Can we get a serious budget plan?

Another year, another display of both parties' complete inability to propose any serious solution to the country's fiscal situation.

The Democrats have not passed a budget in years. They seem completely unwilling to do anything about the fact that entitlement spending (if left unchanged) will explode the federal budget in a decade or so. Whether faced with a budget deficit, a proposed spending cut, or a new program that they have no way to pay for, the leftists' solution is the same: "Tax the rich." The problem is, there just aren't that many rich people. There has been lots of talk about the so-called Buffett rule, which would ensure that everyone earning at least $1 million annually pays at least 30% of their income in taxes--but even the Huffington Post admits that adapting the Buffett rule would bring in only $47 billion over the next eleven years. That's about $4.3 billion per year, which is about 0.2% of the 2011 budget deficit.

We did, at one point, have a fairly reasonable center-left budget plan: the Simpson-Bowles plan. Unfortunately it was rejected, not by the Republicans, but by President Obama.

On the right, we have Paul Ryan's budget. It is perhaps a good conservative thought experiment, and it allows the Republicans to tell the Democrats, "Hey, at least we have a budget proposal." In reality, however, Ryan accomplished no more than he would have if he had proposed a budget plan for the Land of Oz. Besides being dead on arrival in the Senate, the Ryan plan seems unlikely to attract support from anywhere close to a majority of the American people.

The Ryan plan does not address the deficit at all in the short term (although a supply-sider could make the argument that his tax cuts could spur economic growth that would decrease the deficit). In the long term, Ryan would shrink all discretionary spending (everything other than Social Security, health entitlements, and interest payments) to 3.75% of GDP. Military spending (aside from Iraq and Afghanistan) is currently about 3.5% of GDP, and Ryan refuses to cut the military. So that leaves 0.25% of GDP for everything else: infrastructure, border patrol, federal law enforcement, food and water safety, veterans benefits, the safety net, etc. While non-military discretionary spending does need to be cut somewhat, slashing it from its current level (about 3.5% of GDP) to 0.25% is simply ridiculous.

One could imagine a center-right proposal, combining revenue-neutral tax reform with some cuts in discretionary spending and measures to stop the runaway growth in entitlements. But nothing like that has ever been proposed.

Right now, it is clear that Congress and the White House care much more about making political statements, upholding pledges, and sticking it to the other party than they care about actually governing the country.

GOP candidates taking full advantage of tax havens, taxpayer-funded pensions

Despite representing what is supposedly the party of fiscal conservatives, two of the five Republican presidential candidates are receiving tens of thousands of dollars in taxpayer-funded pensions, and front-runner Mitt Romney has deposited millions of his personal dollars in the Cayman Islands to avoid taxes.

Newt Gingrich is one of over 350 former US lawmakers and congressional staff receiving a federal pension of over $100,000 a year. Rick Perry gets a Texas state pension of over $92,000 a year in addition to his governor's salary. This seems questionable for two candidates who repeatedly denounce excessive government spending.

Meanwhile, Romney has between $10 million and $25 million in accounts in the Cayman Islands, a notorious tax haven. Because of his Cayman accounts--and the fact that much of his Bain income was classified as capital gains rather than ordinary income--Romney has been paying a far lower percentage in taxes (about 15 percent of his earnings) than most Americans.

So it seems extremely unlikely that the next president, no matter who it is, will do anything to reform the tax code. Obama and the Democrats will use Romney's low tax payments as yet another argument for raising tax rates, despite the number of millionaires and billionaires (Obama, Pelosi, Kerry, etc) in the party leadership. That's because they know that they can continue to exploit loopholes in the tax code, and only those who are less politically connected will be hit by the tax hike. Assuming he gets the Republican nomination, I cannot imagine Romney--a Wall Street millionaire with numerous accounts in the Cayman Islands--to do anything about tax loopholes. The Republicans seem to think that they can have their cake and eat it too by cutting tax rates while keeping loopholes and congressional pensions in place. Is it a coincidence that the last three Republican administrations have run massive deficits nearly every year?

Republicans nearly shoot themselves in the foot on payroll tax

Congress has agreed on a two-month extension of the payroll tax holiday, which prevents payroll taxes from going back up from 4.2% to 6.2% on January 1. However, this only happened because House Republicans finally gave up their bitter fight against the extension. The reasoning for their resistance made sense only from a pure economic-growth perspective. Historical data shows that stimulus payments and temporary tax cuts do little in terms of sustainable job creation or GDP growth. Long-term tax cuts, like those under JFK in 1961 or Reagan in 1981, have done much better at reviving the economy. A two-month extension could also create problems for businesses trying to budget their costs.

From a political perspective, however, repeatedly voting down the payroll tax extension was a colossal mistake. Ever since they gained back control of the House in January, Republicans have been stubbornly--and often understandably--resisting any and all tax increases. Most of the tax increases they fought against were, predictably, income tax hikes on the wealthy. Some Republicans, devotees of Grover Norquist, even fought against ending asinine tax breaks for special interests like ethanol because they considered that to be "raising taxes." 

Given that history, by trying to block the payroll tax extension the Republicans were simply asking to be portrayed as heartless, plutocratic buffoons. After fighting tooth and nail to extend the Bush tax cuts for the wealthy (warning of the dangers of raising taxes in a bad economy), the GOP was suddenly eager to let middle-class tax cuts expire. It seems like someone should have realized that putting themselves in a position to be blamed for millions of shrunken paychecks in a stalled economy was a really, really bad idea. Besides, I've mentioned in several previous posts about how destructive the payroll tax is--it's regressive for workers, and it directly discourages hiring. Better to just get rid of it completely and replace it with a national sales tax or something.

Supercommittee proposal would raise $500 billion in new revenue--but Democrats reject it

According to the Wall Street Journal, Pat Toomey and the five other Republicans on the Congressional "deficit supercommittee" recently proposed a plan with $750 billion in spending cuts and $300-500 billion in new revenue over 10 years. Under the plan, tax rates would be cut--the top rate would fall from 35% to 28%, and rates from other brackets would be lowered proportionally. However, the plan more than makes up for it by severely limiting deductions, very similar to a bipartisan tax reform measure that was enacted in 1986. The Joint Tax Committee determined that even with no economic growth, the tax changes would raise $300 billion in tax revenue over the next decade. (An additional $100-200 billion would come from changing the way tax brackets are adjusted for inflation.)

Democrats, however, rejected the proposal. And one can only wonder why. There were no cuts to Medicare or Medicaid. The 1.5 to 1 ratio of spending cuts to revenue increases is better for the Dems than the 3 to 1 ratio promised by the Simpson-Bowles plan.

It could be that Democrats see lower tax rates as symbolically intolerable, even if the rich (who reap most of the benefits from tax deductions) would actually pay more under the new plan. Or, it could be that they see "compromise" as a 1 to 1 ratio of spending cuts to revenue increases. In that case, it seems the Democrats would have rejected Simpson-Bowles as well, unless (as some conservative critics claim) it was a bluff containing spending cuts that would never materialize.

Either way, Democrats have just defeated a plan that provided the "balanced approach" to deficit reduction that they keep clamoring for. And by eliminating deductions, it would have made the tax code more fair and helped to curb special interest power as well.

More Government Ridiculousness: A Christmas Tree Tax!

Yep. That's right. President Obama’s Agriculture Department today announced that it will impose a new 15-cent tax on all fresh Christmas trees to support a new Federal program to improve the image and marketing of Christmas trees.

Honestly, this sounds like something Jon Stewart or Stephen Colbert would make up to parody the White House. How, exactly, will this help anyone? What is currently wrong with the image or marketing of Christmas trees, anyway?

Occupy Wall Street and the Tea Party need to work together

Yes, that's right. What we need is some form of collaboration between the Occupy movement and the Tea Party. That seems to me to be the best way--perhaps the only way--to have a good chance of fixing the status quo of dysfunctional partisan politics.

At first glance, Occupy Wall Street and the Tea Party seem like the Hatfields and the McCoys--no way would they ever work together. But they actually have quite a lot in common. Both are vehemently against the status quo. Both argue that the American people are being screwed over by a small minority of powerful people at the top. Both have widespread popular support. And in my view, both of their main points are extremely valid.

For the Occupiers, the enemy is the so called "1 percent," Wall Street in particular. For the Tea Party, the enemy is a different 1 percent: politicians and lobbyists and their ilk. They're both kind of right. Wall Street took lots of foolish risks that led to the 2008 financial crisis--but did so in large part because government gave them huge incentives to do just that. The government gave Wall Street massive bailouts and refuses to pass meaningful financial regulation, in large part because so many people in Congress and in the Obama cabinet are either bankrolled by Wall Street or former Wall Street employees.

Unfortunately, both movements have a tendency to go off the deep end as well. Occupiers tend to view government as the solution to the problem rather than a co-conspirator in the plot. In an era where trust in the government is as low as during Vietnam and Watergate, calls for more government are not going to be well-received by the majority of the people. Besides, given the government played a big part in causing the problem, more government will almost certainly make things worse. The Occupy movement also tends to have a negative view of business in general, also counterproductive during an unemployment crisis.

On the other hand, I am baffled and a bit disturbed by how often GOP candidates have railed against the so-called "47% of Americans who don't pay taxes," and by the continued support for Cain's 9-9-9 plan even though analysis has shown it will raise taxes significantly on lower-income people. I don't really know how much this is attributable to the Tea Party, but given the significant Tea Party influence in recent GOP politics, and the popularity of the 9-9-9 plan among GOP voters, I have to think there is a connection. Calling for more taxes on the poor is an almost surefire way to turn off large swaths of American voters. For two years I made less than $14,000, which put me among those despised 47% who paid no federal income tax. But payroll tax and sales tax still ate up about 7-8% of my income. That's quite a bit.

I really think that the Occupy movement and the Tea Party could find a common cause and become a considerable force for real reform in Washington that limits the power of both government and their Wall Street cronies. Given the polarized partisan nature of politics today, though, it probably won't happen.

9-9-9 solves some problems, but may create bigger ones

Herman Cain's "9-9-9" tax plan is an interesting and radical proposal. It would scrap the current federal tax code completely and replace it with a 9% income tax, a 9% national sales tax, and a 9% corporate tax. Since Cain continues to lead in the GOP polls, his plan clearly has some support at least among Republicans.

And it does make some major improvements on the current tax code.  The payroll tax discourages hiring, hurts small businesses and low-income workers, and is almost hidden from view. The current marginal rates are very high, including a confiscatory 35% on businesses, which discourage production.Worst of all, the tax code is loaded with deductions and loopholes, which (combined with high marginal rates) encourage the special-interest lobbying and economic sleight-of-hand that are poisoning the current system. Under the current tax system it is very easy for the government to pick winners and losers. By zapping most of the deductions and loopholes and eliminating the payroll tax, Cain's plan does well.

The problem, though, is that the 9-9-9 plan is simply not fair.

There are three kinds of taxes. In a progressive tax, the rich pay a higher percentage than the poor. In a flat tax, everyone pays the same percentage. In a regressive tax, the poor pay a higher percentage than the rich.

Clearly, a regressive tax system would not be fair. We would also not want a tax system that is overly progressive. A very good argument can be made for a flat tax, as long as there exists a reasonable individual deduction to prevent the tax from hitting the very poor. There is also a very good argument for a tax system that is somewhat (but not overly) progressive. In the words of Adam Smith:


"It is not very unreasonable that the rich should contribute to the public expen[s]e, not only in proportion to their revenue, but something more than in that proportion."


Where does the 9-9-9 plan fall? Well, there are two taxes for individuals, the 9% income tax and the 9% sales tax. The income tax, of course, is flat. The problem is the sales tax. Sales taxes are almost always regressive, because the poor need to spend a higher percentage of the money they make. So the 9-9-9 plan replaces the current progressive tax system with a combination of a flat tax and a regressive tax, which is overall regressive.

That's not to say a national sales tax is a bad idea. While sales taxes are regressive, they do not distort incentives nearly as much as income taxes, because they discourage consumption instead of production. However, a national sales tax would need to be combined with a progressive income tax in order for the system to not be regressive overall. If Cain proposed a four-tier income tax (say, 5-10-15-20) with no loopholes or deductions, combined with a 9% national sales tax, a 9% corporate profits tax and a 9% capital gains tax, I'd vote for that in a second.

GOP needs to stop resentment of low-income people who don't pay income tax

Traditionally, the Republican platform has been lower taxes for everyone, rich, middle-class, and poor alike. Both Reagan's and Bush's tax cuts benefited almost all workers. Recently, however, some Republicans, including several of the leading candidates, have been complaining about the poor not paying enough taxes. Specifically, they say it is a big problem that 47% of Americans do not pay income tax. In some ways, I see their point. If people are receiving social services but not paying for them, there is nothing to stop them from continuing to vote for more and more government services, ad infinitum. However, the working poor already pay quite a bit of tax: payroll taxes, sales taxes, and gas taxes. Saying they need to pay more tax--while also calling for less overall spending on social programs--is an extremely tone-deaf stance that could cost Republicans a lot of working class votes. It smacks of contempt for the poor and class warfare in reverse.

When I worked as an AmeriCorps volunteer three years ago, I made $900 a month before taxes. The $65 or so in payroll taxes that they took out of each month's pay was a huge hit. My AmeriCorps director encouraged me and my fellow volunteers to go on food stamps. I desperately wanted to avoid relying on government assistance, and managed to make it work--but that was possible only because I did not have to pay income taxes. If Republicans did raise taxes on the poor, many of them would probably just use more food stamps and welfare money. The end result would be more taxes and more government spending--which doesn't seem like what the Republicans want.

In fact, here is a Businessweek article by a conservative economist that calls for expanding the earned income tax credit in order to reduce dependence on welfare.

There is still, however, the issue of people receiving social services without paying for them. I can think of two ways to address this issue without raising taxes on the poor. One, limit the child tax credit, WIC, and similar programs so that credits/benefits gradually phase out after two children or so. At some point, parents have to be responsible for supporting their own children, and the government should not subsidize (i.e. encourage) people who have large numbers of children that they cannot support. Secondly, eliminate the payroll tax, replacing the worker's portion with an additional equivalent amount of income tax. I've already discussed the evils of the payroll tax (it's regressive, it often goes unnoticed, it discourages job growth by taxing hiring). Plus, that way, when Congress wants to cut or raise income taxes, every worker will feel the effects to some degree. Hopefully people will start to realize that they have to pay more to get more, and that tax cuts can help people at all income levels not just the rich.

Republicans, inexplicably, want payroll tax cut to expire

Last December, Congress passed a bill that reduced the workers' portion of the payroll tax from 6.2% to 4.2% for one year. There is naturally a partisan disagreement in Congress over whether to renew the tax cut or let it expire. Some are arguing that the tax increase would hurt workers and the economy overall, while others are saying that the revenue is needed to balance the budget.

Surprisingly, however, the Republicans are the party that wants the tax cut to expire--a tax increase by their definition. This makes absolutely no sense to me. The GOP is fresh off a tense budget battle in which they fought vigorously to avoid any tax increases whatsoever. And now they are changing their tune?

Apparently so. According to the Associated Press (see above link), Republican congressman David Camp opposes extending the tax cuts because of the deficit, and Eric Cantor "has never believed that this type of temporary tax relief is the best way to grow the economy."

Wait a minute. I thought the Republicans believed that tax cuts were the BEST way to grow the economy. If they oppose "temporary" tax relief, then make it last 10 years instead of 1.

Mitt Romney did not come out for or against extending the tax cut, but said he would rather have the cut on the employer's side to spur job growth. I agree. However, why not cut both sides of the payroll tax? Better yet, why not eliminate the payroll tax altogether and replace the lost revenue by closing loopholes or raising the capital gains tax. The payroll tax discourages hiring and hits both employers and low-wage earners fairly hard.

I am completely baffled as to why many Republicans suddenly want to increase taxes on all working Americans. It almost seems to validate the progressives' claim that Republicans only care about rich people and corporations.

What to make of questionable comments from GOP candidates

Last week was not a good one for GOP sound bites. The leading candidates made a couple of statements that, if interpreted a certain way, could lead one to wonder if the party is careening off an ideological cliff.

First, during the GOP debate, every single candidate said that they would walk away from a deficit deal that had $10 in spending cuts for every dollar in tax increases. That is absolutely crazy. Anyone who would actually veto that deal has no business running for president. It's extremely unlikely that they would get a deal that was even that good. Do they think Democrats are just going to disappear? Do they not realize that those ten dollars in uncut spending will mean higher taxes later on? Would they really turn down a chance to substantially reform entitlements and move closer to long-term fiscal health in exchange for, say, ending the Bush tax cuts?

Like the author of the above article, I think that the mainstream candidates in the debate were most likely lying, and simply pandering to the hard-liners in the GOP base. Their statements are thus mostly an indictment of a primary system that is dominated by the radical wing of each party and forces candidates to throw red meat to their base, whether they truly believe what they are saying or not.

Secondly, Mitt Romney proclaimed at the Iowa State Fair that "corporations are people." Again, there are two ways of interpreting this. It could mean simply that corporations are made up of people, and as Romney said, all the money that goes to corporations eventually goes to people. It could, however, also mean that corporations deserve the same constitutional rights as people, an interpretation which the DNC is already using to attack Romney. This is a policy position that was unfortunately legitimized by the Supreme Court in the Citizens United case--in my opinion, one of the most destructive decisions in recent history.

As I stated in my first post, businesses are more akin to governments than to individuals; they are collective organizations which increase overall wealth, security, and efficiency but must be carefully monitored and limited lest they usurp the power of the people. The Citizens United case gives corporations (and unions) undue power over the political process, and Republicans who actually believe that "corporations are people" risk being labeled as protecting corporate fat cats at the expense of ordinary people.

Now is the time for tax reform

The United States is currently in an unenviable situation. The economic slump is approaching the end of its third year. At the same time, sky-high deficits and debt have resulted in a credit downgrade and a bitter partisan fight in Washington. Clearly, a return to economic growth would help solve both these problems.

Where will the growth come from, though? Stimulus spending has been tried--and has failed. Pro-growth tax cuts like those in 1961 and 1981 would not be politically feasible because of deficit concerns. One possible answer, suggested by WSJ columnist Stephen Moore, is revenue-neutral tax reform.

As Moore points out, a similar deal was struck in 1986, when the top income tax rate was lowered to 28%, which was balanced out by eliminating a host of deductions. The deal resulted in an estimated $1 trillion of economy-wide gains. This time, rather than lowering the marginal income tax rate (which was already done under Bush), a better idea would be to lower the corporate tax rate. Combining state and federal taxes, the US corporate tax rate is currently 39%, which is far higher than almost all other countries, and gives US companies a clear disadvantage in the global market. The employer portion of the payroll tax, which is basically a direct tax on hiring, also needs to disappear ASAP. If we want more hiring (which clearly we do), we shouldn't be taxing it.

How can we balance this out? For one thing, aggressively close off loopholes and tax subsidies. The real sad part of our corporate tax policy is that the largest corporations can hire armies of lawyers to figure out how to best exploit the loopholes--but mid-size businesses, without the ability to hire those lawyers, get hit with the full effect of the tax. That needs to end. Similarly, the favors to special industries (agriculture, hedge funds, green energy, etc) in the tax code need to be cut. Ethanol was a good start.

And if that doesn't balance the revenue effects of cutting the corporate and payroll taxes? Raise taxes on large high-yield capital gains, or put a tax on derivatives transactions. Unlike business, Wall Street does not create jobs or produce goods that add value to the economy. Large capital gains and derivatives are almost exclusively the province of the rich. And such a tax could discourage the kind of high-risk speculation that resulted in the 2008 crisis.

Two views on balancing the budget

Esquire today presented a very interesting left-right juxtaposition: two articles by former senators Gary Hart (D-Colo.) and Bob Packwood (R-Ore.) about balancing the federal budget. Here is Hart's article and here is Packwood's.

So who's right? Well, neither. Or both. Hart understandably decries the failure to regulate financial markets. Hart also correctly points out that the Iraq and Afghanistan wars combined with the Bush tax cuts were not good for the deficit. Given that both the wars and the tax cuts have continued for more than a decade, at this point they are responsible for a huge chunk of the federal debt.

Now, the Bush tax cuts, by themselves, were not a bad idea. Hart's biggest mistake is his refusal to acknowledge that tax cuts can stimulate the economy--a strategy that is part of Keynesian economics and worked undeniably well under both Reagan and JFK. The problem is, if you cut taxes you need to restrain spending, and Bush did exactly the opposite. Here's an idea: pass a law that requires a tax increase for any military operation that continues longer than 10 days. That will keep deficits down, and it might make the trigger-happy contingent of the GOP (which thankfully seems to be in decline) less likely to push for war.

Packwood's article discusses the worrisome increase in total federal spending, with a particular emphasis on entitlements. He is right on there: unless something is done to stop the runaway growth of entitlement spending, deficits will explode in the next few decades. However, by failing to discuss anything besides entitlements, Packwood exemplifies a certain conservative myopia. If the GOP focuses too much on slashing entitlements and leaves everything else alone, they will lose election after election. It would almost take a Vulcan to not see it as unfair for seniors and Medicaid patients to have to make all the sacrifices. While restraining entitlements are essential, fiscal conservatives need to be just as willing to consider things like dismantling the American empire, eliminating foreign aid, cutting federal payroll, closing tax loopholes, and probably--in a decade or two--raising taxes in some form.

The debt deal: kicking the can down the road

So, after a months-long fight over raising the debt ceiling, we finally have a deal. But what did it accomplish? Not much, according to this Washington Post analysis. In the words of Sen. Lindsey Graham:

“It’s a $3 trillion package that will allow $7 trillion to be added to the deficit over the next decade. We’re no longer running toward oblivion, we’re walking toward it.”


In the best-case scenario the deal will only cut 6-7% of federal spending over the next 10 years. That is ignoring the fact that federal spending is slated to increase by over 50% over the same time period. Meanwhile, unemployment is as high as ever. As fights go, the budget battle was reminiscent of the War of 1812, which featured years of nasty fighting and then a cease-fire that basically just restored the status quo ante bellum. 


In general, I like divided government. When one party controls the House, Senate, and the White House, they tend to do things like send us into a protracted war without a clear objective, or an exit strategy, or a way to pay for it. The downside of divided government, however, was on full display over the last few weeks. With Democrats stubbornly refusing to cut or reform entitlements, and Republicans stubbornly refusing to raise revenue by closing loopholes or eliminating tax subsidies, there was little chance of achieving significant long-term deficit reduction. They also ignored the ongoing jobs crisis in their obsession with the deficit, refusing to consider more small business tax cuts or infrastructure spending that could help reverse unemployment. Indeed, the only compromise they could settle on was just kicking the can down the road. 

The GOP's Test: Reality or Ideology?

Although the debt ceiling fight is by no means over, John Boehner and Harry Reid have come up with two plans that avoid raising taxes, and either of them seems to be a realistic option. One obstacle in the way of a completed deal is President Obama, who continues to push for a tax increase. However, it is doubtful that Obama would choose to veto a plan that passed the House and Senate and thus expose himself to the majority of the blame for a possible credit downgrade or any other adverse effects of the budget stalemate. The other obstacle is a number of House Republicans who continue to insist on more aggressive spending cuts and refuse to eliminate special tax breaks.

This, argues the Wall Street Journal, would be a big mistake, and I agree. The Boehner and Reid plans are not perfect, but they satisfy the GOP's #1 priority (no tax increases) and seem like they have support in Congress. If House Republicans torpedo them, they play into Obama's hands, allowing him to blame the GOP for the budget impasse. They then might be forced to accept a tax increase in order to avoid suffering the political fallout of the debt limit not being raised.

This is somewhat similar to the situation that Obama and the Democrats faced in 2009-10. They came into office with an impressive mandate, and the GOP's popularity was at historic lows as a result of the disasters of the Bush administration. With a down economy, the Democrats had an opportunity to cement a long-lasting majority by taking a center-left approach that focused on jobs (particularly private-sector jobs) and financial regulation while perhaps also expanding the safety net. Instead, they went whole hog, driven by their ideology instead of by the reality of the situation. They passed a stimulus that contained some good programs and tax cuts but was also stuffed with pork, did nothing for small businesses, and in the end was largely a disappointment. Then, despite continuing high unemployment, they abandoned the focus on jobs and passed ObamaCare, a decades-long liberal dream, without a single Republican vote. Immediately afterward, new hiring almost stopped. The Democrats were crushed in the 2010 election.

If the Republicans want to keep any of the gains they made in 2010, they need to learn from this mistake.

California's insane attempt to tax products sold on the Internet

In a latest effort to avoid dealing with their spending problems, California has decided to try to collect sales tax on products sold over the Internet. Never mind that it would lead to significant lost business for thousands of marketing affiliates--individuals and small businesses--that partner with online retailers. Never mind that it would most likely cause more unemployment in a state already struggling with joblessness. Never mind that it almost certainly violates a 1992 Supreme Court ruling. It allows Sacramento politicians to keep $200 million in pension benefits, social programs, and other pet projects--so it's clearly worth it.

Steny Hoyer accidentally tells the truth

They say a gaffe is when a politician accidentally tells the truth. So I suppose Democratic congressman Steny Hoyer committed a gaffe when he said that he opposes a constitutional balanced budget amendment because it would make it "virtually impossible" to raise taxes.

That's kind of the point. Raising taxes should not be easy to do. The last time I checked, we still have property rights, and it should not be easy for the government to simply decide to take more of our property and give it to whoever they want.

Obama's Tax Hike Obsession

President Obama has been very adamant about including tax hikes in any budget deal. Congressional Democrats, on the other hand, seem to have settled for raising revenue by eliminating special tax breaks. If the congressional leaders come up with a plan that combines eliminating tax breaks with real, immediate spending cuts (as opposed to "future cuts" that may or may not happen), the Republicans would be stupid not to go for it.

However, the question still remains: Why was Obama so insistent on raising taxes? Pretty much every school of economics, and Keynesian economics in particular, says that raising taxes in a down economy is a bad idea. It seems like a more sensible argument for the Democrats would be that we need to keep up spending now in order to increase aggregate demand, and that we shouldn't worry about the deficit until the economy recovers.

However, it turns out that the Democrats' eagerness to raise taxes has a simple explanation: they want to spend even more. MUCH more. Three liberal think tanks devised 20-year plans to balance the budget and pay down the debt. On average, they want the federal government to collect 23.9% of GDP--15% higher than during World War 2.

This article from Reuters has all the gory details.

No good deed goes unpunished by the IRS

On Saturday, Yankees shortstop Derek Jeter got his 3000th hit, a milestone that has only been reached by a handful of players in the history of baseball. The hit was a home run. The fan who caught it, Christian Lopez, graciously returned it to Jeter rather than selling it for a price that would have likely exceeded $100,000. The Yankees rewarded Lopez for returning the ball by giving him luxury box tickets for the rest of the season as well as signed jerseys, baseballs, and bats.

A nice reward for a good deed? Not quite. Apparently the IRS might characterize the tickets and other items as income rather than gifts, which means that Lopez could owe a tax bill of up to $14,000. And he would have to pay in cash, not in tickets.

Out-and-out theft, if you ask me.

We need to control spending, but Grover Norquist's dogmatism doesn't help

As the following chart shows, the government is spending money at record levels, and that spending is expected to increase even more in the following decades:




Given this unprecedented level of spending toward which the country's current fiscal path will take us, it makes perfect sense that the Republicans should take income tax hikes off the table. Clearly, the problem is almost entirely spending. Despite all the rhetoric about raising taxes on "millionaires and billionaires," there are just not enough of them to make much of a dent in the debt even if we taxed them at 80-90%. Raising taxes to the levels shown in the chart would require suffocating tax hikes on all levels of the middle class.

What puzzles me, though, is how much resistance there has been to ending certain tax breaks for select groups of people. Consider the ethanol tax break, for instance. Putting corn-based ethanol in gasoline hurts almost everyone: it raises food prices, wears out car engines, requires tons of fertilizer (which pollutes the water), and significantly lowers gas mileage to the point where the effect on carbon emissions is practically canceled out. The Senate recently voted to end this tax break, only to be rebuked by Americans for Tax Reform president Grover Norquist. Norquist claimed that the vote was not about ethanol at all, but about raising taxes.

This seems to be going too far. If we want to balance the budget, we will need to roll back more of these tax breaks and loopholes that only serve to give artificial advantages to certain people. This is not akin to raising taxes on everyone. Quite the opposite, it will allow government to keep tax rates low by making sure that no one is able to skirt the system. It will also cut down on the crony capitalism that has become more and more endemic in Washington over the past decade.