Saturday, March 12, 2011

Fiscal Solvency: Tax Smart, Cut Smart.

I agree with conservatives and moderates that we need to begin to get USFG spending under control. Fiscal responsibility is something that Democrats actually have a better track record over the past three decades. However, there are smart ways to get the budget in the black and then there are really dumb ways that can kill economic growth.

Raising taxes is going to have to be part of the solution. Therefore it makes sense to restore taxes on the highest income brackets to something like they were under the Reagan administration (the tax on the highest income bracket was 50% under Reagan, under Bush and Obama it is 35%.)

Obama proposed plan would only increase this tax to 39%, but many republicans still call foul. I don't understand why. Especially given that many of the wealthiest Americans are actually paying an overall lower tax rate on their income than their middle class associates. (This because most of their income comes through capital gains which are only taxed at 15% under Bush/Obama.)

For instance, Warren Buffet (the third wealthiest man in the world) has criticized the US income tax system for allowing him to pay at an income tax rate that is effectively lower than that of his secretary. (Buffet pays around18% of his income in taxes while his secretary is paying around 20% of her income in taxes). How is that an equitable tax system?

Furthermore, increasing taxes on the rich is much less likely to hurt our economic recovery, because they are not as important as consumers. The rich are much more likely to either save or invest their income rather than spend it (like 45% versus 90% of their wealth will be spent on consumables). In economic slowdown we need to keep money in the hands of people who will spend it (i.e. lower and middle class people who have to spend to survive) in order to keep the economy moving. In a recession you don't rely on supply side economics because you already have a surplus of production that has resulted in contraction of the economy. (Our recent recession was due to an overproduction of houses - and loans - which than resulted in a massive contraction of those industries). Therefore, in a economic recovery you need to be strengthening demand, not strengthening supply.

To reinforce the point with evidence, Bruce Bartlett (former Reagan economist) and Federal Reserve economists have both conducted research concluding that the Bush tax cuts did little to stimulate growth during the past decade.

Finally, I have already said that cuts will have to be made as well as raising taxes. However, not all cuts are made equal. I got this list from an e-mail sent to me by US PIRG. I think it's got some useful suggestions for cuts that make more sense than the cuts being proposed right now by Congress/President.

$19 billion in subsidies to the oil and gas industry.A 44% cut in funding for the Consumer Financial Product Bureau to police the big banks, mortgage and credit card companies and guard against deceptive practices.
$500 billion in tax loopholes that permit companies to ship their profits overseas and hide them in offshore tax havens—including 83 of the top 100 publicly traded companies.Funding eliminated for the Consumer Product Safety Commission to track and inform the public about dangerous products.
$185 billion in orders for obsolete military equipment.$88.4 million less for food safety inspectorswho ensure that the nation’s egg, poultry, and meat supply is safe and wholesome.
$1 billion for trade associations for multinational corporations to market their products overseas.Pell Grants to increase access to college for 9.4 million Americans cut by $5.7 billion.
$34 billion in Homeland Security contracts that have been plagued with waste, abuse and mismanagement going back to 2001.All funding for high-speed rail eliminated.

[1] U.S. PIRG, The First Trillion: Restoring Fairness And Reducing The Deficit, Feb. 23, 2010.

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