for what we need. and we will need Social Security. and the cost of that at least, is not high enough to notice.

  70. comment number 70 by: SteveinCH

    Coberly,

    In what world do you think workers “pay for their own SS or Medicare”? Is that what you think happens today or are you describing some future world you’d like to see.

  71. comment number 71 by: Bill in KY

    Re Samuel’s comment # 60 – This is absolutely class warfare, but as it is the poor and jobless are not going to win. Yes they are angry, but as a result of the Citizens United decision the uber-rich can use corporations to funnel unlimited money into their campaign to rally their own victims to their defense. And increasingly the “champions of the poor” are literally paid by Rupert Murdoch to channel their anger away from the plutocrats who actually make the decisions to ship their jobs overseas and to increase their own income by slashing labor costs.

    My worst fear is that democracy is inherently unstable – it depends on a supply of politicians who have the integrity to work for what they honestly believe is the good of the whole people, rather than deliberately deceiving them for the benefit of their patrons. Unfortunately a certain beloved ex-president had the mendacity to claim that he could cut taxes, raise defense spending, and thereby miraculously balance the budget. It didn’t work, but for thirty years now it’s been increasingly impossible to be elected without a willful disregard for second-grade math, and an economic philosophy that is fundamentally magic.

    Finally, one question for Carolyn (# 64): Why do we hear so much reference to this:
    “For ye have the poor always with you; but me ye have not always.” (Matthew 26:11)

    But not this:
    “Jesus said unto him, If thou wilt be perfect, go [and] sell that thou hast, and give to the poor, and thou shalt have treasure in heaven: and come [and] follow me.” (Matthew 19:21)

    Or this:
    “And the King shall answer and say unto them, Verily I say unto you, Inasmuch as ye have done [it] unto one of the least of these my brethren, ye have done [it] unto me.” (Matthew 25:40)

    Are we supposed to start Matthew at chapter 26? Or if we have a moral obligation to help the poor, and the government is supposed to be an instrument of the people, don’t we have a moral obligation to use that instrument to help the poor?

  72. comment number 72 by: AMTbuff

    >I’m just saying that it’s better to have a situation in which bad policy ends by default (expiring automatically, absent new legislation) rather than requiring new legislation to end that bad policy

    The bond market will force change within 4 years. This change will not be any easier if the current law baseline includes a major tax increase beyond those 4 years.

    In fact, inclusion of a major tax increase in the current law creates a needless baseline debate. The lack of a common point of reference will increase the partisan conflict at a time when compromise is needed.

    In other words, you are exactly wrong. :)

  73. comment number 73 by: Brooks

    AMT,

    You seem to be implying that you are certain that the timing and degree of reversal of the Bush tax cuts will be no different whether they are extended “permanently” or “temporarily” by any particular number of years.

    I don’t have that crystal ball nor am I inclined to accept that premise intuitively.

    And given that I don’t share your certainty that exactly the same things will happen at exactly the same times regardless of “permanent” or “temporary” extension, as I’ve said, I’d much rather we make it more difficult to maintain bad policy than to make it more difficult to reduce/eliminate that bad policy, so I’d rather the default be expiration with extension requiring the hurdle of getting through Congress (with 60 Senate votes) and the White House, as opposed to requiring that hurdle to be cleared to reduce/eliminate that bad policy.

    Additionally, I think it’s more difficult for politicians to convince the public that we should “increase taxes” — which all would agree would be happening if “permanent” tax rates were increased — than to convince the public that we should allow tax cuts to expire, which at least a large part of the public will accept as “not cutting taxes” (even though in reality, allowing tax cuts to expire means increasing tax rates, regardless of what it’s called).

  74. comment number 74 by: AMTbuff

    Brooks, we just have a reasonable difference of opinion on this one. No biggie. Check the other thread for my answer to your other question.

  75. comment number 75 by: Joe

    It appears that tax or no tax, more problems seem inevitable. Another blog as good as this discuss whether 2012 be a repeat of 1932. see http://www.financialwizardry.blogspot.com

  76. comment number 76 by: Brooks

    AMT,

    Yes, unlike our other discussion in which I’m just asking people to be logical, this one is a matter of opinion, and of course we can just disagree.

    That said, as I re-read your prior comments on this one, it’s actually not clear to me (1) if you’re saying that it just doesn’t matter much or at all whether extension of the tax cuts is “temporary” (i.e., scheduled to expire) or “permanent”, because the bond market will force the same degree of reductions/elimination of these tax cuts at the same times regardless of whether extension is “temporary” or “permanent”, or (2) if you’re saying that “temporary” extension makes such reductions/elimination of these tax cuts at given times less likely because references to different baselines will encourage more partisanship and, in turn, make such reductions/elimination less likely because this partisanship will obstruct compromise.

    Which are you saying?

    (Re: the other thread, yeah, I saw your reply and it seems you want to go around in circles. You backtracked to a response that you gave earlier and which it seemed I eventually got you to see was illogical, and which forced us on an unnecessary detour, after which you finally just gave me a straight “no” to my #4. And in your most recent reply you give no explanation of your old answer that would indicate that you’re answering my actual question any more than the first time you gave that answer. But I’ll reply there, probably today.)

  77. comment number 77 by: AMTbuff

    >Which are you saying?

    Both. From the progressive point of view, the second argument is more important. It’s harder for the two sides to agree on a tax increase if they can’t even agree on how much of an increase any of the proposals represent!

  78. comment number 78 by: Brooks

    AMT,

    How can you say both? Aren’t they contradictory?

    Either you are saying the result will certainly (or almost certainly) be the same either way (under the “temporary”extension scenario or under the “permanent” extension scenario) or you are saying the result is likely to be different depending on which is the scenario.

    It sounds now like you are saying the latter — that there is less chance of a tax increase if the extension is “temporary”, because of the different baseline reference point.

    If so, then you are saying the latter and NOT the former. You’re not saying “both” because the two are contradictory, unless there’s something you’re not saying or I’m missing.

    And since that seems to be what you’re saying, here’s my question at this point:

    1. “Temporary” extension, by definition, expires at a particular point (say, in one year or two years) unless new legislation is enacted.

    2. If legislation cannot be enacted — because of partisanship, or because of the people disagree on the appropriate baseline, or because of the semantics involved in public debate, or for any other reason — then the the “temporary” extension of the tax cuts expires, and tax rates go up.

    3. You are saying that the “temporary” version of the extension makes it “harder for the two sides to agree on a tax increase” because of the difference baseline reference points.

    4. But that misses the whole point: With a “temporary” extension, the two sides don’t have to agree on a tax increase, because that tax increase will happen automatically unless “the two sides agree” to enact new legislation to further extend the tax cuts.

    5. So how does it make sense for you to say that “temporary” extension makes that tax increase less likely (than “permanent” extension) because you think it makes new legislation less likely, when the tax increase occurs automatically without new legislation, and when new legislation is actually required to avoid that tax increase?

  79. comment number 79 by: Arne

    “In what world do you think workers “pay for their own SS or Medicare”? ”

    That is the point of having a dedicated source of revenue for SS. Workers pay premia, workers get benefits. Over time the premia equl the benefits, so obviously workers are paying for their own benefits.

  80. comment number 80 by: SteveinCH

    Actually, over time they payments don’t equal the benefits. That’s the crux of the problem we have at the moment.

    In addition, you analysis ignores the fact that the premia move up in step functions while the benefits do not, further taking away from the equivalence. Lastly, your argument ignores the time value of money and the fact that even if it were true on average (it isn’t), it isn’t true in almost any individual case.

  81. comment number 81 by: AMTbuff

    >How can you say both? Aren’t they contradictory?

    No. As to 1, “If something cannot go on forever, it will stop”. I contend that the bond market will enforce “it will stop” BEFORE the temporary extension expires. You disagree, and predictions are a matter of opinion.

    As to 2, the point is that compromise will occur more easily if both sides argue from the same baseline.

  82. comment number 82 by: Arne

    re SS

    The SS administration does not have the authority to spend more than it takes in, so over time premia DO equal benefits (excluing administrative costs and interest on holdings, which are negligable).

    The crux of the problem we have at the moment is that people are living longer, and benefits cannot continue increasing at the same rate unless they are willing do pay in more so they can get out more.

    Yes, I ignore the time value of money. I also ignore the opportunity cost associated with not paying for your parents retirement.

  83. comment number 83 by: Arne

    “premia move up in step functions”

    I don’t know what you are getting at. Can you explain?

  84. comment number 84 by: Arne

    “even if it were true on average .., it isn’t true in almost any individual case”

    A mathematical impossibility.

    As with all insurance, there are individual cases where premia exceed benefits. However, because of the skewed distribution of incomes (mean > median), the majority of individual retirees have benefits > premia.

  85. comment number 85 by: Brooks

    AMT,

    I don’t know how to ask this any more clearly than I already did, but I’ll try:

    1. Are you saying that (due to the bond market) the tax increases will occur to the same degree and at the same times regardless of whether current tax rates are extended “temporarily” or “permanently”?

    2. Or are you saying that tax rates are less likely to go up (to a given degree at a given time) if the extension is “temporary” (because the different baseline reference points make agreement less likely)?

    The two seem contradictory to me. Either something is equally likely to happen under either scenario or it is more likely to happen under one scenario than under the other scenario.

    So I ask again, which are you saying?

    Another question is why you presume that an extension would necessarily be for more than 4 years (by which time you may be saying the bond market will force whatever change would occur under either scenario), but first I’d like you to at least make sense rather than contradicting yourself (or expressing your assertions in a way that makes them seem contradictory).

    And as for my question #5, again, you seem to be saying that you tax increases (at given times to given degrees) under the “temporary” extension are less likely because the lack of common baseline reference point will make it less likely we’d get legislation to increase taxes. But again no new legislation is needed to increase taxes when “temporary” extension expires, and new legislation IS required to avoid tax increases. So how does your argument make sense?

  86. comment number 86 by: AMTbuff

    1 yes.
    2 no, not less likely, just easier to reach agreement on.

  87. comment number 87 by: Brooks

    AMT,

    First, you said earlier that under the “temporary” extension scenario, it’s harder to reach agreement to raise taxes.

    Now you’re saying it’s easier, or are you just being very unclear.

    Which are you saying would be “easier”:
    - For Washington to reach agreement to allow tax rates to increase under the “temporary” scenario (tax rates raised by default, if no new legislation is enacted, or raised to some degree via new legislation, whichever).

    OR

    - For Washington to reach agreement to enact legislation to increase tax rates under the permanent” scenario?

    Second, what the heck does your answer to #2 mean? What are you saying is the effect of it being “easier to reach agreement” to raise taxes, if it would have no effect on the degree or timing of such tax increases?

    Would it be possible for you to present an argument with some clarity, as in “I think X will mean Y for reason Z”, in a way that makes your reasoning at least somewhat clear and that presents some clear (and valid) logical flow?

  88. comment number 88 by: SteveinCH

    Arne,

    The SSA will ultimately spend more than it was scheduled to take in at any given moment in time. The tax rates keep going up to make it so. Thus, there is a lag effect in the payment schedule. Eventually, whole classes of people will be worse off, even ignoring the time value of money.

    The actuarial return projected for maxed out earners is already at zero and their benefits will be cut or their taxes will be raised at some point in the future.

    In terms of lumpiness, the tax side goes up in lumps…higher rates and discontinuous raises in the cap on income.

    Your argument ignores lifespan. The people who do well on SS are those who live a long time. Die young and it’s a big time loser. Thus, some people do well but many do horribly and very few individuals pay for their own retirement.

    On top of which, why should working Americans pay for the retirement of the wealthy anyway?

    And, I note in all of your arguments, you ignore Medicare…why is that?

  89. comment number 89 by: Jim Glass

    “In what world do you think workers “pay for their own SS or Medicare”? ”

    That is the point of having a dedicated source of revenue for SS. Workers pay premia, workers get benefits. Over time the premia equl the benefits, so obviously workers are paying for their own benefits.

    That certainly was FDR’s original intent and the nature of the SS Act of 1935 that he got enacted. Each cohort of retirees received the bond rate on their contributions, with a modestly progressive distribution of benefits among them, and indeed workers paid for their own benefits through the dedicated tax revenue they paid. His SS was “actuarially sound and out of the Treasury forever”, as he said.

    But Congress changed that immediately as soon as the payroll tax revenue started coming in — over FDR’s veto — to give early beneficiaries far more than they paid in. You’ll remember Ida May Fuller receiving $22,888.92 of benefits on per $24.75 of taxes paid in. She did not pay for her own benefits.

    (You may also remember Paul Sameulson writing back in the day, “The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in — exceed his payments by more than ten times,or five times counting employer payments!)”

    SS, as a paygo program, as long as it stays one, definitionally pays benefits that in total equal taxes paid into it, so workers on the whole pay for their own benefits in the broadest sense. It is arithmetic.

    However it is just as certainly true that when early participants get back *more* than they put in (”five times…!”) later participants must get back *less* than they pay in by the exact same amount. That’s arithmetic too.

    The SS Trustees put the amount by which today’s and future workers benefits will be *less* than the taxes they pay at $16 trillion present value. SS will be a financial ‘loser’ for them as a whole by that much — it cannot be avoided, it is arithmetic. So going forward, yes, today’s workers will still be paying for their own benefits — in fact they’ll be paying for a *good deal more*. :-(

    The SS administration does not have the authority to spend more than it takes in, so over time premia DO equal benefits

    Exactly. And since going forward the Trustees project taxes to be insufficient to cover future benefits by $15 trillion (they already are scheduled exceed future benefits by $1 trillion) participants must lose that $16 trillion on current law. In fact, by arithmentic the only possibilities are that either benefits must be cut by $15 trillion, or taxes increased by $15 trillion, or some combination equalling $15 trillion. Any way one chooses, future taxes exceed benefits by $16 trillion. It’s arithmentic, QED.

    (BTW, the $16 trillion does not include the $2.5 trillion in the trust fund. One can argue until the cows come home about what the trust fund “is” or “is not” — but nobody can deny today’s and future workers will have to pay $2.5 trillion in additional taxes to fund benefits through it, on top of paying the payroll taxes that pay for their own benefits, without getting a penny of additional benefits in return.)

    Of course the bottom line here is that whatever progressives may think and tell themselves, *nobody* today is defending “FDR’s Social Security that so helped our grandparent’s generation”, that everybody loved so. That SS existed back in Samuelson’s day of “Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in…”.

    That Social Security is dead and buried. Those days are gone and are never coming back. In fact, Social Security’s future is guaranteed to be the inverse of that, by arithmetic.

  90. comment number 90 by: Jim Glass

    Of course the bottom line here is … *nobody* today is defending “FDR’s Social Security that so helped our grandparent’s generation”, that everybody loved so … That Social Security is dead and buried. Those days are gone

    Perhaps I should be more precise. Nobody today is defending *either* FDR’s Social Security, which was actuarially sound as it gave particpants the bond return on their contributions, *or* the program that Congress turned it into over FDR’s veto, which Samuelson praised because it was actuarially unsound and gave everybody “five times” what they put in. The latter program being the one that so helped out the grandparents and gained such huge popularity. (Transferring $16 trillion net to a group of people will make you and your program popular with them!)

    Call them Social Security Stage 1 and Social Security Stage 2. They are both dead and gone, and not coming back.

    Social Security Stage 3 is shaping up now. (Will transferring a $16 trillion loss to a group of people make you and your program popular with them?)

  91. comment number 91 by: Jim Glass

    As with all insurance, there are individual cases where premia exceed benefits. However, because of the skewed distribution of incomes (mean > median), the majority of individual retirees have benefits > premia.

    As I’ve noted above that was true in the past — even Warren Buffett is getting an above market return on his contributions. That was the kind of “progressivity” that even the rich can love! The rich get an above-market return, the less rich get an even more above-market return. Who can complain? That’s how a program gets $16 trillion worth of political popularity.

    Unfortunately, by the nature of “paygo” that $16 T net has to be ponied up by today’s and future workers, to have benefits match taxes in total. So those days are gone forever. Now, as DeLong, Thoma and various on the left put it, SS is (having morphed somehow) “fire insurance” against poverty. Your aren’t supposed to get back the premiums you pay for fire insurance, right? So now what everybody insn’t supposed to complain about is not even getting back the money they pay into SS.

    Of course, it is not everybody who won’t get their money back. Some will do much better than others while on the whole all don’t get their money back, to the tune of $16 T.

    But who does better/worse has a lot less to do with progressivity, “incomes (mean > median…)” etc. — SS is only mildly progressive overall — than with whether they are members of groups SS favors or not.

    E.g. future losers include middle class two-earner married couples (a potent voter demographic) especially if with only one or no kids (they pay twice the taxes — big losers, they can get back well less than 50%) and also bottom-income level single men. The winners are old-fashioned single-earner married couples with kids, even highest-income ones — their big payoff is survivor benefits (two lifetime retiree benefits, plus maybe benefits for the kids too, on one tax contribution).

    So whether one will lose a lot, only a little, or gain in the future depends much more on one’s situation than “progressively” on the amount of one’s past income — and, of course, is affected by wealth not at all.

  92. comment number 92 by: Arne

    “I note in all of your arguments, you ignore Medicare…why is that?”

    Medicare is not Social Security. There is no such program as “Medicare, Medicaid, and Social Security”.

    Do not confuse the issues of one program with another program.

  93. comment number 93 by: Arne

    “However it is just as certainly true that when early participants get back *more* than they put in (”five times…!”) later participants must get back *less* than they pay in by the exact same amount. That’s arithmetic too.”

    No. That is pointless math. Your $16T goes up every year forever, and no one EVER ends up with less. If you use infinite horizon numbers, you are stuck with the fact that there is always someone still alive.

    What Paul Sameulson wrote about SS over 40 years ago is actually still true. Back then, demographics did provide a better return than today, but I think most of us are happy to live longer and have more of our citizens actually reach retirement. But still today the increasing productivity of our economy allows the value of SS benefits to go up faster than inflation.

  94. comment number 94 by: Arne

    Steve is unhappy with SS because wealthy people receive benefits.

    Jim is unhappy with SS becaouse wealthy people’s benefits are not as good as poor peoples benefits.

    This is the bizarre kind of alliance that will allow its detractors to kill SS.

  95. comment number 95 by: SteveinCH

    No Jim was responding to your point. He hasn’t ever said whether he likes it or not.

    Arne, you’re just wrong on this. If you are a two earner family, paying the max today, you will NOT receive your money back. It doesn’t matter what happens in the future.

    Somebody has to pay the deficit eventually or the government has to breakdown and tap the general fund. Or it can ratchet up tax rates again and make the deal even worse for the workers who are working at that point.

    As to SS and Medicare (I never said anything about Medicaid). Coberly’s initial response said people pay for their own for both programs and your initial response quoted that to challenge. Can I assume you agree that statement is not true as it relates to Medicare?

  96. comment number 96 by: Arne

    “Can I assume you agree that statement is not true as it relates to Medicare?”

    Technically, the increase to cover Medicare by increasing taxes is smaller than the increase in GDP for decades, so it could be done, but I do not believe that is what people want. They want to get medical costs under control.

    SS is quite different. The beneficiary decides how it is spent, and (for most people) they get it back later, so increasing it a little at a time (less than the increase in their disposable income) is simply not an issue.

    “If you are a two earner family, paying the max today, you will NOT receive your money back.”

    You left out for a full 35 years. When you start paying your premia, you don’t know which category you will be in. Jim is correct that in an earlier stage everyone could get back more than the put in. Now, with everyone living longer, the higher return goes to those who need it more. I did not deny that. As a group worker get back what they pay in. They are not dependent on taking part of the stream of indiviual income tax (which has a dependence on capital gains) or the stream of corporate income tax.

    “Somebody has to pay the deficit eventually ”

    Payroll taxes in equal benefits out. There is no deficit. Increasing taxes does not make the deal worse because benefits increase by the same amount as premia. I really is simple math.

  97. comment number 97 by: SteveinCH

    As a group up to a moment in time, workers get out what they put in but that does not mean they do as a cohort. The current cohort of workers will get out less than they put in unless the government taps the general fund to pay benefits. That’s the simple math.

    As to your point about Medicare, show me some data that says Medicare program costs are increasing more slowly than GDP. I’d love to see that data.

  98. comment number 98 by: SteveinCH

    And to your point about the benefits increasing as fast as the premia, that’s simply false. Let me give you a simple example. When the earnings cap was raised discontinuously (as opposed to by the formula), was there a change in the benefit formula? The answer is no and that’s why you are wrong about this.

  99. comment number 99 by: Tully

    “Premia” is not the plural of “premium.” It’s a commune on the Italo-Swiss border.

    We don’t pay premiums for SS. We pay TAXES.

  100. comment number 100 by: Arne

    “Premia” is not the plural of “premium.”

    Looks like you are right about that. However, your taxes pay for insurance premiums.

  101. comment number 101 by: Arne

    “When the earnings cap was raised discontinuously (as opposed to by the formula), was there a change in the benefit formula? ”

    The earnings cap is raised every year according to the Average Wage Index (AWI). Initial benefits also go up by AWI. Any discontinuity is small enough to be ignored.

  102. comment number 102 by: Arne

    “The current cohort of workers will get out less than they put in unless the government taps the general fund to pay benefits. That’s the simple math.”

    Actually, if you use a zero interest rate (as I agreed I was doing), then for the forseeable future, each cohort gets out more than 50 percent more than they put in. http://www.ssa.gov/policy/docs/workingpapers/wp110.pdf

    “If a risk-adjusted real interest rate less than about
    1.35 percent is deemed appropriate, as suggested by some research,49 then the estimates
    displayed in Chart 3 indicate that even the most distant birth cohorts are projected to
    receive their money’s worth from the OASI program under either of the balanced budget
    policies considered.”

    It is simple math once you agree on assumptions, but I have a feeling we will have a problem there.

  103. comment number 103 by: SteveinCH

    Wow Arne.

    The earnings cap was raised in the last 5 years outside the formula without any change in benefits. It is that change to which I was referring.

    As to the link, it assumes massive tax increases through the series to achieve “balance”. Therefore it’s not current policy and not relevant to the discussion.

    But since this is an article of faith for you (and you’ve dropped the Medicare discussion again), I’ll leave it at that.

  104. comment number 104 by: Arne

    “The earnings cap was raised in the last 5 years outside the formula without any change in benefits. It is that change to which I was referring.”

    You are confusing initial benefits with established benefits. Benefits for retirees did not go up because the cost of living did not.

    Initial benefits did go up with AWI. A 2009 retiree is getting more than a 2008 retiree.

  105. comment number 105 by: Arne

    GDP $14T at 3.3% = $460B increase per year (real)
    Healthcare at 17% of GDP = $2.3T total
    HC growth at 6.1% = $145B per year
    Medicare at 3.6% of GDP = $505B total
    Medicare growth at 8.1% = $31B

    Which is greater $460B or $31B?

    Those are the numbers, but extrapolating them is silly anyway. Even though the increase in the GDP is greater than the increase in Medicare, we do not want to allow medical expenses to soak up too much of our economic growth.

  106. comment number 106 by: Arne

    “As to the link, it assumes massive tax increases through the series to achieve “balance”. Therefore it’s not current policy and not relevant to the discussion.”

    Read it again. Any balance - tax increase or benefit decarease or combination - produces the same result. Current policy is that the SS administration does not have the authority to spend more than it receives, so the report does include current policy.

    I do not depned on faith. I depend on actually understanding the numbers.

  107. comment number 107 by: Tully

    “However, your taxes pay for insurance premiums.”

    No, they pay for entitlement programs in which I hold certain entitlement rights under statute. There are no “premiums” involved — only the government underwriting of the program through tax revenues.

    SS is “social insurance,” which is not the same as private insurance by a long shot. My rights in it are held by statute, not contract. Contactual rights I have a direct say in, with statutory rights my only say is through leaning on legislators.

    Those legislators can change my statutory rights with a voice vote. And probably will. Certainly will, in the case of Medicare, which is also a “social insurance” program.

  108. comment number 108 by: AMTbuff

    >As to 1, “If something cannot go on forever, it will stop”. I contend that the bond market will enforce “it will stop” BEFORE the temporary extension expires. You disagree, and predictions are a matter of opinion.

    I retract this opinion, which assumed at least a 4-year temporary extension. Tax reform might not precede the expiration of the 2-year extension. Only if Obama makes tax reform a top priority (or if the government bond market crashes) will it happen that fast.