Tag Archives: taxes

Deficit Scold.

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            There are big, important things.  Often they are dull.  There are small, unimportant things.  Often, they grab the headlines.  The big, important things are both “global” (the health of the world economy, climate change, global demography) and “parochial” (the economic situation of the United States, the state of American “hard” power, the current political polarization).  The “big” things are worth thinking about, the “small” things not. 

            One “big” thing is the government deficits and national debt.  Earlier in 2024, the Congressional Budget Office (CBO) projected a 2024 U.S. government budget deficit of $1.6 trillion; in mid-June 2024, it revised that to $1.9 trillion.[1]  Even this is probably over-optimistic.  It includes an assumption that the tax cuts passed in 2017 during the first Trump administration will be allowed to expire in the near future.  Politically, this is a very unreasonable assumption.  President Joe Biden has said that he would extend at least some of the tax cuts and Presidential-candidate Kamala Harris is currently expected to model her basic economic policy on that of the Biden administration.  For his part, Donald Trump has pledged to extend all of the tax cuts.  Fully extending the tax cuts would reduce revenue by $5 trillion over ten years. 

The fundamental problem is an imbalance between spending and revenue.  In recent decades, this has led to large annual deficits.  The deficits have been covered by borrowing.[2]    

What are the sources of these deficits?  First of all, a large aging population has started relying on Social Security and Medicare/Medicaid.[3]  Second, borrowing money requires paying interest.  Even at low interest rates, a quantitatively expanding debt will increase the amount of interest that has to be paid.  The CBO estimates that interest payments will rise from $892 billion in 2024 to $1.7 trillion in 2034.  Higher interest rates, used to control inflation, compound this effect.  At the same time, the United States has spent forty years cutting taxes. 

The national debt of the United States—all the accumulated deficits—stood at about $20 trillion in early 2017.  By mid-2024, it had increased to $35 trillion.[4]  One budget expert judges that “the overall fiscal and economic environment is a lot worse” than before Trump and Biden occupied the White House.[5]  The CBO has recently projected that the U.S. national debt—all the accumulated deficits–would reach or surpass $56 trillion by 2034.  In 1999, the national debt amounted to 99 percent of Gross Domestic Product (GDP); in 2034, it projects that the debt will be 122 percent of GDP.  “[T]he country’s fiscal backdrop is increasingly grim.”[6] 

[1] The Biden administration blames the Republican tax cuts for the deficits and debt.  However, the jump from $1.6 trillion to $1.9 trillion sprang largely from the Biden administration’s cancellation of student debt, from the military aid provided to Ukraine and Israel, and from unexpectedly large payments for Medicaid. 

[2] That is, for decades now, Americans have wanted a bunch of stuff, but they haven’t wanted to pay for it.  Instead of doing without any of the things that they wanted, they borrowed the money in return for I.O.U.s in the form of Treasury bonds.  An I.O.U. is a promise to pay in the future.  It has been a long-running complaint among what the great economist Paul Krugman calls “deficit scolds” that “we are leaving our children a mountain of debt.”  That is true only if our children are willing to pay it.  Such a willingness assumes that they are made of sterner stuff than their predecessors. 

[3] The “Baby Boom,” born 1946-1963, retires between 2011 and 2030.  Obviously, this problem will end one day. 

[4] Just over half of the post-2017 increase of $15 trillion took place during the Trump administration ($7.8 t); just under half took place during the Biden administration so far ($7.3 t). 

[5] Jim Tankersley, “Trump Tax Plan Could Add Debt by the Trillions,” NYT, 10 August 2024. 

[6] Alan Rappeport, “U.S. Debt Set to Top $56 Trillion,” NYT, 19 June 2024. 

Inequality 7.

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According to the CIA, income inequality in the United States now is more extreme than in Red China.[1] So what? What matters is that a “rising tide lifts all boats,” as JFK said when arguing for a tax cut. However, some economists argue that the evidence for this “true that” statement is sketchy (as young people used to say). President Clinton got Congress to raise the top tax rate from 31 percent to 39.6 percent and the economy boomed (admittedly with the “Tech Bubble” that collapsed after he left office); President George W. Bush got Congress to cut taxes on high earners to 35 percent, but the economy floundered (admittedly with the “Housing Bubble” that collapsed before he left office). In this analysis, what really matters is the amount of demand for goods in the economy. That is an argument for shifting resources to consumers.

The “Great Bull Market” of the Twenties (and other stuff that pundits don’t want to know about) led to the Great Depression. The Great Depression led to the New Deal and 20 years of Democratic dominance in Congress. The Depression discredited businessmen as prophets-of-the-New Era. The New Deal imposed all sorts of restrictions on business and raised taxes on the rich swells (who were in some vague way blamed for the Depression). By the 1950s the top rate on marginal incomes had risen to 91 percent, essentially a confiscatory tax on high incomes. Proponents of relative income equality point to this period as the ideal society because it coincided with the period of American economic ease. Good-paying working-class jobs allowed many people with only a high-school diploma to enter some version of the middle class.

However, the Great Depression ended in 1940. By the 1970s a whole new generation of businessmen had come on the scene. They were unburdened by the sins of their elders. They campaigned for a reduction in the punitive tax rates of the New Deal era. One can see this as Republicans responding to the Democratic strategy of “tax, spend, elect” with their own mantra of “tax-cut, spend, elect.” In theory, savings create investment capital and investment capital creates jobs. Therefore, the tax rate on capital gains fell to 70 percent in the 1970s, then to 50 percent in the first Reagan administration, and then to 28 percent in the second Reagan administration. Bill Clinton pushed for and won a reduction in the tax on capital gains from 28 percent to 20 percent. George W. Bush pushed for and won a reduction in the tax on capital gains from 20 percent to 15 percent. However, President Bush also pushed for massive cuts on taxes paid by lower income groups.

Two things resulted from the Bush tax cuts. First, the US government lost $400 billion a year in revenue. Of this lost revenue, “only” $87 billion came from people earning $250,000 a year or more. The other $313 billion came from people earning less than $250,000 a year.[2]

Second, taxation became much more progressive. While cutting taxes overall, Bush shifted the burden of taxation onto upper income earners. After the Bush tax cuts, the top 1 percent of income-earners now pays 40 percent of the income tax bill (and 21 percent of all taxes), while 47 percent of Americans now pay no income tax at all.[3] Despite his bitter condemnation of the Bush Administration on many scores, President Obama fought hard to confirm 98 percent of the cuts.

There are three observations worth making. One is that there are big long-term trends or swings in tax policy. The huge deficits looming as the “Baby Boom” ages may herald an end to low taxation for everyone.

A second is that President Obama has loudly condemned the plutocrats “who tanked the economy” in the financial crisis. How did Bill Gates or Steve Jobs or Warren Buffett or the idiots who ran American car companies “tank the economy”? They didn’t. In fact, only about 14 percent of the richest Americans work in finance. Yet Gates, Jobs, Buffett and a lot of other ordinary, successful entrepreneurs were hammered by the Obama tax increases.[4] They have also been subject to his frequent dispensation of moral opprobrium.[5]

A third is that the Democrats need to define what they mean by “fair.” As in, “the rich should pay their fair share.” The rich are already carrying a disproportionate share of the fiscal weight while almost half of Americans pay nothing at all for the programs that benefit them. As Woody Guthrie might have said (had he been an entirely different person), “A poor man with a ballot-box can rob you just as easily as can a rich man with a pen.”

[1] “Taxing the rich,” The Week, 4 November 2011, p. 11.

[2] Can you impeach a former President?

[3] If “taxation without representation is tyranny,” then what is representation without taxation?

[4] Perhaps it is worth pointing out that of the “one percent,” about 16 percent are in medicine; about 12 percent are lawyers, and about 50 percent of the members of the House of Representatives and the Senate belong to the “one percent.”

[5] See: “Stuff my president says.”

Long Term Trends 3.

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In 2010 and 2011, New York Times correspondent David Leonhardt turned to the problem of the long-term deficit.[1] In his analysis, that deficit arises from “the world’s highest health costs (by far), the world’s largest military (by far), a Social Security program built when most people died by 70—and to pay for it all, the lowest tax rates in decades.” By Leonhardt’s estimate, we will need about $500 billion a year in annual deficit reduction for the next decade. The money will have to come out of the three big spending categories and from more revenue.

The Medicare budget is the “linchpin of deficit reduction.”  Leonhardt recommended introducing incentives for people to choose cost-effective health-care. In practice, that will mean taxing employer-provided health-care benefits like the income they really are. The cost has risen massively since 1975. This encourages spending on health-care, rather than using the market to restrain price increases. Also, it is a benefit available only to people with employer-provided health-care. So, Americans get taxed differently for no good reason. This cost the government $264 billion in revenue in 2010. The federal tax subsidy created by sheltering them from taxes benefits drug makers, hospitals, and insurers.[2] He also wanted Medicare to refuse to pay for health care that cannot demonstrate that it makes people healthier.

Test social programs for actual effectiveness. Lots of them just exist, rather than achieving anything. Doubtless, many Republicans would say the same thing about the encrustations of regulations on business and industry that have grown up over the decades without ever being sunsetted.

Last, cut military spending by $100 billion a year to reverse the post-9/11 expansion.

Some leading conservatives—Mitch Daniels, Glen Hubbard, Gregory Mankiw–have endorsed means-testing Social Security and Medicare benefits. That is, shove more of the cost of their own care and retirement off on people who can afford to pay it.

Leonhardt also favored higher taxes on the middle and upper classes. The mortgage-interest deduction chiefly benefits people in the higher income brackets. Tax breaks for investors (IRA exclusion, $12.6 billion; lower tax rate for dividends, $31.1 billion; lower tax rate for capital gains, $36.3 billion; not taxing capital gains on items left to people in wills, $39.5 billion; and the 401(k) exclusion, $52.2 billion) total $171.70 billion in ‘lost” revenue.

Social Security and Medicare are essentially about paying for the past. (Often an improvident past.) Spending on education, research, and infrastructure are about paying for the future we desire. Leonhardt argues that we should actually be spending more on the future.

However, it isn’t clear that American democracy has the ability to confront powerful and well-entrenched interest groups. Reforming Medicare would involve taking money away from doctors, insurance companies, hospitals, pharmaceutical companies.  Stabilizing Social Security will involve raising the cap on withholding, so that upper income groups get gored and means-testing benefits at the cost of upper-income groups. Raising the taxes on the upper income groups to sustain benefits for lower income groups invited push-back in the past and will do so again. Cutting defense spending has never been as easy as increasing it, especially in the midst of dangers. The refusal of Democrats to define “fair share” makes rational discussion difficult.

Still, laying out the problems and some possible solutions makes it possible to think about the implications.

[1] David Leonhardt, “The Deficit: Real vs. Imagined,” NYT, 22 June 2011.

[2] David Leonhardt, “Health care’s obstacle: no will to cut,” by NYT, 10 March 2010; David Leonhardt, “The 3 Biggest Tax Breaks—and What They Cost Us,” NYT Magazine, 17 April 2011.