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Romer's deficit reduction suggestions worth a read

Christina Romer's recent piece in the New York Times is worth reading.  See C.D. Romer, Cutting the Deficit, with Compassion, New York Times at BU5 (Sept. 9, 2012).

Now, I generally have found Romer too willing to advocate austerity economics and too unwilling to support progressive tax policies.  But nonetheless, this piece hits some good notes.  For example, while arguing that reducing the deficit needs to be a priority, she acknowledges that it must be done "in a way that does as little harm as possible to people, jobs and economic opportunity."  Similarly, she recognizes that requires going slowly--" a comprehensive, aggressive deficit reduction plan [should be passed] as soon as possible, but the actual spending cuts and tax increases should be phased in as the economy recovers."  Why?  Because "[a] crude rule of thumb is that every $100 billion of deficit reduction will cost close to a million jobs in the near term."  A big price to pay that makes it reasonable to consider not only LONG-TERM deficit reduction plans but also SHORT-TERM job creation measures.

ASIDE:  And in case you wonder, tax cuts for the wealthiest amongst us, as advocated by the Romney-Ryan team--are NOT job creation measures.  The Romney-Ryan budget proposes to achieve revenue neutrality, huge tax cuts for the rich, and no tax cuts for the middle class by not proposing any specifics.  The reality is that the Romney-Ryan plan is just politico-wishspeaking:  there is no plan that will do what they claim, because they depend on the now-well-disproven idea that huge tax cuts for the wealthy will generate more tax revenues while creating more jobs.  Nope.  Neither likely nor even possible.  And by not specifying what they'd cut, they are merely trying to fool the people.

Here are what Romer proposes, with some commentary:

1) tax credits for businesses that actually increase employment

Not a bad idea to replace the endless suggestions of business tax cuts, but any accountability will have to be long-term--i.e., payroll will have to increase over a period of 2 years and the particular jobs created will have to stay in place for at least 2 years before any tax reward should be available

2) "well-designed tax reform that raises at least some additional revenue" and "let[s] the Bush tax cuts expire for those earning more than $250,000 a year [while] [i]ncreasing rates on top earners" and "lowering tax expenditures" including "the low tax rate on capital gains and dividends"

Hmmmm.The clarion call for tax reform has consistently been used by DC lobbyists to push for tax CUTS for the wealthy and big business.  It is not so clear that we need a huge tax reform.  What is usually meant by tax reform is "simplification," which is just another way to justify unneeded tax cuts  .We do not need to cut the corporate tax rate.  We do not need to reduce tax regulations. 

 But I do agree with Romer's notion that we need some tax increases.  My preference would be to allow the entire panoply of Bush tax cuts--passed by a Congress that unfortunately and wrongly believed the Laffer lie that cutting taxes would increase revenues--to expire as the Republicans originally purported to intend.  Let the sunset happen.  And then come next year, think about what, if any, of the cuts make sense. Perhaps a cut to the income tax rates of those who make less than $100,000 a year.  But an increase for those that make more than that, and a significant increase for the top two quintiles, would be in order.  We should raise rates on the wealthiest by creating additional tax brackets for those making 500,000 to a million, 1-2 million, 2-10 million, and above 10 million.   We could reasonably examine the many tax expenditures/subsidies in the Code and begin to cut back on them--starting with the capital gains rate preference, and moving through the exorbitant support for wealthy mortgages (limit it to an interest deduction on the first $250,000 of mortgage interest and phase that out for anyone with an income above $500,000) and including the R&D credit (rather than deduction), the "active financing exception" and the subsidy for moving active businesses offshore (and along with that, eliminating any idea that there is such a thing as a "profits" partner who isn't taxed on a "transfer" of a partnership interest at the time the interest is provided).

3) slowing spending growth for government health care spending- by reducing overpayments to health care providers (as the $716 billion cut misrepresented by the GOP does); by increasing those cost-cutting reforms to find other ways that we are inefficient; by "making the wealthy pay a larger share of their Medicare costs and gradually raising the Medicare eligibility age"

Here we see the problem that no one in government dares to say what must be said--that until we move to a single-payer system like the rest of the advanced world, we will see private parties continuing to rip off rent profits from providing health care.  We must eventually expand to "medicare for all"--and we should do that soon.  In the transition, it would be reasonable to have a means-adjusted payment scale, so that the Medicare tax is higher for those with more income (corresponding to the increased brackets for the income tax).  And it might be reasonable to have a few major categories of jobs for determining base retirement age--workers in steel plants who work in 115 degree interiors when it is 90+ degrees outside likely should retire earlier than workers in academia who work at their desks in air-conditioned offices.  But that won't be easy and will need to be developed by consensus over some reasonable time, rather than through partisan, anti-worker politics.

4) cut other spending--protecting children, displaced workers, and wounded veterans in the process,as well as money for education (including Pell grants) and infrastructure and scientific research--but cutting "agricultural price supports and subsidized crop insurance programs that mainly benefit large commercial farmers," the Pentagon's budget, and high-speed rail.

We certainly can cut a lot of waste and warmongering out of the Pentagon's budget, which is one reason that I'm all for letting the sequester approved by Republicans go through.  We could save a great deal there that could be used for infrastructure and other spending that builds opportunities and jobs instead of supporting the military-industrial complex.  I'd also support  cutting most of the agricultural subsidies, which primarily support Agribusiness that produces tasteless food at a high environmental cost.  But I disagree strongly on high-speed rail.  If we don't as a nation invest in transportation infrastructure that moves us beyond the costly highways (costly in human lives, dollars to build and maintain, and environmental degradation), we will not advance our economy as we must.

 

Base Broadening as a means of tax reform

The Congressional Research Service recently released a report by Jane Gravelle and Tom Hungerford on The Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening (Mar. 12, 2012).  Tax Base Broadening is the proposal often put forward by those who say we can and should lower rates across the board (also reducing progressivity by limiting the number of rate brackets to two or three) and pay for it by removing some of the tax expenditures and subsidies in the tax system, such as the home mortgage loan interest deduction or certain health benefit provisions.

IHere's an excerpt from the summary of the report.

Congressional interest in a major reform of the individual income tax that would broaden the base and use the additional tax revenues to lower rates and/or reduce the deficit has increased. ...  One way to broaden the tax base is to eliminate or reduce tax expenditures, which have been in the tax code since the passage of the progressive income tax in 1913. An understanding of four complex issues surrounding tax expenditures is necessary for an informed debate over broadening the tax base. First, tax expenditures affect the economic behavior of taxpayers (efficiency effects). Second, changing tax expenditures will change the distribution of tax benefits, and the distribution of after-tax income (equity effects). Third, changes to tax expenditures could change
the administrative burdens on taxpayers and the Internal Revenue Service (IRS). Lastly, many tax expenditures are popular among taxpayers and voters. Each one of these issues presents challenges to broadening the tax base, which could be difficult to overcome.

There are over 200 separate tax expenditures, which are projected to total over $1.1 trillion in FY2014. The revenue loss of all tax expenditures, however, is highly concentrated in a relatively small number—the largest 20 tax expenditures account for 90% of the total revenue loss of all tax expenditures. This amount is equivalent to 74% of the total FY2014 revenue from individual income taxes....

[T]ax expenditures are divided into seven major categories: saving, business investment, consumption, owner-occupied housing (which is a combination of an investment choice and a consumption choice), labor supply, government programs (which in many cases would have no behavioral effects but are simply income transfers), and a category termed structural (which provides benefits based on family circumstances rather than affecting behavior). 

The analysis in this report suggests there are impediments to base broadening by eliminating or reducing tax expenditures, because they are viewed as serving an important purpose, are important for distributional reasons, are technically difficult to change, or are broadly used by the public and quite popular. Given the barriers to eliminating or reducing most tax expenditures, it may prove difficult to gain more than $100 billion to $150 billion in additional tax revenues through base broadening. This amount could have a significant effect on reducing the FY2014 budget deficit—reducing the projected $345 billion deficit by 30% to 43%. This additional tax revenue, however, is equivalent to about 6% to 9% of projected FY2014 individual income tax revenue, and, consequently, would not allow for significant reductions in tax rates (about a one or
two percentage point reduction for each bracket).

The conclusion of the report seems realistic given the current dysfunctionality of Congress--it would be highly unlikely that core reforms could be made to raise sufficient revenues to support a large rate reduction, though some elimination of problematic tax expenditures would be a good move towards reducing our structural budget deficits.  Let's eliminate the long-term subsidies for the extractive industries that have given subsidized profits for oil and gas barons and get rid of other provisions that haven't served the purpose claimed for them, like the research & experimentation credit (any business can deduct real research expenses; the credit is just a way to cut corporate taxes for heavily lobbying industries like Big Pharma, IT and others).  But let's acknowledge that the current  right-wing fad idea to reduce tax rates even more and pretend to pay for it with uny base broadening isn't going to work.

I find base broadening proposals for tax policy reform amiss for three other important reasons. 

• First, we already collect less tax as a percent of GDP than historically; thus,we need to raise more tax revenue rather than maintain revenue neutrality with the current too-low tax system, especially by increasing the take from corporate taxes (the 'tax shelter problem') and by reducing the ability of service partners to game the system (the 'carried interest' problem). 
• Second, most ideas for base broadening and rate lowering end up resulting in more rate lowering than base broadening, because the lobbyists get to work immediately on reinstating the provisions that have been eliminated to broaden the base while simultaneously arguing that letting the rates go back up would be a growth-killing tax increase.  Accordingly, base broadening won't work unless there is a firm will to maintain a broader base and take the political flack that the lobbyists will release.  This Congress isn't anywhere near having that kind of will, and if it does, it is more likely to reduce important social programs (Medicare, health care, education, etc.) and leave the notoriously inefficient subsidies for oil and gas, Big Pharma and other lobby-hard favorites in place.
• Third, much of the assumptions about tax efficiency are questionable--we actually understand the interactive effects of the tax system very poorly, and don't know when a tax change will affect a person's decisions to work, not work, spend, not spend, or otherwise respond to the tax change.  So it is more likely that ideology will drive the decisions, rather than an unbiased approach founded on reasonable research to determine which provisions really work to do what they were claimed to be enacted to accomplish.  And given the current lopsided representation of right-wingers in Congress (compared to the population at large), that means that right-wing rhetoric rather than considered policy determinations will likely drive any "base broadening" tax reform that does take place.
• Fourth, many of those who argue for base broadening may be planning to use this as one more way to reduce or eliminate spending on important safety net provisions like Medicare, Social Security, unemployment compensation and others.

 So my preferred reform involves a few simple ideas:  1) let the Bush tax cuts expire as they are slated to do; 2) reinstate the estate tax at the 2001 rates, except with a $2 million exemption that is indexed to inflation; and 3) eliminate the preferential rate for capital gains and all of the provisions in the Code that deal with capital gains rates; and then 4) wait a while till the system is back in better balance and do tax the right way--ask what we want our government to spend money on, figure out how much money that will take to do it, and then set the tax system so that it collects the right amount of money.

The 1% are the only beneficiaries of Greek austerity, not ordinary Greeks

An interesting post over on Naked Capitalism on the Greek austerity measures being demanded by the EU leaders (Germany, mostly) and the IMF:  Marshal Auerback: Greece and the Rape by the Rentiers (Feb. 10, 2012).

The austerity demands, in order for a sovereign nation to pay back its debt to mostly big banks that lent money recklessly in the leadup to the financial crisis, make no sense at all.  If you impose austerity, you clamp down on the economy.  If you clamp down on the economy, the poor and near-poor who are already struggling will struggle even more.  Unemployment will increase.  Desperation will set in and crime or revolution will follow.  The 1% at the top do okay at least for a while--after all, they've been hogging all the good stuff for a decade at least, and many of them (if the scofflaw wealthy in this country are any guide) will have sequestered funds away in hidden offshore bank accounts to bide them through the rough times or even support them if they expatriate to avoid the mayhem.  When austerity measures include privatization of public assets, that same top 1% is able to acquire very valuable assets for a song and then charge "rentier" rewards for the public to use their own assets. 

That's the story that Auerbach tells for Greece, as he wonders why they don't just get the hell out of the Euro zone and go back to their own currency.  They probably will default anyway.  But they will have paid a high price for trying to avoid default--the huge cut in wages, increase in unemployment and suffering going on now, and the privatization of even more of their public goods.  Greece plans to sell six national companies--energy companies and refineries are included.  The banks must be shitting in their pants in excitement.

 

We're being bamboozled--debt ceiling, cuts to ordinary folks' programs, and the corporatist state continues apace

I almost can't stand watching or reading the news these days and have delayed posting on this blog because it seems there is a need to repeat the same suggestions over and over again.  Don't cave to the right.  Don't cut important social welfare programs that have enabled this country since the 1930s to treat its elderly and vulnerable populations with respect.  Quit trying to strip unions of power--they are one of the important ways that ordinary people can emplower themselves to demand a share of the prooductivity profits their labor has produced.  Quit repeating the garbage free market mantras suggesting that the wealthy investors and managers are entrepreneurs (they're not generally) and that allowing such gross accumulation of wealth as our current CEO pay of 3-400 times the salary of average workers (earning in a half day what a worker earns in a year) is somehow necessary to a good  economy in a democratic political system.  Allowing the owners and managers to continue to reward themselves with grossly oversized compensation and profits packages so that they can maintain their 20,000 square feet marble palaces with kitchens that only a caterer needs (and that the denizens of the house hardly ever use on their own) is just one of the excesses of the brute capitalism that the 'tea partiers' and other right-wing economic policy gurus are supporting.

This free market, brute capitalism where workers are expendable and the entire economy is forced to support the accumulation of wealth at the top is what we have in fact pushed on (and sometimes assisted in imposing on) developing nations in the past .  Think Argentina--where the Chicago Boys oversaw the decimation of the economy and the imposition of austere conditions on the majority so that the economy could be 'remade' to suit the owners of capital (including foreign investors and multinationals). Think Brazil, where in the 1960s we helped their military coup against a leftish president in order to support the ability of US multinationals to continue exploiting Brazilian resources. 

But now the right is so invigorated, through its ability to bamboozle the American people and elect a majority of economic extremists in the House who either don't understand history well enough to know that they are speaking gibberish, or don't care.  They are determined to undermine the meagre social welfare system of Social Security, Medicare and Medicaid, with constant untruths about 'bankruptcy' and similarly misleading statement on almost every issue.  Presidential candidates who make up facts are toasted by the purportedly 'leftleaning' mainstream media (this assertion itself a made-up fact used to continue to bamboozle the people).

The most outrageous spectacle of all is the pontificating dogmatic right in the House and Senate, threatening to cause a U.S. default on the debt ceiling issue in order to pursue their ideological dream of a 'pure' economy.  Their economic model is a disgraced one --the free market, corporatist model that ensures that the small, wealthy investor class is doing well and that Big Business gets what it wants but doesn't give a damn for ordinary folks, whatever verbiage about caring for workers, and ordinary people with mortgage difficulty, etc. they spout.

Truth is, folks, you don't get an economy working well for ordinary people when you (i) make pledges NEVER to increase taxes, (ii) reject cuts in the grossly overlarge military expenditures this country makes in order to secure the world's resources for its multinational enterprises (that then lobby for close to zero taxation on their obscene profits from that secured wealth), or (iii) try to solve all perceived fiscal problems by taking it out of the hide of ordinary folk, thus  stifling the real economy (the one where workers work in businesses that serve local people and that work generates profits that are shared with workers and owners in a way that leads to expansion of the local economy based on the broad-based workers' participation in it) and at the same time bringing the kind of class warfare that the Friedman school has long waged on Latin America and other Third World countries right here to America.  The result of those kinds of policies is concentration of income, wealth, and influence at the top, with ordinary folks in the middle class struggling just to stay even.

The idea that you cannot tax natural resource extractive industries more (by taking away the tax expenditures subsidies that literally hand them outsize profits on a silver platter) when they are making windfall profits is absurd.  The idea that you cannot reimpose a decent estate tax on the estates of the wealthiest 2% in the country, to assist with meeting the heartfelt needs of the struggling middle and lower classes, is pathetic.  The suggestion that you cannot increase taxes on financial transactions and increase capital requirements in banks to stifle the too-rapid innovation and liquidity within the financial institutions that underlies the crisis we just went through (and the worse one we will suffer within the decade if we don't enact even stronger reforms than already in Dodd-Frank) reflects the dogmatic fixation on service to the wealthy investors and financiers that permeates the right-wing in Congress.

Folks. we can't let them do this.  Congress is supposed to serve the people, and this 'tea party'/right-wing extremism that was reflected in Newt Gingrich's 'contract on America' and John Boehner's contract with the investor class is the worst of class warfare.

There was a time when the neo-imperialists and corporatists didn't dare do the same thing in America that they were  pushing for, and secreting doing in Third world countries.  Exploiting the environment without a care for the pollution that ordinary people suffer in their daily lives.  (Think of the Banana Republic attitudes of United Fruit  and  the Latin American oil enterprises conducted by US multinationals.)  Supporting militaristic regimes with a right wing flavor and a taste for torture and imprisonment of radical left thinkers. (Think Chile, Argentina, Nicaragua, Guatemala, etc.)  Labeling governing concepts that pay a lot of attention to the needs of ordinary people as 'subversive' and 'socialist' in order to bring up myths of communistic monsters that hide under the bed and eat the economy.  (Think Cuba and Brazil, especially, and Chile, and now Venezuela.)  All these tactics exist to keep ordinary people in their place as workers who get a pittance of their productivity profits and are "flexible" (meaning can be fired upon short notice by private equity firms flipping companies for their own (preferentially taxed) profits) while the military can control the resources and make good deals (for US multinationals and the military leaders, not for the people of the exploited country).  Read Chomsky's "Year 501" for a (somewhat rambling) account of the neo-liberal corporatist agenda in Latin America.

But now those same ultra corporatist, class-warfare policies are being implemented right here, in the open, with brazen disregard for our historical social contract, for the plight of the poorest and most vulnerable amonst us, all in the name of keeping the 'investor class" and Big Business (generally one and the same, since the investor class is mostly the owners and managers of Big Business) happy.

They paper it over with talk, as Joe Lieberman does in calling for cuts to Medicare, for 'bipartisanship"  or they claim the US is living beyond its budget because it doesn't pay its bills.  But of course they don't really care about that, since the budget put forward by the Republican House majority carved a multi-trillion dollar hole.  IN other words, they don't pay attention to their own rhetoric.  They just want to use the (absurd in itself) requirement in the US that we have a debt ceiling extension vote as an opportunity to blackmail the American people to get concessions on their favored targets--the programs that ameliorate, somewhat, the brute capitalism of the American economic system after forty years of reaganism, friedmania, and the rest of the Chicago School garbage that has been treated as "God's truth" so long by politicians that they don't even realize, perhaps, that they are letting a bunch of mathematicians who like to escape the real world into made-up formulas decide the policies for the nation.

Big Business has had its enablers in place for four decades--Grover Norquist, the Koch brothers and their 'tea party' followers, the various propaganda tanks like the American Enterprise Institute, the Cato Institute, the Heritage Foundation, and the rest  that have spent millions to brainwash Americans into thinking that the failed 'free market' ideas of Milt Friedman and Alan Greenspan and Wall Street are the only way to go.  It has a majority on the Supreme Court willing to be extraordinarily activist in overturning precedents on class action lawsuits (a way for ordinary people to empower themselves against Big Business) and free speech (a way for corporations and their owners/managers to control the political debate through the use of their overwhelming dollar power).  And that right-wing majority is serving its masters well, while Big Business's minions in Congress continue to roll over to make sure that the right-wing panacea of deregulation, militarization, tax cuts, and privatization contines apace. 

The US debt burden is high, but we are not Greece or Ireland or even Portugal.  We have a strong economy.  We have our own monetary system, unlike the Euro nations that are facing much higher debt burdens and can't individually control their monetary flows.  Austerity measures like the IMF has imposed on Latin America to satisfy foreign investors (not the natives of those countries) and like the Euro world is now imposing on its own members are not needed here (and probably are the wrong answer there as well).  Those measures are driven again by the failed corporatist economic model that assumes that the entire world should be run to satisfy the wishes of financial institutions, big money investors and the big multinational corporations that they own and manage. 

The world should be run to satisfy the needs of ordinary people.  Banks should be stripped of the power to create a world-wide crisis with their haystacks of derivatives that catch flame much too easily.  Big Business should make do with lower profits, paying their workers more and their managers (and owners) less and paying their fair share of taxes.  Hedge fund managers should pay tax on their "carried interest" compensation like ordinary people, and private equity firms should be subject to much more red tape that makes it much harder to buy companies and take them private in order to fire their workers.   In fact, consolidation and mergers among big businesses should be made much more difficult through new limitations on the tax-free restructuring provisions. Unionization should be strengthened, in order to give ordinary Americans something with which to have leverage over the hierarchical authorities that undermine economic growth by concentrating everything on the investor class.

Let's start a letter and call-in campaign to every Republican legislator in the coutnry, telling them that we are sick and tired of being treated as lambs led to the slaughter in order to place endless platters on the tables of the rich.  Tax policy should be based on what works, not on ideological dogma that has been the underlying cause of catastrophes and crises worldwide. 

 

Thinking about Inequality and Fairness in Tax Policy--Part I

As most of my readers know, the underlying theme of this blog is democratic egalitarianism--the idea that institutions within our society should pay attention to inequalities and that policies to redress inequalities are supportive of true democracy.  It is not that we will achieve perfect economic equality--that is not possible and likely not even a desirable end.  But we do need to counter the tendency of human systems to concentrate desirable attributes in a tiny powerful elite.  That is, human systems tend to redistribute desirable attributes upwards.  Income, wages, wealth, health care, housing, natural resources, human capital opportunities--all these things that people need to live a decent life tend to be redistributed and allocated to those who already have more of them.  Property begats property, and putting the owner class first begats a situation in which the owner class owns even more of whatever is valuable to own, and therefore commands, even more, the ability to keep the majority of the population in a state of quasi-servitude.  In a democratic society with a primarily capitalist economy, one of government's primaryh purposes is to enable individual freedom for all by countering the brute power of the capital-owning elite and redistributing those resources downwards.

One way that a majority of Americans has favored for achieving this necessary justice result is progressive taxation policies--taxing the wealthy/higher income at a higher rate (or even on a broader base--to wit, the corporate tax).  When there is progressive taxation, the gains that the elite have made merely because they are in the elite and hold the keys to power are marginally restrained.  But more importantly, those revenues then can be used to fund government programs that expand public goods and create opportunities for the vast majority with significantly fewer resources, through programs like unemployment compensation, health care, public education from K-12 to university, public transportation, etc..

So we need to ask a few questions about our system today.  Is it working or is the tendency for income, wealth and other favorable attributes to accumulate at the top overpowering the means of redress that exist?  And does the population have a clear understanding of the democratic egalitarian principle, so that people will vote in the best interest of the continued functioning of a democratically premised society?

I fear the answer today in the US is no, to both questions.  The US has long used its military might to support its wealthy elite and their multinational corporations.  Today, that seems even more exaggeratedly so. 

Think about the invasion of Grenada, Iraq, Afghanistan and the continuing erosion of human rights (read--the rights of ordinary Americans to go about their lives freely choosing how they will live and where they will go and what they will do) which has inevitably fed the military-industrial complex of arms manufacturers, private mercenary outfits, natural resource extraction, financialization of the economy and general globalization trends, all of which are part and parcel of the corporatist agenda for ensuring continuing power to Big Business and its owners and managers. 

And the populace is ill-informed about the true mechanisms of individual freedom.  They have been sold a bill of goods by the right-wing so-called "think tanks" supported, by and large, by wealthy owners of Big Business and the multinational corporations that benefit most by keeping the population ignorant.  The fantasy concept of a "free market" has been pushed as the answer to all ills, even though there is no such thing as a free market.  (And in fact the wealthy elite and Big  Business have benefited from scores of policies designed to provide them distinct advantages, from CIA and military support against popular leftist regimes in Latin America that threatened multinationals grip on natural resources and labor there, to tax and spending policies in the US that favor large corporations over small, localized businesses.)  The people have been told that if only the government will support the "competitiveness" of its multinational corporations, jobs and good fortune will eventually trickle down to them, even though of course the immediate observable result will be additional wealth to the owners and managers of the multinational corporations.  The jobs and good fortune don't trickle down, however.  With no commitment to place or people, multinationals and their owners and managers take the rentier profits and shove them into their own safes (often more investment in exploitative industries in third world countries and private equity ventures that exploit workers by dividing and conquering to eliminate unions).

Think about the current focus of the ultra-right House leadership and Senate minority and the ultra-right governors in many of our states today.  They use divisiveness to turn private workers (long deprived of any real rights to associate in unions by law and practice, and therefore suffering through a decades-long diminution in both their wages/incomes and their general welfare  from health care, pension rights, and job security) against their public counterparts who have generally maintained somewhat stronger unionization and and benefit rights, in order to justify even further curtailment of public employee unionization and benefit rights.  They argue deficits (after supporting costly militarization and warmongering in Iraq and Afghanistan, privatization, deregulation and other legislation intended to push us into the greatest deficits ever) in order to stifle all government programs existing to aid the non-elite classes, such as Social Security, Medicare, Medicaid, and unemployment compensation.  They suddenly find a problem with increasing the debt limit, after borrowing trillions to come to the aid of their bankster cohort, without imposing conditions that would require the banks to treat ordinary Americans fairly.  They argue for the elimination of the little progress made from 2008-2010 in enacting a weak form of health care reform (weak because it favors the Big Insurance companies and their managers and owners' continued rent profits rather than including some form of single-payer, such as the "public option" in the national exchanges) and financial reform (weak because the Dodd-Frank legislation failed to create a fully independent consumer financial protection agency and failed to restrain sufficiently banksters' ability to gamble other people's money to make windfall profits out of a proprietarily managed system that operates to their favor and results in privatization of gains with socialization of losses).  They stand at a line in the sand against all tax increases for the wealthy, on the claim that the wealthy are the people who create jobs (see Eric Cantor on the position that no debt limit increase is possible without a guarantee protecting the wealthy from tax increases), even though the wealthy are not entrepreneurs, have sufficient wealth to invest in their businesses even with high tax payments, and don't do it. 

New jobs will be created when there is a broader middle class with extra money to spend on things that make life better, not when the wealthy have even more money to sock away somewhere because they can't possibly spend all they have.

So if we ask the question--what, then, is a fair tax policy, isn't the answer fairly straightforward?  In any context, it is the policy that favors the most redistribution from the elite to everyman while raising sufficient revenues to provide adequate investment in public infrastructure that moves everybody forward and human capital development (like public education).

Readers, what say you?

If not, why not?  Readers comments welcome.

The Washington Post's Lori Montgomery on the U.S. Debt

Lori Montgomery, Running in the Red: How the U.S., on the road to surplus, detoured to massive debt, Washington Post, April 30, 2011, notes that the run-up of the U.S. debt was a choice, made in the first year of the Bush Administration when Bush pushed through a huge tax cut.

Rubin wanted to use the surplus to start repaying the debt, which was then just more than $3 trillion. The White House billed it as “saving Social Security first,” viewing the surplus as an opportunity to shore up the nation’s finances before huge numbers of the baby boom generation began claiming federal retirement benefits. “The problem was a whole other part of the political spectrum wanted to use the surplus for tax cuts,” Rubin said in an interview. “They said they wanted to give the people back their money. Of course, it was also the people’s debt.”

The Bush tax cut bills passed almost every year he was in office (and the additional losses in tax revenues triggered by recession) are "the biggest culprit, by far" behind the huge increase in the debt that the right is trying to use to convince Americans that we have no choice but to settle for decimating almost all of the New Deal programs.  The 2001 and 2003 Bush tax cuts amounted to about $1.8 trillion (based on the sunsetting gimmick that had various provisions ending after 8 or 10 years to make the cost look lower than it was expected to be).

Many Americans seem to think that Obama is the source of the high deficit/high debt problem.  But Montgomery shows that most of the big ticket spending increases go back to the Bush administration. 

Big-ticket spending initiated by the Bush administration accounts for 12 percent of the shift. The Iraq and Afghanistan wars have added $1.3 trillion in new borrowing. A new prescription drug benefit for Medicare recipients contributed another $272 billion. The Troubled Assets Relief Program bank bailout, which infuriated voters and led to the defeat of several legislators in 2010, added just $16 billion — and TARP may eventually cost nothing as financial institutions repay the Treasury.

Obama’s 2009 economic stimulus, a favorite target of Republicans who blame Democrats for the mounting debt, has added $719 billion — 6 percent of the total shift, according to the new analysis of CBO data by the nonprofit Pew Fiscal Analysis Initiative. All told, Obama-era choices account for about $1.7 trillion in new debt, according to a separate Washington Post analysis of CBO data over the past decade. Bush-era policies, meanwhile, account for more than $7 trillion and are a major contributor to the trillion-dollar annual budget deficits that are dominating the political debate.

Montgomery reports that Republicans (who were the drivers of the huge Bush-era series of tax cuts) "reject raising taxes as part of the solution."  

 But Montgomery's story is, like most reporting these days, too shallow.  She notes that Bush's campaign talk about "giving the tax money back to the people, because 'It's your money'" took place in the context of the surplus generated during the Clinton years. But now they plan to use the need to raise the debt ceiing as leverage to force the Democrats to accept cuts to entitlements while still giving major new tax cuts to the wealthy and big business.

The article suggests that, if only Bush and Congress had known about the two wars and the heightened security costs after 9/11 and the financial crisis, they would not have passed the gigantic tax cuts.  Pete Domenici, for example, says "Nobody would have thought that all these things would have happend after you cut taxes.  That you'd have two wars and not pay for them.  That you'd have another recession.  A huge extravaganza of expenditures."

Yet it was the same president Bush who pushed through the huge tax cuts year after year who chose to start two wars that had little to do with U.S. security and lots to do with the military industrial complex and Republican war-mongering ideology.  And then chose to pay for those wars with borrowing rather than by rolling back the bills that had starved the government of tax revenues at just the wrong time.  And Congress went along.

But even that distorts the perspective on the Bush tax cuts and the surplus.  By the time the 2002, 2003, and 2004 tax cuts were passed, we already knew that there wasn't a surplus.  Bush was running significant deficits, and the wars in Iraq and Afghanistan were mushrooming well beyong the rosy low-cost estimates that the Bush war machine had first projected.  The war funding was being handled by supplemental bills to disguise its huge cost.  So those tax cuts were passed in spite of the deficits and hugely increased borrowing to pay for the Bush-Cheney permanent ramp-up of the military complex, including the expensive hired mercenaries and hired Halliburton services that proved that privatization of the military resulted in increased costs.  The way the tax cuts were handled, and the way the right-wing rhetoric disguised the reality of the need to borrow to pay for tax cuts while conducting a war of choice, demonstrates that the GOP is not the party of fiscal responsibility that it tries to claim it is. 

The hypocrisy of most deficit discussions

Congress seems incapable of setting aside electioneering rhetoric and talking straight about taxes and deficits.  The GOP claims that it thinks deficits are bad things while at the same time it proposes no spending cuts (except to important safety net programs) and does propose further tax cuts.

Just a bit of background on tax cut rationales and deficits.

Back in the old days of the Bush regime, the tax cutters tended to claim that tax cuts would create jobs and raise (not lower) government revenues.  They didn't.  The Bush administration had anemic job growth, certainly seeing no boost from the humongous tax cuts enacted in 2001, 2003, and 2004 (and smaller cuts throughout the term).  And we have enough experience with tax cut programs from Reagan to Bush I to Bush II to see that revenues do not miraculously go up when the taxing provisions that are intended to raise revenues are cut back.  Sometimes there are a few localized effects--such as increased selling of capital stocks to take advantage of a new and lower rate because it is expected that higher rates will have to be enacted later.  But tax cuts cut revenues.

Further, in spite of the GOP attempt to label the Dems as the tax-and-spend party, the GOP turned out to be the tax-cut-and spend-anyway party.  Government grew under Bush, even while revenues shrank.  The war in Iraq, for example, resulted in huge expansions of military and defense costs, and the homeland security apparatus, much of it intrusive of our private liberty and ineffective at dealing with terrorists, piled on additional government bureaucracy and costs.

If you cut revenues without finding appropriate government programs to cut, then you will increase government borrowing and increase government deficits.

Now, deficit increases make sense sometimes.  When the economy is in a slump, it means that private spending is down, so government spending is needed to move it out of the slump.  A deficit that is caused by increased government spending that helps the economy by restoring jobs and getting the economy moving again is a deficit that will be reduced as the economy grows, people with jobs pay taxes, and government spending that was used to supplement inadequate private spending can be cut back.  Infrastructure spending provides that kind of a stimulus--building systems that will last for years now, to create jobs and stimulate the economy serves the public interest now and for the long term. See, e.g., Laurence Seidman, Reducing Future Deficits While Stimulating Today's Economy, 7 Economists' Voice Art. 2 (Sept. 2010).

But the deficit created by the Bush tax cuts doesn't make sense.  It is based on "trickle down" economics--the view that if the rich get richer, everybody else will do well too.  But that hasn't been the case.  Since 1980, the rich have gotten immensely richer, but most Americans have hit stagnation, with real wages not sharing at all in the productivity gains that have made corporate managers multimillionaires.  The productivity gains, that is, have gone to the people at the top, and the people at the top have horded them, supporting tax policies that give themselves huge tax cuts.

Tax cuts--especially for the wealthiest people and corproations--do not make sense.  That money is as likely to be invested overseas as in the US, and overseas it does nothing but contribute to the job drain.  Corporations purchasing new equipment wiht the 100% expensing may buy that equipment from China or India or Korea--again, pushing jobs overseas and doing nothing to stimulate the local economy, but costing the government the tax expenditure that could have been used for public infrastructure projects instead.

And now to the current situation as the "Senate G.O.P. Digs In to Keep Tax Cuts"

The income tax provisions passed during the Bush regime were almost all temporary provisions--they were passed with a sunseting provision so that they expire at the end of 2010, and the law as it was prior to the Bush administration retakes its place as the applicable law.  The question now is whether new laws should be enacted along the same lines.

When the Bush cuts were enacted, the arguments were that tax cuts would lead to more revenues (they didn't), that there was a surplus to return to the people (there wasn't--by the time the GOP Congress enacted the 2001 tax cuts, there was already a deficit), and that the tax cuts would stimulate the economy  so that it would grow really fast and create large numbers of new jobs (it didn't--job growth was anemic).

Remember, folks, there was no huge public outcry for new tax cuts when the Bush regime passed the 2001 cuts.  And the cuts were made temporary BECAUSE of the huge cost of extending them for more than ten years, which would have made the deficit creation impact too obvious.  This was policy pushed by the right, not by the public.  Does the fact that the teapartiers are now part of the anti-government, anti-tax hollering mean that people really want to retain the super-low taxes of the Bush period no matter what?  I doubt it.  Remember those teapartiers who want the government to stay away from their Medicare and Social Security?  How about Center for Disease Control--would anyone want there to be no federal vaccine programs for highly contagious diseases?  How about National Science Foundation--would people want basic scientific research to cease in the US, so that all our brightest young minds would go to China or India for education and work, leaving us with no innovation?  How about emergency response funding--do we not want the Federal Government to be able to send people, supplies and support to Katrina-type events?  What about keeping the food supply safe? the water supply?  medicines?  All of these things are "we the people" acting to do things that need to be done through the Federal Government.

John Boehner, the House Minority Leader and generally not a very astute person to trust with developing tax policy, had actually admitted to some rational thinking on the expiring Bush tax cuts last Sunday on Face the Nation.  He acknowledged that he could support a new tax cut for the middle class, even if the wealthy didn't get one.  Daniel, Boehner says he'd support a middle-class tax cut, YahooNews.com (Sept. 12, 2010).  Of course, he resorted to the old "class warfare" attack--according to the GOP, anybody who doesn't give a tax cut to the rich every time they give some kind of break to the poor is engaging in class warfare. 

Aside on "class warfare":  But of course, the GOP has supported numerous tax breaks that are primarily for the rich--or only available to the top 40% of taxpayers--and never admit that is class warfare.  e.g., the deduction for home mortgage interest on mortgages up to a million dollars, which is available only to those who itemize --about 30% of taxpayers, and of those 30%, is of the most benefit to the richest minority who pay higher rates and thus get a larger deduction, or the exclusion for municipal bond interest, which is used by the wealthiest taxpayers who have most of the financial assets, etc.

Progressives would argue that class warfare is represented by the corporatist agenda that extracts all productivity gains for managers and owners and leaves workers without even the pension promises that were made when workers accepted lower wages for higher pension benefits, or the policies that make it extraordinarily hard for workers to form a union, which would give them some semblance of equality of bargaining power with the concentrated power of megalithic multinational corporations, or the "globalization" policies that lead to free trade agreements that impose no protections for our own workers or our environment, etc.

The reasonableness represented by Boehner's concession lasted all of a microsecond.   Boehner's deputy, the House Republican whip, got out the word on Monday that the Republicans would only be content with a bill that enacted new tax cuts for the wealthiest as well as the most vulnerable--anything else, he says, is a "nonstarter."  And Mitch McConnell, the Senate Republican leader, proposed legislation for new tax cuts that would be the same as the Bush tax cuts for everybody.  See Herszenhorn, Senate G.O.P. Digs In to Keep Tax Cuts, NY Times, Sept. 13, 2010.

The cost of enacting new tax cuts that provide the same revenue reductions as the Bush tax cuts will be enormous.  It will cost $700 billion over ten years for the new tax cuts for the wealthy and a total of $4 trillion over ten years to extend all of the Bush tax cuts.

McConnell's argument is that it would hurt economic growth and job creation to tax the ultra wealthy now.  But that's a sham argument.  The wealthy are likely to save, not spend, any extra monies from a new tax cut.  Or invest it overseas.  Or just buy some more stock on the secondary market--making a bank or another wealthy person even wealthier.  They aren't likely to start a new company or directly invest in a new startup just because they get a little more spare change from a tax cut.  They'd either be doing that already or not doing it at all.  And McConnell, as the Times piece notes, isn't offering either specific spending cuts that won't hurt the economy nor other sources of revenue to make up for the additional $700 billion needed to give these multimillionaires another tax break in addition to all of the breaks targeting the wealthy already in the Code.

What about McConnell's argument that the Obama regime has spent the last two years putting the government in charge of everything?  Note he included student loans.  Just a reminder about the FACTS about the student loan issue.  We used to have a direct loan program.  It actually made money for the government.  But due to funny accounting procedures that were used for such loans, the books didn't look like the loans were making money for the government.  That's because they were counted as "pure" expenditures, and not as loans that included an obligation for the borrower to pay the money back to the government with interest.  So they made money, but looked like they didn't make money.  The GOP seized on this, and under Reagan changed the program to a "guaranteed loan" program.  The same universities would do the work, but the banks would get a significantly larger interest rate than the government had gotten for acting as a middleman but bearing no losses.  In other words, the GOP privatized the loan program, ensuring banks a "cut" of profits, and providing for the government to pay the banks for any losses they might incur--privatization of gains, socialization of losses.  There was less money to lend, since the banks were getting the interest income and paid by the government if there were losses.  The government was losing money instead of making money.  But it LOOKED LIKE the government was smaller.  And the GOP bragged about its new privatized loan program.  As years went on, people argued for a return to the direct loan program.  This was especially true when banks managed to get students to consolidate old loans and retain their higher subsidized rate even when they were supposed to reset the rate to a lower rate.  So Clinton inaugurated a small direct loan program.  And we have moved from there forward, saving the government money and providing students with a cheaper loan program.  The only losers in the direct loan program are the banks who no longer get their "entitlement" "welfare" handout from the government.  And McConnell condemns the Dem for that change, hoping that Americans will be gullible enough to be fooled into thinking that the direct loan program represents an awful invasion into private commerce, instead of a reasonable and wise use of government funds to provide students the opportunity to have a college education.

By the way, Lieberman is, as usual, supporting the GOP platform on taxes with a statement that "the more money we leave in private hands, the quicker our economic recovery will be."  When private spending has declined, that statement is not only likely wrong, it misses the fact that without government spending there is likely to be no recovery.

Dealing with the Sunset of the Bush Tax Cuts (Part V in a series)--dividends at capital gains rate

IN this series, i've been discussing the merits of enacting a new series of tax cuts that mimic, at least in part, the Bush temporary tax cut legislation that expires at the end of this year. 

The primary arguments for the original Bush temporary tax cuts were either bogus to start with or proven weak over the period of the tax cuts. 

1. The Republicans who pushed the cuts claimed first that they were intended to return to taxpayers the surplus.  Of course, that argument was laughable from the beginning: Bush deficits started in the first year of the Bush regime and got worse for the long term as the costs of a military budget pumped up by preemptive war and other augmenting of government spending at the same time that tax revenues were cut again and again throughout the regime. 
2. Various Republicans also admitted that their goal was to cut the size of government--though they didn't mean the military and they did mean any programs that protect average Americans (such as Social Security, unemployment compensation, environmental programs, OSHA, etc.).   But the size of government grew in spite of the reductions in revenue, resulting in expanding deficits.
3. The various  expensing provisions; repatriation with almost no taxation (in the 2004 "American Jobs Creation Act"); tax breaks for oil and other natural resource companies; international tax breaks; and other corporate-favorable provisions were supposed to stimulate entrepreneurial activity and job creation.  Instead, businesses used the low-tax repatriated income to pay managers more and workers less, and laid off workers at the same time.  The expensing provisions allowed corporations tax breaks for equipment they would have bought anyway, but didn't create new jobs--the Bush regime's jobs record was terrible, barely keeping up with inflation and certainly not spurring new job growth.  The tax breaks for natural resource companies fed their complacency about everything from jobs to safety to environmental protection--giving companies more for less doesn't create better citizens and doesn't get us cheaper energy either.  The record from the tax cuts as far as entrepreneurialism and job creation was dismal--the mainstream neoconservative and neoliberal theories of market fundamentalism didn't work out as claimed.
4. The lowering of capital gains taxation and the taxation of dividend as a net capital gain at the lower rate were also heralded as ways to spur investment in new businesses (entrepreneurialism) and job creation.  Bullshit.  Most of the result was just more money in the pocket of the richest Americans who own most of the financial assets, and that money in the pocket was as likely to be invested in offshore bank accounts as put to work supporting a new business here in the US.  The dividend tax cut didn't even lead to much in the way of dividend payouts--except perhaps for firms whose managers and directors saw a chance to benefit themselves.  Even if those expiring tax cuts are not renewed with new tax legislation, it is not likely to have much of an effect on companies' dividend policies.  See Higher Taxes May Not Push Firms to Cut Dividends, Wall St. J., Aug. 30, 2010.
5. The cuts in individual rates were supposed to provide more money as an economic stimulus.  But the Republicans who passed those rate cuts knew that the AMT would act as a clawback to the cuts over time, except for those at the very top who were always subject to the AMT and those in the bottom who are hardly ever subject to the AMT.  And they knew that amending the AMT to conform to the temporary tax cuts would be tremendously expensive--at least a trillion in revenue lost for the decade of the tax cuts, where the "temporary" nature of the bill had been necessary to claim that the cost was "just" 1.3 trillion over a decade.  In other words, the tax cut bills passed during the Bush regime with the 2010 sunsetting gimmick were a sham from the beginning--they cost much more than those who passed them wanted to admit, and they carried with them a clawback mechanism that would undo the cuts in rates for many individuals.  The various annual "patches" to the AMT are extraordinarily costly in terms of lost tax revenues since they are essentially an extension of the tax cuts to an even broader base, and the corporate changes to the AMT have reduced its effectiveness in cutting back on corporate preferences while costing the fisc billions.
6. The estate tax scaleback and one-year repeal was the most gimmicking of all.  Cutting the budget by $30 billion a year in order to fund a giveaway to the wealthiest and most privileged Americans is hard to justify in any budgetary climate.  So Republicans pushing estate tax repeal and the various "coalitions" funded by wealthy families like the Walton heirs have painted a facade of "helping little guy farmers and businesses" on their efforts--a facade that many Americans may have bought hook, line, and sinker since they do not tell the truth, much less the whole story.  Very few family farms and very few small businesses are threatened at all by the estate tax. 

So what should this list of bogus and failed reasoning tell us about what the Congress should do on taxes for 2011 and thereafter? 

1. I say let the Bush cuts expire according to the way they were written.  But enact a new set of tax cuts that are better targeted to jumpstart the economy and to put money where it is needed.  
2. Let the corporate giveaways  expire as slated.  
3. Let the estate tax mess expire as slated.  Enact a new estate tax law that (i) increases the exemption amount to a reasonable level (say, $2 million) and indexes it for inflation and  (ii) enacts a progressive rate structure (ranging from 55% on the estate that exceeds the exemption amount, up to some higher rate of 65% or 70% on multi-billion-dollar estates. 
4. Let the capital gains changes die as slated, and do not enact any further capital gains preferences (so dividends would go back to being treated as ordinary income). 
5. Let the individual rate changes die as slated, and enact a new tax cut for individuals making $100,000 or less, with a temporary tax cut for individuals making up to $200,000 for a three year period to aid us in getting out of this recession.
6. Enact genuine AMT reform--in which capital gains are treated as a preference and which provides a significant exemption amount based on gross income.  See the earlier articles (2005-2006) in ataxingmatter on AMT reform for more specifics about the kinds of reforms to the AMT that make sense.
7. In conntection with the rate cut and AMT legislation, enact measures to pay for the tax cut, including

(i) a carried interest provision taxing all profits interests as ordinary incom

(ii) a corporate tax provision limiting the benefits of tax-free reorganizations and consolidations, and

(iii) a charitable contribution provision eliminating the deduction of value in excess of basis.

War taxes?

Since Bush invaded Afghanistan in 2001 (and then, Iraq), we have been paying for war as an afterthought.  In the Bush era attempt to treat war as something that happened "over there" and didn't disrupt the credit-fed consumer binging happening "over here,"  there were no pics, no war bonds, and certainly no war taxes to pay for it.  Instead, we actually cut taxes year after year after year, reducing government revenues at a time when we were passing supplemental appropriations year after year after year to pay for the war. With reduced taxes and increased military spending, that meant we borrowed to pay for the war of choice that Bush led us into.

In most wars, this country's citizens and leaders have been somewhat wiser on the fiscal score.  In the past, we generally raised taxes to pay for the huge expenditures that war necessitates--for caring for soldiers overseas and after they come home, for tanks and trucks and planes and drones and all the guns and missiles, not to mention warships and fuel, the construction of bases and building of roads and provision of power and all the other expenses of going to war (including, increasingly under Bush, the privatization of the military and the much higher costs of contracted mercenaries compared to Army soldiers and of Halliburton cafeterias that, in quite a few cases, didn't serve the food they charged the US for). 

Now that Bush and much of the Bush Congress are gone from office, it's time to look at the costs of war when we think about what our tax burden should be.  As one writer notes: 

[O]ne thing literally everyone agrees Vietnam showed, from flaiming liberals to fire-breathing neocons, is that it's a very bad idea to get involved in a long, grueling, expensive war without explaining to the American people how much they will have to sacrifice, and securing their support."  The Economist, David Obey's war tax (Nov. 27, 2009).

David Obey, chair of the House Appropriations Committee, introduced on Nov. 19--with 10 Dems as co-sponsors--the "Share the Sacrifice Act of 2010" to do just.  See Pincus, If It is to be fought, it ought to be paid for, Wash. Post, Dec. 1, 2009.  How? by adding a graduated  surtax, in 2011, to the income tax for those earning more than $30,000 a year.  The rate would be 1% on incomes up to $150,000 and more above that--generally, a few hundred dollars, with the rate on higher incomes set to generate enough revenues to pay for the prior year's cost of being at war, with returning GIs and families of those killed in combat exempt.  And the surtax could be delayed (from 2011 to 2012) if the economy is weak.

The article notes an irony that has been mentioned also in the context of the health care reform debate about paying for government action.  IN health care, many of those (especially republicans) who argue that "oh no, we can't do this to fix the health care system, it costs too much and will create deficits" are the same ones who supported the series of Bush tax cuts that led to huge deficits, and their argument was "deficits don't matter."  In the war tax debate, many of those most eager for further commitment to Afghanistan are unwilling to support taxes to pay for the conflict rather than living on borrowed money.  (Or, they'd probably be willing to cut various "entitlements" for the vulnerable amongst us, even while extending even more "entitlements" to corporate taxpayers those who own significant financial assets in the way of further tax cuts.)  Note the article quotes Lindsey Graham as saying spending has been out of control "since the administration came into power."  Funny--the spending that has happened was necessitated by the economic mess left by the Bush Administration, that fought wars and INCREASED SPENDING while cutting taxes.  Was it spending out of control? or was it spending while going on a multi-year tax cut binge that was out of control?  I'd say the latter. 

If you want the right's take on this, read Amy Ridenour--a self-admitted Rush Limbaugh enthusiast.  She thinks Rush's "logic" is fine.  By the way, his argument translates to:  we're in debt [implying it's all Obama's fault and not because of the Bush screwups of the economy and the huge amount of borrowing already committed under Bush] so this argument about paying for the war is silly when we already have so much debt; and/or yeah, well, just cut the spending on all those silly programs that progressives have put in place since Roosevelt (Rush calls it the "Fair Deal, New Deal, Rotten Deal, Raw Deal and Great Society")--ie, the programs (subtracting out Rush's trash talk) that we as a people have decided over many decades to use to support the vulnerable and improve opportunities for decent living standards for all.  And like many right-wingers, Ms. Ridenour claims that her goal is supporting "principles of a free market, individual liberty and personal responsibility, combined with a commitment to a strong national defense."  Amy, how do not paying for the wars we CHOOSE to wage add up to either "personal responsibility" or "commitment to a strong national defense" or even "free market"--since there is no such thing as a "free" market without the stability, institutional structure, and legal forms provided by a stable and functioning government?

At any rate, mainstream commentators seem to think the bill wouldn't pass, which means that they seem to think that it won't get substantial Republican support, which the Rush-Ridenour excerpt surely suggests is correct.  See David Obey's war tax, Economist (Nov. 27, 2009).  Those very people who are gung ho for war ("commitment to strong national defense") and gung ho for not having deficits aren't likely, that is, to vote to pay for the war in which they are so gung ho for  others to fight.  As the Economist article hints, how better to support the troops than paying for their fight? 

Financial Transactions Tax

[edited to add links and correct typos 11/28/09]

The current financial crisis and economic recession were caused by a number of factors--from foolishly optimistic homebuyers to greedily speculative bankers, from pushy real estate salespeople to outright fraudulent mortgage brokers who talked naive first-time homebuyers into getting in way too deep, from regulators too closely aligned with the industries that they are charged with overseeing to congressional senators and representatives too intent on making profits easy for their financial institution allies.  All are guilty, but we can't do much about individual responsibility or the sales puffery that abounds in the real estate market. 

 We can do something about shady mortgage brokers, and congress should act to require a plain statement of the actual cost of the loan, the actual monthly payment, the actual financing resources needed to carry a loan--all to be given to a loan candidate at least one week before a closing.  Note I said "actual"--not those phony sheets that purport to inform but carry caveats that the information may not be complete or up to date.  Terms should be fixed and proper notice given before closing, in plain English.

The remedy for preventing future systemic problems in the financial system must focus on financial institutions (including the shadow banking system), their regulators, and Congress.  We need to shine a lot of sunshine in--through reporting requirements for derivatives, among other things--and we need to draw (or, in many cases, redraw) a number of lines in the sand about capital requirements, leveraging and interlocking ownership.  We need to make some accounting changes, to ensure that all financial institutions have fewer opportunities to engage in earnings management, and some of those accounting changes need to facilitate the way we measure equity capital for regulatory purposes. 

But we also need to think about using the tax system in better ways than we have in the past.   Our primary objective with the taxation of financial instruments has been to relieve them of tax--except for those rare periods, such as 1986, when sound minds recognized that there is no justification for the preferential rate.   The assumptions underlying the preferential rate are in question as never before, and the value to the economy as a whole of "easy trading" --unrestricted by any tax on the transaction and relieved by lower rates from the income tax burden--is itself under reconsideration.

Krugman's op-ed (NY Times, at A29) says that the US should emulate the UK and EU officials who think financial transactions taxes should be used to deter financial speculation.  He notes the UK financial regulator's announcement, in August 2009, that such a tax can discourage "socially useless" activities, used by Gordon Brown at the G20 meeting this month.  (This is, of course, another variant of the "sin tax" idea that I raised as a possibility for use to discourage meat production and meat eating, because of their high societal costs--pollution, health, etc.  See post last week on vegetarianism). 

 Krugman notes the "broad agreement" on the part of "almost everyone not on the financial industry's payroll" that speculative trading is socially useless.  The problem is that speculation in financial assets has a disruptive effect on the world ecoomy.  Tobin proposed, Krugman notes, a similar tax on currency speculation back in 1972.  A "Tobin tax" should be small enough that it would not be a disincentive to those buying for long-term invetment, but would "throw some sand in the well-greased wheels" of those trying to get rich quick from outguessing the market with quick trades.  It's that "churning" that's problematic. 

The tax would therefore discourage potentially harmful activity, while raising much needed revenues for the Federal Treasury.  And the revenues would arise primarily from a source that has benefited enormously from the government's guarantee because of the "too big to fail" problem with multinational financial institutions.

Note another benefit of such a tax.  It should make it less likely that banks, like Goldman Sachs, could use their high frequency trading software to make billions off customers' trade information just ahead of the customer trade, as they currently do.

Krugman says the main argument against the tax is that traders would just work around it.  That, of course, has been a rallying cry for cutting taxes from those on the right--if the rich might be able to avoid the tax, they say, let's just eliminate the tax and give them what they want.  That logic leads down a one-way street with a rigid downward slope--all taxes would ulimately be eliminated, and government would find it hard to provide the barest necessities that we have come to think of as the appropriate fruits of citizens working together through government to address common concerns.  Krugman notes that the very settlement mechanism that permits traders all over the world to engage in current trades provides a ready mechanism for tracking and taxing the majority of financial transactions.

Yes, a "sin tax" on financial transactions won't cure the gullible homebuyer, the fraudulent mortgage broker, or the potential innovations (llike subprime mortgages themselves) that are intended to bypass rules.  But it will hit those managers too besotted by their millions in pay (and more millions in stock) to care that their cost of funds are cheaper because it is the taxpayers backing up their losses while they sock their privatized gains away. It might therefore help to shrink the too big to fail institutions, as it puts a crimp in their quick-trade profits .

One question not answered, though, is how a financial transaction tax will affect securitizations.  One assumes that the "sale" into a securitization vehicle will be subject to the tax, as would the sale of interests in that securitization vehicle, and as would sales (or modifications) of existing assets in the securitization vehicle.  That's likely a good thing overall if the transaction tax itself is a good thing, but it is one aspect of the tax that would need to be better understood. 

Another question is whether there could be some protections for transactions by low and middle income folks.  See Kay Bell's Don't Mess with Taxes "The Investment Tax is Back".  For links to other blog commentary on Krugman's post and the Tobin tax, see TaxProf here.