Monday, August 9, 2010

One Working Man's Opinion On The Bush Tax Cuts

I have been trying to understand how this debate about the economy as it relates to spending and tax cuts. I listen to Democrats and Republicans argue about this on Sunday morning talk shows yesterday. One of the main issues seems to be the tax cuts for the wealthy that were done by President Bush. Republicans feel like having these tax cuts repealed would be bad for the economy because those are the people that create jobs in America. Democrats and some economists say we should let the cuts expire because they are not paid for so they are just as bad for the deficit as spending. That’s the basic argument without all the big technical words.

First of all, I am not one of those people who believe the rich should pay a higher percentage of their money than anyone else. You shouldn’t have to put in a higher share than anyone else because you are financially successful. I say everyone should have to pay the same percentage. Rich folks would end up giving more because they have more but it would still be the same percentage as people like me so everyone is making the same sacrifice and no one thinks the other side is getting over. I would be on board for something like that since the deficit is as bad as it is and we have two wars to pay for. Once we pay off a few of those loans from other countries and bring the troops home then we can talk about cutting everything again.

The second thing is I find it funny that so many of us want to accuse people of being less American if they think government should help people but think it’s okay that so many people have to depend on the decisions of a private citizen or corporation to determine their faith. What I get out of this debate is “If we don’t take care of the rich they will not do anything to hire you.” Unless you are the CEO or the chairman of the board you are still dependent on someone other than yourself. Every morning people get up hoping that some foreign country or computer program hasn’t shown the powers that be a way to do what you get paid to do for half of the cost. That’s why we have self checkout machines in the stores and the kids play with toys made in China. At least with the government having some say so you can keep voting and hope to get it right. If the private sector is going to decide the faith of the country with no regulation and paying no taxes at all we can’t do a damn thing if they decide to take all that money and keep it in their pocket. Let’s be honest for a minute. If someone gave the majority of us a check for ten thousand dollars and didn’t say we had to spend at least three thousand on other people would we? The answer is no so whether we give tax cuts to businesses or people, it won’t make a difference unless you put some stipulations to it.

The third thing is the one question I don’t hear anyone asking. If the tax cuts are supposed to spur economic growth, why are we in a recession now when the rich haven’t been paying these taxes since 2001? Shouldn’t unemployment be at 5% or lower if low taxes and less regulation was the key? I’m a fair minded guy and if President Obama would have taken office with a surplus, eliminated the tax cuts and things fell apart, I would be the first one to say that was a dumb ass policy but that’s not what happened. The economy finally fell apart in 2008 largely in part to the greed of the same people who weren’t paying these taxes for seven years already. How is that going to change all of a sudden? If you did the same thing with your money for this long without a positive result you would be bankrupt. That’s where we are going to be if both parties don’t start dealing with reality.


Paul D. Fernhout said...
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Paul D. Fernhout said...

Here are two links to stuff I put together that connects with your theme of tax cuts not preventing a recession:
"The Richest Man in the World: A parable about structural unemployment and a basic income"
"Beyond a Jobless Recovery: A heterodox perspective on 21st century economics"

The way forward will likely include some mix of a basic income, a gift economy, resource-based planning, and/or stronger local subsistence economies.

(BTW, I saw your blog post tweeted by Livable4All. Sorry, I mad a big typo in my previous post, so I deleted it and replaced it with this.)

Cousin Pat from Georgia said...

I too was once a fan of the flat-tax idea. Doing so would simplify the tax code, and make the whole convoluted system easier to manage. Loopholes would be far more blatant and less likely to endure.

That being said, the progressive tax that we theoretically have operated under for generations has merits as well. One of the theories behind it works like this: if you're earning a living wage, you are still responsible to contribute to society's collective functions: common defense, roads, schools, etc. If you are working for a massive corporation and bringing down seven or eight figures, you are able to do so because your business takes advantage of the defense, roads and schools (and radio towers, sattelites, electrical grids, etc) that everyone else has chipped in for.

The guys and gals on the living wage only pay in, the folks at the top actually make money utilitzing infrastructure.

K. said...

Cliff: You make some great points, as always, especially re dependency on the wealthy.

The problem with a flat tax is that there are very few rich people compared to everyone else. A flat tax tends to shift the overall tax burden down onto the people who can least afford to bear it.

Look at it this way: Suppose we had a flat tax of 10%. How much labor would the L9 have to put in to meet the tax obligation of someone making $5mil/yr?

Anonymous said...

k and cliff. Interesting.

i make 20k a year.

21.5 percent off the top.

10 percent off at the register.

10 percent off the top makes sense to e.

besides the loopholes that the lobbys and the tax exempt are gonna get, why wouldn't this work in a perfect world?


Anonymous said...

meant to say that 10 percent off the top makes sense to me.


Anonymous said...

hey cuz pat.

that's the rub.

every body pays the same.

no loops and lobbys.

it will never happen but if some way if it did everyone would be equally invested and give a rats ass.

K. said...
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K. said...

Anon, your marginal rate is 15%, so I assume that the total you report includes Louisiana state income tax and Soc Sec.

That being said, you make my point for me: Your rate should be 10% or lower, if you're a married head of household. This is what happens when the rates flatten, as they have been doing in this country since 1981: The lower rates assume the tax burden. Adjusted for inflation, your marginal rate has dropped 1% since 1981, whereas the top rate has dropped from 70% to 35%. And yet spending has increased. It's not hard to tell who is footing the bill.

A world with no loopholes would be nice. It would also be nice if the grass in my yard sprouted blades of gold. House Republicans recently obstructed a bill that would have extended health care benefits to 9/11 first responders because the funding mechanism meant closing a loophole that benefited multinational corporations. You could institute a flat tax tomorrow and Congress would start creating loopholes the day after.

K. said...

As a hypothetical, assume three tax payers whose total burden equals government expenditures (i.e., a balanced budget):

Taxpayer A makes $20K and pays 3K in taxes based on a 15% tax rate. This amounts to 1.5% of the total tax burden of 203K (which equals the combined taxes of A, B, C).

Taxpayer B makes 100K and pays 25K in taxes based on a 25% rate. This amounts to 12% of the tax burden.

Taxpayer C makes 500K and pays 175K in taxes based on a 35% tax rate. This amounts to 86.2% of the tax burden.

Now, change the tax policy to a 10% flat tax.

Taxpayer A now pays 2K in tax, but his share of the tax burden rises from 1.5% to 3.2%. Taxpayer B now pays 10K in taxes, but his share of the burden rises to 16.1%. Taxpayer C now pays 50K in taxes, and his share of the burden drops to 80.6%.

Moreover, although revenues have dropped to 62K, expenditures haven't changed, so there is now a debt of 141K which is spread equally among the three tax payers. Thus, in exchange for a tax break of 1K, Taxpayer A assumes a net debt of 46K. Taxpayer B's break of 15K comes at the cost of a net debt of 32K. But Taxpayer C's break of 125K nets out at +78K. And this accrues year in and year out. Who is getting the deal here?

Revenue neutrality in this scenario requires a flat tax of a little over 32%, still a good deal for the guy pulling in 500K, but not so good for everyone else.

In real life, of course, there are many more people making 20K and 100K than 500K, so they will assume an even greater proportion of the burden and the debt.

Even without the Bush cuts, the guy making 500K comes out way ahead. The cuts shouldn't only lapse, that bracket should be raised while Anon's and Taxpayer B's are lowered.

Why hasn't that happened? Because Taxpayer B has become convinced that Anon is the reason why B's tax burden and share of the debt is so high, so that's where B directs his anger. Sorry, Anon: You get it coming and going.

Clifton said...

Maybe a flat tax is not the right way to go in terms of the burden each person carries but I do believe that it's fair that everyone has some burden.

K. said...

No argument: You can't have a free and productive society unless everyone is invested in it.

Of course, you also have to get a return on investment, which is another story.

K. said...

Cliff, since I'm sure that you can't wait to discuss this with your buds over a couple of pitchers, I should clarify that the regular tax hypothetical does not reflect the laddering of the tax brackets. For example, not all of Taxpayer A's salary of 20K is taxed at 15%: The first 8.4K is taxed at 10%, and the remainder at 15%

The overall effect is to drive the total taxes down, but the principal that a flat tax benefits C to the detriment of A and B remains unchanged.