Deficit Reduction

[PassedOut]

David Stockman, Reagan's first budget director, explained to Reagan how his tax cuts without spending cuts would lead to the fiscal disaster that actually occurred. However, the Reagan administration was dominated by economic fools who believed old wives' tales rather than simple arithmetic. "Voodoo economics" took over completely and Stockman didn't last long.

 

Now Stockman is again beating the drums for fiscal responsibility, but his fellow republicans who remain in the fools' caucus still don't believe in arithmetic: A Republican for Higher Taxes.

 

Stockman has been calling for Congress to take serious and immediate steps to start closing the $1.25 trillion fiscal 2011 budget deficit through a series of unconventional actions, beginning with allowing the Bush tax cuts to expire, as they are scheduled to at the end of the year. One of his more cogent arguments has been that since about half of us don’t pay income taxes anyway, letting taxes rise on the other half would be “progressive” (in tax parlance, this means it would hit hardest those with greater means to pay).

 

Stockman has also been talking about cutting military spending, cutting farm subsidies, cutting health-care spending, cutting Medicare payments and Social Security payments for the wealthiest Americans and for whom their financial impact is minimal — despite being rightly owed the money — in order to bring the deficits down and to show the world we are again serious about grappling with our proclivity toward fiscal mismanagement.

No doubt Stockman feels a special obligation to speak out strongly on this as he was present when the US government began its slide into fiscal irresponsibility, yet was powerless to stop it. But I believe that the rest of us who were around at that time owe it to the younger folks to speak out in the same way.

[hrothgar]

Here's a really good analysis from Kevin Drum

 

http://motherjones.com/kevin-drum/2010/11/deficit-commission-serious

 

Most of the discussion revolves around the following image taken from the deficit commision report

 

http://www.motherjones.com/files/images/blog_federal_outlays.jpg

 

Here's what the chart means:

 

Discretionary spending (the light blue bottom chunk) isn't a long-term deficit problem. It takes up about 10% of GDP forever. What's more, pretending that it can be capped is just game playing: anything one Congress can do, another can undo. So if you want to recommend a few discretionary cuts, that's fine. Beyond that, though, the discretionary budget should be left to Congress since it can be cut or expanded easily via the ordinary political process. That's why it's called "discretionary."

 

Social Security (the dark blue middle chunk) isn't a long-term deficit problem. It goes up very slightly between now and 2030 and then flattens out forever. If Republicans were willing to get serious and knock off their puerile anti-tax jihad, it could be fixed easily with a combination of tiny tax increases and tiny benefit cuts phased in over 20 years that the public would barely notice. It deserves about a week of deliberation.

Medicare, and healthcare in general, is a huge problem. It is, in fact, our only real long-term spending problem.

 

To put this more succinctly: any serious long-term deficit plan will spend about 1% of its time on the discretionary budget, 1% on Social Security, and 98% on healthcare. Any proposal that doesn't maintain approximately that ratio shouldn't be considered serious. The Simpson-Bowles plan, conversely, goes into loving detail about cuts to the discretionary budget and Social Security but turns suddenly vague and cramped when it gets to Medicare. That's not serious.

[mgoetze]

The bigger problem is that, in real terms, a tax increase is not paid for by those who have their wealth reduced but by those who are forced to reduce their consumption. If you make Bill Gates pay more tax, he will not reduce what he spends on himself. He will either switch to investments that are taxable in other countries or will simply reduce the amount he invests. Either way, the real losers are those whose jobs are destroyed as a result of the reduced investment.

 

You don't need rich people for investments, they can be done by hedge funds and banks with money they borrow at around 0% interest. Also, if we are only talking about a tax on income (or capital gains), I don't see why this would cause anyone to reduce their investments - they might just have less new money for new investments. Furthermore, there are big incentives to invest outside of the USA quite regardless of taxation.

 

In short, I don't believe in this causality.

[PassedOut]

Here's a really good analysis from Kevin Drum

 

http://motherjones.com/kevin-drum/2010/11/deficit-commission-serious

 

Most of the discussion revolves around the following image taken from the deficit commision report

 

http://www.motherjones.com/files/images/blog_federal_outlays.jpg

If the plan does not actually address healthcare spending, then I was certainly wrong about it being serious. Aside from the problem of inadequate healthcare in the US, the urgency of passing healthcare reform last year was to enable the government to get control over those exploding costs. To be sure, the bill did not go far enough, but it was an essential first step in getting the deficit pared down.

[kenberg]

As one of the links said, this is not the plan of the commission but the plan of two guys. They were upfront about this but then exactly why is this two-gur plan being put out?

 

The fundamental fact about health care is that we can now do a great many things that cost a great deal of money. I am going to die someday. Individually I would not want to detroy the family finances to keep me alive a little longer and really the same logic shouold apply to a large number of people and the national expense.

 

I hope to live a good many more years. But nothing lasts forever and the governemnt cannot change this.

[mike777]

Just a side note...if you want to tax income, then you need to define it. Trust me that is a huge debate. :)

 

 

 

That is one reason,not the only one, that theVAT is so popular as a tax vehicle by governments. You get to tax consumption, at least non blackmarket consumption, rather than income.

 

 

I`ve never been a deficit hawk. More a believer in trying to grow our way out of our problems. Jobs and morejobs.

 

 

 

 

"The most important ways in which I think the Internet will affect the big issue is that it will make it more difficult for government to collect taxes."

Milton Friedman

 

 

"The black market was a way of getting around government controls. It was a way of enabling the free market to work. It was a way of opening up, enabling people."

Milton Friedman

[PassedOut]

"The black market was a way of getting around government controls."

Milton Friedman

Every crime is a way of getting around government controls.

[phil_20686]

Because medicine is very labour intensive, it suffers from baumol's cost disease (http://en.wikipedia.org/wiki/Baumol's_cost_disease) - so it is reasonable to expect that the cost of providing care should rise in line with gdp. I do not beleive that significant savings can be made without some innovation that will make doctors more productive - automated dignostic machines, or machines that allow surgery to be performed more quickly. We are at least 50 years away from that level of automation. And its not clear how comfortable people would be getting diagnosed by a machine. If you add to this new treatment options, it is inevitable that healthcare costs will grow faster than gdp.

 

 

All this talk about higher income tax causing greater gdp growth seems to miss the broader point, which is that the relevant number you want to examine is total governemnt revenue. By this I mean that income brackets on their own are a incomplete measure. Say i reduce income tax but increase co-operation tax in a revenue neutral manner, then I would not expect any growth. The cost of all taxes is ultimately borne by the consumer, and often large changes in the tax code are done in such a way that revenue is only slightly affected. In reality total government revenue as a % of gdp (I.e. the sum of all taxes) grew continuously from WW2 until about 2000 (at 35% gdp), there was a big drop (4-5%) in 2002, and then they went back on an upwards trajectory. Thus the classic interpretation should be that growth fell with time from WW2 until the present. Obviously life is not so simple and the economy tends to have cycles etc. Not to mention sudden burst of growth brought on by a particularly profound technological advancement. It looks to me like that thesis is broadly supported by awm's data. 3.5% gradually decreasing to about 2.5 %, if we make a few adjustments, eg 88-92 is a 4 year period containing a large recession, so it is artificially low, whereas 98-02 would have picked up both teh rebound form the early nineties recession and the dot com bubble (which marked the rise of the internet and like many new technologies it probably caused above average growth when it was first utilised.)

 

Also, lets not forget that awm's analysis misses out several pertinent points. Eg, what was the bracket for the top rate? If you look at my sources before you will see that the total %gdp paid in income taxes has been remarkably stable between 10 and 15% for over 50 years - if you lower the tax but increase the applicability in a revenue neutral way then you haven't really changed the tax burden at all. It should be clear that when one talks about tax cuts stimulating growth one should only be talking about lowering the total tax burden. The idea that if i tax one group less and another more I can stimulate growth seems flawed to me.

 

FYI, income tax makes up slightly over a third of total government revenue in the USA. Vat-like taxes make up slightly less than a third, with the other large contribution being "social insurance". I got my figures from

 

http://www.usgovernmentrevenue.com/downchart_gr.php?year=1950_2015&view=1&expand=&units=p&fy=fy11&chart=F0-total&bar=1&stack=1&size=m&title=&state=US&color=c&local=s#usgs302

[mike777]

"I do not beleive that significant savings can be made without some innovation that will make doctors more productive - automated dignostic machines, or machines that allow surgery to be performed more quickly. We are at least 50 years away from that level of automation."

 

Of course this is the main issue, innovation. If 50 years so be it, but that is not really forever.....this is good news, great news!

 

I link innovation with incentives, incentives work.

 

Now if we can have government policy that may shorten that 50year period even a bit....lets do it!

 

In any case my vote is for innovation and growth. I do believe America is a great country with great people. There are alot of really smart people in the world. Lets give them incentives to come here and incentives to those that are here, today!

[PassedOut]

Because medicine is very labour intensive, it suffers from baumol's cost disease (http://en.wikipedia.org/wiki/Baumol's_cost_disease) - so it is reasonable to expect that the cost of providing care should rise in line with gdp. I do not beleive that significant savings can be made without some innovation that will make doctors more productive - automated dignostic machines, or machines that allow surgery to be performed more quickly.

Huge savings -- hundreds of billions per year in the US -- are available simply by eliminating excessive end-of-life procedures and by eliminating unnecessary tests performed to avoid lawsuits.

[awm]

I'm just trying to argue that the claim that "we should not raise taxes on millionaires because it will destroy the economy" has no factual backing. Certainly it's true that many other things effect the economy besides the tax rate on millionaires (including the other tax brackets, bubbles and busts, wars, the manner in which the government spends its revenues, etc) and that this is overall a complicated issue. But a lot of people seem to think it's somehow "obvious" that we shouldn't raise taxes on the richest segment of society, and I haven't seen any data to convince me of that (whereas there is a lot of data that seems to imply otherwise).

 

Eliminating the tax deduction for mortgages will kill the (already struggling) housing market and hurt the middle class substantially. Eliminating the capital gains tax rate hurts the wealthy, but the deficit committee also wants to cut the top tax rate to 23%, only slightly higher than the 20% capital gains rate we had under Clinton. I agree that we should see how the numbers add up, but it certainly looks to me that the wealthy come out of this pretty well, whereas middle-class homeowners will suffer.

[mike777]

I'm just trying to argue that the claim that "we should not raise taxes on millionaires because it will destroy the economy" has no factual backing. Certainly it's true that many other things effect the economy besides the tax rate on millionaires (including the other tax brackets, bubbles and busts, wars, the manner in which the government spends its revenues, etc) and that this is overall a complicated issue. But a lot of people seem to think it's somehow "obvious" that we shouldn't raise taxes on the richest segment of society, and I haven't seen any data to convince me of that (whereas there is a lot of data that seems to imply otherwise).

 

Eliminating the tax deduction for mortgages will kill the (already struggling) housing market and hurt the middle class substantially. Eliminating the capital gains tax rate hurts the wealthy, but the deficit committee also wants to cut the top tax rate to 23%, only slightly higher than the 20% capital gains rate we had under Clinton. I agree that we should see how the numbers add up, but it certainly looks to me that the wealthy come out of this pretty well, whereas middle-class homeowners will suffer.

 

 

What does your data say....raise how much to create jobs and jobs and jobs???

[mgoetze]

By the way, Germany is presently growing a fair bit, and the individual capital gains tax rate is 26.375%. Sounds impossible to Republican ears, huh?

[hrothgar]

What does your data say....raise how much to create jobs and jobs and jobs???

 

Growth, growth and more growth...

Near perfect description of a cancer cell.

[PassedOut]

It's the weekend, so now I've taken the time to look at the leaked Power-Point version of the draft proposal instead of simply the pundits' reactions to it (I probably should have done that before posting at all in this thread): Co-Chairs' Proposal.

 

In my experience it's always easier to revise and fine-tune a draft than it is to create that draft in the first place, so I found it very interesting to go over. As I'm not a legislator (heaven forbid!) I don't understand all of the jargon now, but I suppose I could learn it if I wanted to. It seems to me that each line in the presentation could expand into a paper of supporting detail, which is just the kind of overview one would want.

 

I note that mandatory spending issues -- including healthcare costs -- are addressed starting on page 30.

[y66]

... I would be happy to bet that the effect of their tax proposal would be a higher tax burden for "wealthy Americans"

 

I'm still reeling from the bet I lost to lobowolf on the Massachusetts Senate race. But this seems like a mortal lock to me. Name your terms.

[hotShot]

If you understand interest rates, than you know that paying more taxes now to reduce the deficit, will be cheaper than paying taxes to reduce the deficit and for the interests for years.

[PassedOut]

If you understand interest rates, than you know that paying more taxes now to reduce the deficit, will be cheaper than paying taxes to reduce the deficit and for the interests for years.

For sure. According to the co-chairs' proposal (page 4), the US is on a track to pay $1 trillion per year on interest payments alone by the year 2020.

 

Pundits are taking exception to the report's target of 21% of GDP for both spending and receipts. I suppose that number was chosen because it is the integer value closest to the value at the end of the Clinton administration, the last year of federal fiscal responsibility. I don't care so much about the actual number chosen, but I do think it important to have a specific numerical target to shoot for -- and that the target is the same for both spending and receipts.

 

If the majority wants spending at 21%, at 25%, or at 30% of GDP, then the target for tax receipts must match up with the 21%, 25%, or 30%. Otherwise, as you say, future taxpayers will be paying huge sums for nothing, except to pay for the free lunch enjoyed by citizens in the past.

[y66]

O.K. kibs, let's see how you'd fix the budget.

[hrothgar]

Thanks for forwarding the link...

 

In a startling development, the simple act of

 

1. Getting rid of all the Bush taxes cuts

2. Some additional tax increases

2. A sharp decrease in defense spending

 

solves nearly the entire problem... (Not overly surprising given that we were running a surplus before the shrub)

[Bbradley62]

O.K. kibs, let's see how you'd fix the budget.

It seems to me that this demonstrates how do-able this is. My mix was 55% tax increase, 45% spending cuts.

[PassedOut]

What a great use of the internet!

 

My breakdown was 50-50. The problem gets a lot harder, though, if you take a firm stand against either tax increases or spending cuts.

[hrothgar]

My plan had 743 billion in savings by 2015 and 1.7 trillion by 2030.

It consisted of 70% tax hikes and 30% spending cuts focused primarily on the military and farm subsidies.

 

Please note: I consider this plan to be a first step. I think that switching to a single payer system for health care could accomplish a lot more.

[PassedOut]

My plan had 743 billion in savings by 2015 and 1.7 trillion by 2030.

It consisted of 70% tax hikes and 30% spending cuts focused primarily on the military and farm subsidies.

 

Please note: I consider this plan to be a first step. I think that switching to a single payer system for health care could accomplish a lot more.

I agree with you about single-payer and also see lots of savings available by reducing excessive end-of-life procedures. But the important thing now, in my opinion, is to chop down the deficit to curb runaway debt service costs.

 

Along with the interactive puzzle, the NYT has this accompanying article by David Leonhardt: O.K., You Fix the Budget

 

Imagine that Democrats and Republicans somehow came together and agreed on a grand bargain to cut the deficit.

 

They decided to cut the pay of federal workers over the next several years, close military bases, reduce foreign aid, eliminate earmarks, expand the payroll tax and cut Social Security benefits for high earners, as the chairmen of a bipartisan commission recommended last week.

 

Democrats also accepted the plan from John Boehner, the presumptive House speaker, to make large cuts to social programs. Republicans accepted President Obama’s proposal to let the Bush tax cuts expire on income above $250,000.

 

If the two parties managed to do all of this, how much of the country’s long-term deficit would they eliminate?

 

About one-third of it.

So congress has got to buckle down and get serious about this. Nibbling at the edges won't cut it.

[cherdano]

What a great use of the internet!

 

My breakdown was 50-50. The problem gets a lot harder, though, if you take a firm stand against either tax increases or spending cuts.

That's still easy! Try it while taking a firm stand against tax increases AND spending cuts other than reducing foreign aid!