I’m afraid that columnist Thomas Friedman completely misunderstands the political fix we’re in. Here’s his version of the source of our problems:
We baby boomers in America and Western Europe were raised to believe there really was a Tooth Fairy, whose magic would allow conservatives to cut taxes without cutting services and liberals to expand services without raising taxes. The Tooth Fairy did it by printing money, by bogus accounting and by deluding us into thinking that by borrowing from China or Germany, or against our rising home values, or by creating exotic financial instruments to trade with each other, we were actually creating wealth.
The emphasis is mine. Would that it were so! If it were prudent conservatives could postpone tax cuts a bit and prudent liberals could restrain themselves from offering new “services” and we could live within our means. That doesn’t comport with the historical record.
The Tax Reform Bills of 1981 and 1986, the Reagan tax cuts that are the foundation of our present income tax system, both passed with broad bipartisan support. The primary sponsors of the reform act of 1986 were those notorious conservative Republicans Richard Gephardt and Bill Bennett. Social Security had bipartisan support. Medicare had bipartisan support. Conservative Republicans have leapt to the defense of Medicare as recently as the past year.
The bills that authorized our invasions of Afghanistan and Iraq, both notable drains on the public purse, garnered majorities of both parties in the Senate including such conservative figures as John Kerry and Hillary Clinton.
The problem is quite different. Politicians, seeking to hold onto their power forever, vote in ways that would be impossible if they voted for ideological reasons but are completely understandable when you recognize they’re voting for political reasons. That’s the source of our fiscal problems and it won’t be cured either by electing all conservative Republicans or all liberal Democrats or some mix of the two.
It can only be cured by electing representatives whose primary motivation isn’t continuing in power, something at least as mythical as the Tooth Fairy.
Tom Friedman – never has such a lightweight gathered so much attention and adoration. But I digress.
Left or right, and you obviously know where I stand, we are spending too much. Period. And we have put into motion programs that guarantee we will spend too much as far as the eye can see, unless we sober up.
The game of musical chairs is ending. With a tax multiplier of 3, the complete, or even substantial, answer cannot be taxation. (Do you hear me Bernard and Michael??)
Everyone wants to throw out “so what would you cut” as an opposing argument to curtailing spending. Tht’s no argument. I confess I don’t know. BUt as a businessman I know we must figure it out. The alternatives are economically suicidal. Government spending almost by definition is wasteful, so guess where we must come to grips with reality? Families do it. Businesses do it. Only government pleads the case that spending cuts cannot be made.
As the person perhaps most closely identified with my last school said: “there is no free lunch.” And we are really close to that realization.
I have some good ideas on what to cut.
1) Means-test SS and Medicare. Re-evaluate eligibility ages in light of changes in average lifespan.
2) In terms of Medicare pay-outs, stop trying to catch a falling knife. We need to stop spending hundreds of thousands of dollars trying to keep octogenarians alive for another year.
3) Figure out that the Cold War is over and once that brilliant insight is digested, conform our military strategy and requirements accordingly. (We are unlikely ever to need large numbers of heavy tanks. Ever.) Withdraw our forces from countries that are perfectly capable of providing for their own security.
4) Legalize drugs. It cuts prison costs and enforcement costs and can become a source of tax revenue. Treat drugs the same way we treat alcohol, as a vice, but one in which people have a right to indulge in limited circumstances.
5) Eliminate agricultural price supports and subsidies.
Michael, why don’t we consider raising the payroll cap on Social Security to fix that, and putting taxes back to responsible levels on the wealthiest Americans as they were pre-Bush and pre-Reagan to get our debts and deficits under control? This doesn’t and shouldn’t have to hurt average Americans – they weren’t the irresponsible ones making the very bad decisions.
Friedman’s column is pure hypocrisy. He has his own Tooth Fairy in the form of a wife who comes from a billionaire family.
http://www.huffingtonpost.com/david-sirota/billionaire-scion-tom-fri_b_26164.html
Of course he would never disclose that in his columns.
“Everyone wants to throw out “so what would you cut†as an opposing argument to curtailing spending. Tht’s no argument.”
It is the crux of the argument. As long as conservatives cut taxes, a popular move, then don’t know what to cut (Micheal’s list is a good start) , they are politically viable. It wins them more elections. However, it just runs up debt. Until conservatives elect
” representatives whose primary motivation isn’t continuing in power” we have no chance at honest political discourse. I don’t really buy this idea that you cannot cut entitlement spending. You can cut it, but you may risk getting not re-elected. They did it in Canada.
I am easier on Dems here as they have been willing to raise taxes, politically unpopular, to pay for programs they want, politically popular. They get voted out when they raise taxes too much. Look at how many Dems are losing their jobs because they passed health care reform and the increase in taxes everyone knows is coming.
“With a tax multiplier of 3”
Romer paper? Remember that tax increases aimed at cutting deficits did not have this effect.
This has some of the makings of a class struggle, so today I will link to a Marxist writer for a different view.
http://mrzine.monthlyreview.org/2010/wolff050510.html
Steve
Tim:
I do want to raise the cap but I was just talking about the cuts side. And I agree that tax increases will have to be part of the fix.
But it’s wrong I think to absolve voters. We are jointly responsible for our government. With power (the vote) comes responsibility. Average Americans voted for pols who offered them irresponsible tax cuts and irresponsible spending. So it’s on us — Republicans, Democrats and none of the above.
But Michael, those tax cuts went primarily to the wealthiest Americans. And even when Republicans (the main people who vote because of tax cuts) voted for other Republicans, tax cuts weren’t the only thing on their minds. Bush won a second term not because he was a great president and gave us tax cuts, but because he was a war time Republican president. Can’t this primarily be solved by simply placing a heavier tax burden on the people who can afford it most, on the people who it was on to begin with?
Tim:
No. We’re too deep in the hole to dig out with tax increases alone.
Tim,
Michael is right. Furthermore, the rich weren’t the only ones to benefit from tax cuts. Taxes were cut across the board and it’s to the point now where middle and lower class families either pay no income tax or end up receiving more than they pay. I’m one of those families – with two children and an income of ~$80k a year, our effective tax rate was about 2% this past year. Tax rates probably need to rise across the board, IMO.
But Andy, if you earned double or triple what you now do you would be paying about 33% in taxes – and if you were making $750,000,000 a year you would be paying only about 15% in capital gains taxes.
In addition to that, from what I understand, working and middle class people haven’t had a wage increase adjusted for inflation in the last 30 years, while the top 1% are making triple what they did 30 years ago.
And Michael, I think we can start by cutting our military budget.
And the one thing that health reform did not reform was the cost to consumers and now tax payers especially – single payer would have been the way to go but we had to keep the private insurance companies alive and well.
Tim, while I agree that the military budget should be trimmed, we can’t get where we need to go solely by trimming the military budget. Military spending is actually less in real dollars than it was 30 years ago. If we cut 100% of defense spending (clearly imprudent not to mention impossible), it wouldn’t balance the budget see here.
If we confiscated 100% of the wealth of the 100 richest people in the country, it only amounts to about $600 billion. That doesn’t even balance the budget for a year.
The federal government’s problem is that Medicare and Social Security spending are growing faster than any conceivable revenue stream. That’s it in a nutshell. Getting the spending on those programs under control is the only solution.
What about confiscating 50% of the wealth of the 25,000 richest people in America?
From what I understand the wealthiest people in America had somewhere between 50 and 90% of their wealth go to taxes between 1940 and 1970 and they didn’t suffer, the middle class was strong, and the economy and government functioned better..
Then what happened was Republicans told people that if we lowered taxes business would take off and tax revenues to the IRS would increase. Honest conservatives now concede that was a bunch of BS.
So I don’t know if things are too far gone now to simply put tax rates back to what they were before Reagan – but it’s a good start.
There is no question that things like Medicare and health care expenses need be reigned in, but lobbyists, rich people, Republicans and blue dog Dems got their way with putting that off a little while longer. When the time comes to get things under control we’ll have to find a way to get more “bang for your buck” instead of shedding entitlements to people that need it.
Oh, and I believe I already stated that the way to “fix” Social Security, which a LOT of people believe ISN’T broken, is to simply raise the payroll tax cap. People are now capped at paying Social Security taxes at $106,000 – that shouldn’t be the case.
Your understanding is wrong. You’re confusing wealth and income. Taxing income even at confiscatory levels won’t get anything approaching the amounts needed.
My bad – you’re right – income.
But still, tax the “income” of the 25,000 highest earners at “confiscatory” levels – as it was between 1940 and 1970 and it would be a REALLY good start.
You stated how much “100% of the wealth of the 100 richest people in the country” is – care to throw out a number on what you believe 50% of the income of the top 25,000 people are? Are you CERTAIN it wouldn’t be enough to make a good headway towards getting things under control?
I believe it would be – people just want to protect their stack of money.
How about 50% of the top 250,000?
correction: * between 1940 and 1980.
I think you’re going to be disappointed with the results of your plan, Tim. According to the Tax Foundation, the total household income of the top 1% of households (everybody with a household income of $350,000 or more), accounting for a bit over a million households, is around $2 trillion. Those households are already paying roughly $400 billion in taxes. All other things being equal if you increased their rate to 50% that would just get you an additional $600 billion—not enough to balance the budget now or for the foreseeable future and not enough to balance the budget after 2020 even if the defense budget were cut to zero.
BTW, when I said “confiscatory” I was referring to wealth rather than income. Taxing away 50% of wealth would be confiscatory virtually by definition.
What happens if you tax the top 3% more? 5%? 10%?
I’m no expert, I only know taxes were A LOT higher before 1980 and things were better for everyone and the debts and deficits weren’t nearly as bad.
I also know that taxes are A LOT higher in Europe, and it’s citizens have a better quality of life and more entitlements – and they aren’t in any worse shape than we are.
We may have to deal with debts and deficits while we try and tackle inequality in this country – this ought to be a lot of fun.
What makes you think that, Tim? Marginal rates may have been higher but taxes, as a percentage of GDP are about what they were in 1980. Federal government outlays are significantly higher as a percentage of GDP than they were then.
You may be right about that, but we have a problem now; the economy is in the tank, the middle class is shrinking, the upper middle class is paying most of the taxes, the rich have become richer, the rich have had RIDICULOUS tax cuts in the last 30 years, we have 2 wars going on, and debt and deficits are out of control.
Where do we get the money that we need now?
Seems like the variables that have really messed us up are tax cuts for the rich and wars. Perhaps if we undid some of that we’d undo some of our problems.
“I’m no expert, I only know taxes were A LOT higher before 1980 and things were better for everyone and the debts and deficits weren’t nearly as bad”
I meant to say taxes on the wealthy were a lot higher before 1980, but I thought you knew that was what I meant from what I wrote in my previous posts.
That’s not true, Tim. The rates were higher but those in the top decile of income earners and, especially, those in the top 1% of income earners pay more in taxes in real terms and a higher percentage of taxes now than they did in 1980.
These things aren’t unrelated. There is a point at which higher rates results in less revenue. That’s been known for a thousand years. Is that point 50%? I don’t know. However, regardless of what the actual number is it means that there is some level of outlays at which the only solution to the country’s fiscal problems is reducing spending.
I seriously doubt that the rate at which revenues actually diminish is anything above 35% and that’s why I’m not opposed to what’s referred to as repealing the “Bush tax cuts”. That’s assumed in President Obama’s current fiscal plans and it still puts us behind the 8-ball on the budget.
Tim,
Here’s some actual data for you to ponder:
First, there is a big difference between marginal tax rates and effective tax rates. Take a look at this CBO spreadsheet (excel file) with tax info from 1979 to 2005. Look at table 1a and compare the effective tax rates over the years. In 1979, the top 1% were taxed at an effective rate of 37%. In 2005, it was 31.2%. That includes all federal taxes, not just income tax. Looking only at income tax, the numbers are even smaller with the top 1% paying 21.8% in 1979 and 19.4% today. So the oft-repeated claim that the rich used to massively taxed and now are hardly taxed at all isn’t supported by real evidence. People making those claims are usually only looking at marginal tax rates which are meaningless since no one actually pays those rates.
Secondly, despite changes in tax law, government revenue hasn’t changed much since 1950 in terms of GDP. That’s because as GDP increases, so does the amount of revenue and, as this chart shows, the tax burden on individuals has increased over the years in constant dollars. That’s completely normal as the country grew in wealth.
Dave is completely right about entitlement spending. There is no revenue stream that can keep up. Consider this simple math – suppose your personal income rose at 2% a year and your housing costs rose at 10% a year. That’s inherently unsustainable. You might, for instance, get a new, high paying job, that doubles your income (which is the equivalent, for government, of doubling tax revenue), but the underlying sustainability remains. The one-time doubling of your income only buys you some time before the miracle of compound interest catches up with you.
This is the problem we face with entitlements – their costs are rising much faster than GDP and all revenue streams. This has actually been happening for a long time now (several decades) but it’s only recently that people are starting to notice because the problem is becoming difficult to ignore, and Congress is running out of methods to kick the can down the road.
In my view, the day when we had a choice between higher taxes and reduced spending is long gone. In the future we will have both. Take a look at what Greece is going through and the austerity measures they face. We will have more flexibility in dealing with our crisis than they do, but the fact remains that austerity is in our future whether we like it or not. You should not kid yourself that we can avoid this by simply increasing the amount of money we take from the people who are already funding most of the government.
Somebody is uninformed or not being honest:
http://www.youtube.com/watch?v=ck-jlqPyGYw
http://www.youtube.com/watch?v=3z_UrOKtjHk
“Though tax cuts for the rich were bigger than those for other groups, the wealthiest families paid a bigger share of total taxes. That is because their incomes have climbed far more rapidly, and the gap between rich and poor has widened in the last several years” :
http://www.nytimes.com/2007/01/08/washington/08tax.html
http://www.nytimes.com/2007/03/29/business/29tax.html
They’re making more and more of the money – they should pay more and more of the taxes. But they’re making more and more of the money and finding clever ways to pay less and less of the taxes.