Why government needs to be able to turn the wrench both ways

[rubato]

And an illustration of how grotesquely unfit to govern anyone is who says otherwise.


http://economistsview.typepad.com/econo ... ction.html
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The Real Trust Fund Fiction

Kevin Drum explains that the surplus in the Social Security Trust fund allowed taxes on the wealthy to be cut, and that it's only fair that taxes on the wealthy should go back up to repay the money in the Trust Fund that was used to finance lower taxes. If it's not paid back, then it is, plainly and simply, a raid by the wealthy (through tax cuts) on the funds working class households are relying upon, and are counting on -- they held their end of the bargain and paid more into the system that it needed for decades -- for their retirements:

No, the Social Security Trust Fund Isn't a Fiction, by Kevin Drum: Charles Krauthammer is upset that Dick Durbin says Social Security is off the table in the fiscal cliff negotiations because it doesn't add to the deficit...

What Krauthammer means is that as Social Security draws down its trust fund, it sells bonds back to the Treasury. The money it gets for those bonds comes from the general fund, which means that it does indeed have an effect on the deficit. That much is true. But the idea that the trust fund is a "fiction" is absolutely wrong. ...

Starting in 1983, the payroll tax was deliberately set higher than it needed to be to cover payments to retirees. For the next 30 years, this extra money was sent to the Treasury, and this windfall allowed income tax rates to be lower than they otherwise would have been. During this period, people who paid payroll taxes suffered from this arrangement, while people who paid income taxes benefited.

Now things have turned around. As the baby boomers have started to retire, payroll taxes are less than they need to be to cover payments to retirees. To make up this shortfall, the Treasury is paying back the money it got over the past 30 years, and this means that income taxes need to be higher than they otherwise would be. For the next few decades, people who pay payroll taxes will benefit from this arrangement, while people who pay income taxes will suffer.

If payroll taxpayers and income taxpayers were the same people, none of this would matter. The trust fund really would be a fiction. But they aren't. Payroll taxpayers tend to be the poor and the middle class. Income taxpayers tend to be the upper middle class and the rich. ... When wealthy pundits like Krauthammer claim that the trust fund is a fiction, they're trying to renege on a deal halfway through because they don't want to pay back the loans they got.

As it happens, I think this was a dumb deal. But that doesn't matter. It's the deal we made, and the poor and the middle class kept up their end of it for 30 years. Now it's time for the rich to keep up their end of the deal. Unless you think that promises are just so much wastepaper, this is the farthest thing imaginable from fiction. It's as real as taxes.

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yrs,
rubato

[Lord Jim]

it is, plainly and simply, a raid by the wealthy (through tax cuts)

That sentiment perfectly encapsulates why I could never, ever, ever become a Democrat...

In just a few words, it illustrates the two fundamental flaws of dominant Democratic party thinking...

First, the belief (disproven, over and over) that tax cuts do absolutely nothing to stimulate economic growth and thus bring in revenues, so that one can speak meaningfully about tax cuts as representing nothing but some hypothetical "cost" to the treasury and be seen solely as nothing but a drain on government revenues.

Second, the curious ideological view that taking less of someone's money some how represents some sort of "give away" to that person. The idea that somehow money left in someone's pocket actually came out of somebody elses pocket...

Strange...

We can argue about what appropriate tax rates should be, and what programs that they ought to fund, but those two ideas are every bit as nutty and wrong headed as anything that Democrats like to mock Republicans for believing.

Believing those things is no less off base than believing the earth is only 6000 years old...

[Joe Guy]

First, the belief (disproven, over and over) that tax cuts do absolutely nothing to stimulate economic growth and thus bring in revenues, so that one can speak meaningfully about tax cuts as representing nothing but some hypothetical "cost" to the treasury and be seen solely as nothing but a drain on government revenues.

Do you believe that raising taxes on earnings of more than $250,000 is going to hurt the economy or help the economy?

[rubato]

First, the belief (disproven, over and over) that tax cuts do absolutely nothing to stimulate economic growth and thus bring in revenues, so that one can speak meaningfully about tax cuts as representing nothing but some hypothetical "cost" to the treasury and be seen solely as nothing but a drain on government revenues.

Do you believe that raising taxes on earnings of more than $250,000 is going to hurt the economy or help the economy?

Clinton proved that tax increases on the wealthy have no negative effect on the economy. Median income grew by 13% (inflation adjusted) and the deficit became a surplus.


Bush II proved that tax cuts on the wealthy have no positive effect. Median income decreased by 4% (inflation adjusted) and the surplus became a deficit.

Both Reagan and Bush II proved that tax cuts add to the deficit. (even Glen Hubbard admits that a 1$ tax cut in the long run only adds 26cents in revenue; i.e. it costs 74%)


yrs,
rubato

[Lord Jim]

Do you believe that raising taxes on earnings of more than $250,000 is going to hurt the economy or help the economy?

It will do damage, but since the proposed increases are not huge, the damage should be relatively modest. Sufficiently modest, that if in exchange we can get an agreement on serious spending reform, with the people who think that the tax increases would actually do something positive, it's probably worth the cost.

Clinton proved that tax increases on the wealthy have no negative effect on the economy. Median income grew by 13% (inflation adjusted) and the deficit became a surplus.

You know rube, a grossly misleading and intellectually dishonest statement repeated over and over again will not make it true. How many times am I going to have repost the data that shows that the vast amount of economic improvement (including real income growth) that took place during the Clinton years occurred after the tax and spending cuts achieved by agreements between Clinton and the GOP Congress? The rate of growth after his initial wrong-headed tax increase was about half of what it became after the tax cuts, (it was already growing when Clinton took office) Clinton's tax increase had a negative impact on economic growth; the rate would have been higher without it.

Both Reagan and Bush II proved that tax cuts add to the deficit.

Once again rube cherry picks a single data point, taken completely out of context, and attempts to extrapolate a conclusion from it. (Very poor form for a supposed "scientist")

Rube ignores both the conditions of the economy at the time the tax cuts were implemented, and the corresponding spending vectors. He also fails to mention the corresponding GDP growth, and the enormous increase in tax revenues. (This is most pronounced in the Reagan case.)

Alot of Dem's like to say that despite the tax cuts under Bush 43, economic growth wasn't spectacular, but this ignores both the recession that began with the burst of the "Dot Com Bubble" prior to Bush taking office, and the way in which the recession was deepened by 9/11. (Also the fact that compared to the Reagan or Kennedy tax cuts, the rate cut under Bush wasn't all that deep, so the amount of economic benefit was less.)

But despite these factors, there's no question that without those tax cuts, the recovery would have been even weaker.

[Econoline]

From the "Comments" section after the article rubato linked to:

Another thing that should be pointed out is that the long-term projected shortfall in SS is caused almost entirely because the rich have been underpaying payroll taxes. The changes in demographics were taken into account during the 1983 changes, but they failed to predict the incredible increase in income inequality. As a result of the rich getting most of the gains in income since 1983, the share of income subject to SS taxes fell from 90% to 84%. We should raise the cap to $180,000 to get it back up to 90% and then we should raise it higher to make up for all the years, the rich have already underpaid.

...and another comment in reply to the first:

We seem to like 10 year time horizons, so my proposal would be to remove the cap for one year and then over the next 9 years set the cap so it covers 99% of national wages, then 98, 97, etc. until it reaches 90% where it is maintained. So it's one tax increase followed by 9 automatic tax cuts.

I also think that as the economy recovers and the SS payroll tax is restored it should also be restored gradually and increase slightly. So raise the employee rate 1.1% per year for 2 years and raise the employer rate .1% per year for 2 years. At the end, both employee and employer rates would be 6.4%. You could then raise the rate .1% per year for the next 6 years until the rate for each is 7%. Those two relatively minor adjustments would add at least a couple of decades to the program's viability.

Excellent suggestions, IMHO.

[Econoline]

Jim: woulda coulda shoulda. And if we would have decreased the tax rate to 5% for everyone the economy would have taken off so explosively that the government would have plenty of money, and we could have paid off the national debt.

Even Reagan knew that you sometimes have to raise taxes.

[rubato]

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Greg Mankiw on the effects of tax cuts on the deficit:



I used the phrase "charlatans and cranks" in the first edition of my principles textbook to describe some of the economic advisers to Ronald Reagan, who told him that broad-based income tax cuts would have such large supply-side effects that the tax cuts would raise tax revenue. I did not find such a claim credible, based on the available evidence. I never have, and I still don't.

[...]

My other work has remained consistent with this view. In a paper on dynamic scoring, written while I was working at the White House, Matthew Weinzierl and I estimated that a broad-based income tax cut (applying to both capital and labor income) would recoup only about a quarter of the lost revenue through supply-side growth effects. For a cut in capital income taxes, the feedback is larger--about 50 percent--but still well under 100 percent. A chapter on dynamic scoring in the 2004 Economic Report of the President says about the the [sic] same thing. [Greg Mankiw, 7/2/07]
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In other words, tax cuts always increase the deficit.

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Bush-Appointed Federal Reserve Chair Bernanke: "I Don't Think That As A General Rule Tax Cuts Pay For Themselves." In his April 27, 2006, testimony before the Joint Economic Committee, Federal Reserve chairman Ben Bernanke had the following exchange:

SEN. JACK REED (D-RI): Thank you, Mr. Chairman. Thank you for your testimony today. And just in line with the question about the effect of tax cuts, the former chairman of the Council of Economic Advisors, Greg Mankiw, wrote in his macroeconomic textbook that there is no credible evidence that tax cuts pay for themselves and that an economists [sic] who makes such a claim is -- quote -- "a snake oil salesman who is trying to sell a miracle cure." Do you agree with that?

BERNANKE: I don't think that as a general rule tax cuts pay for themselves. What I have argued instead is that to the extent the tax cuts produce greater efficiency or greater growth, they will partially offset the losses in revenues. The degree to which that offset occurs depends on how well-designed the tax cut is. [Joint Economic Committee hearing, 4/27/06, emphasis added]

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Ben Bernanke says tax cuts add to the deficit.

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Bush Economic Adviser Samwick: "Tax Cuts Have Not Fueled Record Revenues." In a January 2007 blog post titled, "New Year's Plea," Andrew Samwick, former chief economist for George W. Bush's Council on Economic Advisers, wrote:

You [in the Bush administration] are smart people. You know that the tax cuts have not fueled record revenues. You know what it takes to establish causality. You know that the first order effect of cutting taxes is to lower tax revenues. We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one. [Vox Baby, 1/3/07]
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Andrew Samwick says tax cuts add to the deficit.

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EPI: Bush Tax Cuts "Added $2.6 Trillion To The Public Debt Over 2001-10." In a September 26, 2011, article, Andrew Fieldhouse of the Economic Policy Institute (EPI) wrote:

A spending-cuts-only approach is regressive in that it forces the brunt of deficit reduction on the backs of poor and working families while ignoring a prime culprit of the budget deficit: the expensive, ineffective, and unfair Bush-era tax cuts. These top-heavy tax cuts added $2.6 trillion to the public debt over 2001-10 and will add $3.8 trillion to deficits over the next decade if fully continued. [EPI, 9/26/11]
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Andrew Fieldhouse of the EPI says Bush added $2.6 trillion to the debt with stupid tax cuts and if the jackass Republicans get their way this will be $3.8 trillion of debt.

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Bartlett: Revenue Has Been Historically Low Because "Taxes Were Cut In 2001, 2002, 2003, 2004 and 2006." In a July 26, 2011, New York Times blog post, Bruce Bartlett, former policy adviser to Presidents Ronald Reagan and George H.W. Bush, wrote:

In a previous post, I noted that federal taxes as a share of gross domestic product were at their lowest level in generations. The Congressional Budget Office expects revenue to be just 14.8 percent of G.D.P. this year; the last year it was lower was 1950, when revenue amounted to 14.4 percent of G.D.P.

But revenue has been below 15 percent of G.D.P. since 2009, and the last time we had three years in a row when revenue as a share of G.D.P. was that low was 1941 to 1943.

Revenue has averaged 18 percent of G.D.P. since 1970 and a little more than that in the postwar era. At a similar stage in previous business cycles, two years past the trough, revenue was considerably higher: 18 percent of G.D.P. in 1977 after the 1973-75 recession; 17.3 percent of G.D.P. in 1984 after the 1981-82 recession, and 17.5 percent of G.D.P. in 1993 after the 1990-91 recession. Revenue was markedly lower, however, at this point after the 2001 recession and was just 16.2 percent of G.D.P. in 2003.

The reason, of course, is that taxes were cut in 2001, 2002, 2003, 2004 and 2006. [The New York Times, 7/26/11]

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Bruce Bartlett admits that the huge deficits are mostly a result of tax cuts.

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The Economist: "No Serious Economist Believes Mr Bush's Tax Cuts Will Pay For Themselves." A January 2006 Economist editorial stated:

A surprising rise in tax revenue last year has pushed this chutzpah even further. Mr Bush last week implied that the supply-side fantasy might hold after all: tax cuts do pay for themselves. "There's a mindset in Washington that says, you cut the taxes, we're going to have less money to spend," he noted contemptuously, before claiming that recent experience suggested otherwise.

Even by the standards of political boosterism, this is extraordinary. No serious economist believes Mr Bush's tax cuts will pay for themselves. A recent study from the Congressional Budget Office suggested that, after ten years, up to one-third of the cost of a 10% cut in income taxes can be recouped from higher economic growth. That fraction may be higher for cuts in taxes on capital alone. But it is nowhere near 100%. [The Economist, 1/12/06]

http://mediamatters.org/research/2012/0 ... -re/186569
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The Economist, a famously conservative publication says that tax cuts don't pay for themselves.


And many other examples.




yrs,
rubato

[rubato]

From the "Comments" section after the article rubato linked to:

Another thing that should be pointed out is that the long-term projected shortfall in SS is caused almost entirely because the rich have been underpaying payroll taxes. The changes in demographics were taken into account during the 1983 changes, but they failed to predict the incredible increase in income inequality. As a result of the rich getting most of the gains in income since 1983, the share of income subject to SS taxes fell from 90% to 84%. We should raise the cap to $180,000 to get it back up to 90% and then we should raise it higher to make up for all the years, the rich have already underpaid.

.

The next dollar you earn above the SS limit is taxed at a 6.2% lower rate* and your take-home goes up by that amount. Speaking from our experience, if you are in a partnership they can increase the 401k 'match' by an amount equal to the employers share of the SS taxes so that the net change is a 12.4% boost in income, half of which is untaxed.



yrs,
rubato

* except for the temporary recent SS tax cut.

[Econoline]

As an independent contractor, I'm considered self-employed and thus have to pay both parts (employee and employer) of the "payroll taxes"--13.3% this year, 15.3% next year--plus income tax. (If I earned the same amount from capital gains, of course, I would pay 0%--plus a lower income tax rate. Go figure. )

[dgs49]

Zero percent tax on capital gains?

To what country do you refer? Certainly not the U.S.

Any blanket statement about the effects of a tax rate increase or decrease on the budget is of necessity either false or simply stupid. It is entirely situational.

At present, we have a Democrat party that is peddling the provably-false fiction that, "...if only the Rich were paying thier fair share, then all would be copacetic." Even the people propounding this nonsense (most poignantly Our Beloved President) know that it is phony, but their continually beating this drum allows them to ignore the monstrous spending problem that is the REAL cause of our unimaginable deficits. And of course the non-Fox media lets them get away with it.

Clearly, they bought the last election with OPM, but one dare not say it aloud.

Question: I'm 62 years old, and I have been paying into the SOCIAL SECURITY TRUST FUND since at least 1965. If I die tomorrow, what happens to my proportionate share of the "Trust Fund"? Can I include it in my will? What rate of earnings can I expect?

Do tell.

[Econoline]

Zero percent tax on capital gains?

To what country do you refer? Certainly not the U.S.

We were discussing payroll taxes: I was referring to the Self-Employment Tax (analogous to employees' PLUS employers' portions of payroll taxes, i.e., Social Security plus Medicare). If I earned the same amount from capital gains as I now do from self-employment, I would pay, as I stated above, 0% (rather than 15.3%) SE Tax--plus, probably, a lower income tax rate if most or all of the gains were long-term. (Yes, this is in the United States of America. Shocking, ain't it?)

[Lord Jim]

Of course if you were earning that money from capital gains, the money (that was used to make the investment in the first place) would already have been taxed once, and the money earned would not have been made without the risk involved in the investment....

[Econoline]

Of course if you were earning that money from capital gains, the money (that was used to make the investment in the first place) would already have been taxed once

Unless, of course, the money that was used to make the investment in the first place was from an inheritance, dividends, interest, gambling, or some other form of income not subject to the Social Security tax--including previous capital gains, or wages above $110,000.

[rubato]

Very good points.

yrs,
rubato

[rubato]

"...
Any blanket statement about the effects of a tax rate increase or decrease on the budget is of necessity either false or simply stupid. It is entirely situational.
... "

Any statement about the effects of tax rates on the deficit or the economy much be grounded in the data we have generated over the past 70 years.

And the data has shown that there is no negative effect on growth from higher marginal rates on the rich.


yrs,
rubato

[rubato]

"...
Question: I'm 62 years old, and I have been paying into the SOCIAL SECURITY TRUST FUND since at least 1965. If I die tomorrow, what happens to my proportionate share of the "Trust Fund"? Can I include it in my will? What rate of earnings can I expect?

Do tell.

Your wife will receive higher benefits as your survivor.

yrs,
rubato

[dgs49]

The point is that there is no "trust fund." I plan to die jointly with my wife in a high-speed motorcycle accident. All of our SS contributions will go, pfft, along with our last breaths. Because there is no trust fund.

[MajGenl.Meade]

When are you planning on doing this, dgs? I'm thrilled with your altruism because I was a bit worried about what happens to my SS and you've done your bit to reassure me. In dgs I trust

[Econoline]

Is this a unilateral decision, Dave, or have you discussed this with the wife?

Which of you will be Thelma, and which will be Louise?