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12/26/2010

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Kevin McGilly

Another profound suggestion from the economics profressor: offset the extension of unemployment insurance for the long-term unemployed by *cancelling* the insurance benefits to which the newly unemplyed (less than 3 months) are entitled.

Here's another helpful idea: Offset the revenue loss due to the extension of the fiscally unsustainable Bush tax cuts by confiscating the wages of all economics professors.

Observer

In the first place, the so-called "Bush tax cuts" were not tax "cuts," but rather, legislative corrections that redirected marginal tax rates toward 1986 levels.

Second, government-sponsored unemployment "insurance" has grown out of control. What once was short-term help for the temporarily unemployed has now become a long-term entitlement.

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Jack

Observe: What do you suggest we do?

Jack

"The great majority of the short-term unemployed are not liquidity constrained since they can finance their unemployment from savings, earnings of spouses, and borrowing from relatives and friends."


.......... Interesting. Anything on the amount of liquid savings of the lower income folk most likely to be laid off in recession?

..."the income base should be greatly broadened by eliminating the deductibility of interest on mortgages,"

......... something else so as to relieve those having corralled ALL of the productivity gains from the last 25 years from pitching in a bit?

Main home. You can have only one main home at any one time. This is the home where you ordinarily live most of the time.

Second home. A second home is a home that you choose to treat as your second home.

Second home not rented out. If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. You do not have to use the home during the year.

Second home rented out. If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you do not use the home long enough, it is considered rental property and not a second home. For information on residential rental property, see Publication 527.

............ Might be good to limit the size of the mortgage and trim second home deducts a bit. But! not any time soon, we've a ton of dogs to pawn off first!

"A broad-based flat income tax could have a relatively modest tax rate- perhaps about 25%- and still raise as much revenue as the tax structure that would exist if the Bush tax cuts were allow to lapse."

.......... ah yes! as the GINI (inequality curve steepens) lest's by all means steepen it further -- post tax. Grand idea!

"A flat consumption tax would be even better than a flat income tax since such a consumption tax would not distort the incentive to save."

.......... Interesting. And Haha! Some truth to it too! Slap a 25% sales tax atop that $40k hybrid we've been eying and just see how long we can keep the old gas guzzler running!

Seriously Prof Becker for most of our "left behinds" of the working world "consumption" and earnings are close to the same thing -- only those of the higher brackets have the option to spend or save. You're aware that many states, (CA and OK) come to mind already have regressive sales taxes in the 10% range. I don't think we can tighten our belts to favor the topmost gleaners much more.


GreeceRUS

As the changes that American voters instituted in the past few elections, seem to have initiated America’s irreversible transition to a European style welfare state, America’s long term growth rate trendline will inevitably hover around the typical 1.5% European rate.

If, as Mr. Becker points out, a 0.5% growth rate differential makes such a big difference, imagine what the growth differential of a US growing at 1.5% in a world that grows at 4.5% on average will do.

The dis-incentives and complacency afforded by the Welfare State, are fundamentally incompatible with the growth rates that Social-Democracy relies upon in order to finance its utopian promises of strong and immediately equally distributed growth.

A host of emerging economies encompassing 3+ billion people have finally woken up to the huge production incentives inherent in individual economic freedom, and are thus springing up towards their new wealth equilibrium points at 5-10% growth rates.

The US and the Western World in general have only one option: They either re-institute individual incentives to high growth, or they fade away into worldwide averagedom within 20-30 years. It’s just as simple as that. Growth rates of 1.5,2,3% are just not going to cut it.

Many people in the west believe that low growth is a necessary evil to tolerate in order to implement mandatory compassion and immediate redistribution. However, growing at 1.5% in a world that grows at 4.5% annually, mathematically leads to a rather cruel outcome. This is not only because emerging economies are currently growing faster. Had the world experienced 15% slower growth in the last 500 years, we would still be in the late 1800’s with a 35-40 year life expectancy, $5K/year average annual income and dying from malaria and tuberculosis, amongst other ills.

GreeceRUS

In the calls to a consumption tax, call it VAT or whatever, the American middle class is now staring at their very own grave, the grave they, themselves, bamboozled by politicians, helped dig. With 10% of taxpayers already paying 65-70% of the total US income tax, there just isn’t any more room for taxing the most productive individuals without hurting economic growth and further depressing future prosperity; a prosperity already in strong competition from 3+ billion people in emerging markets worldwide. So time has inevitably come for the middle class and poor to start paying a non trivial portion of the bill, a bill that their very own central planning and class-warfare utopia created.

So expect an additional general consumption tax, hidden as much as possible from the middle and lower-class end consumer, to be instituted sooner or later at an initial modest few percent rate, to soon rise to 20-25% within 20-30 years, as it has in virtually every country that implemented such a tax in Europe.

Spending other people’s money to finance inefficient government indirect redistribution programs brings about the inevitable: high compound taxes for everybody, just like in Europe where top tax rates of 40-60% kick in at just 2-3 times average annual income and then an additional 20-25% tax on everything that you buy to top it all off (as well as over 100% taxed gasoline at $7/gallon). The high tax will then, in turn, finance slow sophisticated, indirect and persistent propaganda for even higher taxes. That is essentially the future you asked for dear Americans.

Elaine

With the help of Obama and his Congress & Senate & his Czars whose goal from the very beginning has been to destroy America and Americans from the very beginning even as far back as his campaign. In 20 or 30 years there will be nothing here but another 3rd world country, no longer the strongest Nation in the World because we will have been destroyed from the inside out. That is Obama's plan. That is the goal he was given to turn us into a Global One World Order under the thieving UN.
I didn't vote for Obama, so "No" that is not the future we asked for.

Observer

Jack asks: "What do you suggest we do?"

Easy, Jack. Avoid the road to serfdom at all costs.

John

All lies

It is appalling to read such a work of fiction.

The only thing that Bush's tax cuts correlate to is a decline in capital investment.

Here is a pretty good link to a McKinsey report

http://www.mckinsey.com/mgi/publications/farewell_cheap_capital/pdfs/MGI_Farewell_to_cheap_capital_full_report.pdf

which explains that households cannot save because of income inequality.

instead of giving the rich a pass, we ought to to impose taxes that recoup the windfalls that have gone to the mega rich since the mid-1970s, and invest in education, infrastructure, and basic r & d, while also eliminating all FICA taxes.

Jack

Observer: Agreed. But already happened:

http://webcache.googleusercontent.com/search?q=cache:bB64joVfJsYJ:lanekenworthy.net/2008/03/09/the-best-inequality-graph/+best+inequality+graph&cd=2&hl=en&ct=clnk&gl=us

Considering a slave owner found it wise to protect his investment by at least housing, feeding, clothing, and supplying what little medical care was available in those days........ seems this richest of nations should be able to provide at least a minimal std of living for all who work.

Gin us up a budget for those of the lowest quintile... who've not even kept pace with inflation, much less share in the gains of a doubling of productivity over the last 25 years.

More? "3-4% GDP gains... yadda coming "out" of this deep and atypical recession? Yah, sure. Gains from where? Normally as folks healed a bit major purchases using future dollars through credit lead the way. This time? New housing is dead for years and the car biz is halved.

In a nation 70% dependent on consumer spending but suffering from stagnant and declining wages, and unemployment show me the way to any growth beyond that directly related to population growth.

Ha! Greece! Still crying over the top few percent paying a high fraction of the income tax? As every extra dollar of income is 60% or more tax free, THE reason they ARE paying most of the taxes is they've garnered an even higher percentage of the income. Won't work........ they don't need nor want that many cars, grains of wheat, bottles of wine......... while those at the lower echelons can NOT buy those surplus products. Economic constipation.

John to the rescue of rationality!

"instead of giving the rich a pass, we ought to to impose taxes that recoup the windfalls that have gone to the mega rich since the mid-1970s, and invest in education, infrastructure, and basic r & d, while also eliminating all FICA taxes. "

.......... Indeed! Instead of mincing around over a piddly 3% rate issue it would be tempting to claw back some of the wealth stolen outright if there were a means of doing so.

These All For The Rich Policies lead only to the final rounds of a game of Monopoly. Remember what happens when one player has all the hotels?

Moneysavingexpertscotland

I generally agree with what you have to say but I think that the long term growth for the economy is greater than you suggest.

I'm from the UK and use your blog to keep up to date with all the financial news.

Keep up the good work.

Kind regards,

Brian Smith
www.debtscotland.net

kanino

From the book "AN AUTISTIC WORLD (1)"

One of the usual inferences from inequality, is the recognition for the need of a more equilibrated distribution of wealth, which in turn would produce a better society. That is only partially true. Dividing wealth among individuals is not a bad idea, but isn’t a fair idea either because doesn’t value the different efforts of those individuals to acquire prosperity. What is needed is the realization of common sense. A society that has thirty or forty percent of its population under an economic struggle is a society in trouble, even if it doesn’t count correctly the number of people unemployed and disregard the health concerns of those individuals. It would be a matter of time until they will ask “why us, and not you,” in which case two options could be given: one is to publicly admitting that the current system is effective only for part of our community; the other is to transform those individuals into living zombies in order to ignore their reality.

Jack

John: The paper you posted is extremely good, thought provoking should be read by all interested in where we are and where we might be going.

http://www.mckinsey.com/mgi/publications/farewell_cheap_capital/pdfs/MGI_Farewell_to_cheap_capital_full_report.pdf

As McKinsey discusses too little investment in the recent past and the need for much more world wide investment in the near future, they also touch on the quality of investment.

In the US a wicked combination of tax deductible interest on residential R/E combined with exempting most of the capital gains has led to Americans "investing" in "too much house" as well as too many of them, in short poor policy creating an economic distortion.

The size and quantity of housing beyond what one needs to be comfortable is a non-productive, even negative "investment" as oversized "McMansions" and second homes sit there consuming energy and other assets and producing nothing. Yet the combo of tax policy, low interest and fraudulent banking practices made "housing" a "can't lose" proposition for several decades; long enough to create a "truism" of inflationary expectations tough to reverse. A similar "boom" has taken place in commercial R/E.

Mckinsey's case for a nearly insatiable demand for W/W capital is indicative too of a W/W demand for production that would include much of what we're good at and what we COULD be good at if we "get it right".

Friedman sums it up well in today's column:

"In my book, the leaders who will deserve praise in this new era are those who develop a hybrid politics that persuades a majority of voters to cut where we must so we can invest where we must. To survive in the 21st century, America can no longer afford a politics of irresponsible profligacy. But to thrive in the 21st century — to invest in education, infrastructure and innovation — America cannot afford a politics of mindless austerity either."

So we've been neglecting a couple trillion in needed infrastructure maintenance and upgrades for what reason? That Pentagon spending, war, and tax breaks for the wealthy that we all agree little to increase demand has frozen out public investment?

Perhaps, in this era and certainly during the steep recession, it's going to take more than 20% of GDP to meet the obligations we've taken on, including that of servicing the debt built up over decades of deficit spending. What better time to tackle infrastructure (and make it easier for the next generation to get the educations they need) than when the private sector is so weak?

Then after deciding that it's a good idea to pass the ranch on to our kids, well maintained and staffed, it's another decision as to how much debt to pass on as well; we can and have paid more than 20% of GDP in taxes.

Jack

"Dividing wealth among individuals is not a bad idea, but isn’t a fair idea either because doesn’t value the different efforts of those individuals to acquire prosperity."

Indeed! Once upon a not so long ago time (1970) the ratio between the lowest quintile and the top 5% was four, today it's nearly eight. CEO wages have soared from 30 times that of working folk to over 400 times. In the 70's the "financial sector" was a small fraction of our economy and has more than quadrupled today.

In terms of the steepness of the GINI (inequality) curve one of these eras must have gotten it wrong. Since those of the lowest quintiles have not shared at all in the "rising tide" that we once hoped would "raise all the boats" I'd suggest the ratios of the early 70's were a lot closer to getting it right than what is taking place today.

Aside from "fairness" I don't see how an economy 70% dependent on consumer buying can do much "growing" when all but the topmost tiers have long suffered from stagnant wages, and now very high unemployment. But I am open to mathematically sound suggestions.

GreeceRUS

The title of the post is Tax and Spending compromise. But there is only a Tax compromise, virtually nothing is done on the Spending front. Spending remains more or less on autopilot. The spending heavyweights of Social Security, Medicare, Military Capability/Operations and now ObamaCare added to the mix, continue unabated their march towards subduing significant portions of future incomes to serve central plans and thus moving towards an eventual environment of much reduced incentives to produce – hence loss of America’s fundamental differentiating factor from the rest of the world, and an inevitable vicious cycle of economic decline.

The Tax only changes without accompanying spending changes are, at best, just a typical short term distorting stimulus, to be paid for from future growth. The distorting effect makes the entire endeavor a long term overall loss.

Do not expect politicians to propose any fundamental changes in spending. After all, the job of politicians is essentially to manage spending. Who expects politicians, or anybody else for that matter, to eliminate the very subject of their work?

If the main challenge in the Western World is to close the annual growth differential between the West and the emerging world economic heavyweight contenders, then this Tax only compromise is a feeble, one sided, kick the can down the road for a couple of years, attempt which will make little difference into whether or not we and our descendants 20-30 years from now will have converged to the worldwide average income. That destiny seems all but guaranteed right now under any possible realistic politico-economic scenario. Americans, oblivious to this overriding reordering of world economic power, continue laying hope into feeble attempts. Unless spending is seriously and credibly reduced and Americans regain the individual incentives to produce inherent in personally (rather than collectively) managing the fruits of their labor, America’s fate of decline seems all but sealed. For a preview of what is going to happen to the US watch how Europe, now facing the precipice, will fade away into economic oblivion in the next 10-15 years. But by then Americans will also be way too far down the road to decline to reverse course. In my view, Americans have already passed the point of no return and thus their fate of relative decline seems all but a done deal at this point. The Tea Partiers are the last cry, the last doomed attempt along the impending fate of decline.

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Agreed, very well written and can't wait for the second half.

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PhD Student

I was taking a short break from my studies, reading this blog and, I must say, that some of the class warfare commentary is outright depressing.
 
I am in the middle of working on my PhD thesis on recombinant DNA and quite frankly, as one might expect, I’m struggling a lot. This is because although I have always been a top student, finishing high school in the top 1% in my state, I am now attempting to be better than anyone else before me, pushing the frontiers of knowledge, discovering and inventing stuff that no-one else has been able to before me. So naturally, almost by definition, I’m struggling a lot and I’m not sure if I’ll even manage to pull this off in the end.
 
So reading some of the class warfare commentary, I’m wondering: Is it really worth it to be giving up my youth and  aspire to a demanding fast paced career of innovation and essentially almost perpetual stress, discovering stuff that no one else has been able to before? To do what? To face class warfare at the end?
 
Why not be like the other guys and gals? Those who naturally party more, enjoy life a lot more than I do and simply aspire to one day become e.g. lab supervisors? Come to think of it, already having a Masters in Biology I could probably end up eventually becoming a simple Lab Supervisor making 150k/year with less stress and without inventing anything new. So, yes! I would much rather reclaim my youth. I’ve been studying hard and squeezing my brain ever since I was 10 years old seems like. Why do all this? Is a world of class warfare what is awaiting me at the end?
Why put up such effort to solve problems no one else has been able to solve before and then engage in a career of perpetual higher effort? To face the pitchforks at the end? Is this how the public plans to reward me if I discover the next Avastin or Sutent?
 
If that’s what it is, I have better things to do with my time and life…

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nice article, good job:)

Laws

There is a huge need of compromising tax these days, as we see lot of corporates and medical institutions have increased the tax. Tax spending needs to be compromised, for sure..

Jack

PhD?? Are you being completely honest with us? For example if you have the chops to roll back the scientific frontier would you be satisfied with a (plodding?) career as a Lab Super ever were the pay similar?

Also? "Class warfare?" Are you aware of what the last 25 years has done to America?

http://webcache.googleusercontent.com/search?q=cache:bB64joVfJsYJ:lanekenworthy.net/2008/03/09/the-best-inequality-graph/+best+inequality+graph&cd=2&hl=en&ct=clnk&gl=us

Note the 2nd chart depicting that "class war" has raged for 30 years with working folk having lost every battle. Perhaps in history class? (can you get a PhD w/o taking a smidgeon of econ these days?) there was mention of one JFK's expectation of a "rising tide (of increased productivity) lifting ALL of the boats?"

Sadly for working folk AND our economy those of the mid an lower incomes barely kept up with inflation, much less getting ANYthing from the doubling of productivity that took place.

Lastly? if the skiffs and rowboats were not sinking as the "tide rises" who would really care? Trouble is most working folk are NOT making it on their diminishing share of GDP. While ALL really should stay in school so they can kinda scoff at
$150k "lab super" jobs......... as you move about, mebbe ask your brilliant self, how our nation would operate w/o those laboring at the mundane tasks of meeting your daily needs.

Thus!! We find ourselves in "stag-Deflation!" as Flat and declining wages for most result in what seems obvious; Flat and declining economy for ALL.

Surely the above is not a difficult concept for one studying the often interdependent relationships of various organisms....... and the whole that they comprise?

OnePlusOne

So, how much money can we get from the rich?

The top 1% of US income earners make 20% of the income and pay 40% of the taxes.

So suppose we mandate an additional 45% tax on them, thereby bumping their marginal combined federal and state income tax to around 90%. We would then raise roughly 10% of national income to redistribute to the rest. That roughly means that Average Income for the rest of us would rise from 50K to 55K/year. And we would have imposed Soviet level incentives to produce to America’s Steve Job’s (Yes I know that, just like in the Soviet Union, these people would keep producing because we are all primarily driven by challenge and a strong desire to serve people we do not even know, don’t we?).

So, as someone already pointed out, there is just no way to pay for the upcoming American Welfare State without raising taxes for everyone, just as was done in Europe where progressive taxes of 50-60% on income are supplemented by a flat VAT tax for everyone at 20-25%, and Europe still seems poised for its next dive in worldwide competitiveness on what now seems to be an inevitable vicious cycle to worldwide economic marginalization.

That being said, high taxes on the rich are a necessary precondition to getting the middle class to swallow significant tax increases too (VAT and the like) under the theme of “look! taxes on the rich are even worse!”.

So that is the pot of gold at the end of the central planning, surrender your independence to the collective, class warfare rainbow. Be prepared, because one way or another it is coming. You asked for it, you got it folks!

Jack

OnePlus: Some of your message is tough to follow due to mixing seemingly stretched ideology in with selective math.

Assuming your first line is correct:

"The top 1% of US income earners make 20% of the income and pay 40% of the taxes."

It follows that a doubling of tax rates for the "top 1%" would mean they'd pay 80% of current revenues. Though NO one is talking of doubling, in fact what is, or was, at issue is but a 3% hike for those over $250k. As you can see, below, even a doubling would not amount to "90%"

# 10% on income between $0 and $8,350
# 15% on the income between $8,350 and $33,950; plus $835
# 25% on the income between $33,950 and $82,250; plus $4,675
# 28% on the income between $82,250 and $171,550; plus $16,750
# 33% on the income between $171,550 and $372,950; plus $41,754
# 35% on the income over $372,950; plus $108,216

.......... the total for the $373k income is just 29% under the existing (unaffordable) Bush tax cuts. Thus, in the worst case (if such is the term for having a multi-million buck year that somehow is not protected by resorting to capital gains or other tax reducing tactic, a doubling would mean taxing marginal income at 70%.

........ Perhaps worth repeating that neither I nor anyone else is suggesting such. Also worth remembering is that very, very little of our tax revenues go to "redistributing to the "rest"" with the big chunks going to A. Military spending B. Interest on the debt built up during the years when our leaders opted to lower taxes -- as you point out -- largely paid by a small percentage of top earners (and gleaners?) below what it cost to run the show.

Further? WERE we to get into "redistribution" via taxes and benefits financed from taxes we quickly see that far more benefits accrue to the upper middle class and wealthy than to those of the lower incomes. Much higher deductions for mortgage interest on one or more "jumbo" home loans, and similar deductions for platinum H/C insurance that covers what most of us think of as luxuries come quickly to mind. The list is long and includes public theaters, museums, and national parks.

You do seem to be onto something in predicting somewhat higher tax rates by one means or another. The DEBT largely amassed by fooling around with "Laffer curve" "supply side" theories (or? was it simply good old Keynesian spurring poorly directed and camouflaged as, ha-ha! "outspending the USSR on defense?) WILL take a couple percent of GDP for a very, very long time. Also government has taken on a lot more responsibilities. Consider the "drug war" for example, or finding it necessary? to lock our fellow citizens up at 5 or ten times the rate of the civilized nations. Serving as back-up for our "too big to fail" operations and costs of attempting to monitor and regulate the rascals.

Lastly? you guys seem to like to invoke "incentives" to work when it comes to those in the upper tax rates of correspondingly high incomes, but when reminded the lower income set hasn't had a "performance bonus" or any other kind of "incentive" in 25 years the room tends to fall silent. Since some of the follies of the USSR are on your mind, I'm reminded of the lament of their working folk "They pretend to pay us and we pretend to work".

The "old" UK comes to mind as well. Pre-Thatcher it seems the lords and inheritors of position didn't do much because they didn't have to, while those of the lower tiers knew that shop foreman or head teller was their glass ceiling found hanging out in discos of the era a better use of their time than banging their heads on the hard glass.

As we begin the new year with many problems to solve, do you think the "rising tide" of JFK's era in which all shared in the benefits of increasing productivity should be cast aside in favor of most of us not rising at all that the "owner class" can have more?

http://webcache.googleusercontent.com/search?q=cache:bB64joVfJsYJ:lanekenworthy.net/2008/03/09/the-best-inequality-graph/+best+inequality+graph&cd=2&hl=en&ct=clnk&gl=us

......... keep ascending that hockey stick like "curve" of inequality? Why?

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