By James Kwak
In the current issue of Democracy, Elbert Ventura discusses the history of a problem that I’ve brought up as well: the transformation of the Democratic Party into the party of tax cuts. Except, that with the Republican Party as the real party of Texas-sized tax cuts, the Democrats can never be more than the kid brother, half-hearted, talking-out-of-both-sides-of-its-mouth party of tax cuts.
Ventura points out that the Democrats have always been squeamish about taxes, even in the supposed glory days of the New Deal. But things have gotten worse. As Ventura points out, President Obama’s proposal to raise taxes only on households making over $250,000 per year means that “he would bring back the higher Clinton-era rates for only the top 2 percent of taxpayers.” While that proposal still stands (I think), the recent emphasis on the Buffett Rule means that Obama has shifted the tax discussion up to an income group that is completely foreign to most Americans. (Yet a significant minority of Americans are bitterly against the Buffett Rule. Go figure.)
The economic results are obvious: With both parties allergic to tax revenues, there is little alternative to rising deficits as the dependency ratio gets worse and health care costs increase. The political results are only slightly less obvious. A message of “tax cuts for most people” has little chance against “tax cuts for all,” even if it makes slightly more policy sense.
The underlying problem is that forty years of conservative tax revolt, abetted by twenty years of Democratic me-tooism, have conditioned the public to expect tax cuts as their constitutional right. It will take forty years to reverse this trend and will require the kind of “think tanks,” foundations, and media outlets that conservatives have and liberals don’t. Which is to say it could take forever.
The Baseline Scenario 
Sad but true.
Make it a $100,000, and even the playing field!
Nah, not 40 years.. Just U6 (because they’ll keep redefining the other ones as they see fit to keep ‘unemployment’ to ostrich-acceptable 5-8%) unemployment figures of 25%+, and the rise of a few ‘demagogues’ (since liberals don’t care).
Walt Mondale was the last Presidential candidate to forthrightly say he would raise income taxes. Nobody remembers him but nobody has forgotten what happened.
True, James, the GOP has outfoxed and outspent the dems in the propaganda department, to the point all taxes are bad, all government is bad, health care is bad, and what’s needed is one trillion in appropriations cut in a single fiscal year.
This is the stuff of the lunatic asylum, but consider the source, and the target audience.
As I have noted before, no one knows what the real cost of health care is because no one has the data. Fraud is rampant. Enron was just the warm up to for-profit health insurance:
http://www.pharmalot.com/2012/07/biggest-deal-ever-glaxo-pays-3b-for-bad-behavior/
“True, James, the GOP has outfoxed and outspent the dems in the propaganda department”
Yep, and it will be the death of us.
The little guy vs. the big guy has been a chess match probably played since man spoke the first language. As of the New Deal and the end of WWII the little guys were starting to win, but the big guys have regrouped and reanalyzed the board and have a winning strategy – they will propagandize us until we’ve gone silly. Moreover half the time we can’t even tell it’s happening to us – it’s so integrated into modern life (eg: “fair and balanced journalism”). That in my opinion is “What’s the Matter With Kansas,” we’ve been programmed into self-destruction.
There’s this optimistic human belief that we’ll figure it out in the end and it’ll all work out, but I’m not so sure the game isn’t up. The future of the planet itself is ticking and at some point it will be an endgame that goes far beyond liberal vs. conservative.
Ahh, the old they can remain solvent longer than you can remain sane defense. I like it.
Democrats have dramatically overpromised benefits to win votes. Republicans are the ones saying “me too” to stay in power. The money (resources) is going to run out. Then what?
What sort of taxes are going to fill in the hole that has been created? Things are going to get ugly.
Under Standard Accounting Rules
05/24/2012 – USA Today
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[edited] The deficit was $5 trillion last year under standard accounting rules. The official number was $1.3 trillion. Liabilities for Social Security, Medicare and other retirement programs rose by $3.7 trillion in 2011, but the amount was not registered on the government’s books.
• The government would need $22.2 trillion today, set aside and earning interest, to cover benefits promised to current workers and retirees beyond what taxes will cover. That’s $9.5 trillion more than was needed in 2004.
• Deficits from 2004 to 2011 would be six times the official total of $5.6 trillion reported, under a standard accounting.
• Federal debt and retiree commitments equal $561,254 per household. By contrast, an average household owes a combined $116,057 for mortgages, car loans and other
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Tax WALL STREET on financial transactions, a sales tax, and you’ll see remarkable improvement in federal balance sheets, and maybe fewer gaming casino operations in play.
I have long been puzzled by the change in the political parties. Here is my best shot at what seems to be happening.
On June 6, 2012, The Pew Research Center for the People & Press released an amazing document. It is called Trends in American Values: 1987-2012 – Partisan Polarization Surges in Bush, Obama Years. I urge you to go to their website and download the entire 168 pages.
The Pew Center, and its director, Andrew Kohut, are absolute professionals. They absolutely “call ’em as they seem ’em”. Over the years, I have been greatly impressed with their work.
Anyway, I have become increasingly worried about the inability of Congress and the President to get the nation’s business done. Why they should so completely not be able to get along, is the great puzzle. My initial guess was Obama’s race. While that may still be a factor, the Pew study paints a more nuanced picture. They have asked the same questions of a sample of registered voters for twenty-five years and this report summarizes the results of all those surveys. And the Appendix shows the complete detailed results.
This is my take on what has happened over those twenty-five years. More and more voters have become disillusioned with their party and have become independents. (That is my case.) Only 24% of registered voters now self identify as Republicans and only 32% identify as Democrats. But 38% now identify as Independents.
As best as I can discern from the data, the increase in Independents has come from white men, Millennials (born 1981-1994) and Gen Xers (born 1965-1980).
Since Independents are “moderate” in their political attitudes, each party is left with only an increasingly strident minority who control the party apparatus, and Congress, of late. The problem for Independents is that except for Bernie Sanders and Joe Lieberman, there are no Independents in Congress. The Republicans and Democrats actually in Congress represent these small, declining factions of the respective parties.
It also seems to me from reading the data (something I have considerable experience doing), that there are just two main issues dividing the remaining Republicans and Democrats.
1) The size of government, which actually means is the government effective in what it does?
2) Should there be a safety net for the less fortunate among us, which actually means is the government supporting slackers?
These are just my conclusions so I strongly urge you to draw your own conclusions. It may be the single most important issue of the day.
And, in case you don’t think Pew can measure anything, look at the change in attitudes toward inter-racial dating.
The US cannot wait 40 years to get their taxes at a point to balance the budget. Even if they cut the Defense budget in half, the US cannot balance its budget without both huge increases in sin taxes (beer, liquor, cigarettes and gas), income taxes and corporate taxes. They may also need a wealth tax as well. See “The Price of Civilization” by Jeffery Sachs http://www.amazon.ca/s/ref=nb_sb_ss_i_7_9?url=search-alias%3Daps&field-keywords=the+price+of+civilization&sprefix=the+price%2Caps%2C200
Two keynesian parties in power is a disaster. When the ponzi collapses, the USA, and therefore the world, enters a Depression. Reagan tripled national debt, Bush doubled it, Obama is gonna double it. tripling on doubling on doubling, a true exponential disaster.
Here’s an argument for at least raising the capital gains tax. From 1917 – 2012 http://www.ctj.org/pdf/regcg.pdf there were two periods of time with rates at or below 15%. In both cases, there was a 7 year run up that lead to a major economic crisis.
1917 – 1921: 67 – 73%
1922 – 1934 12% — Great Depression 1929
1934 – 2002 20-30%
2003 – today 15% — Great Recession 2010
To John Cardillo,
So, is that universal accross time and countries? Does a lower capital gain rate always create a major economic crisis?
Economic “crises” happen all the time. How do you know that low cap gain rates caused them? It would be easy to find other “causes” which happened to preceed crises. I suggest that higher spending preceeded every crisis, if only because spending increases in good times, up until the crisis.
What is the mechanism that would explain your statistics? Lower cap gain rates allow people to keep more of their investment returns. How does this cause the next crisis?
The most important challenge with taxes is not about raising or lowering them, but making them legitimate again… here for instance is a sketch of my tax paradise http://perkurowski.blogspot.com/2012/03/my-tax-paradise.html
@Per: As this paradise is one in which only living humans are taxed, for the purposes of income taxation, therefore, would you change the legal definition of corporation? To what extent does taxing at the personal level ignore the synergistic effects of action-en-masse? If you intend to reward personal initiative and thereby emphasize the collective effects of small entrepreneurs, would taxing strictly at the personal level actually achieve this?
@Oregano… this is a scenario where dividends are of course taxed, and there are no tax savings for corporate spending which usually translated into a lot of waste. I cannot see why small entrepreneurs would be specially affected. (There is of course a need for some basic rulings, such like that loans to shareholders or political contributions are to be considered dividends). By the way the Scandinavian tax system is based somewhat along these lines… low corporate taxes and higher personal taxes for almost everyone…. everyone chips in.
@Per. OK, good start. One of the problems of strictly personal taxation is that all personal income flows have to be included and equally weighted to avoid offshoring games. I’m not convinced, though, that eliminating all corporate taxation would be as benign as you would suggest, however, and this concern engenders my question about whether such a tax regime is sufficiently linearizing to control overconcentrations of economic power.
@Oregano Offshoring games in taxes are very often the direct result of a lack of legitimacy of the tax system… and legitimacy, not only in taxes being well paid but also in taxes being well used, must be the number one goal… and for that transparency and ease of understanding is a must.
To Andrew,
Though correlation does not imply cause and effect, I can’t help but wonder if the two biggest economic crisis in American history could have been avoided by not lowering the capitol gains tax . I have a background in engineering, not economics. From my perspective, the economy is behaving like a system that is plagued by positive feedback. Its like putting a microphone in front of a speaker. Positive feedback drives systems to there physical limits and in some cases self destruction. The only way to bring a system under control is to introduce negative feedback.
Capital gains taxes represent a form of negative feedback. By lowering capital gains taxes, investors seek out assets that are appreciating instead of investments in the production of real goods and services that are returning profit. Therefore, I conclude that tax policy is a big factor in driving the masses to chase asset bubbles instead of the production of real goods and services.
To John Cardillo,
Investments produce an average return adjusted for risk. A higher capital gains tax causes some people to invest less for any given risk. By lowering investment, projects are limited and employment goes down or is less well paid. It seems to me that a higher CG tax limits all types of development. I don’t see the feedback component here which is supposed to cause bubbles. More investment yields more production and profit. The expansion of those things is good.
Possibly you think that high investment returns created the housing bubble. But, in this case, the government intervened in housing to create increasingly easy credit. It spread the idea that housing prices would never go down. It created more money to push up asset values.
The prior market in housing for 40 years had prices which rose in step with inflation. That would be about right for a long-lived, replaceable asset. The government created the expectation that housing prices would increase faster than inflation (that is, be a real investment) by manipulating money, credit, and expectations. Government is the feedback mechanism which broke the housing market.
We Guarantee It – The Government Caused the Economic Crisis
To Andrew,
Interesting discussion and I must acknowledge that there are many variables to be considered. I’m just a bit surprised that that the role of capital gains taxes is virtually never mentioned. Your concern that it may ttemper investment is the point I’m trying to make. If capital gains taxes causes certain types of investment to cool down, then it can be used as a policy tool just like interest rates. I would never suggest raising the tax to the point of snuffing out investment, but it could be used cool down the type of investing that often leads to bubbles and bring the system under control. The housing bubble is actually a good example. Its one thing to build houses to fulfill the needs of the population but its quite another thing to buy a house you don’t need because you think you can flip it for more later on. That kind of risk taking would be tempered by a higher capital gains tax. On the other hand, shouldn’t investments that promise to yield production and profits be less affected by the tax. I wonder what investment would look like if tax policy was reversed such that profits were taxed less than capital gains. Wouldn’t there be more investment focused on real production rather than hyped up ponzi schemes.
The democratic party has shapeshifted into the nazi – I mean gop lite party – pandering to this or that oligarch, betraying the people who elected them, cowardly backing down to every conflict, and working against the people’s best interest – while posing on TV as the workingmans representative.
The gop hates the government – unless it’s oppressing the people by perpetuating a fascist police state, or engaging in warsofchoice on dubious grounds for profit, or funding the gargantuan private military, private intelligence, private prison industrial complexes, – or bestowing billions in taxpayer funded grant to predatorclass agra, pharma, defense, intelligence, and finance oligarchs. Then the government is doing godzwerk, and we need trillions to support the same twisted government. Hypocrites!!!
Education, infrastructure investment, support for those less fortunate, future technology investment – how dare the government work towards these ends. Better to funnel trillions of taxpayer dollars into the off shoreaccounts of thieving marauding predatorclass oligarchs, then to work in the people’s best interests.
The predatorclass must pay their fair share in taxes. If not we inhabit a kleptocracy. It is the moral prerogative of every civilized society to support and advance those less fortunate. History proves this point. Every society in the bloody history of the earth that abandons or perverts this truth is doomed to violent upheaval and certain collapse. And for you ruthless fascists in the mix – the only freeloaders here are the predatorclass den of vipers and thieves in the oligarch obscounding trillions of dollars of government largess, grants, and favoritism. The rest of us just want to work, feed our kids, and keep a roof over our heads.
Deny our inalienable rights at your peril.
There will be a reckoning and a balancing – and there will be blood.
@John Cardillo “From my perspective, the economy is behaving like a system that is plagued by positive feedback. Its like putting a microphone in front of a speaker.”
Absolutely! With capital requirements for banks that are lower for what is perceived as not risky than for what is perceived as risky you are discriminating in favor of what is already being treated favorably by the bankers, e.g. being lent the umbrella because the sun shines, and against those already disfavored by the bankers, e.g. asked to return the umbrella because it rains.
And that is why, if changes are not made, all our banks are going to end up gasping for oxygen and capital in the last perceived safe haven… like US Treasury or Bundesbank.
@Andrew M Garland, “…Possibly you think that high investment returns created the housing bubble. But, in this case, the government intervened in housing to create increasingly easy credit. It spread the idea that housing prices would never go down. It created more money to push up asset values….”
If you want to blame government for intervening in the housing market, start with The Homestead Act and follow that bouncing ball to now.
Arguing about who has the god-given right to EXPLOIT the “housing bubble” weakness in human nature – the desire for a home in which to raise a family and a stable, sustainable, CIVILIZED community (democracy) free from predators – is really just floundering around the intellectual chaos caused by not having a mission for the role of “rule of law”, AKA “government”.
Our corporate citizens will ensure that government always represents the elite and their moneyed interests first and foremost. The political process is mere ‘theatrics’.
Annie:
The government DID those things. Yes, it was a continuation of past bad policy. Yes, appealing to the desire to own a home. I say no one and no government has the right to “EXPLOIT the housing bubble weakness in human nature “.
What do you think? Was the housing bubble (1) a one in a million piece of bad luck, or (2) was it the predictable result of government manipulation of the housing market? I say 2.
— —
Anonymous of July 4, 2012 at 12:37 pm,
Corporations are a productive invention. They allow people to come together to do things they couldn’t do individually, and without risking their entire, personal assets. Corporations express the desires of many people.
If you don’t like the influence that rich citizens and rich corporations have on government, it is destructive to remove corporate and individual freedom. Why not blame the politicians and the government for using their power against the benefit of the general population.
Yes, politicians are routinely bribed. But, you can’t bribe an honest man. If we can’t find honest men to run the government, maybe we should limit the power of government to decide who gets what.
If corporations did not pay taxes… these would not have the excuse for having representation!
@Andrew M Garland, “Corporations are a productive invention. They allow people to come together to do things they couldn’t do individually, and without risking their entire, personal assets. Corporations express the desires of many people.”
The biggest USA corporations are NOT providing “desires”, they are providing life-maintenance SERVICES for the human being – food, shelter, clothing, medicine, energy, transportation, protection against predators. Corporations are “inventions” only in the sense that they are the most efficient at providing scale. Example, I created a work of art as an individual with my hands and a few tools at the ceramic studio. It happened to be the mold with a pattern carved into it of snowflakes. When the order from an admirer came in for 900 tiles, I had to do the math to scale it up (raw materials) and find skilled workers. Basically I became a corp with that DESIRE for 900 work of art tiles to go into a single-family residence. But as a corp, I did not turn my workers into mercenaries who would rough up anyone else who tried to make another work of art to strike the fancy (desire) of someone else who had a WEAKNESS for beauty to be present in their shelter.
YOUR version of a corporation no longer serves the human capacity for progress and invention. It’s a standardization of mediocrity that is germaine to feeding the VULTURE capitalist. And it is hell bent on GLOBAL slave labor. Which means a DESIRED GOVERNMENT is rising against your corporation without your permission or the corporations’s permission.
Slamming the Middle Class’s financial future to be un-competitive for the next 1000 years against the insane and UNEARNED amassment of stolen wealth garnished, through LEVERAGE of labor’s savings, by global war lords, slave lords and drug lords is nothing short of a declaration of war against HUMANITY. There’s no psychobabble or religiosity for them to hide behind anymore, either. There’s just the droning noise of 24/7 propaganda that only the drugged and the depraved still listen to as “fact”.
Vote for Annie :-))
@Per: “if corporations did not pay taxes, they would have no excuse for [demanding] representation”. Touche! Fair point…frightening, but a fair point. Now if they didn’t pay fees, well, I’m not so sure that’s a good thing…
@Oregano – don’t have the time right now to find the list on the internet, but there are corps that did not pay taxes. And what do you call TBTF bailouts?
How about a pain in the neck, for starters. : > )
@Annie – zero taxation as the result of games played and decisions made to reduce those corporate taxes to zero vs. a system of progressive personal taxation that tries to eliminate such tortured, nonproductive business activity is Per’s point. Taken by itself, that sounds appealing, but Per’s idea relies on the presumption that there is a level of personal taxation that will be accepted as fair and meaningful by the taxed; in essence, that the taxed agree that they should be taxed for the common good if the means by which that common good are served are fairly and transparently managed. I can’t see that altruistic state existing for any length of time.
Markets are not inherently ethical choicemakers. They can exist in any political and social environment. The society in which the market exists must provide its ethical framework. TBTF bailouts are an effective negative tax rate on a subset of the economy, yes, and therefore zero tax rates on corporations already exist, but via gaming and error rather than societal intent.
Per’s idea is thought provoking, intended to stimulate thought about how we would design an taxation system that efficiently promotes societally good business decisions. But as he says, it is a paradise. And I suspect one populated by some distinctly superhuman beings.
There´s nothing as effective against tax havens as tax heavens
@Oregano – thank you for the explanation (no sarcasm).
With a fiat monetary system and fractional reserve banking, there is no way to levy a tax that will end up doing anything other than pay interest. Money is issued as debt. As soon as you have money, you just have debt with interest that you have to pay by taking something from someone else – labor, time, health, physical life-maintenance resources like water, clean air, land that produces food, etc. What am I missing?
Allow dividend tax cut to expire. Return all rates to Clinton era rates, but exclude the first $30,000 of income from taxation. Big tax cut focused squarely on the lower middle class. Raises revenue. Restores progressivity. Make it the Obama tax cut, not the Bush tax cut.
Outstanding suggestion Guest.
If a knucklehead like me could come up with something like this, why didn’t Obama and the Democrats do it when they had the power to do something about it in 2009-2010? Well that would not have been bipartisan! Why are the Democrats so obsessed with bipartisanship when the Republicans clearly are not?
Why WERE the Democrats so obsessed with bipartisanship. They’re not so much now.
If you are true, and certified, Know Nothing, which so many politicians are, you can’t come up with anything like that. Maybe it was a perceived power, and not the real thing in 09-010.