In fall 2005, a Wall Street Journal editorial cast a Congressional Budget Office (CBO) report on tax revenues as a vindication of the effectiveness of Bush's tax cuts, claiming that tax revenues as a percentage of GDP were on a par with historic levels. As this blog aptly illustrates with a number of graphs, however, when the tax cuts are fully taken into account and presumed to be made permanent, tax revenues will actually decline to record low levels.
The CBO also issued a report in December, 2005, the Long Term Budget Outlook, that indicated considerable concern over the relationship between federal outlays (in particular, for health care costs) and federal revenues. "If taxation is restricted to the levels that prevailed in the past, the growth of spending on programs for the elderly will have to be reduced substantially." Id.
As noted in a story by Jesse Eisinger titled "Night of the Living Debt," Wall Street Journal, Jan 4, 2006, at C1, based on information from the Economic Policy Institute, "Americans spent more money than they made last year....The average worker hasn't participated in the economic recovery. Inflation-adjusted hourly and weekly wages are still below where they were at the start of the recovery in November 2001." Id. States have been forced to take the lead in trying to increase the minimum wage for ordinary Americans to a decent standard, since the federal government has so far proven incapable of doing so. See John Broder, States Take Lead in Push to Raise Minimum Wages, NYTimes, Jan. 2, 2006, at A1.
Meanwhile, Congress' plans to strengthen private pensions will not do much good for the 48 million full time employees who receive no pension benefits and for whom their companies offer no retirement savings programs. See Joi Preciphs, Congress May Focus on Retirement Funds, Wall Street Journal, Jan 4, 2006, at A4. The article notes that workers without pensions are "disproportionately Hispanic, young, single, less-educated and lower-paid than the work force in general." IBM joined the ranks of large companies reaping additional profits for shareholders by pulling the legs out from under their pension plans: IBM will cease funding its plans after 2007. It expects to save about $3 billion by 2010 with this move. See this story.
These economic facts should be a sobering wake-up call to Congress. If my wish list were granted for the Congressional response, it would look something like the following.
First, Congress should not pass further tax cuts. In particular, it should forget extending the low dividend and capital gains rates, and it should undo the giveaway expensing provisions. It should just turn back the clock on any provisions that were due to kick in for 2006 (such as the phaseout provisions), and let the estate tax spring back to life (with a somewhat higher exemption amount) in 2011.
Second, If Congress really wants to solve some of the financial problems facing this country, it could consider enacting a system of much more progressive rates within the "upper quintile" tax bracket--i.e., tax those who have a half million of annual income at a higher rate than those who have a quarter million, those with a million at an even higher rate, those with 10 million at an even higher rate, and those with more than 30 million at an even higher rate. See, e.g., Tom Daley, Progressive? Yes, But Steeply Progressive?, Letters to the Editor, 109 Tax Notes 395 (Oct. 17, 2005) (suggesting that our current rates are not steeply progressive, providing a copy of the 1937 tax rate table with bracket amounts updated to 2005 dollars, in which the top bracket was $68 million in today's dollars, and suggesting that we should have "incrementally higher tax rates" on incomes at the very top of the distributional scale).
Third, Congress should deliberate carefully about the best ways to spend the revenue that the government currently takes in. There should be a national discussion, with electronic town meetings all across the country about national priorities. Every Senator and Representative should consider it his or her solemn duty to be as frank as possible in discussing with constituents the possible needs.
Fourth, the place that can best be cut is the bloated military budget that consumes hundreds of billions annually for weapons systems and operations (not to mention the additional hundreds of billions in supplemental budgets for the occupation of Iraq and Afghanistan). The CBO's latest update of long-term budget needs, linked here, includes a chart (Fig 1.1) that shows the enormous amounts of funds that we spend on the military. Ben Cohen, in an opinion piece on Alternet, linked here, agrees that the military budget is the prime target for reductions. Cohen suggests that just reducing expenditures for outdated weapons programs could garner $60 billion.
Fifth, of the money saved from the military budget, just a few billion could do wonders for those lower-income families that our hearts went out to during the Katrina disaster. Imagine establishing a fund for Katrina victims so that we can compensate them similarly to the way we compensated World Trade Center Victims' families--with a substantial cash payment. I'd opt for a $50,000 cash payment to every Katrina family that lost a home, with up to an additional $150,000 based on need. Similar but smaller awards could be made to those whose homes were damaged but not destroyed. Perhaps similar cash grants should also be made for families that lost husbands, mothers, sons or daughters. I still don't understand why we could give millions in cash to the wives of investment bankers who earned millions annually, had million-dollar homes and million-dollar savings accounts but we can't give even $200,000 to all the homeless and poor victims of Katrina in New Orleans. Let's give them a lump-sum cash award that is substantial enough to help lift them out of the mire of poverty. Let them spend it to return home to rebuild or to start a new life somewhere else. For those that return home, their cash will be a significant boost for the local economies, creating jobs that will continue the cycle of economic growth and generate tax revenues much needed by the cities and states that were devastated by the floods.
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