Everyone Gets a Tax Cut

A few thoughts on the announced tax-cut deal between Obama and the Republicans:


Generally, I like the deal. Everyone gets what they want (even if we can’t pay for it). Taxes don’t go up for everyone next year. We even get a little tax cut. Unemployment benefits get extended for another year. And the earned income tax credit get extended. So, tax cuts for everyone and the most needy get a little extra.

It’s absurd that there had be to any negotiations at all. The Republicans get a say because they have 42 senators and Democrats only have 58. Since it takes 60 votes to do anything, 42 is as good as 58. If the senate doesn’t kill that rule at the start of it’s next session then the Democrats are insane. I’m looking at you Jeanne Shaheen. What the heck, I’m looking at you too Kelly Ayotte. Just because you’re a Republican doesn’t relieve you of the responsibility to end this foolishness.

Liberals who are apoplectic about this deal need to rethink their priorities. Would the world really be a better place if taxes for everyone went up next year? And unemployment benefits ended? This is a stealth-stimulus. It’s not a very efficient stimulus. But it’s better than nothing -- and will be much more popular.

I support progressive taxation. I opposed the Bush tax cuts. I never liked the Democratic plan to extend 75% of the Bush cuts. I don’t think it’s a moral imperative that rich people pay higher taxes. We need a lot more revenue to balance the budget. When we get serious about the nation’s fiscal health I would like to see a little extra come from where it’ll cause the least hardship - people richer than me. But everyone will have to share the burden. We shouldn’t fool ourselves into thinking otherwise.

But we aren’t serious about balancing the budget. Nobody cares. Not this year. This deal piles on another $600-$900 billion on the deficit. It also settles taxes and economic stimulus issues for the next few years. Maybe this is our last big bender. Hopefully, this opens the door to serious negotiations around a big picture deficit reduction plan (like Simpson-Bowles) where everything is on the table and we look at the kinds of real, structural changes that are required in tax policy, defense, medical, and entitlement spending.

Speaking of negotiations- Obama is clearly at home with them. He’s much more interested in being the presidential centrist than leading the charge as the front-man of the Democratic party. I admire this quality. But it drives “the base” berserk. Obama will get plenty of opportunity for negotiation over the next two years. The man himself is such a stark contrast from the communist-socialist rhetoric that comes from the right. I hope that’ll become increasingly apparent, that the fever will break, and that American center will realized Obama is one of them.

In this highly polarized era there may not be much support for a President-as-centrist-negotiator. But that’s his job. And I’m glad Obama is the one doing it.

Tales of My Tax Return

It's tax time. Last week I was preparing for the annual day of reckoning with my tax preparer. She is a charming Obama-volunteer who generally reckons the government owes us a sizable rebate check. So it's not such an unpleasant experience. But it got me thinking. For all my writing and arguing about taxes (it's slavery!) how much attention do I really pay to my own tax rates? Does anyone? Do you know how much of your income went to taxes last year? I had only a rough idea and I'm guessing I'm not alone.

We're a reasonable stand-in for the average, affluent American family. We've got two incomes (software architect and public school reading tutor), two kids, and own a house. We're doing well but aren't exactly independently wealthy.

Let's run the numbers:

% of our income paid in federal income tax: 12.7%
% of our income paid to social security and medicare taxes: 6.8%
% of our income paid to state and local taxes (mostly property because we live in NH): 3.6%
% of our income paid to medical costs (insurance premiums and expenses): 10%

% of our income paid to all taxes combined: 23%
% of our income paid to all taxes plus medical: 33%

There's some data. I won't try to draw any grand conclusions. Well, maybe one:

If this country got universal health care, and my family got a 75% income tax increase, we would still come out ahead.

FBB Part 2: Taxes

Part 2 of the 'Bank Slate Federal Budget Blueprint series. The goal of this series is to make realistic recommendations that would allow the US to balance in the budget within 10 years. The basic tenants of the the 'Bank Slate Federal Budget Blueprint are:

• The year 2000 should be used as a policy baseline. Tax and spending policies should be reset to the levels and rates they had in 2000.
• Any policies enacted since 2000, that we wish to keep, need to be funded.

Politicians and the good citizens they represent always think taxes should be lower. If times are bad, or maybe they aren't so bad, but we want them to be better-- we can stimulate the economy by cutting taxes. And if times are good and there's a budget surplus-- well then that's not the government's money. That's your money! You should get it back.

For Republicans there is no problem that can't be solved by cutting taxes. Even today they all promise to "cut taxes and reduce the deficit". There is no political cost to uttering this nonsense.

Even the Democrats have gotten in on the act. Clinton and Obama both realized that calls for spending increases will be met with protest. But everyone likes a targeted "tax credit". These are much easier to pass even if the result is pretty much the same.

 Nobody like taxes. I don't like taxes. I don't like paying my credit card bills either. But if you're going to spend the money you've got to get it from somewhere. Somewhere means income or debt. Conservatives say they don't like the government spending all this money. But their commitment to tax cuts is not matched by a commitment to spending cuts.

After a decade of tax cuts for all seasons, we're looking at a $1.56 trillion 1 year budget deficit. There is no party willing to enact tax hikes. And there are no Americans who are going to demand it.

Fortunately, there is a simple solution. In fact, it's the simplest of all possible solutions. Congress should do nothing at all.

In their wisdom, the Bush Administration and its congressional supporters, scheduled all of the Bust tax cuts to expire this year. At the end of 2010 all the Bush tax cuts -- income, capital gains, estate etc.. are scheduled to reset to their 2000 level. Obama's tax cuts are also scheduled to expire in a year or two. Obama has suggested that congress should extend some of the tax cuts that go to "working families". Congress should not do this. The projected deficit is $1.56 trillion. We can't afford the tax cuts. Not even the ones that go to me.

The other tax that congress should to nothing about is the AMT. The AMT (Alternative Minimum Tax) was enacted in 1969 and designed to make sure Americans with high incomes couldn't hide all of it in tax shelters. The problem with the AMT is that it didn't account for wage growth over time. What was considered "high income" in 1969 counts is considered to be "middle-class" today-- although we still mostly talking about couples with income over $200k.

Every few years congress "fixes" the AMT by bumping up the level where it goes into effect. But the AMT is a simple, progressive tax system. So, we should leave it alone, even if I end up paying it some day.

Raising taxes is always a bitter pill to swallow. But reverting to year 2000 tax policy will be much less nasty than ongoing $1.56 trillion dollar deficits. And all congress has to do is nothing at all.