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Go Home Obama Shows His Upper Hand on 'Fiscal Cliff' Negotiations

PLANK NOVEMBER 9, 2012

Obama Shows His Upper Hand on 'Fiscal Cliff' Negotiations

BY JONATHAN COHN

President Obama sent Republicans a message on Friday: I won. Get over it. 

He didn’t put it quite that way, of course. Instead, he gave some formal, prepared remarks about economic policy—specifically, how he would like Congress to address expiration of the Bush tax cuts and the implementation of some automatic spending cuts, both of which are scheduled to take place on January 1. Dealing with this “fiscal cliff” will likely be the primary political preoccupation of the next few months. And, over the last few days, Republican leaders have made a series of statements about the tax portion of the debate, hinting at how they intend to approach negotiations.

Exactly what message the Republican are sending depends, in part, on which statements you consider and how you interpret them. House Speaker John Boehner, for example, has generally struck a conciliatory tone: "I don’t want to preclude anyone who might have a good idea of how we move forward," he said on Friday, not long before Obama spoke. But Boehner on Thursday told ABC's Diane Sawyer, "Raising tax rates is unacceptable. And frankly, it couldn’t even pass the House." Senate Minority Leader Mitch McConnell has been even more blunt. In a statement released to Breitbart News, McConnell said:

One issue I’ve never been conflicted about is taxes. I wasn’t sent to Washington to raise anybody’s taxes to pay for more wasteful spending and this election doesn’t change my principles. This election was a disappointment, without doubt, but let’s be clear about something: the House is still run by Republicans, and Republicans still maintain a robust minority in the Senate. I know some people out there think Tuesday’s results mean Republicans in Washington are now going to roll over and agree to Democrat demands that we hike tax rates before the end of the year. I’m here to tell them there is no truth to that notion whatsoever.

Boehner, at least, may be open to tax changes that raise revenue by closing loopholes, rather than raising rates. But, as the Washington Post's Suzy Khimm points out, loopholes alone can't raise that much revenue. And Boehner's ability to rally his caucus around a deal remains as questionable as ever. In other words, the Republican position doesn't seem much different than the one Republicans held in their last negotiation with Obama, during the debt ceiling debate in the summer of 2011. 

Obama on Friday made clear he thinks circumstances have changed since then:

...this was a central question during the election. It was debated over and over again. And on Tuesday night, we found out that the majority of Americans agree with my approach—and that includes Democrats, independents, and a lot of Republicans across the country, as well as independent economists and budget experts. That’s how you reduce the deficit—with a balanced approach.

Obama also framed the issue as a clear choice: If the wealthy don’t pay more, he said, the poor and middle class will end up paying more, directly or indirectly. “I am not going to ask students and seniors and middle-class families to pay down the entire deficit while people like me, making over $250,000, aren’t asked to pay a dime more in taxes. I'm not going to do that," he said. After the remarks, White House press secretary Jay Carney said that Obama stands by his threat to veto legislation extending tax cuts for the wealthy.

The administration was not quite as emphatic when it came to another issue: what kind of spending cuts Obama might accept as part of an eventual deal. During the prepared remarks, Obama reiterated his support for changes to the "health care system." That presumably means Medicare and Medicaid changes that would affect providers (drug makers, doctors, hospitals, etc.) without reducing benefits directly. But when a reporter (Laura Meckler of the Wall Street Journal) asked Carney about specific Medicare changes, such as raising the eligibility age from 65 to 67, Carney said he wouldn't go into such detail. Obama was open to that proposal during the 2011 debate and liberals (like me) are watching nervously to see whether he'll consider that idea again.

But liberals will (and should) be pleased by something else Obama said on Friday. At the very beginning of his remarks, Obama indicated that the primary, short-term focus of economic policy should be creating jobs—ideally, by passing the proposals he laid out a year ago (as part of the American Jobs Act) and championed during the campaign.

Many, and quite possibly most, mainstream economists agree that the economy still needs bolstering. Broadening the economic discussion to include job creation, as well as deficit reduction, would make that possible.

SHARE YOUR THOUGHTS

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79 comments

It seems to me that Obama did a great job of laying out his approach to the House: the Bush cuts expire at year end, for everybody. He'll veto anything that doesn't raise rates at the top end. Notice served, ball's in your court Mr. Boehner. I only hope Obama has learned to stick to his negotiating position when he's holding the whip hand. History does not re-assure on this point, but he's a smart man, so here's hoping .....

- IowaBeauty

November 9, 2012 at 5:43pm

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what Iowa said, Republicans are blowing smoke, they know Obama holds the cards as to tax rates and what will they say if rates go up? Will the American people understand that the rates were due to expire? I doubt it. Obama can blame it on them for not cutting a deal, even more so, he can blame the tax hikes directly on them as they voted for the bill that had the sunset provision in it.

- blackton

November 9, 2012 at 7:19pm

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Did Obama actually say he'll veto any proposal that doesn't raise rates on the top end? I sure hope so--and it so, I hope he'll stick to his guns. I hope he takes to heart Krugman's latest: Just Say No to Government by Blackmail.

- AaronW

November 9, 2012 at 8:17pm

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To me the solution is very simple--let the Bush tax cuts expire for everyone. No one will actually be writing checks for taxes at the Clinton Era rate until 2014, an election year. Let the middle class know, constantly, in 2013 that, thanks to the Republicans, they'll be writing bigger checks for taxes in 2014. And let the Republicans know, constantly, that 2014 is an election year. Problem solved.

- magboy47.

November 9, 2012 at 8:46pm

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My advice is for President Obama to pass out titles and dispatch an army of experts to the airwaves: "We have with us Ms. So-and-So who is currently the chief assistant of the assistant chief for tax policy, and she says, higher top rates won't hurt the economy."

- Nusholtz

November 9, 2012 at 9:00pm

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I know people scraping by, still on extended unemployment, who will go under if Obama stands firm, and lets the Bush tax cuts expire. Which they want him to do. But they also hope that President Obama will campaign, educate, and succeed in marshalling enough pressure on Boehner's blackmail bunch to govern instead of terrorize.

- JCAtwood

November 9, 2012 at 9:18pm

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Raising taxes on those over $250k will not bring in enough revenue. The imagery helps Obama vs Boehner, and may well work politically, but it is a disingenuous fantasy. Raising revs from 16% to 17% GDP, which is the top end of what the upper income hikes will produce won't put a dent in 23% GDP (and rising) spending. Some reality please people. Either tax collections need to rise across the board (eg, including the 3% GDP from expiring the cuts on those under $250k) or spending needs to fall significanty. The public seems confused, and nobody including many on these boards understands that those are our choices. No thanks to either Obama or Boehner. Seems to me the voters said don't cut my spending. Fine, then collections have to go up to at least 20% GDP and likely higher. Clinton era revenue levels will need Clinton era taxes. But our politicians are pandering and posturing, with not an honest one in the lot. Let the Bush cuts expire, period.

- ds111

November 10, 2012 at 1:45am

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Ditto ds111. And I might add Clinton era revenue levels will not only need Clinton era taxes but also the equivalent of the collapse of the Soviet Union in peace dividends, and the equivalent of the dotcom boom.

- Robert Powell

November 10, 2012 at 6:05am

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ds111 It doesn't have to be all taxes. Progressive rates are easier on the economy, easier on the taxpayers, and easier on the Internal Revenue Service enforcement. Raising the top rates is the first place to start in the current economy.

- Nusholtz

November 10, 2012 at 7:47am

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Au contraire, ds111 and Robert Powell. We could raise enough revenue by taxing the income about $250,000, especially now with income as highly concentrated at the top as it has been in about 80 years. But we cannot do it with just the Clinton top rates. We could fund the entire operating budget of the Federal government with income taxes only on the top 10% and they would still have a larger share of aggregate net private income than they did in 1980. The decision not to finance the government this way is a political choice, by no means economically necessary. Just the reverse. Reducing income inequality would increase private demand and stimulate growth. No matter. We have to start somewhere and this is a good place. It would be better if the Bush tax cuts expired completely, but the Republicans have succeeded in making that politically toxic. The first step is to show that we can raise taxes and not see any economic decline as a result, probably some net benefit as the ant-debt psychology eases. The notion that we cannot afford any particular level of government spending is flat-out wrong. There is no fundamental difference between public and private spending. It is a purely a matter of the allocation of net income. More public spending has an equalizing effect. That would be good for the country both in terms of demand and productivity.

- roidubouloi

November 10, 2012 at 11:23am

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Nusholtz, we have progressive rates. Roughly 70% of income taxes are paid by those earning over $250k, and 95% by those over $125k. You want it to be 75-80%? It still won't put a dent in the deficit. First place to start? Fine, but a place to start isn't enough. Again, 80% of the revenue loss from the Bush cuts comes from below $250k. Made no sense. If we're going to spend a lot, we need to raise a lot, and it won't come from the top. Any pol saying otherwise isn't being forthcoming. The only way to fund a middle class welfare state is by having the middle class pay for it. Let the cuts expire.

- ds111

November 10, 2012 at 11:37am

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You've made that taxation argument before roi, and it's still both true and a political non-starter. For most folks the difference between public and private spending is the difference between who's doing it, us or them. Similarly, the question is not whether or not the money can be raised to fund almost any level of government. It's whether we want as much government as we already have, particularly in areas of clearly counterproductive activities like our various Global Wars (terror, drugs, what have you), massive incarceration, corporate welfare, fraud and malfeasance in healthcare, distortionary subsidies, etc, etc.

- Robert Powell

November 10, 2012 at 11:41am

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I've made the argument before and I was right before. It is first of all important to keep clear the difference between what is politically possible and economic necessity. It is generally the case that the right cloaks what is essentially a political/ideological argument -- that the rich should not be taxed more heavily, or that the middle class should be taxed more heavily, or that indeed the poor should be taxed more heavily -- in false economic claims about what a given distribution of the tax burden will do to growth and output per capita. The claim is that shifting the burden toward the high-end, where 10% now have 50% of pre-tax GDP, will adversely affect the economy. This is false. The opposite is the case. History shows this to be so and there are very sound economic explanations for why it is so. However, it happens to be directly contrary to supply-side voodoo economics. All the more reason for not allowing the political/ideological Randian claim, that justice demands that we shift the tax burden away from the rich(!), to masquerade as economics. Another phony economic claim is that we are approaching a debt apocalypse. This too is used as false economic justification for the political/ideological demand that government's share of the economy be reduced. The only real justification for reducing government spending (unless it is government spending that we don't want, which appears to be a very small portion of the total -- the so-called "waste, fraud and abuse" that is a small percentage of the total) and shifting the tax burden toward the middle class and the poor is that the rich deserve to be rich, the poor deserve to be poor, the middle class deserves to struggle ceaselessly, and the government should do nothing to upset that moral universe. So, let us be clear, if nothing else: The debt apocalypse claims, the anti-government share of the economy claims are fake, fraudulent, voodoo economics. They are pure ideology, class warfare waged by the wealthy against everyone else. What is and is not a political non-starter is not static. My point above is that it is necessary to start to walk the political posture and public perception back from the anti-tax cliff at which Reaganomics has had us standing for a generation now. We have to start changing the perception of the possible regarding the distribution of taxation -- recalling that in the life-times of many of us there were 90% marginal rates and we still had much higher growth than we do today. You change perception by changing the landscape. The first step is to let the Bush tax cuts expire. I would let the expire in their entirety. But, if that too is a political non-starter in the current environment, then let us begin where we can begin, with a restoration of Clinton-era rates at the top. ds111, we could collect 100% of income taxes from people earning more than $150,000 a year, sufficient to eliminate the operating deficit, and they would still have a higher income share than in 1980. Was the top 10% living in tragic circumstances in 1980? The claim that the only way to fund a middle class welfare state (do we have such a thing now?) is by having the middle class pay for it is simply false. But you will repeat it, as will the rest of the right, because you want the public to believe that what is good for the wealthy is an economic necessity rather than an exercise of political power. Not true.

- roidubouloi

November 10, 2012 at 1:02pm

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As far as I know, people on "Extended Unemployment" don't pay that much in taxes, because they're not making that much in income. Besides, increasing their tax burden a whole 6% isn't going to make that big a hole in what they're taxed now. People making over $250K -- well, it STILL won't make that big a hole in what they're paying in taxes. I'd really like to see Capital Gains taxes go back to 35% -- now THAT would put a hole in Romney's taxes. He might even have to slow down construction of his third house, poor guy.

- AllanL5

November 10, 2012 at 1:30pm

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There is no economic justification for the capital gains preference other than the supply-side fantasy that this stimulates investment. No, it doesn't. It stimulates asset bubbles.

- roidubouloi

November 10, 2012 at 2:01pm

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I'm glad to see capital gains tax rates finally enter the discussion. Potius sero quam nunquam. I am not, it is clear to me, as sophisitcated as most of you all in terms of the details of economic policy, but the preferential rate given to capital gains strikes me as blatantly immoral. After all, we supposedly value the ethic of hard work, and want to encourage people to see honest work as the way to get ahead, to improve their lives. But the capital gains tax rate preference essentially means that work, and workers, subsidize capital, and capitalists. I can see retaining a capital rate differential for those who's annual gross income is below some level designated as top of the "middle class" (say, $250 K), but to retain that rate for high rollers, folks like Romney, is just wrong, IMHO.

- Haole45

November 10, 2012 at 2:44pm

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ds111 Our tax code is less progressive and the fact that income disparity results in the wealthier citizens paying the bulk of the taxes does not diminish the need for a more progressive tax code. Almost every country in Europe has a tax/GDP ratio high enough to cover all of the projected increase in spending in the United States through higher revenues alone. The high-tax economies grow about as fast as ours does, sometimes faster. Prosperous Denmark, Norway, and Sweden have tax rates well above 40 percent. We have never been able to afford the Bush top rate tax cuts and they have not helped us for 12 years now.

- Nusholtz

November 10, 2012 at 2:52pm

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haole45 I think the capital gains preference is nothing more than a subsidy to the stock market that diminishes investment in small business by making sales of investments more attractive (15% rate) than profits from ownership of a small business (35% rate). Ask yourself if you would rather put $200,000.00 in a small business that needs money with a tax at 35% of profits or the stock market with a tax of 15% of gains. Reagan got rid of the preference in 1986. Clinton reinstated it in 1997. Look up job growth before and after those dates. It is down before 1986 and up afterwards. It is up before 1997 and down afterwards. Cap gain preference kills small business and jobs.

- Nusholtz

November 10, 2012 at 2:58pm

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haole45 Oh, and I should add that Bush increased the preference in 2000 and added in dividends - Job growth dropped to 2.7 million. Go here for job numbers: http://en.wikipedia.org/wiki/Jobs_created_during_U.S._presidential_terms

- Nusholtz

November 10, 2012 at 3:00pm

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Not even a justification for under $250K earners, haole. If one guy makes $150,000 by working and another makes $100,000 by working and $50,000 from capital, why is the income from capital to be preferred? We should also get rid of corporate taxation and include corporate taxable income in personal taxable income. That way the tax on corporate income is progressive. The very simple way to do this is to have corporations either elect pass-through status, like S corporations of limited liability companies, or withhold at the top marginal rate and then deduct dividends and interest paid. People who own the stock the entire year would have their share of undistributed income and the tax on it reported and attributed to them. This would allow people paying less that the top marginal rate get a refund if they were long-term holders. Those at the top marginal rate could just ignore the whole thing as it would be a wash. People who traded in the stock during the year would in effect pay the top marginal rate on their share of corporate income, a disincentive to short-term trading. Nusholtz point is another bit of what is actually overwhelming evidence that capital gains preferences and low taxes on the wealthy are bad for growth, not good for it. The reason is that wage-earners end up with too little purchasing power, that reduces aggregate demand, and aggregate demand is the key to both output and investment. The only purpose of investment is to meet demand. If the demand isn't there, doesn't matter that there are income subsidies to investment. Investment can only earn if the output is sold and it is only sold if there is someone to consume it. So profoundly elementary that it is too often overlooked.

- roidubouloi

November 10, 2012 at 3:40pm

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We won't get any of the (sensible) reforms mentioned above without more Dems in the house. We've got two years to pursue a populist agenda and then get the base to the poles in 2014 with the understanding that gains could be rolled back.. If we can show that government is the necessary protector of middle class life we can get people to turn out again. At the top of agenda should be two years of community college free for all. That will be huge relief to millions of families and a long term boost to growth. Couple that with income-based student loan repayment for those who go on to get 4 year degrees and you've just jump started a robust middle class.

- gaarondawson

November 10, 2012 at 5:08pm

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And I would add to what roid said that under the current Bush Tax Cuts, a married couple with income of $85,000.00 of capital gains and dividends pays zero taxes, while a married couple who work, pay $16,000.00. You can find these numbers yourself with tax software for 2011. Put in a married couple with no kids. Put in $85,000.00 of dividends or capital gains (you can go a little higher) and get a zero tax. Now, erase that and put $85,000.00 on a W-2. Add in your share of social security and medicare taxes to your income tax. It should be around $16,000.00 altogether. Or try putting $85,000.00 on a schedule C (business income) for same result. Whacky.

- Nusholtz

November 10, 2012 at 6:07pm

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Roi, I'm not arguing theoretical possibilities. Your +$150k tax regime is absurd and holds no where in the world, andyouu know that. When it brings in half the rev you expect, you'll do what the europeans do, lump in a 20% VAT, which will of course hit the middle class. Dont live in fantasy world, it is not about right or left. At 90% marginal rates, we brought in the same average rev as under lower rate regimes. Think maybe people adjusted their behavior? Wealth ownership shifts to corporate ownership, or flees to friendlier climes but it stays roughly the same, as it has for a century, according to Picketty and Saez wealth data. I'm simply trying to dispell the dangerous fantasy that "the rich" will pay for middle class entitlements - they won't, because they can't. And yes, we are a middle class welfare state, not far behind the OECD in our total govt spending, and heading in their direction, though we do so less efficiently and spend far more on defense. The justification for the cap gains preference is that it is an optional tax. I agree that it should be no lower than the income tax, to prevent arbitrage, and for the very good reasons Nusholtz has spelled out (you've stuck with your argument over time, and it is right) and agree with Roi that much of corporate income should flow directly through to the owners. But when cap gains rates are relatively high, tax collections from it are low, because owners can defer realization, almost in perpetuity. That's why you saw a spike in cap gains collections under Clinton (20% rate) and more under Bush (15% rate). Raise the rate and collections will collapse, which doesn't bother me, but recently represents up to 2% of GDP (out of 15-20% total), so again, don't kid yourselves, higher cap gain rates won't pay for the govt you want. We have (too) low collections for our spending, even with low rates which encourage income at the high end to be realized and taxed. Raise rates and high end income will drift back towards unrealized and untaxed. I know Roi hopes for a magic formula to get all income taxed, but he is dreaming. If he were honest, he would acknowledge that the middle class will pay for the benefits they receive. As they do under all similar regimes. Otherwise, I agree with you Roi. Let the cuts expire, heck, even raise the cap gains rate, as 20% was too low vs 39.6% top income tax rate.

- ds111

November 10, 2012 at 6:13pm

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What this argues for is either a flat rate, or tiny incremental step ups that don't discourage additional taxable earnings, and on all earnings. It is doable technologically. But again, we are back to Europe, where the bulk of tax revs come from the middle class. Those at the top won't earn less, but they will produce less taxable income. There is no escaping this.

- ds111

November 10, 2012 at 6:24pm

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ds111 I'm simply trying to dispell the dangerous fantasy that "the rich" will pay for middle class entitlements These two things are only related by people who argue they are related. We have $16 trillion in debt. That is debt from money already spent. We need to collect revenue in the most efficient way possible with the least damage to the economy. Flat rates diminish consumption more than progressive rates. Flat rates mean people who can't pay owe more, while people who can afford to pay more, pay less.

- Nusholtz

November 10, 2012 at 6:47pm

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Sorry Nusholtz, I see it all over these boards and in the campaign by Obama, with comparable disingenuousness by the repubs.

- ds111

November 10, 2012 at 7:03pm

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Does ds stand for disingenous? You are surely the last person, ds111, with the exception of seattle, who should be lecturing anyone about reality, fantasy, and tax policy. All you do is repeat the talking points of supply-sider True Believers who have never been right about anything, not one single thing. 1. There is first of all exactly zero evidence that any plausible tax rate discourages people from generating taxable earnings, unless of course we give them loopholes in which to hide it. But that is a political choice, not an economic necessity. 2. Income is more evenly distributed in Europe than it is here. So, of course taxes have to be more evenly distributed than the need to be here. The fact is that are taxes are regressive relative to Europe while our income distribution is more skewed to the top. You just keep claiming that we cannot collect the taxes we need from the 10% who have half of national income. But that is false. Obviously false. It is a political choice. Now, if you want to argue about what is politically possible in the current environment, that is a different subject. Your economic claims are nonsense. They are detached from the reality of income distribution. 3. Of course top marginal rates collected little back then because there was relatively little income at the top marginal rate. But income distribution was much flatter than it is today. With so much of pre-tax income now flowing to the top 10%, there is lots and lots and lots of income to tax at whatever we choose as the top marginal rate. 4. What you really fail totally to understand, ds111, is that we are always talking about shares on national income, pre-tax and after-tax. As long as the economy produces $15 trillion of GDP, someone gets it. And as long as someone gets it, then it is possible to tax it. And as long as it is possible to tax it, it is possible to raise $2.5 trillion for federal spending via income taxes that are much more progressive than our system today. There is actually no good argument whatsoever for a flat tax, other than that you say so. But income is now so skewed, that a high zero bracket, say $100,000 if not $150,000, and a single bracket above it, could still raise all the income we need. Flat enough for you? I bet not, because you have the religious belief that taxes should not be used to redistribute output shares. That has nothing whatsoever to do with economics. It is, as I said, a religious/moral belief that masquerades as economics. 5. The only way we stop having the $15 trillion of income to tax for the government's share is if the impact of the tax somehow reduces output. This is the phony claim that supply-side voodoo economists, and wannabes such as yourself, have been claiming for years, in both directions, that higher income taxes reduce output and that lower income taxes increase output. There is however exactly ZERO evidence for this proposition. You all just keep claiming it as if it is a revealed truth and are utterly indifferent to evidence. Indeed, to the extent that there is evidence, it is all in the other direction. Since WWII, tax cuts at the high end have been accompanied by slow growth. When Clinton undid some of the Reagan-Bush tax cuts, we had higher growth. 6. Counter-intuitive? Yes, but that is because you don't understand the concept of income share as opposed to the illusion of nominal income. If the income share of one group, say the wealthy, is reduced, then the income share of someone else goes up. The income that is received by people who labor for a living is almost entirely spent. Therefore, when their income share goes up, there is more demand and the system responds with growth. Conversely, when the income share of the wealthy is too high, there is a lack of aggregate demand, because they cannot consume enough to spend it and they are never going to invest more money than needed to serve aggregate consumption demand. When that does happen for a short span of time, the result is a bust, because without demand to service the investment, it fails. The skewing of income share to the wealthy is the proximate cause, along with trade deficits, of the slack demand and low rate of growth we have had to endure since 1980. 7. For a similar reason, it is of no importance whatsoever if higher capital gains rates reduce capital transfers. So what? Transferring capital between owners does not generate wealth. And you can be sure that if there are those who want to buy existing capital, there will be those who want to sell it to them. The gross price may go up because of the taxes, or it might not. Again, so what? We are only ever talking about the distribution of aggregate output and the distribution of taxes on that aggregate output. If we capital gains dropped to zero, there would still be the same output/income to tax. 8. If those at the top did produce less taxable income -- a highly dubious proposition -- then the income would reappear elsewhere. Some people would be gain income that would still be over the threshold for taxable income. Some people below that threshold might gain. If we fain ourselves short of revenue because more people were in higher brackets without being subject to taxation, all we would need to do is lower the ceiling of the zero bracket and we would re-capture the tax revenues. So, if indeed the result of a more progressive rate structure were to induce a more equal income distribution, so much the better. As income becomes more evenly distributed, we would inevitably move to a flatter overall tax structure. Also to the good. Even if the supply-side hypothesis that high-earners would work less were true -- and it really is a lot of nonsense -- it would be a good thing. More income at the top line for everyone else. That's because it is about share of output. Now, perhaps you believe that only particular individuals are able to generate output and if they took off from work, no one would be able to fill their shoes. More nonsense, wholly unsupported by any evidence other than crackpot libertarian economic claims that are simply deemed by libertarian crackpots to be self-evident. 9. The notion that people will take their wealth elsewhere if they don't like being taxed is absurd, ds111. In what form are the going to take it? Are they going to dismantle factories and move them to Ecuador? Maybe leave the country with bushels of wheat? Oh, I know take their financial assets elsewhere. So what? If they take all their dollars and move them to some other country, all we have to do is print more, for nothing. Their dollars are off somewhere, outside the US economy, we need more dollars, we print them. Adios amigos. Perhaps what you wanted to say but didn't know enough to articulate properly is that people will stop investing in real capital assets if our tax rates are too high relative to other countries. But there isn't any other place that can absorb the capital. Not going to happen. If we were short capital here, then capital share of output would go up and we would have both adequate investment and, once again, the income to tax. Because the investment opportunities exist here so long as there is a large base of consumers with purchasing power. The worst thing for investment is our policy of leaving too much income in the hands of the wealthy. That reduces consumption demand and then reduces investment so that GDP growth is sluggish. So, ilsten up ds111. When you learn some real economics, instead of the garbage you collect from libertarian websites, you can come back and talk to me about reality and fantasy. As it stands right now, you have not a clue.

- roidubouloi

November 10, 2012 at 8:08pm

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ds111 "I see it all over these boards and in the campaign by Obama, with comparable disingenuousness by the repubs." I have to guess that you are saying that when we raise tax rates, it increases spending. How about the Republican philiosophy of lowering top tax rates without decreasing spending, which is the cause of our debt? Decoupling taxes from spending, like Reagan and Bush did, doesn't work (Reagan almost triple, Bush double). No more of the bullsh*t dynamic scoring and fantasyland that cutting taxes will solve our problems. It hasn't and it won't. Raising the top rates is prudent and necessary. Bush lowered the top rates and got a paltry 2.7 mill. jobs in his first term. Minus 4.5 million in his second.

- Nusholtz

November 10, 2012 at 11:04pm

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My problem with roi's quant analysis is pretty simple: pure economics only exist in theory. In an actual economy, it's not simply a matter of dividing up the the GDP this way or that with some kind of deux ex machina command structure, even if such a thing was possible (or desirable) politically. A modern economy, not to mention society, is just way more complicated than that. Moreover, those who advocate solving our problems by the blunt instrument of redistributionary taxation start with the assumption that we need to keep funding all the government we have already, or even more. This is, to say the least, an over-broad assumption that is not shared by a majority of voters. A large recent study by the Institute of Medicine demonstrates that the US healthcare system wastes about $750 billion annually, and a major driver of that waste is in government programs. For example, the study estimates about $75 billion is lost to fraud alone, a figure that comports well with Christine Romer's estimate of "at least $60 billion annually" in Medicare and Medicaid. Then there are the tens of billions annually in farm subsidies to agribusiness, subsidies to energy companies, various other forms of corporate welfare--and does anyone care to estimate the figure in defense contracting? These are not trivial numbers, nor or those associated with our catastrophic War on Drugs and the ever-metasticizing Security Industrial Complex. I agree that there's little evidence that raising the marginal rates a few points or taxing all income the same would hurt the economy. But if we're going to ask anyone to pay more (and I think everyone should be expected to do their part), we should first try to cut spending on things that demonstrably make our society worse. If nothing else such cuts would make tax increases much more palatable.

- Robert Powell

November 11, 2012 at 7:58am

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Nusholtz, No, not linking the two. Just saying we can't go on with 16% collections vs 23% spending. While the public says they want both, low taxation and high spending, I believe the vote suggests they view the spending as more critical, but that they dont understand that said spending will require higher collections. The repubs should give up on the low tax mantra and work on getting spending more efficient, to Robert Powell's point, but there will always be waste in public spending, just as there is in private spending. It is ridiculous to talk about tax cuts, or no increases when we need at least 20% collections and considerably more to be deficit neutral (tho a deficit in line with the real growth rate is fine). Have to get to Roi's fusillade of vomit later.

- ds111

November 11, 2012 at 8:37am

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ds111 I can't disagree that the debt is bad and it comes from collecting less than spending. The debt, however, is second to the economy (when the economy does well all of our problems are smaller). We can raise taxes now for less debt in a way that has minimum damage to the economy. Clinton proved that. When the economy is repaired, you work on spending; but don't make the debt worse with unnecessary top rate cuts that have not helped for 12 years.

- Nusholtz

November 11, 2012 at 8:53am

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I eagerly await your fusillade of ignorance, stupidity, and libertarian wingnuttery, ds111. Roll in it, baby.

- roidubouloi

November 11, 2012 at 8:59am

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Robert, I am not claiming that we can solve all our problems through income redistribution via the income tax system. Nor is the reason that we cannot do so that the tool is “blunt.” That is just rhetoric. Rather, it is that the tool is rationally addressed to certain problems – financing the government, income inequality – and not to others. The fact that we cannot use the income tax system to solve the problem of health care costs or global warming does not mean that we cannot use the income tax system to balance the budget AND to achieve greater income equality at the same time, a win-win. Far from being a blunt instrument, the income tax system is in fact an extremely precise instrument. When we levy a sales tax, we have not real idea what the incidence of the tax is or its redistributive effects. When we levy the income tax, we collect reams of information about the finances of everyone in the economy and then levy the tax with great precision based on the particular income of the individual as defined by very elaborate rules. Thus, we have rather precise control over the incidence of the tax. The is exactly the reason why it is not at all complicated to use the income tax system to re-balance income shares in the country. We don’t have to consider what people do with their income, what things cost, who can afford them. All we have to know is who has what market income and we levy the tax with precision. Taxes redistribute wealth. All taxes inevitably redistribute wealth. That is because the distribution of the benefits of the spending is necessarily different than the incidence of the tax. Libertarians, who in my opinion are the biggest intellectual frauds on the planet, like to claim that everyone should pay via taxes for just the benefits they receive so that taxes will not have any redistributive effects. But, of course, they are ferociously hypocritical. They don’t believe this when it comes to what benefits them, that they ought to pay for the benefits they receive. Nor do they want to rely on the free market, as they claim to, when the market will not deliver them the outcome they want. For example, defense and security. Why don’t we just have everyone buy their own defense and security? The first and most obvious answer is the free-rider problem. If everyone ends up enjoying the benefits of defense and security whether they pay or not, no one will pay. This is a classic market failure, the positive externality that cannot be captured in a market price. In this case, it also has the special name, “the free-rider problem.” Libertarians have no problem in seeing that the market cannot solve this problem and that government fiat, to organize defense and security, tax to pay for them, and even compel service. It is only when there is market failure disserves someone else that they magically discover that the market is perfect and must not be tampered with. Defense and security protect people. Much of what government does protects people. Much of what it does also protects property interests. The wealthy have almost all of the property in the country as property is even more unevenly distributed than income. We should levy a wealth tax to pay for defense of property, and most of the operation of the federal government while we are at it as, overwhelmingly, the federal governments operations (as opposed to its welfare functions such as health care and social security) protect and advance the interests of property. But wait, it is inconvenient and inefficient to do so. There are undesirable market outcomes from doing so. Must we therefore surrender in the face of these difficulties and levy taxes per capita, or national sales taxes, or some other regressive tax beloved by libertarians who never saw a poor person they didn’t want to tax? Why? We have a very, very good substitute for wealth taxes that does not produce any (or hardly any) of the bad market outcomes that flow from wealth taxes: progressive income taxes. Of course, since wealth is far more concentrated than income, a flat wealth tax, or even better, a flat wealth tax with a zero bracket, can only be replaced with a much more progressive income tax. Is there a certain misfit? Do the taxes end up allocated slightly differently than they would if we could levy a wealth tax? Certainly. And likely in the direction of under-taxing the wealthy. But we should not make the perfect the enemy of the good. How much the government should spend, and on what, are important questions for our society to answer. However, the answer to those questions should not be based on the false claim that we cannot finance almost any arbitrary level of government spending – we can --, that doing so is deleterious to the economy – rather it is of benefit to the economy if the taxation is sharply progressive --, or that we cannot at the same time efficiently and fairly redistribute purchasing power from the top end, where income is piling up, to the middle class by raising the zero bracket considerably. These are all false claims and should not be permitted to drive debate about the desirable functions of government. It is simply not true that we cannot as a country afford our current government or even a much larger government if we choose to do so. That is not complex. It is simple. When we levy payroll taxes we transfer wealth, regressively, from working people to retired people. The justice of doing so is worthy of discussion. However, the claim that this is some abstraction, that in the real world, with a complex modern economy, we cannot transfer wealth from working people to retirees, is obviously false. Not only can we redistribute wealth in this way, we do. Invoking complexity is merely a way of hiding. Some things are complex. Some or not. Using the income tax system, much more progressively, by lifting the zero bracket and charging what is necessary above that, is not at all complex. It is devastatingly simple. We don’t do so for political reasons, but the first step to achieving the outcome politically is sweeping away the false claims about what is and is not doable. When we understand what is doable – easily doable – we can then discuss rationally how closely we want to approach that outcome.

- roidubouloi

November 11, 2012 at 10:56am

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As Paul Ryan has been going around the country making pains to point out ... debt is at the highest rate versus GDP since 1945. What Ryan has studiously avoided mentioning, and what neither his audiences nor Democrats (mystifyingly!) fail to ask him is: how did our grandparents dig us out of this hole, thereby making the prosperity of the 1950s and 60s possible, and ergo our prosperity today? Of course the answer is obvious. Top marginal tax rates of 70%. Which were, by the way, lowered, when the job was done. Failing to raise taxes on the wealthy is effectively the same thing as mortgaging the debt to the middle and lower classes. I personally have been of the mind to call the Ayn Rand "John Galt"ers on their bluff. Leave. Seriously - if you can't put up, go. If you think that your silly little high school book report assignment from the Objectivist Society actually represented a lesson in economics ... go. Go do it. Take your money and leave. You will not have aircraft carriers, or drones, or special forces and very soon you will find out more importantly, that you don't have a society, a society that you will find was more important to you than you are ideologically capable of admitting. The middle classes and working classes can retrench. The wealthy, go - make your clone of the economy of Alabama ala Rand and Mises, writ large, and see what a beacon of hope, prosperity and inspiration you make for the rest of the world doing so. See just how much society you can re-create through Trickle-Down. At least it will be nice being aristocracy. When the lower and middle classes are asked to fight wars, and pay for wars - for decades, are asked to compete in an economy where the entry points are set on ladder rungs fixed at many times their annual incomes, and then be lectured about how terrible it will be to ask those doing perfectly fine to put out according to the value of the shared and collective economy returned to them, I think the lower and middle classes can do without. And we should. Fiscal cliff - bring it on.

- dcwood10

November 11, 2012 at 12:00pm

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I understand your point roi. All I'm saying is that we will have much more success in actually reforming our tax system if this is accompanied by a realistic set of cuts that focus on things widely seen as counterproductive. Setting a goal to fund through tax revenues not only all the things we agree on like defense, social welfare, education etc, but also all the things about which there is widespread agreement that we don't need and that are in some cases destructive of the common welfare, is a formula for getting nothing done. And again, if you please, don't confuse legitimate libertarian scholars like Hayek, von Mieses, and their adherents with the faux libertarianism now current in Republican circles. These men recognized the legitimate role of government in defense, social welfare, etc. and emphasized the need for the state to counterbalance monopolistic corporate interests. Milton Friedman frequently pointed out that the danger was self-replicating bureaucracy in government AND corporate entities. Ayn Rand was not an economist or a philosopher, but a crackpot novelist. Today's Republican "libertarians" are just shills for special interests disguised as advocates of individual liberty. Notice they never complain about Big Government when it involves defense appropriation, huge bureaucracies focused on intelligence and security, prisons, etc no matter how inefficient or counterproductive.

- Robert Powell

November 11, 2012 at 12:09pm

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Rpowell, the odd thing about what the points you seem to be making is that we will be moving on to the third time now that democrats have offered a $3 cut for every $1 revenue raise deal, only this time if Obama and company use the fiscal cliff trump card, as the GOP through its irresponsibility has many times now made clear they must, then the outcome will be just that. You have dogma people. You have those on the left who literally, dogmatically, will not touch social security and medicare. You have people on the right who dogmatically will not raise revenue EVEN as they insist Obama is imperiling national security with a defense budget of $553 billion. The difference is: the left's dogmatists get 3 minutes on CNN just before they are about to lose, the dogmatists on the right run their party and enjoy the stalwart support of their base. As to your point about "legitmate" libertarian economists, I both hear you ane I submit it doesn't matter. Millions, in tens of millions of average thinkers on the right got their virginal education in Ayn Rand, then went on to read a few select chapters out of Mises or Hayek, and hold it as a community article of faith that they undertand economics better than Krugman and Stigletz, even though they couldn't be troubled to remember either name in the heat of argument. My own experience is that to break the cognitive barriers it takes a sustained strategy of one-two punches of shaming them one month with their own ignorance and hubris and beguiling them the next sideways and respectfully with economics affecting their own kitchen that they never bothered to think about.

- dcwood10

November 11, 2012 at 1:44pm

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dcwood- Your boxing metaphor fits with roi's steady defense of aggression. Okay. I'm just saying that simply punching isn't as effective as punching to your opponent's vulnerabilities, discerned by understanding his strengths. Simply characterizing opponents as deluded or pernicious isn't the best way, IMHO. All I'm saying is that cuts aren't necessarily a give to the other side. There are a lot of things that can be cut from government spending before we get to social security and medicare, and doing so will make it easier to do the necessary actuarial work on those programs that represent demographic and medical reality, and yes, the reality of "waste fraud and abuse".

- Robert Powell

November 11, 2012 at 2:06pm

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...things that can be USEFULLY cut...

- Robert Powell

November 11, 2012 at 2:22pm

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Robert, I went through this fiscal exercise very quickly, but it gives a good, simple picture of what has gone wrong. 2011 GDP $15 trillion NDP $13 Fed Non-Defense Operating Budget $1.1 trillion 7.3% of GDP Defense 0.9 6.0 Health and Pension 1.6 10.7 Total $3.6 trillion 24.0 % FICA and Excise 0.9 Income tax and other 1.4 Total $2.3 trillion Deficit $1.2 trillion 2000 GDP $9.8 trillion NDP $8 Fed Non-Defense Operating Budget $750 billion 7.7% of GDP Defense 300 3.0 Health and Pension 750 7.7 Total $1.8 trillion 18.4 % I have scaled the budget numbers to GDP because that takes account of both population growth and inflation. Non-defense, non-health/SS opertions (which includes interest and income support – welfare) has actually FALLEN as a share of GDP since 2000. If it were the same percentage as in 2000, it would be $50 billion higher. That is not a small number, a 5% real decline. Defense on the other hand has doubled as a share of output. You want to know where the waste, fraud and abuse are? Mostly in the defense budget. Of course, entitlements have mushroomed. This is in part an inevitable result of demographics, an aging population, but also due to out of control medical costs. The thing the spending cutters don’t get, unless we are going to (1) means-test entitlements, (2) put the elderly out on ice floes to die, (3) deny medical care, or (4) get our medical costs under control, all of these costs will still have to be born by the economy. The beneficiaries cannot afford to pay for these things (except in the cases where means-testing would reduce benefits). I am all for means-testing. That’s just a tax increase on the wealthy. You are very concerned about what is politically do-able. Do you thing means-testing is politically achievable? Entitlements are under-water, but the trust funds are not as yet. Thus, in a sense these programs area entitled to run deficits, they were planned to run deficits, at least for a time. The core fiscal problem is that we do not collect enough in taxes to pay for the operating budget. The budget is $2 trillion, we collect $1.4 trillion. Given that the non-defense operating budget has already fallen 5% in relative terms, why should anyone think there are huge opportunities to cut spending there without doing serious damage to the country? I would say that the 5% cut has already done serious damage to the country. Half of the operating budget is interest and income support. How much do you think we are going to get out of the $500 billion that essentially constitutes the entire operations of the federal government other than the military? I am all for cutting defense radically. We do not face any immediate existential threats. We have an enormous preponderance of power, at least in our own defense if not to destroy and then re-build other countries. Do you think a 50% cut in defense is politically doable? The fact is that there is absolutely no point in discussing entitlements while we refuse to collect sufficient taxes to pay for operations. Do the necessary taxes for operations have to hit the middle class? No, they don’t. If we have $13 trillion of NDP (GDP less depreciation), that is our national income. Say that $1 trillion is unreachable for taxation – tax exempt. That means we have $12 trillion we could tax if we didn’t exclude all sorts of income. Of the $12 trillion, about $6.5 flows to the bottom 90%. Of the $5.5 trillion going to the top 10%, about $1.5 trillion represents the first $100,000 of annual income. That leaves $4 trillion to tax if we had a zero bracket up to $100,000. Tax that at 50% and you have covered the current operating budget with no spending cuts. Cut defense by half and you can lower that rate to 39%, the top Clinton era rate, while giving the middle class a tax cut. The thing that is screwing us is the combination of Bush tax cuts and Bush defense increases. It is really that simple. Simpson and Bowles are full of crap. There is no justification for cutting entitlements to fund defense and tax cuts for the wealthy. It is an outrage. That doesn’t mean we don’t also have an entitlements problem, but the problem is one of financing (and of controlling medical costs which we refuse to do because the libertarian wing-nuts insist that would be socialism). Of the $6.5 trillion that goes to the bottom 90% maybe as much as $500 billion is income in excess of $100,000. Count the 50% tax on that toward social security and medicare. That leaves a funding requirement for entitlements of about $1.4 trillion. On a tax base of $7.5 trillion, representing all family income up to $100,000, applying the current payroll tax rates to all of that income, you collect $1.15 trillion, short $250 billion. So, if we eliminated payroll taxes and applied the current 15.3% payroll tax rate as the first income tax bracket FOR ALL CLASSES OF INCOME, up to $100,000, we would be down to a $250 billion deficit. We could fix that if we went to single-payer and controlled medical costs, something we will inevitably do anyway. We could fix that if we got back to full employment, a good reason not to fix it now. We could fix that with means-testing of entitlements. In the near-term, it should be ignored until we decide which of these methods we are going to look to. Longer-term, we should get rid of that 15.3% bracket in favor of carbon taxes, but that too is not something to do immediately. The things to do immediately are, not to cut spending – worst thing in a recession -- but to let the Bush tax cuts expire and cut defense spending over the next five years. I would have no problem personally with eliminating federal income support and turning it over to the states. Not because I think they would do a good job and people wouldn’t suffer, but because the blue states would replace the lost federal dollars and the red states would not, in the process discovering that, far from being burdened by the federal government, red America is actually the financial ward of blue America. Let’s give red America a taste of what they claim they so desperately want until they get over their anti-government, anti-tax mania and return to the reality-based community. We have to go to single-payer, we ought to means-test entitlements. Destroying the entire non-defense federal government through spending cuts is not the answer to the problem of our failure to do one or both. Indeed, it is not the answer to any problem. It would be a disaster, whereas cutting defense spending would not. Given all of that, I agree with dcwood (and Krugman) that we are better off going over the fiscal cliff than not. Tell Simpson and Bowles to drop dead in the process. Theirs is the wrong solution to the wrong problem. The fiscal effects of the cliff will not be felt immediately, but it sure will make the Pentagon and the right scramble. The better alternative, that Republicans may finally accept once we spend a bit of time on the far side of the cliff, is to let the Bush tax cuts expire in their entirety, with bi-partisan support, and not cut spending at all in the near-term. We do not have a spending problem apart from defense. We have an entitlement problem largely because our medical system is out of control. Denying ourselves medical care is not the solution either. The reform of entitlements is not a one-day affair, particularly when the trust funds are still above-water. The entitlement programs have saved in order to run deficits now. It would be INSANE to force entitlements into balance through cuts so that we can continue to run deficits in the operating budget merely because we refuse to collect taxes from the people who earn most of the income of America. Which is exactly why Simpson and Bowles need to go away and stop bothering us with crap.

- roidubouloi

November 11, 2012 at 3:32pm

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I had my numbers lined up in columns, but TNR didn't take it that way. The second number in a given line is the percentage of GDP, the first the dollar amount. Not my fault.

- roidubouloi

November 11, 2012 at 3:33pm

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dcwood's point about libertarianism is spot-on. It occurs to me that it is a happy coincidence that the rate of taxation on dividends is 15%, about the same as the payroll tax rate. If we consolidated payroll taxes into the income tax with an initial 15.3% bracket and a 50% bracket above $100,000, wage-earners wouldn't notice any difference and neither would those who have dividend income, unless they make more than $100,000. But many of them would still see a tax cut because of the reduction of taxes on the first $100,000. This would also eliminate a lot of the reason for tax deductions and exclusions. I am sort of indifferent as to whether they ought to remain for income above $100,000. I think not, but if for some reason people prefer to have the deductions but then pay a rate higher than 50%, so there is no net loss, okay. But getting rid of all of that would simplify tax returns. Going to a pass through system of corporate income would also eliminate a lot of occasion for tax game-playing. All offshore income should come in as well so that we are taxing NNP, not NDP. We could also simplify corporate tax accounting a great deal. Plus, eliminating different tax rates on different classes of income -- income is income is income -- would remove vast pages from the tax code and regulations. We can have a much simpler system that raises a lot more revenue. Finally, we ought to consider a super-tax bracket of 60% on income above $1 million a year. If we do that, we would have additional money to devote to infrastructure that we badly need. Maybe eliminate college tuition for qualified students at accredited schools. If government takes the primary role for health, retirement, education, defense, and market regulation, we can have a paradise for everyone in America.

- roidubouloi

November 11, 2012 at 4:23pm

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Finally, finally, even if a simple yet very progressive unified federal tax system is not politically do-able now, having the model, and knowing that it would work fiscally is very important. When proposals are made, one can then ask whether they move the system closer to the ideal or further away. That matters. Just accepting the former and rejecting the latter would start to work significant improvement. It is from this point of view that it is easy to see that the Bush tax cuts should expire in their entirety as the predicate to either fiscal or tax reform.

- roidubouloi

November 11, 2012 at 4:28pm

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Roi, it is amazing to see your Jekyll and Hyde routine, nasty and aggressive, then calm and reasoned. I had been agreeing generally that we need to raise collections, and that a majority appears to prefer our current spending, at a minimum. No problem, but how to achieve the needed revenues. It is a fact that every other high public spending society collects it's revenue from a broad base. In spite of all evidence that suggests that the "political choice" everwhere in the world is in favor of broad based taxation, exactly what I'm suggesting we need, you argue for a magical elixir by which we can just tax "the rich," by which you mean the high earners of today. Well, in truth you'd like to tax wealth instead, but deem that impractical. You point to income inequality, a partial mirage that is in largely the result of our tax code. Wealth statistics have not changed materially, and Europe as a whole has similar wealth statistics, they just shield it legally from the tax man through their own tax codes. Their income distribution is flatter, true, but again that is a product of their tax code, which forces the wealthy and high earners to reduce taxable income in favor of untaxed wealth accumulation. I note that combined US federal income and corporate collections at roughly 12% GDP have barely varied since FDR (tho state and local collections have increased), through a wide array of government policies. It is collections/outlays that matter and though there are rates at which collections will suffer I agree we are no where near that now. Just like the repubs who dream that you can starve the beast, you dream that only the top incomes can fund broad govt spending, but all evidence is to the contrary. Worse, you think it is a good political sale, and it is, until you dump the bill where it will inevitably end, at which point the repubs will probably win on "cutting taxes". I am a bit agnostic as to a tipping point where large government slows down an economy, believing it has a lot to do with societal views. I'm fine with that, and view it as the best political discourse. Denmark does fine at over 50%, but Singapore does fine too at under 20%. Denmark, incidentally, along with Singapore, is regarded by Heritage as one of the world's freest economies, illustrating that either high or low taxation and a free economy can coexist. I don't buy the Keynesian demand argument as being central. We are not simply cogs in an economic machine. Incentives matter, note how Chinese agriculture blossomed only after the farmers were allowed to reap the benefits of their work individually. For me to demand something of you I must be willing to supply you with something of equal value. Potential demand is infinite, but demand can only be filled by willing supply, absent a lord/serf relationship. The economy is not Keynes' aggregate, but a collection of individual suppliers. High per capita GDP is not a given, but a product of a system which encourages supply. There is a lot of room in the middle, from libertarian to statist.

- ds111

November 11, 2012 at 8:42pm

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I could easily say the same of you, ds111. All calm and reason at the moment, having seemingly exhausted for the time being your accusations of economic fantasy that are the product of what you yourself do not understand. Denialism regarding income inequality is a standard part of libertarian economics. There is in fact a substantial difference between Europe and the United States in terms of income distribution. We are way off the scale, a huge outlier, amongst advanced industrial economies as measured by our gini coefficient. When libertarians are not outright denying that this is so -- consistent with climate change denial, public opinion poll denial, reduction in income tax progressivity denial, economic efficacy of tax cuts denial -- it is typical, as you do here, to characterize it is some sort of illusion. It is very much a reality and not an illusion as applied to income. Wealth and wealth differentials are more difficult to measure but are beside the point. Income is ultimately not something dollar denominated but a share of aggregate output. The illusion is that your income consists of money, but as the money itself has no fixed value -- prices are constantly changing -- at the end of the day all that really exists is output and shares of consumption of output. Sure, there can be some net changes in cash balances, but these don't alter the picture much, and they cannot continue very long in one direction or the economy comes to a halt. Money received must be re-spent, circulate, sooner or later. When the government commandeers a share of output, it does it buy spending, not by taxing or borrowing. The instant that the government spends a dollar, it is printing the dollar that it spends. While there can be slack in the economy, and there is growth and often unrealized growth potential, the total output capacity at any given moment is roughly fixed within a few percent. If the government commanders a share of output, as the government can always do because it can always print the money with which to buy what it wants, the private sector can only divvy up what is left. The reason that the government taxes and borrows is only to ensure a relatively stable value for the currency. After printing money to buy what it wants, injecting additional money into the economy, the government then withdraws most of it, either through taxation or through borrowing. More is printed than withdrawn, seignorage, which allows the government to command a share of output without either taxing or borrowing. If the amount is in line with real growth, then there is no inflation that results. If the amount is more than real growth, we get inflation, as we normally do. You don't see this process occurring because the functions are divided between the Treasury and the Fed. On paper, the government must either tax or borrow. But the Fed then buys up Treasury debt so that some of what the government appeared to borrow is not really borrowed; it is new money. When the government borrows, it gets this money from people who are saving, who are spending less than their nominal income. There is a certain Keynesian efficiency in this in that, for the most part, private spending is not reduced by this borrowing because it come from those who wouldn't spend the money anyway. That is why they are willing to lend it back to the government. The same amount could be withdrawn just by taxing. This would be less efficient in terms of demand because more of the taxed money would come from people who would have spent it. Thus, there is a tendency to reduce demand and output. But if the taxes are levied principally on the investor class, there is not necessarily a large difference in terms of demand. Viewed another way, if the government commandeers 25% of output, it doesn't matter one whit how much money the private sector has or tries to spend. The private sector can still only consume 75% of output (including investment in real output). No matter how hard it tries to spend what it perceives as extra income, prices will adjust so that the net consumption by the private sector is still only 75%. It is hard to stay at full employment if the rich receive too much income unless the government then takes it from them, either as taxes or borrowing, and spends it, because labor pretty much spends what it gets. The investor class does not. So full employment in a modern economy requires increasing government spending or redistribution of income to the laboring class. The dynamic effects are therefore directly contrary to what supply-siders claim (which is why Clinton could raise taxes and produce a boom and a surplus while Bush cut taxes and produced slower growth, huge deficits, and an epic colllapse). When too much money goes to the wealthy, they bid up asset prices, demand becomes fragile, and we get a bust. If, however, we ignore the dynamics, that argue for more progressive taxes, the issue of the incidence of taxation is PURELY a question of how the private share of output is going to be divvied up once we hit full employment. If the high income earners are taking in 50% of aggregate cash income, on what basis could you possibly claim that we cannot recover half of that via taxation if we chose to do so? That doesn't even make sense. It is an income tax after all. The operating budget of the federal government is 13% of the economy. The average tax on the top 10% need by no more than about 35% and they would still have a higher net income share than in 1980. Europe taxes more broadly because Europe has both flatter income and a much higher level of government services. If for example the top 10% earns only 33% of GDP and you have a 50% government sector, you cannot collect 50% out of 33%. We can assume you cannot collect more than 20% out of 33% at an extreme. So, the rest of the country, the middle class, has to come up with at least 30% here. So what? This is another standard libertarian trope that is supposed to prove that we cannot have a more progressive system, but it proves absolutely nothing. We have both a much more skewed income distribution, regressive payroll taxes that fund a good share of government, and a much smaller public sector than in Europe. The way they have to levy taxes tells you zero about efficient taxation our economy. The third libertarian dodge is the claim that, if we try to tax them, the wealthy will hide or reduce their income -- engaging in so-called non-income producing but wealth-growing activities. That is impossible on an aggregate basis. Real output is real output. You either produce it our you don't. If you produce it, you sell it. And if you sell it you have income. Period. Real output cannot be hidden, unless we allow it to be hidden with lousy tax laws and banking practices. Nor can output be converted into some non-output wealth producing activity because there is no such thing. Yes, individual wealthy people can try to buy appreciating assets. But if they don't produce more of them, only trade them, and we have capital gains taxes at normal rates, they will simply end up paying the taxes we need as capital gains taxes. If they don't trade them or produce them, where is anyone going to put their income so that it is not income. Do you really think the high earners are just going to kick back and close their factories and businesses when there is money to be made? You just don't get that this is, in the aggregate, a zero-sum game if we are producing at capacity. What one person or sector gets, another doesn't, and vice versa. If we reduce the income share of the top earners through taxation, they get less. No ifs, ands, or buts. If the dynamics were such that reducing their share reduced output -- shrunk the pie -- that would be a problem. But they aren't, just the reverse. Because the government and labor both spend 100 cents on the dollar of income. Any dollar that flows out of the pocket of someone at the high end will undoubtedly be spent whereas a dollar that flows into the pocket of someone at the high end may not be spent. Have you noticed, for example, how much cash corporations have accumulated during the recession? Yet a third way to see the same thing is that, if the government has a deficit, higher expenditures than its income, taxes, the private sector necessarily has a surplus, more cash income than its expenditures. It isn't labor that has that surplus, because labor spends what it earns. It is the investor class that has the surplus, cash income in excess of its expenditures. If we tax away the surplus, the government no longer has a deficit and the private sector no longer has a surplus. If we tax the middle class, we don't eliminate the private surplus, because they don't have the surplus, we just reduce private spending, probably shrink the economy, and still have a deficit (the opposite side of the private surplus). The only danger in taxing the investor class is that we end up with too much consumption and not enough investment. There is no evidence at all that the US economy is not investing sufficiently when the consumption demand is there to support the investment. When we are at full employment, let's discuss that. Particularly noteworthy is that when we had a much more level income distribution, between 1940 and 1980, we had the fastest growth in our history. That could not have occurred if we were not investing adequately. Plainly, a much lower income share for the wealthy is consistent with adequate investment. Finally, we come to your anti-Keynesianism, this romantic notion that because we are not cogs in a machine, aggregate demand is not key to macroeconomic output. Demand, the willingness and ability of people to pay, will ALWAYS elicit supply. No matter what economy you look at, if there is someone standing there with money in his hand offering to buy, there will be people falling all over themselves to produce what is desired and sell it, and trying to keep others from doing the same. China boomed because the US furnished the demand that still doesn't exist within the Chinese economy. Of course, if China were still a communist country and people couldn't get paid for supplying, the wouldn't supply. But all that says is that if potential suppliers are cut off from effective demand by government control (or by anything else for that matter), they will not produce. That itself proves you are wrong and Keynes was right. No one produces anything unless there is someone there to whom they think they can sell it. No one produces anything, potentially losing all their wealth in the process, in the hope that if they build it, they will come. Supply does not elicit demand. Demand elicits supply. Whether we are cogs in a machine is neither here nor there. The system that encourages supply is one in which there is demand, supply is financed and people have the opportunity to supply. Doesn't take more than that. Demand is not infinite or even potentially infinite because it requires both willingness and ability to pay. People do not have unlimited means to pay. Nor are they necessarily willing to spend what they have. Demand can and does fall below capacity when those who are willing don't have money to spend and those who have money are not willing to spend it. We are in that condition right now. The best thing we can do is to take money from those who don't spend it, those with a surplus, and spend it for them. End of deficit, end of recession. You can "buy" Keynes theory of effective demand or not. You can buy Newton's theory of gravitation or not too. It is of no consequence whether you do or you don't. They were still both correct.

- roidubouloi

November 11, 2012 at 10:42pm

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RP: the debate about the scope of government, and generating the revenues to support that scope is what I think of as the Hoosier School merging with Plains Populism. That debate is ongoing, just not at tnr.

- K2K

November 11, 2012 at 11:29pm

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I said: "If we tax the middle class, we don't eliminate the private surplus, because they don't have the surplus, we just reduce private spending, probably shrink the economy, and still have a deficit (the opposite side of the private surplus)." This over-simplifies a bit. If we reduce middle class income below expenditures, there is the possibility for a decline in demand. However, part of what occurs is that the investor class lends back the surplus to the middle class to sustain its consumption -- consumer debt. So the debt that is the opposite of the surplus of the investor class, rather than being government debt, turns into private debt. Anyone seen an excess of consumer debt in our economy? This is even less sustainable than government borrowing, but the investor class much prefers this situation because: (1) rates on consumer debt are much higher and (2) on paper, the investor class is not on the hook as it is with public debt. Fundamentally, there is too much income flowing to the top, with very bad effects on our economy. This money has to be re-circulated as debt, mortgage debt, consumer debt, public debt, which is exactly what occurred until it couldn't anymore. We would be much better off in every respect, equity, output and growth, government finances, sustainability, if we taxed away the surplus flowing to the investor class. Not only can we do this without damaging the economy, it would be a boon to the economy. See, e.g., Clinton administration. The only way for the investor class to evade having surplus taxed away would be to reduce its income by a lot more than that. There is nowhere to hide aggregate output and no way for the investor class as a whole to grow its wealth without generating income that can be taxed.

- roidubouloi

November 12, 2012 at 7:51am

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Could be K2K. Plains Populism I associate with William Jennings Bryan. The Hoosier School I'm familiar with is a basketball clinic......... I believe a deal can be had. Here's what I know: 1--The Federal Government is about double the size it was 11 years ago, much of the increase a function of hysteria and paranoia dedicated to the proposition that all Americans must be made completely safe from every possible threat all the time. Most of the rest results from runaway medical costs a substantial part of which is waste and fraud. 2--In 2011, "payments to individuals" constituted 65% of Federal spending, up from 21% in 1955. Given the realities of demography and politics, this share will only increase. Currently about 50% of Americans receive benefits of some kind, and the number will go up with Obamacare. If this is what we want, fine, but it has to be paid for. 3--The political odds of getting this increasing mismatch between income and spending covered by taxes on "the rich" approach zero, whatever the theoretical math. So, yes, let's means test entitlements. Let's cut defense. Let's declare victory in the War on Drugs, have a parade, and reduce our prison population by 50%. And let's raise taxes as part of a package that demonstrates that we can make a dent in genuinely wasteful and counterproductive spending with the clearly stated principle that we must as a society pay for what we want to buy, and that it can't all be done with other people's money.

- Robert Powell

November 12, 2012 at 8:00am

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Can we have a moratorium on attributing the Clinton surplus exclusively to the slightly higher marginal tax rates of the time? We tend to over-simplify economics generally, but surely we can agree that the peace dividend associated with the collapse of the Soviet Union and the dotcom boom had something to do with a healthier set of books in the '90's.

- Robert Powell

November 12, 2012 at 8:07am

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It has do be done with the money of the people who have all the money. But, amen. Let's means test entitlements, cut defense, declare victory in the War on Drugs, have a parade, and reduce our prison population by 50%. Which do you think will happen first? Any of those or a tax increase? Which has greater political odds? Moreover, do any of those things succeed in reducing runaway medical costs? Has there indeed been a huge increase in the safety net, or is the increase in payments to individuals indeed the result of nothing more than demographics and runaway medical costs? Our realistic alternatives are these: raise taxes on the rich, adopt some version of single-payer to control medical costs, shoot the elderly or let them die from lack of medical care, or gut the entire non-defense federal government (with ultimately disastrous effects on economic growth). There are no other options, no matter what the rhetoric. If we attempt to eliminate the deficit by taxing the middle class at a time when the top 10% have increased their income share from 33% of GDP to 50%, as has occurred from 1980 to the present, we will not reduce the deficit or control medical costs, we will merely precipitate a deeper recession by further weakening aggregate demand. If we destroy the federal government except for defense, the outcome sought avidly by the right, we will both precipitate a deeper recession and destroy our ability to grown and compete. This would be eating our seed corn. Unfortunately, libertarian economics simply doesn't work, no matter how earnest the rhetoric. Why? Because it does not describe reality. It is an empirical failure. Any solution to our problems must proceed, whether wittingly or unwittingly, from an empirically sound basis. If none of what can work is politically possible, then we will simply go along as we are or make matters worse: Demand will be weak, unemployment will be high, medical costs will soar out of control, the standard of living of the middle class will decline, the rich will pile up surpluses that are then lent out either to the government or consumers. No version of Simpson-Bowles can work because it is not rationally addressed to our actual fiscal and economic problems. It just appeals to the moral sensibilities of a certain crowd who analogize the national economy to a big household -- cut your spending, stop borrowing and you will recover. But that is not how the national economy works. It is not just a big household. In macro-economics, there is no such thing as other people's money. There is national output and there is share of national output. Money is merely a medium of exchange. We can use control of money to re-allocate the shares any time we have the will to do so. If we don't have the will, we won't, but things will still fail.

- roidubouloi

November 12, 2012 at 8:19am

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Did we see a significant decline in defense spending with the collapse of the Soviet Union? How much taxable income was generated by the dotcom boom? A great deal of it was an inflation of asset values that then collapsed.

- roidubouloi

November 12, 2012 at 8:22am

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RP: I used Hoosier because Indiana seems to produce fiscal conservatives, regardless of party id, and Indiana has the lowest per capita debt for public union pensions (and is not maligned as a RedState hellhole). 'Plains Populism' is my poor descriptor for North Dakota's Kent Conrad and Byron Dorgan's Farmer/Populist brand of democratic party affiliation. I am enjoying seeing the GOP now re-considering Mitch Daniels' approach, which was to define what government must and can do, and then match the revenue to the mission, while setting aside the 'social wars'. I know Daniels was never going to run, probably would have been libelled as the re-incarnation of Calvin Coolidge, just based on looks, but he was, at the time, pounced on by the GOP SoCons for such heresy. As for the Clinton surplus? The actual surplus amount was a bookkeeping trick, adding in all the FICA surpluses into the general revenue. Those FICA surpluses were the legacy of the Reagan compromise, and should have stayed in their "lockbox". Maybe it would have been more difficult for Bush43 to get his irresponsible tax cuts in 2001, which were meant to expire just in case Greenspan's "surpluses as far as the eye can see" were an illusion. Why does no Dem ever mention that? And, yes, there really was a peace dividend after 1992 in defense spending. Quite dramatic. Just no longer have the data at hand. Anyone know what happened to the Estate Tax? I keep thinking it such a shame that America's late 20th century Robber Barons had such bad taste in MegaMansions, for the day when the USA reaches the point of having to tax the rich to pay for the wars, as Britain was forced to after WW2. We won't even get the tourism-bump :) I am also glad to see Tom Coburn emerge from his pariah status within the GOP. Coburn was an industrial engineer before he became a doctor, and has done incredible work on identifying Federal waste, duplication. All it takes is political will. I have destested the Harvard MBAs like Romney since 1978. But, someone really does need to whack the waste and fraud out of the system. Why not an industrial engineer who understands how you cut costs through continuous improvement? I await the demise of the F35 JSF.

- K2K

November 12, 2012 at 10:02am

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I want to confess to being unreasonably pleased with myself this morning. It seems that, in my comments yesterday, I anticipated Krugman's slamming of Bowles this morning, with basically the same reasoning. Interesting Op-Ed in the Times about what Hamilton did in the face of the Revolutionary War debt, basically what we did after WWII, grow our way out. However, the article does not distinguish between the level of our debt, which is not really a problem, and our structural deficit, which is a problem. Did Hamilton advocate structural deficits? I don't think so. The Clinton surpluses were not an illusion, although destined not to last without changes due to the demographic bulge coming with boomer retirements. As Gore said (an Keynes said), we should have been running surpluses in the boom -- colloquially described as the "lockbox." Instead, Bush squandered them and proceeded to convert them into deficits. The absolute deficit is not even the issue. It is always a question of whether the public debt is rising or falling relative to GDP. It fell under every post-WWII administration until Reagan/Bush. Their crackpot fiscal policies then caused it to rise. Fell again under Clinton. Then more crackpot fiscal policies under Bush II again caused a rise. We still have the fiscal policies of Bush to a large extent, certainly his tax policies and his defense spending. But it would have been a mistake to undo them in the midst of Bush's Great Recession. Hence, we are still seeing the rise. As Republicans have resisted the measures that would have allowed a robust recovery, we can afford to increase taxes on the rich but otherwise should wait as to both tax increases and spending cuts until we are climbing steeply toward full employment. Duh.

- roidubouloi

November 12, 2012 at 10:26am

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Yes, there were significant defense cuts, especially in personnel which is where most of the money is. And a LOT of taxes were paid in during the dotcom boom. I guess you've nailed it with "in macro-economics, there is no such thing as other people's money." In politics, medical financing, large-scale entitlements that pay multiples of what's paid in, Wall Street manipulating, and a number of other prominent areas including the usual scams that are actually criminal rather than just within the letter of the law, there certainly is. And it is a very important reality with which we need to come to grips. So there's our difference. In terms of practical tactics, of course we raise taxes on "the rich", even though they don't have quite all of the money yet and there's no practical way to do it sufficiently to solve the problem. And so we "balance" that with cuts, not to food stamps or housing assistance for the poor, but with means testing EVERYTHING; allowing Colorado and Washington to lead the way to a more sensible drug policy; cracking down ruthlessly on waste and fraud in the delivery of medical care; and taking advantage of technology to make our defense establishment smaller, smarter, and quicker. That's all it takes for a deal roi, and until proven otherwise I think it's there to be had. Plutocrats will be a lot less inclined to use their resources to fight higher taxes if they can be convinced the extra money isn't being used to ruin the country by financing stupidity, bad policy, and organized crime.

- Robert Powell

November 12, 2012 at 11:30am

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I'm a Daniels fan too K2K, and took tons of crap defending Evan Bayh here. Yeah, I definitely fit with that kind of Hoosier. I like Tom Coburn a lot too, the rare Senator with actual qualifications is several rigorous fields. Unfortunately he's out after the lame duck session as he has had enough of the Senate and is now presumably off to something else. He's be a great catch for Obama's next cabinet, which is developing a lot of holes that need filling. I think Romney would be perfect for Commerce Secretary, given the task of phasing out the department completely and turning off the lights on his way out.

- Robert Powell

November 12, 2012 at 11:50am

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RP: Tom Coburn's term ends in 2016. He term-limited himself, but that is four more years! I think he is a stronger force in the U.S. Senate, if only to defang DeMint :) Seriously, his cost-cutting details are more important than ever. ND's Kent Conrad is a lame duck - but maybe the next CBO head. Yes, near full employment does make a difference on the annual deficit! Too bad Bill Clinton's Green Jobs idea has not worked out for Obama. Evan Bayh. When I was involved in Obama's campaign (Mar-Sept 2008), I got cyber-bullied by an Obama delegate from Indiana in a MyBo Group e-mail because I defended Evan Bayh. It was brutal, even tho a few others in that group defended me. At the time, I still believed Obama was a role model for civility. We'll just have to wait and see what the next cabinet looks like. Meanwhile, LIPA has delivered the perfect storm for the DeMints to blast Statism. And thus ending any aspiration Andrew Cuomo has for the presidency, not that I am aware he has such aspirations - what with so much personal baggage.

- K2K

November 12, 2012 at 5:57pm

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There may be moral arguments to make about not taxing the 1o% who have 50% of GDP in order to balance the budget, although I don't see them. There may be political claims about what is achievable, although, if we are talking about political possibility. the chance that the Republicans would agree to tax increases in exchange for defense cuts, de facto or de jure drug legalization, means testing of entitlements, and pursuit of waste, fraud, and abuse is nil. Indeed, I doubt they would agree to any one of them even on its own merits. Even the last. They like to talk about waste, fraud and abuse, but as most of that inures to the benefit of business, they don't actually want to weed it out. Never-the-less, macroeconomics is macroeconomics whether we like it or not, just as the law of gravity is the law of gravity. We really don't get to pick and choose which theory we like. You can't jump out of the window of a five-story building and float to earth because "you don't buy the theory," as ds111 put it. No more can you magically conjure the macroeconomic effects you would like while doing the wrong thing. The reality is that the medical expense problem is not due to Medicare or Medicaid. For decades, they have controlled costs better than the private sector. And we have a pretty good example of how successful fully socialized medicine can be in the VA. As long as we choose to ignore the evidence of our eyes and buy into the right-wing claim that controlling medical costs, using the means that actually exist to do so, is "socialism," we are headed downward. We can "solve" the problem for a short time by denying medical care to those elderly and poor who cannot pay for it -- if they were all put back into the regular insurance pool private rates would sky-rocket, as this is just cost-shifting. But there is no solution, ultimately, other than controlling costs through government control of prices and consumption. Nothing we do with the federal budget is particularly relevant. Withal, those who like Simpson-Bowles like "solutions" feel the need to defend them based on false macroeconomic claims, about the impact of high-end tax increases on the economy, about the impact of spending cuts, about the availability of things to cut if the military and means-testing are off the table. The moral and political arguments are not persuasive as the lead to doing nothing. Only false macroeconomics can sustain Simpson-Bowles. The alternative would be to do what will actually work and to sell the public on the necessity.

- roidubouloi

November 12, 2012 at 6:03pm

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Just remember, The defense budget has doubled since 2000, the rest of the federal operating budget has declined 5%, social security and Medicare/Medicaid have mushroomed, mostly in the health budget, due to demographics and our failure to control medical costs. "Show me the money" as to how significant spending cuts can be achieved other than by cutting the defense budget or cutting medical costs by denying care. There is no other there there.

- roidubouloi

November 12, 2012 at 6:10pm

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Roi, your numbers do not seem to add up. I don't see how the top 10% earn 50% of GDP. Just a snapshot, for 2009 for instance, earners over $200k, above the 10% threshold, represent less than 23% of total AGI (total AGI was roughly 60% GDP). We are under taxed vs our spending, and while taxes on high earners have ample room to rise, the needed revs to get us to balance will come mostly from the middle class, according to the info on the IRS tables.

- ds111

November 12, 2012 at 6:53pm

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Otherwise, I agree!

- ds111

November 12, 2012 at 6:57pm

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AGI is a tax category, ds111, defined by the tax code. It is not the same as real, current economic income. To be precise, AGI significantly under-counts income. We have $15 trillion of GDP and $2 trillion of depreciation. The nation's net national product is $13 trillion. That is all current income/output. None of it is appreciation. I looked at the question once and, as I recall, not more than $1 trillion is tax-exempt income, charities and pension funds (although that is still income). That leaves $12 trillion. AGI is only $9 trillion. $3 trillion goes uncounted and/or untaxed, as a political decision. As wage earners have for the most part nothing but their wages, from which taxes are withheld at the source, you can be pretty sure that the bulk of the missing $3 trillion flows to the highest earners -- say people like Mitt Romney who manage to characterize current income as an investment that is not realized income until it is sold. The first place to reform the tax system is to account for all current income, something well within our ability to do. If it is part of GDP, someone in the economy receives that income.

- roidubouloi

November 12, 2012 at 7:30pm

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To be more precise, someone gets to consume or invest and then hold as an asset virtually 100% of the Net Domestic Product. A small bit is direct earned income of the federal government, but all the rest of the government's revenues come to it as taxes or loan proceeds. Hence, in the first instance it is all earned by someone in the private sector. SOMEONE in the economy who is not tax exempt receives almost all of the $12 trillion as real, current income that that that someone either consumes or invests in real assets. The national income accounts tell us so.

- roidubouloi

November 12, 2012 at 7:36pm

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I want to cut the EPA's advertising budget so I do not have to see their online ads advising me to keep my pets off my couch to prevent asthma attacks, or the one telling me to vacuum dust.

- K2K

November 12, 2012 at 8:11pm

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There is undoubtedly waste in government, and we should go after it. That would require a significant expansion of the Inspector General's audit capabilities. No way the Republicans will accept that. They don't even want the tax laws enforced. The only laws the want enforced are laws that disadvantage minorities, women, the poor. The first thing to do to balance the budget is not cut spending but raise taxes to pay for what we spend. Just stop borrowing. Then, if the public is unhappy with the cost of government, there might be some consensus about what to do. Or the public might just be fine with it. That's what really worries the right, that the public may indeed prefer to spend this money and redistribute income in the process. All this waste, fraud and abuse nonsense has nothing to do with actually weeding out waste, fraud and abuse. What it means to the Republicans is eliminate the spending altogether on the unproven theory that it is rife with waste, fraud and abuse. They have no interest in the problem any more than they care about deficits when the deficits are created by tax cuts. They are a bottomless well of hypocrisy.

- roidubouloi

November 12, 2012 at 9:03pm

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Still, updating the #s to today, 09s 7.5 total AGI, on 14+ GDP (12 or so NNP, both depressed) let's say gets you between 8 and 9 Tn AGI. My expectation would be that a comp amount, 20-25% AGI is earned by top 10% earners. Why is the other 3-4 untaxed? I suspect it is mostly health insurance and 401k and pension accruals - untaxed comp, and perhaps untaxed retained earnings, which are offset by prior losses. I'd love to know the answer to the discrepancy. I'd guess the untaxed proportion was much larger when tax rates were higher, along with three martini lunch deductions and the like. I agree there is a political decision, but disagree that it is simply a matter of slicing up an existing pie. More likely that there are behavioral actions that respond to the tax code. Any business man would tell you the same, as would the teacher who prefers untaxed pension contributions to taxable income. And this is where your aggregates miss the point. The world as it is here and in the EU, taxes the middle income spectrum to fund largely middle class benefits. I'm saying that won't change, and believe the evidence is compelling. Signed, Jeckyll (touché).

- ds111

November 12, 2012 at 10:03pm

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Anyone watching Erin Burnett's interview with Erskine Bowles tonight is wondering 'wtf - why are we just hearing about this now?', He said fiscal cliff would lead to two million job losses ... which was already the question of the program with #1 Petraeus story and a real Youtube of Broadwell's speech in Denver, and now the Red Cross is dinged on Sandy. well, this is too good. Erin will now show us the Rockaways, and then "Who IS Paula Broadwell?" Go Erin!

- K2K

November 12, 2012 at 11:30pm

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Nice try, ds111, but no cigar. See the CBO study of income inequality here: http://www.cbo.gov/publication/42729 It includes health insurance premiums paid by employers in household income and attributes corporate income. Very complete definition of income. Covering the period 1979 to 2007, it pegs the income share of the top 20% in 2007 at 60%! The minimum cut-off for the top quintile is $98,000. 60% of $12 trillion of income (still excluding $2 trillion of depreciation and approximately $1 trillion of income on $16 trillion of pension fund assets and $3 trillion of charitable tax-exempt assets, but not excluding pension fund or charitable contributions) is $7.2 trillion. There are about 130 million households. 20% of them is 26 million. Their first $100,000 of their income aggregated is therefore $2.6 trillion. Subtract that from $7.2 trillion and you have $4.6 trillion to tax, right in line with what I estimated above. Taxed at 50%, that gives you $2 trillion for the operating budget and, as I estimated, about $250 billion as a contribution toward entitlements. I estimated, based on various published studies, that the top 10% has $5.5 trillion of income. Probably a little high based on the CBO study. $5 trillion would be more like it, but the cut off for the top 10% is in the neighborhood of $150,000, not $100,000. The conclusion is the same. We could replace payroll taxes with an initial bracket of 15% up to 100,000 and then tax at 50% and essentially eliminate the deficit. The CBO study also measures income and incomes shares after federal taxes and income transfers. The cut off for the top 20% by that measure is $81,000. That's less than $85,000, which means that the lower end of the top 20% would see a tax cut with a $100,000 first bracket. Given that the average federal income tax rate for the highest earners is in the 20% range, at $150,000, the net is $120,000. With a 50% bracket at $100,000, the total tax, not including the 15% that is a wash with payroll taxes, is $25,000. To a rough approximation, this means that the only people who would see a tax increase doing it my way would be the top 10%. $3.25 trillion in taxes would be collected, $1 trillion more than today. After-tax total income would be $8.75 trillion. The taxes paid by the top 20% would be $2.7 trillion leaving them with $4.5 trillion of after-tax income, a 51% after-tax income share. According to the CBO study, the 1979 after- tax and after transfer income share of the top 20% was about 43%. As I said, we could levy the income tax only on income above $100,000, virtually eliminate the deficit, and the top earners would still have an after-tax income share, their purchasing power, higher than in 1980. Everyone else, and even the 80-90th decile, would see a tax cut. Cry me a river.

- roidubouloi

November 13, 2012 at 2:01am

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What this is really all about is not the specifics of the tax structure, but the boogeyman that the right uses to scare the middle class, insisting that the middle class is struggling because of the weight of government. No, it isn't. The middle class is being propped up by government. The real problem is that almost all of the national income gains of the last 30 years have gone to the very wealthiest. Bad for the middle class and very bad for economic growth. The shift from a 33% share to a 50% share, applied to the $12 trillion figure for NDP net of tax-exempt income, is $2 trillion. That is equal to the entire operating budget of the Federal government. Not the income of the wealthiest, just the increase in their income since 1980, would pay for all of Federal government operations. The single biggest economic problem in this country, the one that is starving demand, weighing down the middle class, and making it impossible to spend what we need on physical and human infrastructure is income inequality. This is at the root of almost every one of our economic struggles, including low employment and slack output. It is exacerbated by the run-away cost of health care, the other major economic problem, such that the disposable income of the middle class, net of health care costs, is surely smaller than it was 30 years ago. There are many causes of the growth in income inequality, including government tax, fiscal, and trade policy, globalization, and technological change. The simplest and fairest and most efficient way to alleviate the problem is to shift a lot more of the tax burden to the wealthiest who now have the bulk of national income. If we do not tax those with the lion's share of national income, how can we possibly pay for the things we need, how can the economy grow? The simple solution, requiring no great time or great or complex changes in the law, is denied to us by libertarianism, whether of the straight form, the ultra-conservative form, or the Republican form makes no difference. This is a vicious ideology, grounded in fantasies about the economic world and a pinched view of justice that only a fanatic few accept. The rest are just shills for wealth, lining the pockets of their patrons and hoping for nickels to fall out, or the standard dupes who are frightened by the specter of racial pollution into believing that the poor are their enemies. The enemies of our society are the rapacious rich. They have found the fig-leaf of libertarianism to cover the nakedness of their greed. That about covers it.

- roidubouloi

November 13, 2012 at 10:54am

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Needless to say, I couldn't disagree with you more. Nationally, we spend about 35% at all levels of govt. Could it be higher? But it is not an illustration of a govt starved society. Your assumption that the gap between AGI and NNP (adjusted) accrues mostly to the top is also questionable. For instance, much of the $1.5 Tn in untaxed indirect comp, employer provided health and pension benefits and social insurance payments accrues to the middle class. The bulk of the change in income inequality occurred as a result of tax code changes - from C corporations moving income to S corps to - in part because of tax arbitrage given the 35% statutory corporate rate - to declining capital gains and dividend taxation. Change them back, and people will respond in kind, modifying their behavior to take advantage of whatever the tax regime is. Your tax proposal, appealing in its simplicity as it is, would hit medium to high earning working couples especially hard. A couple each earning $75k each would see 15% on the first $100k, then 50% on the last $50k, a 27% all in rate. Those at the very top will figure something out, and you simply won't produce enough revenue. We are suffering a revenue shortfall, and 80% of the guilty tax cuts benefited those under $250k. I understand your zeal, though I find it over the top tribalism, but your suggestions are impractical, that is, they won't happen, even if you get rid of all the libertarians.

- ds111

November 13, 2012 at 12:03pm

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The image of a government that assumes the entire GNP is its pie to carve up according to political ideas about classes or quintiles or whatever is not one likely to attract much political support outside of neo-Czarist Russia. Nor will identifying and vilifying enemy philosophies (classes, races, nationalities?) serve to enlighten the debate. I think it's fair to say that roi wants to reverse the Reagan revolution and stamp out the theory of trickle-down economics wherever it raises it's ugly head. I'm okay with that as far as it goes. But I also recognize that starting from a base-line of needing to fund everything we're doing now, good, bad, and ugly, by the simple expedient of raising taxes is not something many thoughtful people will support. Most of my suggestions above roi, and I've got a lot more of them, don't depend on Republican support. Some can be done by Executive prerogative, others with a few key Republican defections which I think in the next year will be a realistic possibility, some at the state level, and some administratively. Let's get a deal. Simplify the tax code and fix glitches of the sort described by ds111. Cut spending on things we can get a majority on--there's more than you think. Address long-term entitlements obligations with some reasonable attention to medical and demographic realities. We can do this if we don't make perfect the enemy of good.

- Robert Powell

November 13, 2012 at 12:47pm

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Sorry, ds111, but your factual premise is incorrect. The CBO report does not rely on the tax numbers which are responsive to the definitions, and exclusions, in the tax laws. It starts with the Census definition of income, much more comprehensive, and comes close to reconciling to aggregate economic income. In particular, the CBO report specifically includes all employer-paid health premiums in household income. According to your thesis, this should significantly reduce the income share of the top quintile and decile as most of this flows to the middle class. But you are wrong! The CBO still finds that the top 20% garner 60% of aggregate income. So, no, ds111. The change in distribution is not a result of changing reporting of taxable income, or a response to income tax changes. It is a real phenomenon, verifiable, and having nothing to do with tax definitions. It is the change in the share of real output that flows to different deciles and quintiles of the populations. Read the CBO report. Stop making up your own libertarian facts. Of course, because the stagnant income of the broad middle class makes a mockery of libertarian claims that the wealthiest getting wealthier is good for everyone, the only response you and the rest of the libertarian crowd can muster is denial of reality. The libertarian income inequality denialism is on exactly the same footing -- fantasy that is -- as is its climate change denial. That's why I refer to libertarians as crackpots, wingnuts, and, when I am in a good mood, morons. Because their house of ideological cards relies on maintaining, in the face of all evidence to the contrary, things that manifestly are false. We should no more pay respect to this nuttery than we do to the belief that the earth is flat. We should greet it with derisive laughter if we pause at all in the serious business of righting our economy and providing for the American people, all of them, in this century. As to the numbers, ds111, you are also wrong about "the couple earning $75,000." If they work for a living, they are already paying 15.3% in payroll taxes. I suggested eliminating those and just making them part of the income tax system. If the income is dividends or capital gains, it is already taxed at 15%. As I would alleviate all other income tax burdens on income up to $100,000, everyone under that income level would see no increase and most would receive a tax cut. Indeed, most up to the level of $150,000 would receive a tax cut. That this is possible is purely the result of the fact that gross income is now so outrageously skewed to the highest earners. That's where 60% of national income goes. Therefore, that's where we have to levy taxes to fund government or else continue to pay the price for phony, crackpot, voodoo libertarian Reaganomics. The notion that those at the top "will figure out something" to avoid taxation is nonsense. We have the capacity to account for all output if we choose to do so, and for who receives that output. People at the top don't just "figure out something" by being clever. They have rules that favor them written into the tax code. Then they cheat by mis-classifying income to take advantage of favorable definitions. If all income is counted and all types of income are taxed at the same rate, the only way to cheat is tax fraud. We can deal with that if the Republicans will stop starving IRS enforcement for resources. If the rich cannot hide their income, the only way to reduce their taxable income would be to reduce their income. Are the going to do that? No, they are not. Most of their income is in reality passive to begin with, coming to them through ownership or proximity to ownership of capital. They have no reason to reduce their own passive income even if they only pocket 50% of it. If some plastic surgeon wants to cut his hours and take home $1 million less per year, all to the good. Someone else will fill the niche and the result will be greater income equality. We don't need to get rid of the libertarians, just make clear that when they claim we can only achieve fiscal balance with middle class tax increases, they are lying. Their main goal, as ever, is to make the tax code less progressive because they have an ideological devotion to flat taxes. The obviously don't think that is persuasive enough for the general public, hence the need to lie about both the static and dynamic effects of high-end tax increases. My job is to help the TNR readership understand the libertarian lie. If we are going to eliminate deductions in order to cut taxes, we ought to be making the tax code more progressive, not less progressive, because income distribution is now more regressive. The tax code should, if anything, mitigate that, not aggravate it. The simple way to make the tax code more progressive is to raise the zero bracket. Then everyone gets a tax cut. Of course, since everyone gets a cut in roughly the same amount, the benefit to the rich is trivial. Good. We shouldn't be cutting their taxes in any case. We should be raising them. Let's do both. Raise the zero bracket and raise the top tax rate. You don't like $100,000, start with $50,000 so that everyone up to the median household income pays no income taxes at all, only payroll taxes or their equivalent in income taxes. ______________________ I don't see what cuts of magnitude are going to come from Medicare/Medicaid so long as medical costs generally are uncontrolled and out of control. We can deny care and ruin people's health. That would indeed save money but not likely to be popular. We could increase the age for participation in Medicare, but that would actually increase the aggregate cost of medical care. Those people would then go back into the private insurance pool and, guess what? Your insurance premiums would go up to pay for it. But by more than the Medicare savings because Medicare is much more successful than the private sector at controlling costs. Sure, you wouldn't see it as clearly, because there would be no line in a budget to point to, but we would all be poorer for freeing a chunk of medical insurance coverage from the most effective cost control we have so far. This is yet another example of the essential fantasy of the libertarian position. Costs don't magically vanish because they cease to by financed by government. The question is always the most efficient and equitable way to take care of a social need. It is of no importance whether the government collects the insurance premiums in the form of taxes and pays for medical care or we all pay private insurance premiums. The evidence is overwhelming that the public sector does a better job of controlling medical costs than the private sector. Cut the defense budget? Sure. End the war on drugs? Go ahead. Get rid of agricultural subsidies and other subsidies to business? Be my guest. None of it is going to happen any more than we are going to end the three big deductions from taxable income: state taxes, mortgage interest, and charitable donations. But I'm all for it. In the meantime, whether or not we are wasting money and whether or not these tax expenditures are sound policy, it makes no sense to borrow money to do it. We are better off raising taxes to pay for whatever we are spending and then turning our attention to efficiencies. They may be a very long time coming, and there is no reason to go further into debt while we go about it. The notion that progressive taxation is akin to communism is pure ideological cant. It means nothing. The questions are whether we can do it, both in the static sense of having enough income to tax and the technical means to do it -- the answers are yes and yes -- and whether there is an adverse dynamic effect, loss of output, that we have to address. The answer to the last question is not only no, but that we would gain in output. There are macroeconomic reasons why the Reagan tax cuts were accompanied by a slowing of growth, the Clinton tax increases by a boom, and the Bush tax cuts by a slowing of growth again. So, yes indeed, kill the Reagan revolution. It was a colossal mistake, based on economic fantasy, that has brought us nothing but slow growth, rising income inequality, a mountain of debt, an epic recession, under-employment, unemployment -- nothing but disaster. The first step to killing it is understanding clearly what it has wrought and how out of kilter our economic life has become as a result. ____________________ Upon reflection, my first estimate of the income of the top decile, $5.5 trillion, was probably right. The second quintile is about at par, meaning 20% have a 20% income share. For the decile between 80 and 90, a 15% share is a very plausible estimate. This leaves a 45% share for the top decile. Applied to a $12 trillion aggregate income, that is $5.4 trillion, close enough to my original estimate of $5.5 trillion. Is this magic? No. It is just algebra, call it the Nate Silver approach, relying on actual facts and algebraic relationships to tell you what is and is not possible rather than the unfounded claims that are the stuff of libertarianism.

- roidubouloi

November 13, 2012 at 5:35pm

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http://www.thedailybeast.com/articles/2012/11/13/michael-tomasky-on-how-mitt-romney-finally-killed-reaganomics.html I think Tomasky's right--this horse is dead, and so are Republicans who still want to ride it.

- Robert Powell

November 14, 2012 at 6:09am

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Do you plan to raise the corporate income tax too? Because if you don't, a good chunk of high earners, lawyers and doctors and such, will go through the trouble of incorporating as a C Corp for $49. Right now it is not worth doing because income taxes are deemed reasonable. You will have to jack the corporate rate to match, the only way to prevent tax arbitrage. But our corp rate is already one of the highest in the world, and other countries have been lowering theirs, which they can do, because they rely on the VAT, a middle class tax, to pay for their middle class entitlements. I doubt it would be politically popular, and just might give a big opening to your opposition. You really need to better identify the difference between AGI and NNP, because the AGI numbers show not $5.5 Tn for the top 10%, but 50% or so of AGI. You can keep shouting "shares of NNP", and using that as your calculation base, but it does not change the fact that here in the real world, it is AGI, not NNP that we apply for federal income taxes. Furthermore, AGI includes all wages and salaries, which are not hidden from the tax man, and which, from your cited CBO report, make up 40-50% of market income for the top 1%, and far more for any lower stratum. 2009 IRS data: Total AGI $7.6 Tn. Selected components: over $75k AGI, $4.75 Tn; over $100k, $3.75 Tn; over $200k, $1.95 Tn; over $500k, $1.05 Tn. Combined, these groups make up 85% of federal income taxes paid (excludes SS/MC). I have looked at CBO's numbers. 2007 minimum market income (not AGI): top 20%, $70k; top 10%, $100k; top 5%, $140k, top 1% $350k. Not enough there there. Be honest, the numbers, by AGI, which are the only tax numbers we actually have, say you'll tax need to tax the middle class and higher to get revs anywhere close to our projected expenses. You are not being practical. You are being in ideologue, a defender of the faith. Your propaganda and vilification of your opponents (enemies?) is unseemly, irrational, and beneath you.

- ds111

November 14, 2012 at 6:31am

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Thanks for the link, Robert. Let's hope that is not just wishful thinking. _____________________________ As I wrote somewhere here just the other day -- on one or another of the fiscal cliff links -- I would eliminate corporate taxes and pass the income through to individual taxpayers so that it can be taxed at their marginal rates -- that is, progressively. This is not hard to do at all. For a pass-through entity, such as a partnership, LLC, or S-corp, this is done directly now. I would require non-pass-through entities, C corporations (are there others?), to withhold taxes at the highest marginal rate, 50% as I propose it. Those who were shareholders the entire calendar year would have their share of corporate income reported to them and would be able to include it on their personal returns with a credit for the 50% tax paid. If their income without the corporate income did not hit the 50% marginal tax rate, they would in effect receive a tax refund on the excess withheld, just as individuals now do with excess taxes withheld from wages. No one would be obliged to include the corporate income on which tax was withheld as it couldn't possibly increase their tax liability, taxes already having been withheld at the highest marginal rate.; the high earners could ignore the whole thing. I would also withhold taxes on interest and dividend distributions and similarly allow people to report their interest and dividend income and receive a tax refund if they were not taxable at the highest rate. Contrary to libertarian/supply-side cant, it does not matter whether our rates our the same or higher or lower than other countries. We are taxing almost entirely our own GDP, what is produced here. It cannot be produced elsewhere nor moved elsewhere to escape taxation. If the revenue is generated in the US market, it can be taxed here. Anyone who sells anything into our market should be taxed on the income. For importers who pay third parties for the goods, there is no issue about measurement of income. For producers who export to the US, there is a measurement problem in terms of allocation of cost to what is sold in the US. This is not an unfamiliar problem as it arises already in international trade and arises between states. I would simplify by imposing a 6% gross receipts tax on US sales as a credit against income taxes. I would then allow the seller to demonstrate, according to US reporting and accounting rules, that this overstates the margin (implicitly 12% if the tax rate is 6%). This is in effect, again, a withholding scheme for exporters into the US. The key to dealing with complexity is to put the burden on the taxpayer to demonstrate that the normal assumption is too high as applied to him/it. Honest? Let's do be honest. Do you think we have a $9 trillion economy or a $13 trillion economy (GDP less depreciation). Almost all of the $13 trillion is market income. GDP and NDP do not include asset appreciation, only output, that has to be traded to be counted with only a couple of exceptions (I think GDP includes an imputed value for rent on owned homes). The GDP cannot be made to appear as if it is generated elsewhere unless 1) we write tax definitions that permit that or 2) there is tax fraud. If there is corporate withholding, it cannot be sheltered within corporations. AGI is what is reported under current definitions. We can change those so as to include all domestic output. AGI is not at all the only number we have. We have the entire Bureau of Economic Analysis telling us that our income is much larger than AGI. Someone gets the income. It is highly unlikely that the difference between AGI and NDP is flowing to the bottom of the income scale in material amounts because wage income is all reported and the bottom has very little if any other income. If we started to count all of NDP in the tax base, it is inevitable that the difference between current reported income and NDP will turn up at the high end. If we permit the top earners one way or another to exclude large amounts of current economic income from the tax base, then, of course we have to tax elsewhere to raise sufficient revenues. But there is nothing that obliges us not to count all of that 60% of NDP that is flowing to the top and there is no serious technical obstacle to doing so. If we let the middle class pretend it didn't have income it has in order to minimize its tax burden, you would scoff. That is exactly what we do now with the high end. It is not a law of nature that we must do so. There is no practical obstacle to doing so. You seem to think VAT is the answer. It has the same or more difficult measurement problems as an income tax. You have to be able to count business income. We could structure at least half of the income tax as VAT by collecting a 25% VAT and then refunding individuals up to 10% of their reported wage income (the difference between the VAT and the 15% first bracket) up to $100,000. If they didn't actually spend it all, there's a little incentive to saving. What isn't reported as wage income to someone must be business income to someone. If that information can be captured for a VAT, it can be captured for income tax purposes. It only takes political will. I am beginning to think that I could get a doctoral dissertation out of this, including a reconciliation of NDP and aggregate taxable income. Note: You report that 2007 CBO threshold for top 10% income is $100,000. Now isn't that just where I said we should set the top of the 15% bracket intended to substitute for current payroll taxes and dividend taxes?

- roidubouloi

November 14, 2012 at 9:33am

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"does not matter whether our rates are the same" As my daughter said when she was three, "Dad, you make so, so many mistakes." True.

- roidubouloi

November 14, 2012 at 9:35am

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I think you could get a dissertation out of it, and it would be a great public service. We can change the definition of income, though I highly doubt it will be possible politically, not just here, but in the EU as well. I'd be happy to see a truly fair distribution of income vs taxes, I think most would. BTW, I am not a fan of the VAT, just note that it is widely used in high public spending countries, who, perhaps because of higher income tax rates, have resorted to other means to raise revs. I used to like the old TNR format, where it was easy to view posts with lengthy comment sections, usually indicative of a good discussion. Even when I disagree, I enjoy the commentary and learn something. This post is two weeks old today, and you wouldn't find it without a lot of effort. Am I missing something in the format,? Because the extended commentary was a big reason for my getting a subscription years back. The writing is still good though. Robert Powell, that was exactly my original point. Spending won (at the Pres and Senate levels, maybe not in the House) and the hard work will be figuring out how to pay for it. Cheers all.

- ds111

November 14, 2012 at 10:32am

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I quite agree with you about the format , ds111. Really a shame. You have given me a splendid idea, using VAT as a basis for a progressive income tax that includes all market income. As I understand VAT, it is an add-on tax at each level of production. The price of something sold includes labor, L, cost of other inputs, C, and profit, P. The value added is the difference between the price and the cost of non-labor inputs. Labor is relatively easy to define (although we have issues about independent contractors that we could make go away if we required any seller other than a worker to be identified as such with an appropriate ID tax). But, simply, labor expense is what you report to the IRS on a W-3 and you report to your employees on a W-4. You VAT base is gross receipts less non-labor inputs, that is, all other costs not reported on a W-3. If the VAT were 25%, it is charged as an add-on. This is the equivalent of a 20% income tax paid by someone. Just not initially clear by whom. On top of that, the business (someone with a business TIN who can therefore employ people and buy stuff for production) withholds income tax at a 30% rate on its reported labor expense in excess of $100,000 per individual. The individual who pays wages has therefore already paid income tax of 20% on the first $100,000 and 50% thereafter. Everyone gets to apply for a refund of 5% on their first $100,000 of labor income. Businesses have to pay an additional 30% tax on their profits. Easy to compute from the VAT. They subtract from their total VAT liability 25% of the reported (W-3) labor expense. That gives the VAT on their profits, a 20% rate. Multiply that by 1.5 and you have the additional income tax to be paid on profits. (The computation can be done for losses too if labor expense exceeds price less cost of non-labor inputs.) Business income is attributed to owners as I described above. This allows anyone to apply for a refund of 35% on their business income to the extent it is part of marginal income up to $100,000. So, all income taxes are remitted by business as withholding and the adjustments to income are then made at the personal level so that the tax is a progressive income tax. Banks and other borrowers etc. should withhold too on the interest they pay at the top marginal rate. Then no one has to file a personal return unless that are seeking a refund with regard to taxes paid on the first $100,000 of income. You can even jigger it slightly so that the VAT is the equivalent of the 15% first bracket (a VAT of 17.65%. Then no one who has only labor income has to apply for a refund. The tax has been paid already as VAT or withheld income taxes for those earning more than $100,000. Those who spend less than their first $100,000 of labor income would actually be getting a tax break, until they spend the difference on consumption, a modest incentive to save. To compute the additional business income tax withholding, you use a factor of 35/17.65 = 1.98 (applied to the VAT paid less VAT paid on labor costs). The additional withholding on labor income above $100,000 would be 32.35%. I think this would be a great tax system. Individuals with only labor income would be freed from the need to file at all. All taxes would be either paid or withheld by producers/businesses rather than by individuals. The tax would be highly progressive yet depend on only two brackets and would be the full equivalent of an income tax (with a very slight wrinkle, that people who deferred consumption would be getting a tax break until they later spent what had been saved because you don't pay the VAT until you spend your income).

- roidubouloi

November 14, 2012 at 12:27pm

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I can't think about that right now, but good luck with it!

- ds111

November 14, 2012 at 3:15pm

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Thanks for the inspiration, ds111. You are quite challenging. You are obviously no seattle, but you gotta get away from some of that libertarian literature. It is an echo chamber. They repeat stuff over and over again, such as this story that US GDP can somehow be made to reappear in another country and hence avoid US taxation, until it becomes received truth. It is all wrong.

- roidubouloi

November 14, 2012 at 3:56pm

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Enjoyed it Roi, and likewise. That's why I read TNR. Trying to keep an open mind.

- ds111

November 14, 2012 at 4:53pm

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