In the March 8th Newsweek columnist Fareed Zakaria proposes three solutions to the debt crisis in “Defusing the Debt Bomb.”
His second proposal was to “end the massive , distorting subsidies for homeownership, healthcare, and agriculture.” I agree with him.
Canada and Britain have no home mortgage deduction and they have a higher rate of home ownership. Our mortgage tax deduction was the result of using the tax code for social tinkering, in this case to encourage home ownership. The home mortgage deduction is regressive, giving a bigger tax deduction to the wealthier with more expensive housing.
Health care is also distorted by the tax deduction. We are actually encouraged to have too much first dollar coverage. Obama tried to address this is in some limited way with the tax on Cadillac plans and this was one of the few parts of the bill I liked. Removing the tax preference for employer controlled coverage would be a critical step toward restoring control of health insurance to the individual and get the employer out of it completely.
Farm subsidies are just ridiculous relics from the Great Depression. Obama spoke of eliminating such programs, but he lacks the ability to sell it after the poor way he handled health care.
Elimination of these tax subsidies may have to be gradual. Such radical shifts especially in this market would cause pain but the end objective should be to eliminate them. According to Zakaria these deductions cost the government $250 billion a year. But the pain they have cost in distorting the markets has been even worse.
We should see a reduction in the tax rates to offset some of the lost benefits. Congress is certainly capable of spending every dollar they can find a new way to raise, and we still need to insist on spending prudence even though that almost seems laughable today. I wonder if the populists and tea baggers who are truly concerned with the deficits will be ready to restore some common sense to these subsidies. Will they remain committed even if it affects their pocketbooks?
It is not uncommon for anyone to omit something from his tax return or financial disclosures and find the need to file an amended return or statement. It is another thing to omit numerous significant entities that could affect your stated worth or income by half. And it is entirely another thing if the absent minded taxpayer is the Chairman of the Ways and Means Committee that actually writes the tax code; Mr. Charles Rangel.
In the Friday (8/28/09) editorial of the Wall Street Journal they note that the Chairman amended his financial disclosure to report more than a half million dollars in assets and income, about half of his net worth. He omitted his Federal Credit Union balance of over $250,000; vacant properties in New Jersey, stock in PepsiCo, and $75,000 in income from rental properties in the Dominican Republic.
While not significant sums in the scheme of trillion dollar deficits, it is sloppy at best and should be unacceptable from the man wielding so much power over how much taxes the rest of us pay. Given how many Obama appointees had to withdraw over tax improprieties, the Democrats would improve their credibility in tax and financial reform if they would demand some integrity from their own leaders.
The percentage of taxes paid by the top 1% now exceeds the percentage paid by the bottom 95%. This increase in progressiveness happened under George Bush. The top 1% are made of 1.4 million taxpayers and pay 40.4% of all taxes, and the bottom 95% consist of 134 million taxpayers and pay 39.4% of all taxes down from 58% twenty years ago.
Reference here.
It is important to note that any tax policy that hurts the ability of those those top 1% to produce income will have a dramatic effect on tax revenues.
Obama has already announced plans to increase the maximum tax rate to 40% for those who make over $250k. He has also proposed elimination of the ceiling on social security taxes and now the health care bill adds a tax on employers who do not provide health insurance. If you combine this basket of tax hikes with the hikes in taxes from states like California and New York to avoid their own meltdown and you have a substantial change in the taxes levied on small business owners. Add substantially higher minimum wages, enacted long ago but now taking effect in the most severe recession in decades, and higher proposed capital gains taxes. And then consider the vast uncertainty of the Rube Goldberg system called Cap and Trade and the impact of some version of the strongly pro union card check bill will have on business thinking.
You have to be an economic moron not to understand that this will sharply curtail economic growth, investment and hiring. Any of these changes would have an impact, but the collection of such disincentives has a staggering impact on the decisions of small businesses.
Those who are able will shut down and just retire early even if they have to reduce their lifestyle to do so. I hear this from small business people consistently. With the last kids off to college they speak of selling their business and moving to their beach house.
These same business people see their risk reward opportunity to be so poor now that they would rather sit on their money in low yield money funds that risk it in expansion only to see 70% of it taxed away IF they are successful. That is why there is over 3.5 TRILLION dollars sitting in money market funds.
Many will adjust to the new looter mentality and do the best that they can. I am sure that lawyers and accounting advisors will seek and finds loopholes and other non productive means to protect private wealth. Those who are sophisticated enough will seek foreign opportunities.
Unless this direction is changed unemployment will soar and economic growth will stagnate for a long time.
Larry Kudlow in National Review
July 10, 2009 4:49 PM
The Road to Economic Demoralization
Washington is going the wrong way.
read the whole article here.
excerpts
And China has no capital-gains tax. It only has a 15-to-20 percent corporate tax. The U.S., on the other hand, is raising its cap-gains tax rate to 20 percent.
Fortune magazine recently reported that the number of U.S. companies in the world’s top 500 fell to the lowest level ever, while more Chinese firms than ever made the list. Thirty-seven Chinese companies now rank in the top 500, including nine new entries. Meanwhile, the number of U.S. firms has fallen to 140, the lowest total since Fortune began the list in 1995.
our 40 percent corporate tax rate is already almost 15 percentage points higher than the corporate rates in most of Europe.
Here’s the clincher: Year-to-date, Dow Jones stocks are off 8 percent, while China stocks are up 71 percent. The world index is up 4 percent. Emerging markets are up 25 percent. They’re all beating us. None of this is good.
excellent point form Ari Fleischer in the WSJ
Everyone Should Pay Income Taxes
It’s bad for our democracy to exempt half the country.
By ARI FLEISCHER
excerpts
A very small number of taxpayers — the 10% of the country that makes more than $92,400 a year — pay 72.4% of the nation’s income taxes. They’re the tip of the triangle that’s supporting virtually everyone and everything. Their burden keeps getting heavier.
As a result of the 2001 tax cuts enacted by a bipartisan Congress and signed by President George W. Bush, the share of taxes paid by the top 10% increased to 72.8% in 2005 from 67.8% in 2001, according to the latest data from the Congressional Budget Office (CBO).
Contrary to the myth that Mr. Bush cut taxes only for the wealthy, the 2001 tax cut reduced taxes for every income-tax payer in the country. He reduced the bottom tax rate to 10% from 15% and increased the refundable child tax credit to $1,000 from $500 per child, both cuts that President Barack Obama says we should keep. In so doing, millions of lower income taxpayers were removed from the tax rolls, shifting the remaining burden to those at the top, even after their taxes were cut.
According to the CBO, those who made less than $44,300 in 2001 — 60% of the country — paid a paltry 3.3% of all income taxes. By 2005, almost all of them were excused from paying any income tax. They paid less than 1% of the income tax burden. Their share shrank even when taking into account the payroll tax. In 2001, the bottom 60% paid 16.3% of all taxes; by 2005 their share was down to 14.3%. All the while, this large group of voters made 25.8% of the nation’s income.
When you make almost 26% of the income and you pay only 0.6% of the income tax, that’s a good deal, courtesy of those who do pay income taxes. For the bottom 40%, the redistribution deal is even better. In 2001, these 43 million Americans, who earn less than $30,500, made 13.5% of the nation’s income but paid no income tax. Instead, they received checks from their taxpaying neighbors worth $16.3 billion. By 2005, those checks totaled $33.3 billion.
James Surowiecki writes in the January 26 New Yorker that the impact of rebates on economic behavior may vary.
A rebate in the form of a tax cut that increases weekly take pay may be spent more readily than a single large lump sum payment. Perhaps such a lump sum payment may be used to reduce debt or save for a rainy day, especially if it occurs during a time great economic insecurity.
People will be more likely to spend based on how wealthy they feel. In an economic atmosphere of uncertainty, escalating unemployment, drastically declining retirement accounts and credit tightening lump sum rebates not have the stimulus affect expected.
If the rebate is seen as an increase in their wealth they may be more likely to save it. If it is seen as an increase in their income, they may be more likely to spend it.
Surowiecki recommends giving it in small amounts over time.
A small rebate over time is another way of describing a tax cut.
What is the difference between increasing your sales margin by $500,000 or reducing your expenses by $500,000?
If all else is the same the answer is zero. My personal financial situation is the same if my revenue goes up or if my living expenses go down by the same amount.
So what is the difference between cutting taxes a trillion dollars or increasing expenses a trillion dollars? If all else is the same the answer is nothing.
So how can we determine that tax cuts are the failed policies of the past when we are willing to incur the exact same net effect by spending today? We are simply replacing the “failed policies” of the past with the “doomed” policies of the future.
The main difference between tax cuts and increased government spending is who gets to spend the money.
Tax cuts have the benefit of getting the money into the economy faster, being spent wiser, and based on 100 years of tax research likely INCREASING the dollar revenue generated.
But that would mean that you and I and other taxpayers would get to determine how the economy is stimulated and this Congress and Administration will have none of that.
To argue that cutting taxes is the “failed policy of the past” and that deficit spending is any better or different is like claiming we can fix a short blanket by cutting 18″ off one end and sewing it on the other.
New York Governor Paterson lamented the loss of state tax revenue as a result of top Wall Street CEOs getting much lower bonuses as a result of their crappy performance and the taxpayer payout. He noted a $180 million drop in revenue just because of lower bonuses.
I assume this does not include the lower revenue from declines in other business profits. Jindal in Louisiana and Palin in Alaska face revenue shortfalls due to declining oil volume. Unlike the Federal Government the states can not print money and the credit markets are not particularly friendly to their borrowing either.
Economic policy such as higher taxes and more regulation that suffocates business growth is self defeating. The decline in tax revenue quickly undoes any tax benefit and starves the public sector.
A profit producing business is one of the best public goods we can have. We should be encouraging them.
by Henry Oliner
The stimulus package assumes that the government can repair a badly damaged economy by sending checks to a certain sector of citizens. This is such a flawed view that it should be obvious to anyone.
The money sent to one party is taken from another party. The check Billy gets to spend at Walmart is simply taken from Bobby who will not get to spend it at Bass Pro Shop. The net effect on the economy is zero.
The government can only redistribute wealth, it can not create it. Even public spending on roads and bridges and the military is simply money taken from another sector. The tax money spent on roads is tax money not in the hands of the citizens that is not spent on a new car, a charitable contribution or a mutual fund.
It certainly does not feel like it is taken from someone else because it is taken later by either inflation or debt repayment, but the transfer is just as real as if it is taken the day it is spent.
We all know the money spent on the stimulus package has to come from somewhere at some time.
Rather than giving away money it does not have, the government should be focusing on ways to stimulate others to actually produce the wealth. This comes from free trade, low taxes, and a sound currency.
The sound currency portion will come from a balanced budget which inevitably means drastically reduced government spending. The two biggest government expenditures are Social Security and Defense. The cuts must start there. The Farm Bill, Medicare Prescription Drug Benefit, and other hugely expensive programs must go and fast.
No one ever solved a financial crisis by giving away money they don’t have.
