As my co-blogger PuddlePirate wrote yesterday, he and I got into something of a spat over the presidency of George W. Bush. My position is that, in the past 7 years with him as president, he has done more damage to this great nation of ours than just about any other person in history.
Needless to say, my good friend the PuddlePirate turned beet red with rage and demanded to know how I could possibly justify a statement like that. It all went down hill from there.
He has put together a very nice argument for tax cuts and why supply-side economics are just what the country ordered. You can find that here. The problem with this, in my opinion, is that it is disingenuous and misses the point of my argument. Let me start by making a very broad disclaimer – I am not, nor do I pretend to be, an economist. Having said that, I trust the words of the economists who should be setting policy.
The justification for the 1.35 Trillion (yes, that is Trillion with a T) tax cut package that Bush passed through congress in the first part of his presidency was that the country was projecting 10 Trillion dollars in budget surpluses over the next decade. The goal was to spur the economy, create new jobs, and replace the tax revenues through growth. In this package, it accomplished some very good things, most namely eliminating the “marriage penalty” (i.e. two people with income would be better off not getting married due to higher taxes). It also increased the tax credit to lower income people with children (not that I am against this, but it smacks a little bit of a “buy your vote” kind of deal). The bottom line is that of the 1.35 Trillion dollars in tax cuts, according to the IRS’s own statistics, approximately 70% is going to the top 0.5% of society (those individuals making over $1,000,000.00 in reportable income). The last time I checked, the last year the country had a budget surplus was 2001. It also just about completely failed in its stated purposes (create jobs), since approximately 5,000,000 jobs were lost between when it was passed in 2001 and 2004.
The argument has been made that the idea behind the tax cuts bears out, since tax revenues are up. This is, again, disingenuous. The reason tax revenues are up is that the top 0.1% (those making over $1.6M per year) account for over 10% of the nation’s income and 19% of the taxes. Contrast this with 1979 when the top 0.1% accounted for 3% of the nation’s income and 7% of the taxes. When income in this group goes up, tax revenues go up a lot faster than if income rose evenly across all tax brackets. This is borne out by the fact that, while income tax revenues are up significantly, Social Security and Medicare tax receipts have remained flat (indicating that the average wage earner’s salary has not been rising, nor have there been additions to the average wage earner’s numbers). In other words, the rich have gotten richer while the average person has stagnated. Where did this money come from? A large chunk came from Capital Gains taxes. Where did the capital gains taxes come from? Unfortunately, a very large chunk came from investments in foreign markets, where the returns have been up significantly due to the falling dollar (I don’t even want to get started on that presidential economic fiasco). Think about that for a second, our tax revenues are up because the top 1% of the population has been investing their money in other countries. How do I know this? To quote an example, Warren Buffet, the “Oracle of Omaha,” has made no secret of the fact that Berkshire Hathaway has been exploring the foreign markets as a primary source of growth for their investors.
My view on this is that, in a time of war when the country is running huge deficits (with most of the debt being bought by the Chinese, by the way) it is not the right time to continue giving the top 0.5% of people a tax cut that is costing the country more than the entire cost of the Iraq war. I have some folks who agree with me, too. Namely, some of the top economists in the nation who signed a letter in 2003 titled Opposing the Bush Tax Cuts. Like I said, I’m not an economist, but when 10 Nobel Laureates in Economics are calling the president to the carpet, I tend to take notice. If that particular piece of prose is a little dated, there is also the Briefing Paper from the Economic Policy Institute updated in March of 2006 titled THE BOOM THAT WASN’T – The economy has little to show for $860 billion in tax cuts. The long-term health and well-being of the country has been seriously compromised by this gift to the rich.
A couple of final notes. My friend quotes from his research that “Overall, we find that America’s lowest-earning one-fifth of households received roughly $8.21 in government spending for each dollar of taxes paid in 2004. Households with middle-incomes received $1.30 per tax dollar, and America’s highest-earning households received $0.41.” My only issue with this is how do we come up with these numbers, since it is not explained? Are we talking about Social Security and Medicare for retirement? Income credits for the poor, or building highways that lower income people drive to work on? All of the above?
Let me put it another way. If a single person makes $30,000 a year, of that amount they will pay $3,159.00 in Federal Taxes and $2,295.00 in FICA (Social Security and Medicare). Not taking into account State or Local tax burdens, this means that already they have paid out 18.2% of their income in taxes. This is the standard deduction, because most people in this income range cannot itemize deductions (which require the ability to itemize more than the standard deduction of $5,150.00). This leaves them with roughly $2,050.00 per month to pay their bills and feed themselves (assuming no state taxes). Am I advocating lowering their tax burden further? No, I am not. But I am also not going to hold them to the same standard as someone who makes in a day what they make in a month. A serious reexamination of the tax code and all the tax benefits are necessary, including the sacred cows of “home mortgage interest deduction” and “State Income Tax deduction.” Why should a millionare who owns a $750,000 house get to deduct $60,000.00 in mortgage interest because they chose to buy a bigger home? Most financial advisers will tell you it is better to buy a home with a mortgage rather than spend your money on it for the tax savings that you will realize (as long as the size of the mortgage allows you to itemize deductions), with the argument being “you can invest your money then into a mutual fund and receive a return of 8-12%, while the government subsidizes your home.”
On the flip side, let’s take a look at another example. A single lawyer who makes $250,000.00 a year and owns a $750,000.00 home will pay approximately $6,885.00 in FICA and $30,000 in Federal taxes after taking itemized deductions for his home, unreimbursed business expenses, charitable contributions, a home office deduction and the like. This equals out to approximately 14.8% of their income. It also means that they have only $17,760 per month to pay their bills and feed themselves (again, assuming no state taxes). You will notice that I state they will pay $30,000, not $66,303.00. The $66,303.00 is what they would pay if they took the standard deduction. I am making the argument that they would be able to shelter approximately $125,000.00 via deductions. Does this sound excessive? It isn’t when you consider that as a small example your car can be deducted if used for business, and that the miles are deducted at $0.485 per mile not considered commuting. There’s a reason CPAs get paid big money for working on people’s taxes (which is also a deductible expense). Oh, and if they did take the standard deduction (foolish lawyer!) that would leave them with only $14,700.00 per month to live on. Someone needs to let them know where they have to go to get the food stamps.
Here is the bottom line, and the most important part of the debate in my mind. My daughter is 4 years old. All these deficits will come due to be paid when she reaches the work force. Her mother is currently serving in Iraq. The cost of that war, the crumbling infrastructure of this country and crippling debt that will occur in the future could be averted for the most part if we were to reset the tax rates for the top 1% back to what they were paying in 2000 before Bush took office. If we don’t do something, we’ll be leaving it to our children to shoulder the responsibility for our inaction. I’m sorry, telling people that the best way to support the troops is to go to the mall and buy a pair of jeans is not my idea of good policy. Ask them to sacrifice a little instead by paying what they were paying only a couple of years ago. That would be supporting the troops, because it would mean that the country they are fighting to defend will still be around when they grow old.
OK PuddlePirate, ready for Round 2?