New Congressional Budget Office Numbers Once Again Show that Modest Spending Restraint Would Eliminate Red Ink
Back in 2010, I crunched the numbers from the Congressional Budget Office and reported that the budget could be balanced in just 10 years if politicians exercised a modicum of fiscal discipline and limited annual spending increases to about two percent yearly.
When CBO issued new numbers early last year, I repeated the exercise and again found that the same modest level of budgetary restraint would eliminate red ink in about 10 years.
And when CBO issued their update last summer, I did the same thing and once again confirmed that deficits would disappear in a decade if politicians didn’t let the overall budget rise by faster than two percent each year.
Well, the new CBO 10-year forecast was released this morning. I’m going to give you three guesses about what I discovered when I looked at the numbers, and the first two don’t count.
Yes, you guessed it. As the chart illustrates (click to enlarge), balancing the budget doesn’t require any tax increases. Nor does it require big spending cuts (though that would be a very good idea).
Even if we assume that the 2001 and 2003 tax cuts are made permanent, all that is needed is for politicians to put government on a modest diet so that overall spending grows by about two percent each year. In other words, make sure the budget doesn’t grow faster than inflation.
Tens of millions of households and businesses manage to meet this simple test every year. Surely it’s not asking too much to get the same minimum level of fiscal restraint from the crowd in Washington, right?
At this point, you may be asking yourself whether it’s really this simple. After all, you’ve probably heard politicians and journalists say that deficits are so big that we have no choice but to accept big tax increases and “draconian” spending cuts.
But that’s because politicians use dishonest Washington budget math. They begin each fiscal year by assuming that spending automatically will increase based on factors such as inflation, demographics, and previously legislated program changes.
This creates a “baseline,” and if they enact a budget that increases spending by less than the baseline, that increase magically becomes a cut. This is what allowed some politicians to say that last year’s Ryan budget cut spending by trillions of dollars even though spending actually would have increased by an average of 2.8 percent each year.
Needless to say, proponents of big government deliberately use dishonest budget math because it tilts the playing field in favor of bigger government and higher taxes.
There are two important caveats about these calculations.
1. We should be dramatically downsizing the federal government, not just restraining its growth. Even if he’s not your preferred presidential candidate, Ron Paul’s proposal for an immediate $1 trillion reduction in the burden of federal spending is a very good idea. Merely limiting the growth of spending is a tiny and timid step in the right direction.
2. We should be focusing on the underlying problem of excessive government, not the symptom of too much red ink. By pointing out the amount of spending restraint that would balance the budget, some people will incorrectly conclude that getting rid of deficits is the goal.
Last but not least, here is the video I narrated in 2010 showing how red ink would quickly disappear if politicians curtailed their profligacy and restrained spending growth.
Other than updating the numbers, the video is just as accurate today as it was back in 2010. And the concluding message—that there is no good argument for tax increases—also is equally relevant today.
P.S. Some people will argue that it’s impossible to restrain spending because of entitlement programs, but this set of videos shows how to reform Social Security, Medicare, and Medicaid.
P.P.S. Some people will say that the CBO baseline is unrealistic because it assumes the sequester will take place. They may be right if they’re predicting politicians are too irresponsible and profligate to accept about $100 billion of annual reductions from a $4,000 billion-plus budget, but that underscores the core message that there needs to be a cap on total spending so that the crowd in Washington isn’t allowed to turn America into Greece.
Illinois Downgrade: More Evidence that Higher Taxes Make Fiscal Problems Worse
I don’t blame Democrats for wanting to seduce Republicans into a tax-increase trap. Indeed, I completely understand why some Democrats said their top political goal was getting the GOP to surrender the no-tax-hike position.
I’m mystified, though, why some Republicans are willing to walk into such a trap. If you were playing chess against someone, and that person kept pleading with you to make a certain move, wouldn’t you be a tad bit suspicious that your opponent really wasn’t trying to help you win?
When I talk to the Republicans who are open to tax hikes, they sometimes admit that their party will suffer at the polls for agreeing to the hikes, but they say it’s the right thing to do because of all the government red ink.
I suppose that’s a noble sentiment, though I find that most GOPers who are open to tax hikes also tend to be big spenders, so I question their sincerity (with Senator Coburn being an obvious exception).
But even if we assume that all of them are genuinely motivated by a desire to control deficits and debt, shouldn’t they be asked to provide some evidence that higher taxes are an effective way of fixing the fiscal policy mess?
I’m not trying to score debating points. This is a serious question.
European nations, for instance, have been raising taxes for decades, almost always saying the higher taxes were necessary to balance budgets and control red ink. Yet that obviously hasn’t worked. Europe’s now in the middle of a fiscal crisis.
So why do some people think we should mimic the French and the Greeks?
Soak-the-Rich Taxes Create Happier Nations According to Junk Science Study
In the past 20-plus years, I’ve seen all sorts of arguments for class-warfare taxation.These include:
- President Obama says he wants higher tax rates for fairness, even if the government doesn’t collect any revenue.
- Rich leftists say they want higher taxes because they can afford to pay, but then refuse when offered a chance to cough up some cash.
- Elizabeth Warren supports higher taxes because government made it possible for rich people to succeed.
- Warren Buffett wants a big tax hike because…well, because he’s bad at math.
- Some leftists support higher taxes because they assume that rich people obtained money dishonestly.
- The New York Times wants higher taxes on the rich in order to enable higher taxes on the middle class.
- The President said higher tax rates are acceptable because sometimes “you have made enough money.”
I suppose leftists deserve credit for being adaptable. Just about anything is an excuse for soak-the-rich tax hikes. The sun is shining, raise taxes! The sky is cloudy, increase tax rates!
But if there was an award for the strangest argument in favor of higher taxes, it would probably belong to a group of academics who have concluded that “progressive” tax systems make people happier.
I’m not kidding. There’s a new study making that assertion. Here are some passages from an announcement by the Association for Psychological Science.
…a new study comparing 54 nations found that flattening the tax risks flattening social wellbeing as well. “The more progressive the tax policy is, the happier the citizens are,” says University of Virginia psychologist Shigehiro Oishi, summarizing the findings, which will be published in an upcoming issue of Psychological Science, a journal of the Association for Psychological Science. …Well-being was expressed in people’s assessments of their overall life quality, from “worst” to “best possible life,” on a scale of 1 to 10; and in whether they enjoyed positive daily experiences (such as smiling, being treated with respect, and eating good food) or suffered negative ones, including sadness, worry, and shame. …The degree of progressivity was measured by the difference between the highest and lowest tax rates, corrected for such confounding factors as family size, social security taxes paid, and tax benefits received by individuals. The results: On average, residents of the nations with the most progressive taxation evaluated their own lives as closer to “the best possible.”
The actual study isn’t available yet, but the release from APS screams junk science – especially since a study of American states found that high taxes lead to unhappiness.
But we should be skeptical of all this research. There are myriad pitfalls, including cultural differences.
But the most obvious problem is causality. Even if we assume it’s possible to make accurate cross-border comparisons of happiness, is there any reason to think that progressive tax rates are a causal factor, one way or the other? Heck, we may as well assume that crowing roosters cause the sun to appear.
Here’s one very obvious guess about what may cause the APS results. I’m guessing that people in Sweden and Denmark say they are happy. That’s not too surprising. They live in rich countries. But those countries became rich before the welfare state began and before high tax rates became the norm. So does it make sense to say they are happy because of high tax rates?
People in Mongolia and Bulgaria, by contrast, probably aren’t as happy as people in the Scandinavian nations. They live in relatively poor nations that suffered from decades of communist enslavement. In recent years, though, both nations implemented flat taxes in hopes of spurring growth and catching up to the rest of the world. But progress doesn’t happen overnight. So does it make sense to say that they are unhappy because the tax system isn’t “progressive”?
Ironically, the APS release does include the following results.
Higher government spending per se did not yield greater happiness, in spite of the well-being that was associated with satisfaction with state-funded services. In fact, there was a slight negative correlation between government spending and average happiness.
Since we do have good evidence that economic growth suffers as government expands, this conclusion makes a lot more sense.
But I’m still skeptical about happiness studies. Seems like they might suffer from the credibility issues associated with global warming research.
Actually, I retract that statement. Happiness research may be imprecise and susceptible to bias, but I doubt people in that field would ever make a claim as absurd as global warming causes AIDS. And I doubt they would try to do something as stupid as rationing toilet paper or create something as silly as a hand-cranked vibrator.
Austan Goolsbee’s Budget Math Is Wrong – More than 100 Percent of Long-Term Fiscal Challenge Is Government Spending
Austan Goolsbee, the former Chairman of President Obama’s Council of Economic Advisers, had a column in the Wall Street Journal that argues government spending isn’t too high.
That’s obviously a silly assertion, as I explain here, here, and here, but I want to focus on what he wrote about tax revenues.
Here’s the relevant passage from his column.
The true fiscal challenge is 10, 20 and 30 years down the road. An aging population and rising health-care costs mean that spending will rise again and imply a larger size of government than we have ever had but with all the growth coming from entitlements—while projected federal revenues as a percentage of GDP after the rate cuts of the 2000s will likely remain below even historic levels of 18%.
He’s right that the main problem is in the future. As I’ve noted before, America is doomed to become Greece because of rising entitlement spending.
But he’s completely wrong when he implies that the problem is because taxes will stay below the long-run average of 18 percent of economic output. Here’s a chart I posted last year showing that tax receipts will soon rise above the long-tun average – even if the 2001 and 2003 tax cuts are made permanent. And these numbers are from the left-of-center Congressional Budget Office.
It’s rather shocking that a former Chairman of the Council of Economic Advisers isn’t aware of this CBO data. Or, if he is aware of the data, it’s unseemly that he would deliberately mislead readers.
But let’s set aside any discussion of why Goolsbee made such a fatuous claim about revenue. What really matters is that this is a debate about fiscal policy and the size of government.
The folks on the left want to convince us that inadequate revenue is causing deficits, both in the short run and long run.
We can see that they’re wrong in the short run.
But what’s especially remarkable is that they are wildly wrong about the future. The long-run data from the Congressional Budget Office shows that the federal tax burden over the next 70-plus years will jump to more than 30 percent of GDP.
This CBO baseline data assumes the 2001 and 2003 tax cuts expire, so it exaggerates the increase in the future tax burden compared to current policy. But even if you correct for this assumption and reduce tax receipts by about 2-percentage points of GDP (and presumably even more than that in the long run), it’s clear that the tax burden will be far above the historical average of 18 percent of GDP.
It’s easy to understand why Goolsbee ignores this data. After all, why report on information that completely debunks the left-wing argument about the supposed need to increase the tax burden.
But this isn’t the first time Goolsbee’s been wrong about tax policy. Let’s dig into the 2010 archives and share this video, which takes apart his arguments for class-warfare tax policy.
So what’s the bottom line? Well, we know Goolsbee and other leftists are being deceptive about taxation.
But my main takeaway is that I wish the left would be honest and admit that taxes already are projected to increase. And I’d like them to level with the American people and admit that they want the tax burden to climb even faster because they want government to get even bigger.
Mitt Romney, the Value-Added Tax, and America’s European Future
My Iowa caucus predictions from yesterday were hopelessly wrong, probably because I was picking with my heart rather than my head. As I noted a couple of weeks ago, Mitt Romney’s openness to a value-added tax makes him a dangerously flawed candidate, and I hoped Iowa voters shared my concern.
In a column for today’s Wall Street Journal, I elaborated on those concerns, explaining why a VAT is bad fiscal policy. I had three main points. First, I noted that the big spenders need a VAT in order to achieve a European-sized welfare state in America.
… the left needs a VAT. It is the only realistic way to collect the huge amount of revenue that will be necessary to finance the mountainous benefits promised by our entitlement programs. Which is exactly what happened in Europe, where welfare-state policies only became feasible after VATs were adopted, beginning in the late 1960s.
Second, I explained that the left favors this giant tax on the middle class because they want more money and soak-the-rich taxes don’t generate much revenue.
First, there aren’t enough wealthy people to finance big government. According to IRS data from before the recession, when we had the most rich people with the most income, there were about 321,000 households with income greater than $1 million, and they had aggregate taxable income of about $1 trillion. That’s a lot of money, but it wouldn’t balance the budget even if the government confiscated every penny—and if it did, how much income do you suppose would be available in year two? Second, higher tax rates don’t raise as much revenue as expected. Upper-income individuals are far more likely to rely on interest, dividends and capital gains—and it is much easier to control the timing, level and composition of capital income, so as to avoid exposing it to the tax man.
Will the Last Job Creator to Leave California Please Turn Off the Lights?
I’ve written before about whether California is the Greece of America, in part because of crazy policies such as overpaid bureaucrats and expensive forms of political correctness,
And we all know that California has one of the nation’s greediest governments, imposing confiscatory tax rates on a shrinking pool of productive citizens.
So it is hardly surprising that the Golden State is falling behind, losing jobs and investment to more sensible states such as Texas.
But not everybody is learning the right lessons from California’s fiscal and economic mess.
There’s a group of crazies who want to increase the top tax rate by five percentage points, an increase of about 50 percent. And they have made Kim Kardashian the poster child for their proposed ballot initiative.
I’m relatively clueless about popular culture, but even I’m aware that there is a group of people know as the Kardashian sisters. I don’t know who they are or what they do, but I gather they are famous in sort of the same way Paris Hilton was briefly famous.
And they have cashed in on their popularity, which may not reflect well on the tastes of the American people, but it’s not my job to tell other people how to spend their money.
But not everybody share this live-and-let-live attitude, which is why the pro-tax crowd in California produced this video.
I suppose I could criticize the petty dishonesty of the proponents, since they deliberately blurred of the difference between “tax rates” and “taxes paid.”
Or I could expose their economic illiteracy by pointing out that higher tax rates would accelerate the emigration of investors, entrepreneurs, small business owners, and other rich taxpayers to zero-tax states such as Nevada.
But I won’t do those things. Instead, like the Nevada Realtors Association and Arizona Business Relocation Department, I’m going to support this ballot initiative.
Not because I overdid the rum and eggnog at Christmas, but because it’s good to have negative role models, whether they are countries like Greece, cities such as Detroit, or states like California.
So here’s my challenge to the looters and moochers of the Golden State. Don’t just boost the top tax rate by five-percentage points. That’s not nearly enough. Go for a 20 percent top tax rate. Or 25 percent. After all, think of all the special interests that could use the money more than Ms. Kardashian.
And if somebody tells you that she will move to South Beach or Las Vegas, or that the other rich people will move to Texas, Wyoming, or Tennessee, just ignore them. Remember, it’s good intentions that count.
In closing, I apologize to the dwindling crowd of productive people in California. It’s rather unfortunate that you’re part of this statist experiment. But you know what they say about eggs and omelets.
By the way, here’s some humor about the Golden State, including a joke about the bloated bureaucracy and a comparison with Texas.
Why Are American Tax Dollars Subsidizing a Paris-Based Bureaucracy so It Can Help the AFL-CIO Push Obama’s Class-Warfare Agenda?
To be blunt, I’m not a big fan of the Organization for Economic Cooperation and Development. But my animosity isn’t because OECD bureaucrats threatened to have me arrested and thrown in a Mexican jail.
Instead, I don’t like the Paris-based bureaucracy because it pushes a statist agenda of bigger government. This Center for Freedom and Prosperity study has all the gory details, revealing that OECD bureaucrats endorsed Obamacare, supported the failed stimulus, and are big advocates of a value-added tax for America.
And I am very upset that the OECD gets a giant $100 million-plus subsidy every year from American taxpayers. For all intents and purposes, we’re paying for a bunch of left-wing bureaucrats so they can recommend that the United States adopt that policies that have caused so much misery in Europe. And to add insult to injury, these socialist pencil pushers receive tax-free salaries.
And now, just when you thought things couldn’t get worse, the OECD has opened a new front in its battle against free markets. The bureaucrats from Paris have climbed into bed with the hard left at the AFL-CIO and are pushing a class-warfare agenda. Next Wednesday, the two organizations will be at the union’s headquarters for a panel on “Divided We Stand – Tackling Growing Inequality Now.”
Co-sponsoring a panel at the AFL-CIO’s offices, it should be noted, doesn’t necessarily make an organization guilty of left-wing activism and misuse of American tax dollars. But when you look at other information on the OECD’s website, it quickly becomes apparent that the Paris-based bureaucracy has launched a new project to promote class-warfare.
For instance, the OECD’s corruption-tainted Secretary-General spoke at the release of a new report on inequality and was favorable not only to higher income tax rates, but also expressed support for punitive and destructive wealth taxes.
Over the last two decades, there was a move away from highly progressive income tax rates and net wealth taxes in many countries. As top earners now have a greater capacity to pay taxes than before, some governments are re-examining their tax systems to ensure that wealthier individuals contribute their fair share of the tax burden. This aim can be achieved in several different ways. They include not only the possibility of raising marginal tax rates on the rich but also…reassessing the role of taxes on all forms of property and wealth.
And here’s some of what the OECD stated in its press release on income differences.
The OECD underlines the need for governments to review their tax systems to ensure that wealthier individuals contribute their fair share of the tax burden. This can be achieved by raising marginal tax rates on the rich.
Like Obama, the folks at the OECD like to talk about “fair share.” These passages sounds like they could have been taken from one of Obama’s hate-and-envy speeches on class warfare.
But the fact that a bunch of Europeans support Obama’s efforts to Europeanize America is not a surprise. The point of this post is that the OECD shouldn’t be using American tax dollars to promote Obama’s class-warfare agenda.
Here’s a video showing some of the other assaults against free markets by the OECD. This is why I’ve written that the $100 million-plus that American taxpayers send to Paris may be – on a per dollar basis – the most destructively wasteful part of the entire federal budget.
One last point is that the video was produced more than one year ago, which was not only before this new class-warfare campaign, but also before the OECD began promoting a global tax organization designed to undermine national sovereignty and promote higher taxes and bigger government.
In other words, the OECD is far more destructive and pernicious than you think.
And remember, all this is happening thanks to your tax dollars being sent to Paris to subsidize these anti-capitalism statists.
Supercommittee Tax Fight Is About Increasing Spending, not Reducing Deficits
Some people have asked why I’m so agitated about the possibility that Republicans may acquiesce to tax increases as part of the Supercommittee negotiations.
Rather than get into a lengthy discourse about the proper role of the federal government or an analysis of how the Bush-Obama spending binge worsened America’s fiscal situation, I think this chart from a previous post says it all.
Republicans are considering a surrender on taxes because they are afraid that a deadlock will lead to a sequester, which would mean automatic budget savings. And the sequester, according to these politicians, would “cut” the budget too severely.
But as the chart illustrates, that is utter nonsense.
There are only budget cuts if you use dishonest Washington budget math, which magically turns spending increases into spending cuts simply because the burden of government isn’t expanding even faster.
If we use honest math, we can see what this debate is really about. Should we raise taxes so that government spending can grow by more than $2 trillion over the next 10 years?
Or should we have a sequester so that the burden of federal spending climbs by “only” $2 trillion?
The fact that this is even an issue tells us a lot about whether the GOP has purged itself of the big-government virus of the Bush years.
A few Republicans say that a sellout on tax hikes is necessary to protect the defense budget from being gutted, but this post shows that defense spending will climb by about $100 billion over the next 10 years under a sequester. And that doesn’t even count all the supplemental funding bills that doubtlessly will be enacted.
In other words, anyone who says we need to raise taxes instead of taking a sequester is really saying that we need to expand the burden of government spending.
So even though Ronald Reagan and Calvin Coolidge are two of my heroes, now you know why I don’t consider myself a Republican.
Sequestration Is a Small Step in Right Direction, Not Something to Be Feared
I have sometimes wondered whether it is accurate to say that Republicans are the “Stupid Party.”
We’ll soon know the answer to that question. As part of the debt limit agreement, the politicians agreed to set up a “Supercommittee” comprised of six Republicans and six Democrats that was responsible for producing at least $1.2 trillion of supposed deficit reduction.
But the Democrats appointed a group of hardcore leftists to the Supercommittee, which means that it is virtually impossible to get the necessary seven votes for a good agreement. Indeed, the more relevant question is whether one or more of the Republicans surrenders to a big tax hike.
Fortunately, there is an alternative. The law says that there will be automatic spending reductions if the Supercommittee does not reach an agreement. The political establishment in Washington thinks that this outcome—known as sequestration—would be horrible.
They tell as that a sequester would mean “savage” and “draconian” budget cuts. The only “responsible” approach, we are told, is to go along with a tax increase.
This is hogwash. The automatic spending cuts are only “cuts” using Washington’s dishonest budget math. Here’s a chart showing how much spending will grow over the next 10 years, and the relatively tiny reduction in budgetary growth that will be caused if there is a sequester.
We’ve actually been down this path before. There was a small sequester back in the mid-1980s, shortly after the Gramm-Rudman-Hollings law was enacted. There was much wailing and gnashing of teeth, but the sequestration helped restrain the growth of spending and helped bring about a record amount of deficit reduction in 1987.
There was a similar (unsuccessful) fight in 1989. Here’s what then-Senator Bob Packwood of Oregon wrote in 1989.
…the sequester has become the focus of partisan debate . Each side accuses the other of being responsible for “deep and arbitrary” budget cuts . Some legislators say we should do whatever it takes to cancel the sequester, even if it means higher taxes. While a sequester is certainly not the ideal way to resolve this year’s budget dispute, there are reasons to believe that the fiscal discipline of a sequester is the medicine we need to cure the budget process. For all its drawbacks, a sequester is real deficit reduction . Instead of budget gimmicks, accounting tricks, phony cuts, and “revenue enhancements,” a sequester would reduce spending levels by a fixed percentage in eligible spending programs . In other words, unlike most deficit reduction packages, sequestration would actually reduce the deficit.
The only argument against a sequester, at least among conservatives, is that a sequester would impose too much of a burden on the defense budget. But I’ve already explained in this post that the defense budget will climb by about $100 billion under sequestration.
I don’t know whether Republicans are the stupid party, but I know they will be very stupid if they don’t take the sequester and declare victory.
CPAs Celebrate as Obama Proposes to Create a Turbo-Charged Alternative Minimum Tax
Wow, this is remarkable. The alternative minimum tax (AMT) is one of the most-hated features of the tax code. It is such a nightmare of complexity that even Democrats routinely have supported “patches” and “band-aids” to protect millions of additional households from getting trapped in this surreal parallel tax universe – one that requires taxpayers to calculate their taxes two different ways, with the IRS getting the maximum amount of money from the two returns. (Hong Kong, by contrast, give taxpayers the option of calculating their taxes two different ways, but they’re allowed to pay the smaller of the two amounts.)
Notwithstanding the AMT’s status as arguably the worst feature of the internal revenue code, President Obama apparently wants to double down on this horrific policy by creating a new version of this nightmarish provision.
Here are some excerpts from the Wall Street Journal‘s coverage, including a key observation that Obama’s scheme is just another version of the AMT.
The administration’s principle resembles the Alternative Minimum Tax, which was first adopted in 1969 and was intended to hit the superwealthy. The AMT has been hitting an increasing number of the middle class because it wasn’t indexed for inflation, and Congress has continually wrestled with how to get rid of it.
The WSJ article also notes that a glaring inconsistency in the White House’s rhetoric. the plan is supposed to be a “very significant” tax hike, but doubling the tax burden on millionaires would only raise $19 billion per year. In other words, the Administration’s class-warfare rhetoric is probably just cover for a tax hike that actually will hit a lot of people with far more modest incomes.
The proposal also could apply to a broader selection of taxpayers—all households with incomes of more than $1 million. Those earners are expected to pay an average of $845,000 this year, according to the nonpartisan Tax Policy Center. Assuming the households in the group of 22,000 pay that amount, even doubling their tax burden would raise just $19 billion a year at a time when deficit reduction is being measured in trillions of dollars. That doesn’t take into effect any change in taxpayer behavior prompted by a new tax regime. A senior administration official said that depending on where the minimum rate is set, the plan could be a “very significant” revenue raiser. The official wouldn’t provide details. …Some conservative economists say such a proposal could put a drag on capital markets and ignores the fact that many companies have already paid tax on the income before it is distributed to owners as dividends or capital gains.
The New York Times, to its credit, provides a fair description of the issue (including a much-needed acknowledgement that Warren Buffett may not have been honest and/or accurate), and also suggests that Obama may be proposing to replace the existing AMT with this new version (though that presumably would negate its impact as a revenue-raiser).
Mr. Obama will not specify a rate or other details, and it is unclear how much revenue his plan would raise. But his idea of a millionaires’ minimum tax will be prominent in the broad plan for long-term deficit reduction that he will outline at the White House on Monday. Mr. Obama’s proposal is certain to draw opposition from Republicans, who have staunchly opposed raising taxes on the affluent because, they say, it would discourage investment. It could also invite scrutiny from some economists who have disputed Mr. Buffett’s assertion that the megarich pay a lower tax rate over all. Mr. Buffett’s critics say many of the rich actually make more from wages than from investments. …The administration wants such a tax to replace the alternative minimum tax, which was created decades ago to make sure the richest taxpayers with plentiful deductions and credits did not avoid income taxes, but which now hits millions of Americans who are considered upper middle class.
Actually, the AMT also hits lots of middle-class families since having kids is considered a “preference” for tax purposes.
But that’s just an insult layered on top of injury. What makes Obama’s new scheme so destructive is that it would (though the White House has not explained the details) somehow classify dividends and capital gains as “preference” items – even though everyone acknowledges that such income already is double taxed!
In other words, Obama claims to be concerned about jobs, but he is proposing a big tax hike on the saving and investment that is necessary to create jobs. Amazing.
Regular readers will recognize this video about Obama’s class-warfare tax policy. But if you haven’t seen it, five reasons are presented to explain why it will backfire.
But look at the bright side. At least accountants and tax lawyers (and don’t forget bankruptcy specialists) will get more business if Obama’s plan is implemented.
Warren Buffett’s Fiscal Innumeracy
Warren Buffett’s at it again. He has a column in the New York Times complaining that he has been coddled by the tax code and that “rich” people should pay higher taxes.
My first instinct is to send Buffett the website where people can voluntarily pay extra money to the federal government. I’ve made this suggestion to guilt-ridden rich people in the past.
But I no longer give that advice. I’m worried he might actually do it. And even though Buffett is wildly misguided about fiscal policy, I know he will invest his money much more wisely than Barack Obama will spend it.
But Buffett goes beyond guilt-ridden rants in favor of higher taxes. He makes specific assertions that are inaccurate.
Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.
His numbers are flawed in two important ways.
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When Buffett receives dividends and capital gains, it is true that he pays “only” 15 percent of that money on his tax return. But dividends and capital gains are both forms of double taxation. So if he wants honest effective tax rate numbers, he needs to show the 35 percent corporate tax rate.
Moreover, as I noted in a previous post, Buffett completely ignores the impact of the death tax, which will result in the federal government seizing 45 percent of his assets. To be sure, Buffett may be engaging in clever tax planning, so it is hard to know the impact on his effective tax rate, but it will be significant.
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Buffett also mischaracterizes the impact of the Social Security payroll tax, which is dedicated for a specific purpose. The law only imposes that tax on income up to about $107,000 per year because the tax is designed so that people “earn” a corresponding retirement benefit (which actually is tilted in favor of low-income workers).
Imposing the tax on multi-millionaire income, however, would mean sending rich people giant checks from Social Security when they retire. But nobody thinks that’s a good idea. Or you could apply the payroll tax to all income and not pay any additional benefits. But this would turn Social Security from an “earned benefit” to a redistribution program, which also is widely rejected (though the left has been warming to the idea in recent years because their hunger for more tax revenue is greater than their support for Social Security).
If we consider these two factors, Buffett’s effective tax rate almost surely is much higher than the burden on any of the people who work for him.
But this entire discussion is a good example of why we should junk the corrupt, punitive, and unfair tax code and replace it with a simple flat tax. With no double taxation and a single, low tax rate, we would know that rich people were paying the right amount, neither too much based on class-warfare tax rates nor too little based on loopholes, deduction, preferences, exemptions, shelters, and credits.
So why doesn’t Buffett endorse this approach? Tim Carney offers a very plausible answer.
For more information about why class-warfare taxes are misguided, this video may be helpful.
Deconstructing the Revenue Side of the Debt-Ceiling Deal: Yes, There’s a Real Threat of Higher Taxes
Politicians last night announced the framework of a deal to increase the debt limit. In addition to authorizing about $900 billion more red ink right away, it would require immediate budget cuts of more than $900 billion, though “immediate” means over 10 years and “budget cuts” means spending still goes up (but not as fast as previously planned).
But that’s the relatively uncontroversial part. The fighting we’re seeing today revolves around a “super-committee” that’s been created to find $1.5 trillion of additional “deficit reduction” over the next 10 years (based on Washington math, of course).
And much of the squabbling deals with whether the super-committee is a vehicle for higher taxes. As with all kiss-your-sister budget deals, both sides can point to something they like.
Here’s what Republicans like:
The super-committee must use the “current law” baseline, which assumes that the 2001 and 2003 tax cuts expire at the end of 2012. But why are GOPers happy about this, considering they want those tax cuts extended? For the simple reason that Democrats on the super-committee therefore can’t use repeal of the “Bush tax cuts for the rich” as a revenue raiser.
Here’s what Democrats like:
There appears to be nothing in the agreement to preclude the super-committee from meeting its $1.5 trillion target with tax revenue. The 2001 and 2003 tax legislation is not an option, but everything else is on the table (notwithstanding GOP claims that it is “impossible for Joint Committee to increase taxes”).
In other words, there is a risk of tax hikes, just as I warned last week. Indeed, the five-step scenario I outlined last week needs to be modified because now a tax-hike deal would be “vital” to not only “protect” the nation from alleged default, but also to forestall the “brutal” sequester that might take place in the absence of an agreement.
But you don’t have to believe me. Just read the fact sheet distributed by the White House, which is filled with class warfare rhetoric about “shared sacrifice.”
This doesn’t mean there will be tax increases, of course, and this doesn’t mean Boehner and McConnell gave up more than Obama, Reid and Pelosi.
But as someone who assumes politicians will do the wrong thing whenever possible, it’s always good to identify the worst-case scenario and then prepare to explain why it’s not a good idea.
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