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Elites agree: it’s time for you and your kids to pay for their failures

Today’s POLITICO has one of those only-in-the-Beltway kinds of stories that make you wonder if there’s any signs of life there at all.  Reported by Jim VandeHei and Mike Allen, it’s a synthesis of elite opinion (lawmakers and staffers from both sides of the aisle, as well as business executives) about what needs to be done to get our economy back on track once and for all.  Now certainly, there’s some good stuff in there — expanding immigration for high-skilled workers, for instance, is something that is long overdue.  But let’s be clear here.  The elite agenda for “fixing” our economy calls for significant doses of sacrifice from the middle class and working poor and precious little sacrifice from them.

Let’s start off with the sacrifice that the elites are willing to make — an increase in taxes for those making over $250,000 a year.  This would raise the top marginal tax rate (on income over $250,000) from 35% to the Clinton-era rate of 39.6%.  That’s certainly something, although one could fairly argue that returning to the tax rates that coincided with the best period of economic growth this country has had in the last 20 years might not be the worst thing in the world.  But let’s look at what isn’t on the table.

Changes to capital gains taxes?  Nope.  They’ll continue to get their much lower rate, meaning that folks like Mitt Romney or Paris Hilton who live off of investment income will continue to pay tax rates in the 15% range — lower than many middle-class and working poor families.  Not only that, but hedge fund and private equity investors will still get to treat their regular earnings as investment income instead of wage income, saving some individuals millions in tax liability every year.

Taxes on financial transactions or financial speculation?  Nope.  In the wake of the financial market meltdown in 2008, some suggested using a transaction tax on stock or bond transactions or higher rates on short-term capital gains as a means to both discourage speculative activity that makes the markets more volatile as well as creating a fund to deal with the damage created by current (and future) market failures.  These are still not on the table.

Breakup of the largest financial institutions?  Nope.  The 2008 market meltdown required government intervention to prevent the collapse of institutions deemed “too big to fail”.  What largely happened in these cases is that other large banks ended up buying the failing banks.  So an industry that was already unduly concentrated and prone to risk has become even more concentrated and even more prone to risk (despite some of good provisions in Dodd-Frank).

All of these items would represent real sacrifice for the elites in our society, but they’re not on the table.  What are they asking of the middle class and the working poor?  Oh, not much, except the gutting of perhaps the two most effective government programs at providing income security and health care to Americans.  Banks and financial institutions get bailouts when they make bad decisions.  Now the government is poised to give you insecurity when you retire after decades of hard work.

Sacrifice for thee, not for me

Medicare is the largest contributor to the future deficit problem due the explosion in both the number of seniors citizens and the continuing rise in health care costs (at a rate much faster than inflation in the rest of the economy, which means it will have to be part of the solution.  But there’s smart ways to reform Medicare and stupid ways to reform Medicare.  As befits our current political dialogue, the ones that are being debated are the stupid ones.

One of most likely changes to Medicare is an increase in the age of eligibility from 65 to 67.  At a base level, this doesn’t sound like that big of a deal.  Well, the problem is that in trying to save the federal government a little money, we’re going to end up spending a lot more overall.  Increasing the age to 67 would save the federal government about $5.7 billion a year, but would raise individual out-of-pocket expenses by $3.7 billion, and increase the insurance premium expense for employers by $4.5 billion.  Already, we’ve made the overall system less efficient by $2.5 billion, but we’re not done yet.  Adding 65- and 66-year-olds to the general health insurance pool is going to make everyone else’s health insurance more expensive (because the overall population will be sicker) — that’s another $2.5 billion.  Finally, states are going to have additional health expense on some of these seniors totaling about $0.7 billion.  If you total it up, the financial cost to society of changing the Medicare eligibility age is twice as large the savings we would see in the deficit.  That’s not a good trade-off.  (And that’s before we look at some of the non-financial impacts.)

There are smart ways to save money — significant money — in Medicare going forward.  We can end fee-for-service payment policies and replace them with paying providers for results.  We can give Medicare enhanced power to negotiate prices with suppliers — particularly for prescription drugs.    We can research the statistically most effective and cost-efficient ways to treat conditions and encourage providers to use those guidelines.  These are the types of reforms that we should be pursuing.

Perhaps even more galling in the context of the current budget debate is the fact that Social Security is getting dragged into the mix.  Social Security contributes nothing to our nation’s current budget deficit.  In fact, Social Security ran a $69 million surplus in 2011 and is projected to run surpluses for the next decade.  We have 20 years before the Trust Fund is exhausted (under current projections), and the simple act of removing the cap on the payroll tax would resolve at least 95% of the projected deficit going forward.  And if we did nothing, the cost of filling the gap after the Trust Fund is exhausted is less than 1% of GDP — a relative pittance compared to Medicare.

Instead, we’re seeing the same shortsighted tactics on Social Security as we are on Medicare.  What’s on the table is an increase in the retirement age from 67 to 70, and changing the way inflation is calculated so that such increases would be smaller than they are today.  These changes would have severe negative impacts on future retirees, but they would only raise 1/3 of the money that removing the payroll cap on the wealthy would.  Yet, no one’s really talking seriously about major reform to the payroll tax cap.

Big bad ideas

These reform plans for Medicare and Social Security are based on two big ideas, both of which are misguided.  The first bad big idea is “People are living longer, so increasing the eligibility ages is no big deal!”.  And while that’s true, it’s not true in the same way for everybody.  Wealthy Americans have seen their life expectancies improve by six years since 1977, while folks in the lower half of the income distribution have seen only an increase of one year in that time period.  These workers are more likely to be in blue-collar industries that are more reliant on physical labor.  Working in those jobs in their upper-sixties with questionable health insurance just isn’t a winning proposition.

Source:  The Incidental Economist

Source: The Incidental Economist

The other really bad big idea in these plans is “We have to protect current seniors”.  It’s certainly true that low- and middle-income seniors shouldn’t be expected to see substantial changes to these programs.  But if this is the kind of crisis that makes one of our political parties willing to risk defaulting on our bonds, maybe rich seniors should make some sort of contribution to solving the problem?  Certainly, there are wealthy seniors (and seniors-to-be) who could afford to pay co-pays for Medicare or take some means testing on their Social Security check today.  It hardly seems fair to think that the bill for this financial mess should be borne primarily by the children and grandchildren of those who ran up the credit card in the first place.  If we’re not willing to require any sort of contribution by today’s seniors (and seniors-to-be) to solving this crisis, aren’t we in fact admitting that it isn’t a crisis and just a problem that needs to be addressed in a reasoned manner?

Passing the buck and the bill

And it gets worse yet.  Many of the elites pushing these sorts of “solutions” to the problem are simultaneously pushing for so-called tax reform that would lower corporate taxes.  David Cote, the CEO of Honeywell, has been one of the key public faces behind Fix the Debt, a business organization that has made a large effort to influence the debate.  Cote loves to talk about tax reform as a part of this process, but what he doesn’t like to talk about is that he’s really trying to eliminate the corporate income tax.  If corporate taxes are eliminated, guess who’s going to get the bill to make up the lost revenue?  (Hint:  It’s not David Cote.)

I’m not opposed to tax reform.  But tax reform shouldn’t consist of a series of handouts to one group while demanding sacrifices from another.

And guess what else isn’t on the table as part of these negotiations?  Any real attempt to focus on the unemployment problem.  Basically, at this point we’re left to hope that if the elites get their way and extract the appropriate sacrifice from everyone else that the certainty created by such maneuvers will suddenly convince business owners to start creating jobs.  Of course, that notion in and of itself is misguided.  Businesses don’t create jobs out of certainty — they create jobs because there is demand for their product and services.  To create demand for their products and services, we need to have a population that has jobs and disposable income to spend.  Cutting Medicare and Social Security while squeezing government spending through austerity does nothing to improve the employment picture or improve household income.

We have a medium- to long-term deficit problem that needs to be addressed.  The important thing we need to remember is that it’s far more important to do the right thing for all of our citizens than to just earn political scalps by “raising taxes on the wealthy” or “cutting entitlements”.  These problems are about more than numbers on a spreadsheet — they have real world impacts that CEOs or lawmakers or writers for Washington D.C. political journals will never have to deal with.  It’s time for the voices of those who don’t attend Georgetown cocktail parties to be heard as part of this process as well.

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Popping the bubble: more data that bursts commonly-held GOP tax beliefs

We’ve talked about this on more than one occasion, but the data shows that many conservative/Republican talking points on tax policy just don’t reflect reality.  Let’s look at some (relatively) new data on this subject that continues the trend.

A recent study by the Congressional Research Service (CRS) looked at the effects of the top marginal individual income on various measure of economic growth.  As the study itself concluded:

The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.

However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.

Here are two graphs from the study that give a little more color on that conclusion.

 

This graph plots GDP growth against the top marginal and capital gains tax rate going back to 1945.  Note that the trendline on both graphs is essentially flat.  That represents the fact that as the tax rate increases, GDP growth is unaffected.  In fact, the right graph (which looks at the capital gains tax rate) shows that higher capital gains taxes correlate to higher GDP growth.

This graph shows how the lower top marginal tax rates work to change the distribution of income — favoring the most wealthy in society.  Each graph shows that lower tax rates result in higher concentrations of income at the top of the income scale.

What happened when the CRS tried to release this study?  Senate Republicans had it killed.  After all, if their narrative is found to be untrue, it pretty much undercuts their entire reason for existence at this point.

Well, that, and the unending Republican desire for cutting taxes on corporations. Well, a Congressional Budget Office study from earlier in the year shed some light on that situation.  In 2011, corporate taxes as a percentage of profits hit a 40-year low.

Some of this drop in recent years can be attributed to temporary measures (such as a change in depreciation rules) that were part of the stimulus package, but overall, the tax environment for business has been getting more friendly over recent decades — not less.

Republicans and Democrats should work together to find solutions that will make our tax code simpler and fairer — and I believe there are significant areas of agreement to be found there.  But if we’re going to have solutions that really work for all Americans, we need to start with a real understanding of the facts and not persist with myths, talking points, and empty rhetoric.

The anti-business, socialist President strikes again

Republicans have attacked Barack Obama for being anti-business and socialist over and over and over again since his election in 2008.

So, how’s that been working out?

Well, business profits are up.  Way up.

The Fortune 500 generated a total of $824.5 billion in earnings last year, up 16.4% over 2010. That beats the previous record of $785 billion, set in 2006 during a roaring economy.

The stock market is up.  Way up.

The Dow Jones industrial average has soared 62 percent since President Barack Obama took the oath of office during some of the darkest days of the Great Recession. The Dow was just below 8,000 then and stands near 13,000 today.

Corporations have record amounts of cash on their balance sheets.

Apple Inc. (AAPL), the world’s most valuable business, led U.S. corporations in amassing a record $1.24 trillion of cash last year as memories of the 2008 credit crisis linger, according to Moody’s Investors Service.

Excluding Apple, with $97.6 billion of cash and no outstanding debt, the figure was relatively unchanged at $1.15 trillion, even as revenue and cash flow from operations rose to a record, Moody’s analysts led by Richard Lane said in a report yesterday.

Government (federal, state, and local) is smaller.

For the first time in 40 years, the government sector of the American economy has shrunk during the first three years of a presidential administration.

Spending by the federal government, adjusted for inflation, has risen at a slow rate under President Obama. But that increase has been more than offset by a fall in spending by state and local governments, which have been squeezed by weak tax receipts.

Source: New York Times, based on Bureau of Economic Analysis data

It seems the anti-business, socialist President has actually worked out pretty well for corporate America.

Carver County GOPer loves recycling — at least when it comes to discredited talking points

Earth Day may have been a few days ago, but Carver County Republican Secretary Vince Beaudette shows us his fidelity to Mother Earth in this week’s Chaska Herald by recycling long-since discredited talking points in relation to the 2008 U.S. Senate election between Norm Coleman and Al Franken.  Let’s look at a couple of the gems in Beaudette’s letter:

The Minneapolis director of elections said 32 absentee ballots were found in an election worker’s car a day or two after the election, and all votes happened to go to Al Franken.

This is one of the long-lasting myths of the 2008 election, but it’s just not true.  Here’s a summary of what happened with those 32 ballots gleaned from accounts in MinnPost and the St. Paul Pioneer Press:

  • Minnesota law requires absentee ballots to counted at the precinct place the voter would have normally voted at if they were able to vote in-person on Election Day.
  • Absentee ballots for Minneapolis are returned not to city officials, but county officials.  On Election Night, a batch of overseas ballots came in late, and were only delivered from Hennepin County officials to Minneapolis officials at 7 p.m., one hour before the polls closed.
  • Minneapolis had 13 certified precinct support judges who were responsible for delivering the absentee ballots to the 131 individual precinct locations in the city.
  • Because of the late arrival of this last batch of absentee ballots, 28 ballots were not able to be delivered to the precincts before the polls had closed and the vote-counting process had began.  No additional absentee ballots can be introduced at the precinct once that has happened.
  • Those 28 ballots, as well as four absentee ballots that were erroneously not opened and counted at the precinct level that night were returned to City Hall that evening, where they were securely stored until they could be counted in the presence of a judge and attorneys from both the Franken and Coleman campaigns.  Ballots were never found or stored in cars for days, as Beaudette alleges.
  • Of the 32 votes, 17 went to Franken and 8 to Coleman.  The other seven ballots were for third-party candidates or had no vote for the Senate race at all.

Here’s another classic:

Precincts in Two Harbors and Partridge Township sent Al Franken a net gain of another 350 votes, claiming miscounts, in the days immediately following the election.

Miscounts in elections are actually fairly common.  In 2006, an election won by Amy Klobuchar by a double-digit margin, her vote total changed by over 2,000 votes from the initial canvass to the final results.

Here’s an example of how this occurs, from the Pioneer Press story:

Like many stories that emerged during the recount, the Pine County error became something nefarious through the prism of the campaign and the national media. But it has an innocent explanation, one that the secretary of state’s office spelled out for callers.

Similar to Buhl, Pine County results must be written down, read over the phone and then typed in. Terry Lovgren, a county worker of 23 years, thinks she made the error.

Lovgren’s Election Day was fairly typical — hectic and stressful. She started around 8 a.m. and spent much of the day driving late-arriving absentee ballots to polling places in the farthest reaches of the county.

In the evening, she and Auditor Cathy Clemmer manned a computer, typing in the results from handwritten forms from 47 precincts that were piling up on her desk.

“We just start ripping and entering,” Lovgren said.

In rural Partridge Township, Coleman got 143 votes, edging out Franken’s 129 votes. That’s what the machine tape read at the end of the night and what was written on a ledger that was hand-delivered to the county offices in Pine City.

But that’s not what was typed into the county’s computer and transmitted to the state. Those figures showed Franken with a mere 29 votes.

The numbers sat there until the county canvass the Thursday after the election. Lovgren was taking notes while someone read results.

“Nope, that’s wrong,” someone piped up when Partridge Township was read.

“I felt ill,” Lovgren said. “I was sick that I had made that mistake.”

Nothing nefarious here, just a human mistake that was caught and corrected by the processes in place already.  In a close election, such mistakes are magnified and blown out of proportion by partisans looking to score political points.

The worst part about these consistent attempts by Beaudette (and others) to recycle these stories is that they know by now that these stories are false.  Yet they keep repeating them.

The question is:  why do Beaudette and those of his ilk feel they can’t make the case for voter ID legislation based on the facts?  Why do they have to keep repeating these lies?

10 Charts of the Year – Political Polarization

Today’s Chart of the Year comes to us from Peter Orszag, former Director of the White House Office of Management and Budget and current Vice Chairman of Global Banking at Citigroup.

What does this chart mean?

Our political system is so plagued by polarization, it’s difficult to move any legislation forward. In the late 1960s, significant overlap existed in votes cast by the most conservative Democrats in Congress and those cast by the most liberal Republicans. By the late 1980s, the common ground had diminished. Today, it has virtually disappeared.

10 Charts of the Year — Federal Spending and Revenues

Our Chart of the Year for today comes from the Senate Budget Committee, showing the gap between federal spending and federal revenues.

Source: Senate Budget Committee

What does this chart mean?

This chart demonstrates that revenue has to be part of the solution to the deficit. It shows that the last five times the budget was in surplus (in 1969, 1998, 1999, 2000, and 2001), revenue was near 20 percent of GDP. Revenue is now at 15.4 percent of GDP, near its lowest level in 60 years. – Sen. Kent Conrad (D-ND)

With logic like this, he can’t go wrong

I took some time today to visit the web page of Republican U.S. Senate candidate Joe Arwood.  Here’s a sample of what is posted there:

We can no longer afford the price tag of ineffective leadership, we shouldn’t have to pass a balanced budget amendment to get a balanced budget.  This is why I support a balanced budget amendment, to keep those in Washington accountable to us.

We shouldn’t have to pass the amendment to balance the budget, which is why he supports the amendment?  My head hurts.

It’s a wonder he hasn’t been able to raise more than $10,000 so far…

 

About those “people who don’t pay taxes”

Republicans have spent a lot of time lately complaining about the sizable portion of Americans who now don’t pay federal individual income taxes.  Current estimates show that over 45% of taxpaying units have a zero or negative federal individual income tax liability, a percentage that has grown over time.

To them, they say, it’s a “skin in the game” problem.   Minnesota Rep. Michele Bachmann, for instance, recently said “We need to broaden the base so that everybody pays something, even if it’s a dollar. Everyone should pay something, because we all benefit.”

Let’s leave aside for the moment the fact that people who don’t pay federal individual income tax are still being taxed in substantial ways — including payroll tax and gas tax at the federal level (the individual income tax only represents 41% of federal revenue) — and look at just who these “nonpayers” actually are.  Are they “lucky duckies” as the Wall Street Journal like to call them?  And just how did they get to the point of paying no federal individual income tax?

Obviously, the key factor behind most of the folks who fall into the nonpayer category is their income.  Specifically, they don’t have a lot of it.  88% of nonpayers have household incomes of under $40,000.  Of the remaining 12%, almost half of them have incomes of over $100,000, including about 4,000 households with incomes over $1 million (that’s up 53% from 2007, even though the number of households with incomes at that level has fallen over that time).

There are other key attributes that tend to drive whether one is a nonpayer or not:  46% of nonpayers are elderly and 64% of nonpayers have dependent children.

So how did we get to this situation?  The short answer is that both parties have filled the tax code with targeted credits.  In the immediate WW-II period through the Nixon Administration, the percentage of nonpayers stayed pretty close to 20%.  The introduction of the Earned Income Tax Credit in 1975 spiked that percentage up slightly such that the percentages tracked closer to 25% until the late 1990s.

Since then, the tax code has been littered on a bipartisan basis with multiple credits that have, in part, caused the sharp increases we have seen in recent years.  The first step was the introduction of the Child Tax Credit in 1998, which gave a $400 tax credit for each dependent child on the return.  This credit was expanded in 1999, 2001, and 2003 (reaching its current level of $1,000).  In 2001, the child and dependent care credit was expanded, and in 2003, the new lowest tax bracket of 10% was established and taxpayers got a cut in capital gains and dividend taxes (this contributes greatly to the wealthy folks who fall into the nonpayer category).  In 2008, taxpayers received stimulus checks, and in 2009, the stimulus bill included the Making Work Pay Tax Credit (replaced in 2011 by a temporary payroll tax cut).

These provisions, building one upon the other and in combination with the weak economic conditions, have created the 45%-plus nonpayer rate we have seen in recent years.  Removing these tax credits would fully cut the number of nonpayers in half.

The real question, then, is where do we go from here?  Should we follow Republican logic to its conclusion, remove the credits, and raise taxes on 60 million lower-income Americans?

That’s where the question gets tougher.  Removing credits like these actually impact all Americans, and the middle class and wealthy would take the brunt of the damage.  Except for the earned income tax credit, all of the credits noted above provide greater benefits to the top three quintiles of Americans than they do the poorest in our society.  In total, the top 20% earn twice as much as a percentage of income (and far more than that in real terms) as the bottom 20% from these provisions.

As such, removing these credits — in and of themselves — is not a solution.  Not only would it take money out the pockets of those who can least afford it, but it would further squeeze middle-class families AND take substantial money away from the wealthy — the so-called “job creators” Republicans have been so anxious to protect.

The real answer to what we’re facing is a return to principles embraced on a bipartisan basis in 1986.  Simplify the tax code by removing all but the most essential credits and deductions.  Lower rates across this wider tax base.  Treat all income the same, regardless if it was earned through work, earned as a capital gain or dividend or inherited.

Such reform would accomplish goals that both parties have:  more people would be paying in, the tax code would be simpler (it shouldn’t be used as a backdoor way to handout money), and it can continue to be just as progressive (or even more so) than before.

What’s more popular than Congress? Just about everything. [UPDATED]

From a Washington Post story:

Here’s the percentage of Americans that approve of…

40% Barack Obama’s performance as President at its lowest point (Gallup, 2011)

39% Cloning sheep (ABC, 1997)

37% Bill Clinton’s performance as President at its lowest point (Gallup, 1994)

37% Corporal punishment for juvenile offenders convicted of vandalism (L.A. Times, 1993)

31% Believe in alien abductions (CNN, 1997)

24% Richard Nixon’s performance as President at its lowest point (Gallup, 1974)

23% Behavior of banks (Gallup, 2011)

22% George W. Bush’s performance as President at its lowest point (multiple polls in 2008)

21% Behavior of organized labor (Gallup, 2011)

19% Behavior of big business (Gallup, 2011)

19% Behavior of HMOs (Gallup, 2011)

18% Human cloning (Johns Hopkins, 2002)

14% Behavior of BP during Gulf oil spill (Washington Post, 2010)

14% Performance of Congress (CNN, 2011)

[UPDATE:  New data points added in italics above for comparison]

News Roundup, August 9

A few short items of note:

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