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Tuesday, November 20. 2012
Almost a year ago, I commented on a tax 'solution' which I think could work here in the U.S.
Here we are, post-election, and what are we hearing from Republicans? Astonishingly little pushback, almost no effort to 'obstruct' (not that were ever obstructionist, in my opinion), and a generally held agreement that taxes have to rise because that's what the election was all about.
I doubt the commentary would be vastly different if Romney had won, but the focus on tax increases versus spending cuts would probably be significantly altered. I also don't think that's what the election was all about, either. But that's the meme.
Can the Tobin Tax rise from the dead?
Still, where do we go from here? Every day, we hear that "something has to be done before we fall off the fiscal cliff."
I say the "fiscal cliff" is nonsense, and several people who I admire, and some I have lost faith in, agree. The reason it is a cliff is purely political. In economic terms, it may well be the first step to being the cure to what ails us. Not the best cure, but a cure, nonetheless. It's a modestly political event forcing political maneuvering. Modestly political because the event isn't biased - it was agreed to as a non-partisan kick-the-can-down-the-road solution. Now the politicians who agreed to it are scared of it because nobody benefits directly and nobody can lay claim to its results or consequences.
My solution won't benefit any political party directly, either. What it will do is soothe many political hacks, and open the door to a word I feel is overused and not well understood by those who vote. Compromise.
What does Obama want?Obama has said the only option is to make the very wealthy pay more. I suppose, if you consider yourself morally superior, this is a logical stance. The very wealthy (which Obama has said is $250,000 a year – a level I have a hard time agreeing with), however, have been paying progressively more of their income to Federal Tax over the years. From 1999 through 2009, the top 1% saw its rate move up and down each year, with up being the main direction. The top 50% has seen its overall share rising consistently over the same period. We have fewer people paying more than ever before.
Furthermore, if you live in a major urban area, where most people who make $250,000 or more, then you'd know $250,000 in salary isn't 'very wealthy'. Very well off, yes, but not very wealthy when you consider cost of living. You're best bet is to set it at $300,000 a year and above, which would make it seem a bit more honest but not raise as much tax income.
Not that this matters. Taxing people who earn $250,000 or more in salary isn't going to raise revenue in the amounts Obama wants. All it will do is soothe class warriors and earn Obama some political credibility. The real 'very wealthy' make their money from investments and capital gains. If nothing else, Romney's tax returns prove this (as do Obama's).
My first reaction to solving our deficit issue is to cut spending back to the current tax revenue levels. This is logical and reasonable, since the issue we are really faced with is too much spending, not too little in taxed income.
But my stance is considered crazy by some who feel they are morally justified in demanding people pay for others, that government is the font of all that is good. I MUST COMPROMISE.
Fine. Since Obama won, and compromise is an overused word of the day, I will seek to make concessions in a fashion which is win-win for all involved.
My new solution is really my old solution but updated a bit to make it more appealing to both sides. It still won't get voted on, but it's going to solve some of the issues both Republicans and Democrats face.
1. Cut $900 billion in spending. This eliminates the impact of "stimulus" carryover in the budget, plus the deleterious effects of TARP and all the other bailouts.
2. Limit spending increases to 3% a year across the board for the next 5 years.
3. Do a zero-based budgeting approach, rather than the current flat increase approach. Make people explain why they want to spend, rather than just spending for spending's sake.
4. Institute a Tobin Tax on all financial transactions, payable by buyer and seller, of .02% (.0002) per transaction. This will raise more than $1.2 TRILLION annually from the NYSE alone. If you factor in foreign exchanges, commodities exchanges and a host of other exchanges which exist, you could cut it to .01% (.0001) and still raise about $1.5 TRILLION!! Remember, it's only .01-.02%, so it's not going to hurt investing. Furthermore, it's taxing the source of the recent financial meltdown. Finally, it's taxing the group which directly benefits from the Fed's insane QE Infinity program to keep ZIRP in place forever and ever. It's a justified tax, in many ways.
5. Cut income taxes by 1% point on all incomes below $250,000, do not raise taxes on any incomes or capital gains for 5 years. I doubt anyone would argue against this.
Ultimately, what is the benefit of this solution? Republicans get spending concessions (somehow...that's the political battle that should be fought, where and how to cut). They also get guaranteed limitations on growth of both income taxes and spending.
Obama wins the 'tax the very wealthy' argument he's seeking, the Republicans and Democrats both engage spending cuts they know they must have, the Republicans can get a tax cut, AND say they didn't raise taxes on the average person (which Democrats would enjoy, too), and the people get a balanced budget.
I know this will never fly because nobody 'wins'. It's also not what I'd like to see. I'm just trying to take a somewhat realistic view on how some of these issues can be overcome and not have it seem like one side wins an argument that isn't worth winning or losing.
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The fiscal cliff is quite real and we have already fallen off. The problem we have today is our debt AND our inability to set a federal budget that equals our revenues. There is a point where the totality of the debt and the debt service can no longer be sustained and we passed that in 2009 or 2010 and since then it got worse. This will/has killed us. A crash is inevitable and it could be worse then the great depression was. The only question is when will the printing or borrowing fail to push off the inevitable.
As far as taxes are concerned it is important to understand that Democrats want taxes in the same way teenagers want sex (and in many cases for the same reason). AGW, fiscal cliff, The Great Society, you name it and the solution in every Democrats mind is taxes. Just as the solution they have to get elected is spending and this is why they are called the "tax, tax, tax, and spend, spend, spend party. They DO NOT want higher taxes so they can fix the fiscal cliff or anything else for that matter. They want higher taxes so they can spend more.
Taxes: There is a limit on how much you can tax a society/economy before it begins to have serious negative results and diminishing returns. Various people have defined this but pretty much come up with the same answer which is about 17% of GDP. More then that and you start tanking the economy and return less in revenue. Less then that and the peasants enjoy life too much and without a crisis it's hard to pass repressive legislation. So 17% of GDP is about the limit. So we can argue about the type of tax or who gets taxed but unless you are stupid or went to a Liberal Arts College you recognize this intrinsic limit.
The thing that has brought us to the precipice is spending. Governments at all levels use spending to buy votes and pay off special interest groups. Until and unless we get spending under control the underlying problem will continue to destroy our economy and bring devastating depressions and recessions down on our citizens. We are NOT under taxed the problem is our leaders over spend.
I was reading a econ blog a week or two ago that said essentially, "If you think that the stimulus cured the last recession, then not going over the fiscal cliff will cure the next one." Or alternatively government fixes don't really do much in the short run except mess with everybody's attitude. As "Gonewith" says above the long term looks horrendous but when that comes due is impossible to predict. I believe in economics more that I believe in government but what is undoubtedly true is math.
I agree that a)we have gone over the cliff and b)spending is the problem.
However, be realistic for a moment. The Democrats are, more or less, in control and the Republicans have a lousy message (which is primarily why I left the party years ago, though I'd never become a Democrat).
We have a situation where the press is ignorant AND antagonistic toward the GOP. They aren't interested in your logic. As I pointed out in the article, the real answer is to let the 'fiscal cliff' happen - or more importantly just cut spending.
Neither of these are likely scenarios.
What do you propose as an alternative that could actually occur? This was the basis of my post. You can see that the taxes I propose are both modest (seriously, do you think Wall Street is going to shut down over a .02% tax?), and give the average person an improved tax situation, while calling for cuts AND limiting growth.
This COULD HAPPEN. If politicians were even just a little bit honest, fair, and forthright. Since they are not, and since this is more about class warfare and political maneuvering, then nothing even remotely logical is going to occur.
Economic outcomes are usually easy to predict, if you understand the primary drivers and the information available is not being manipulated in some fashion. Sadly, that's rarely the case anymore, as the last few unemployment reports show. The tough part about the prediction process in economics isn't the outcome - but the timing. You can fool people and you can fool yourself for a very, very long time. But the bills always come due regardless of how long you convince the collector that it's not worth collecting.
Keynesians believe you can fool the collector forever. In Keynes' story of the tailor, he paints a picture of unencumbered and never ending greed, whereby a man buys a suit and promises to pay double for it in a year. Every year, the tailor returns, and the man promises to pay double in another year. In this fashion, the man tells his children, you never have to pay a dime for the things you purchase.
The story was both anti-Semitic (tailors tended to be Jewish in Keynes' time) and untrue. You can get away with that nonsense for only so long. Every nation which has attempted what we are doing has failed to accomplish it. We will not be smarter, or different.
My approach, by utilizing a Tobin Tax, is to go after the group(s) who benefit most from the Fed's largesse. It's a reformed version of Chartalism, a theory of money that is terribly wrong, but it could help put the brakes on the issues we face.
Could we fix it? Is it possible? Could we at least minimize the amount of time we will have to accept austerity before we can return to a more or less normal economy? The answer to these questions is yes. Will we? No! It is too hard, human nature prefers the easy choice. The leaders will tell us that there is another way; raise taxes on the rich (which is dog whistle for raise taxes on the middle class), cut defense, etc. But it isn't true.
So given that we will not do what we should to fix this mess what options are left? We can crash; crash now - crash later. Crash and go through hell for a few years (6-10) and slowly pull ourselves out of the quagmire. Crash now and it may take six years, crash later and it may take ten years. If we had crashed in 2008 we would be in a Reagan style recovery today because the debt was so much smaller and the trillion$ had not yet been printed to throw away on so-called bailouts. But crash we must.
Is there any feasable amount of tax increase that could "fix" us? No. Not the Tobin tax, not ending the Bush tax cuts, not the new and enormous taxes hidden in Obama care and not even the huge tax increases that the Republicans will agree with when they "compromise". Our leaders are spendthrifts and giving them money is like giving a heroin addict heroin.
Keynes was wrong. We proved that in the 1930's but afterwards the message was distorted by the left and the media and now FDR is considered one of the greatest presidents right along with jefferson and Lincoln. But he was a fool and prolonged the depression with the same policies that Obama will prolong this depression. If it weren't for WW II we may have never survived FDR and his Socialist/communist cabinet. Interestingly Obama has a even greater Socialist/communist cabinet and something like 32 unconstitutional socialist Czars. The coincidence is too scary to ponder. If we do survive this as a country I sincerely hope that this time we don't allow the media and the left to rewrite history and make it appear Keynesian economics saved us.
I will propose one radical "fix" fully knowing ahead of time it is radical and will no doubt result in everything from simple disagreement to name calling:
1. Print (I know we don't actually "print" this kind of money we create it out of thin air electronically) as many trillion dollars as required to buy all of our national debt not already owne by our government then declare bankruptcy. Best done over a long weekend followed by a long bank holiday. This way the Chinese and others who own our debt are paid off and have no recourse.
2. Eliminate 90% of the federal government and 90% of the federal civilian employees.
3. End federal welfare, all 2400 programs. Replace it with "workfare" to be run by the states, counties and cities. This would be simply that if you need help you are offered work at minimum wage, no more then 8 hours a day and 5 days a week. You pay SS and other appropriate taxes. Thats it. No other assistance, period. If you still need help ask a church, your parents, friends, who ever.
4. Rewrite the entire income tax code no more then two pages. Tax only personal income.
5. End any borrowing of money by the federal government and require them to live within their budget.
6. Take SS out of the lawmakers hands and require it to be administered using generally accepted accounting principles and that they cannot pay out more then they take in.
There would be more but I don't want to bore you. The result of all this would be a crash but followed by a recovery. How long? Months maybe. Because with lower taxes and the bigger crash no longer hanging over their head the American people would get to work. Finally we could unleash this huge pent up desire by the productive to throw off the yoke of the government and the 100 million hangers-on and we could go to work. I would also advise the states and cities to also streamline their taxes and regulations as well.
Enjoyed your thoughtful post Bulldog.
1) You really don't think the stock trading business would leave the USA over 1.2 trillion/year? Wow.
Somebody is going to miss that kind of money.
2) The problem I have with new taxes like this is that a .02% tax would likely just be for openers. How long before it comes .2% or even 2%?
I see your solution as, at best, a 2-3 year fix. Runaway spending for entitlements would soon have us back in the position we are now.
I just don't see how this ends well and I don't understand how sucking additional trillions from the private sector helps.
As long as Congress can spend limitless amounts of money with no personal repercussions for doing so, they will continue to spend.
The math doesn't lie. This will not end well, and there is nothing we can do about it. Greece, Spain, Italy, France and California are not changing course. Why will we be any different?
I think the issue is a difficult one - and it's a question of whether we're going to ignore everything that's going on and stick to our guns and make ourselves (us being moderate Americans, Republicans and Libertarians seeking to shrink government) look bad or take the offensive.
The meme, currently, is that Obama's victory and the Democrats' gains are a clear sign that we have to raise taxes. Even re-elected Republicans are saying this.
I disagree. But it's a harsh and unwelcome reality. I can ignore it, but then I'm being an ideologue.
As I stated twice, I don't like this solution. I'd prefer to either just cut spending OR let the fiscal cliff be hit. This would be both intelligent and bring a harsh sense of reality to voters.
As GWTW points out, we will have to pay for all this at some point. Using the solutions I'd prefer would speed up that payment, but in doing so the Republicans and those supporting a smaller government would lose support and likely be in the wilderness for years to come. So what options are left?
The solution I proposed lets Republicans take the offensive, and on territory the Democrats think they know well (but do not) - taxing the wealthy.
No, Wall Street won't miss $1.2 trillion. Because you've focused on the larger total rather than how it will be collected. At the rate I proposed, Wall Street will be able to pass on a portion of this total to its investors, who won't really mind paying an extra $200 on a $1,000,000 transaction. In reality, it'd be less than $200 because firms can't pass on the full cost, but either way, do you think large investors would mind this?
More importantly, it would impact High Frequency Trading, which is rotting Wall Street from the inside. This would catch the firms' attention, but they are intelligent people - they figured out how to create HFT and frontrunning so they can steal pennies. They will deal with a tax like this quite well.
Finally, they are making billions on Fed manipulation of interest rates. While this tax is a crude form of Chartalism, it's 'fair' insofar as it's really just putting back in the Treasury money that was printed to cover deficits (in a roundabout way, doing what GWTW proposed in just printing money to cover existing debts - which is terribly inflationary, but is probably what is going to happen anyway).
I agree - it's a short term fix, but it's a fix. And if it's handled properly from a political standpoint, the Republicans can still a very big win from Obama and shift the discussion back on to the important turf they need to have it on, while delaying the inevitable payment until we have a chance to do what is truly correct.
In the meantime, it can give taxpayers a break on their taxes, which would win Republicans a huge debt from voters - something they desperately need to win if they ever hope to regain the White House.
After all, I don't agree with Romney's statement that Obama bought his victory with handouts, but he's not far off. Republicans need to 'buy' some votes somehow - and they should buy them from the people that matter, the workers and wage earners. Time to make it look like they are cutting Wall Street loose.
This won't 'cut Wall Street loose', but it will sure look like it.
So my short response is I agree with you, but give me a political solution which will allow the meme to shift from where it is today. I think mine is workable, even if it will never happen.