Monthly Archives: July 2011

Rebels Without a Clue

Rebels Without A ClueThe political equivalent of testosterone has the potential of doing something that bullets, bombs, ordinary corruption, conspiracies and daylight failed to do for over 300 years.

Maybe that’s over the top – we’ll see. But the dumbed down, “grass roots” electorate who voted and gave a path to power to weak minded new politicians and reelected old politicians who saw the light of promised, simple solutions to complicated problems, have us – all of us – in a game of chicken over the debt limit that should never have been played.

Those aware, should remember the game of chicken from Rebel Without a Cause. Two testosterone laced teenagers drive toward a cliff with a plan to jump out of the cars they do not own at the last possible moment. The one who jumps first is the chicken. Life to this point was irrelevant. Only the dare was important. The game didn’t have to happen until they decided that it did and then it had to. Only one could win, both could die, but both could survive. In the movie, Buzz, played by Corey Allen, caught his sleeve in the door handle, couldn’t jump out and the car and Buzz go off the cliff into the ocean.

In my metaphor, the Republicans have caught their promise not to raise taxes in the door of their car. Obama has caught the sleeve of revenue vs. fairness in his. Our cliffhanger is only ten days from the edge and it looks as if they are both going off the cliff and taking us with them. Our only hope is they will hit the brakes and save us all. Chicken is not the worst outcome. Going off the cliff is.
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Note: this story has been updated to correct a plot error caught by an alert Dew reader.

Bring Back the Bad Old Days

Bipartisan Congressional leadership meetingOh, how I long for the time when politicians lied to get elected. When a Democrat could run as a hawk and govern as a dove. When a Republican would run as a conservative and it meant they were cautious to change and represented traditional values, not the values of a mob. Oh, for the days when we knew the contract with America was not worth the paper it was printed on.

When getting things done was the goal of both parties and compromise was seen as a victory for each. Incrementalism was the result. Respect was the rule, not the exception. Peace was a goal. Being patriotic included doing what was best for all Americans. Believing in Democracy included supporting majority rule. Laws were meant to protect people. Justice was non-partisan. Giving a leg up to someone less fortunate was an ideal. Educating our young and taking care of the aged were bi-partisan platforms. Delivering jobs in your district was a good thing, because it meant jobs. A time when campaign promises were quickly forgotten to be replaced with the reality of American life. And flip-flops were what you wore on the beach.

Oh, how I long for the time before entertainment news. Before celebrity politicians, pundits and talking points. When extremists didn’t get air time. When politics was dull and before it became a made for TV sport with avid fans* on both sides.

It was Dick Cheney, who said in 2002, “Reagan proved that deficits don’t matter.” It was also Reagan, who proved that raising the debt limit doesn’t  matter – he raised it 17 times in his eight year mythological reign. Bush, Jr. raised it seven times. But now, Obama is President, so it does matter.

It matters, because to win as a Republican, you must, no matter what:

  1. Keep a promise to Grover Norquist never to vote for any additional government revenues, including, but not limited to taxes, fees or ending subsidies;
  2. Keep a promise to the Tea Party to reduce the size of government** and the reach of government regulation;
  3. And keep a promise to Republicans everywhere to defeat President Obama.

Passing a debt limit extension, which has been done 74 times since the law that required it was passed in 1962, may violate promise number three: to defeat President Obama, no matter what.

President Obama did not cause this problem. In fact, he has done more than any President in two generations to help the Republicans keep their promises. Federal, state and local taxes are the lowest per capita since 1955 – well below the high water days of Nixon and Reagan. It is a fact that President Obama has presided over cutting taxes more than any President in history.

But Obama’s help to the Republicans doesn’t stop there. He has secured the Republican promise to reduce the size of government – the number of government workers has gone down by 500,000 since Obama took office.

What more must he do? For the answer, just look back to April when the House Republicans voted to privatize Medicare and increase the costs to seniors an average of $6,000 a year (not a tax). The House Republicans also voted to turn Medicaid, the medical safety net for the poor and disabled, into a voucher system so the states could make Medicaid meaningless (not a tax). Immediately after their votes, House Republicans poll numbers fell off a cliff. They have only one chance to save themselves: force Democrats into drinking the poison tea, too.

Now, we are being held hostage to a crisis totally of Republican promise making – a demand that any agreement to raise the debt limit be matched by permanent spending cuts and include entitlements (not a tax). At least two trillion in additional debt is needed to fund authorized spending through the next election.

Obama, true to his campaign promises saw this as an opportunity to enroll the Republicans to do something meaningful. Why not take the advice of Simpson-Bowles? Cut four to six trillion of the debt by a fair combination of revenue increases and cuts to discretionary and entitlement spending. Nasty compromises required for both parties for the good of the nation to secure our future. No new taxes would be included – just plugging of corporate loopholes, ending of subsidies for corporations who don’t need them, and allowing the Bush tax cuts to finally expire. To protect the fragile economy, neither the revenue enhancement, nor the spending cuts would be immediate. Nor would the entitlement changes privatize Social Security, Medicare or Medicaid — more likely, a means test, and some reimbursement and cost of living changes.

Too bad for all of us. To keep their campaign promises, Republicans won’t do the big deal and may not do any deal. Republicans were gamed last spring by Obama in the continuing resolution deal. The $30-40 billion in cuts turned out to be only a few hundred million – maybe less. Republicans don’t trust Obama – he’s considered too smart for them.

Who will blink and when? The White House told seniors today that they may not get their August 3rd Social Security checks. The pundits are camped in the cable network parking lots. The rhetoric talking points sound as if both sides are going to the mattresses. This is going to be close.

Without an agreement, the Republicans are likely to pass something partisan in the House. Depending on the details, and they are likely to be onerous, it is doubtful that it could even come to the floor of the Senate.

Thursday, Senate Republican leader Mitch McConnell has suggested a back up plan that would give the President new power and release Republicans from having to vote for anything that they have promised not to vote for. Lending authority for the balance of this Presidential term would be granted in three installments of up to $2.4 trillion, provided that the President cut spending by the same amount. Congress’ role would be reduced under special rules such that they would only be able to vote against a Presidential plan. Which of course, Republicans would. Which would then be vetoed by the President. The McConnell plan would give Republicans 100% authority to blame Obama for all of the economic woes, while keeping their agenda of fear in the news, and keep moving the day the world ends as we know it until just before the 2012 election. This plan, is likely a non-starter, as it would be giving the President way more power than Tea Partiers’ are likely to approve in the House.

Scenarios for default are unprecedented and no one really knows how one would play out. The White House may not have the authority to prioritize spending – allowing them to default on some debt to make payroll and pay other bills. At this time, the White House doesn’t plan to use the 14th Amendment, but may anyway. The Supreme Court will surely be called to decide many emergency details.

Should a deal not be done, what happens next is almost too dark to describe — sounding more like apocalyptic fiction than what is so seriously possible.

Inaction by Congress before recessing on August 5th would mean that revenues would only be available to pay 40-45% of our bills (that is 10% of our economy that would be missing in August). Our debt would be downgraded by ratings agencies. Smart money would likely already have made their bets — shorting everything — especially instruments guaranteed by our government — and almost guaranteeing things will get worse quickly. Safe places for cash would be almost impossible to find. The market impact of would be immediate. Everything will begin to go down. At 1000 Dow points down, margins calls will become commonplace forcing the markets lower and increasing computer trading.

The Treasury would be called to make hard and unpopular choices on who to pay with the estimated $172.4 billion of August revenue. Non-essential government workers would be sent home. The parks would close and campers evicted. Payments for Social Security, disability, VA benefits, food stamps, unemployment benefits, Medicaid and Medicare reimbursements, rental assistance, public housing funding, children nutrition programs, Pell grants, state education grants, IRS refunds, military active duty pay, federal employment salaries and others would be at risk. As would contracts for defense, Homeland Security and others.

“Handling allpayments for important and popular programs (e.g., Social Security, Medicare, Medicaid, Defense, active duty pay) will quickly become impossible.” – Bipartisan Policy Center

Here are examples of some of the choices we would have in August from the Bipartisan Policy Center:

Payment scenarious from the Bipartisan Policy Center

Payment scenarious from the Bipartisan Policy Center

The Treasury must also rollover $507.4 billion in debt in August and there may be no takers – interest rates could skyrocket increasing the national debt even more, while reducing funds available to pay bills — and the Fed may have to intervene. Home sales would stop. As markets and currencies tank, people, banks and countries would begin to fail. There will be chaos on all world exchanges and many would be shut down. People would take to the streets. Then it gets really bad.

Even if Congress passes a bill by mid-August, there is great risk that the damage to markets and interest rates would already be so great that we would be thrown back into a deep recession.

More money could be lost in the markets during the first week than is needed for the debt increase. More money could be lost in the subsequent weeks than our national debt. Recession could easily turn into depression. People would jump out of windows. War might be threatened. All because of campaign promises. Oh, how I long for the time when politicians lied to get elected.
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* Short for fanatics.
** Officially, the Pentagon, CIA, NSA, etc. are not included.

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Editor’s note: The post was updated at 7:43 am on July 13, 2011 to correct and provide new details of the Mitch McConnell back up plan as they became available.

A Progressive Argument for a Flat Tax

"The Destruction of Tea at Boston Harbor", lithograph depicting the Boston Tea PartyDemocrats and Republicans will only agree to changes in the tax codes if forced to by their caucus or in exchange for tax contributions. The debt default is looming, so let’s strike a deal.

  • A deal that requires no passage of a debt extension – now, or ever again.
  • A deal that protects social programs while creating incentives to make them more efficient.
  • A deal that allows a Democrat in the White House and a Democrat majority in the Senate to pass a series of core Republican initiatives – how’s that for reaching across the aisle?
  • A deal that will make the business lobby happy and create millions of new jobs for unemployed and under-employed Americans.

Tax subsidies without representation is tyranny.

The US tax code is more than 50,000 pages. Few among us have any idea of what is really in there. Much of the tax code was written decades ago to correct wrongs, incentivize or favor one economic group, investor, industry or corporation. Rather than even attempting to fix something politically impossible to fix, I propose that in exchange for striking all current tax regulation1, we:

  • Pass a balanced budget amendment requirement with tax rates to be set each year based on the CBO estimate of authorized spending and projected emergencies (war, for instance) requiring only a conference committee finding and a simple majority vote not subject to Senate filibuster rules to pass:
    • A flat personal income tax – the same tax rate paid for every individual with:
      • An exemption of $6,0002 for each person or a standard deduction of $15,000;
      • An exemption for charitable contributions up to $2,0003 to incent personal investment in important personal causes that help us all;
      • A continued exemption for contributions to a retirement, education or health savings account;
  • End all corporate taxes with a requirement that corporate income, no matter where in the world it is earned, be dispersed as dividends to shareholders4;
  • End payroll taxes for Social Security, Medicare and Medicaid getting the fiction that there are “trust funds” and removing those intra-governmental holdings from the national debt – which, by the way, would end the need to pass an extension of the national debt.

Yes, it would mean that any special break would have to be a direct subsidy including businesses or groups, energy initiatives, capital gains and home ownership2.

Yes, it would mean the payroll tax income limit capped at $106,800 in income (2010), would end, but so would the employer share of payroll taxes.

Yes, it would end double taxation of corporate profits by their shareholders.

Yes, inheritance, beyond the tax household, would also be subject to the flat tax. However, existing trust and charitable exemptions should continue to apply.

Yes, it would end an industry of the more than 1.2 million Americans employed as tax preparers and have negative economic impact on the US Postal service, the IRS, tax attorneys and the printing and paper industries. (Perhaps, at some time, if they have friends in Congress, they could receive a subsidy to be reeducated.)

Yes, a zero tax rate would be a huge benefit to business, especially small business. Large corporations simply do not pay at rates anywhere near the tax rates anymore. Small businesses do. Millions of new jobs would be created. Companies now sheltered in off-shore tax havens could finally be repatriated.

Yes, it would directly impact foreign investment in the US. Investors who earn money here would be required to pay taxes. Seems fair.

Yes, this plan, at least on paper, unfairly benefits the higher income taxpayers and is inherently unprogressive. However, that does not pass the real life test. The earnings of the very rich earn are deferred, unearned, sheltered and buried in million dollar losses – their effective rates would go up. If future Congresses want to address this, let them.

Yes, it would absolutely make each Federal expenditure have direct political consequences in its direct impact on the tax rate – that includes war, corn ethanol and new office buildings.

Yes, there would be huge incentive for our politicians to get as many people working as possible since each would be figured into the tax rate.

No, it would have little direct impact on state taxes. Each state would have to decide. Sure, there would be less competition for industry displacement using tax incentives, but we can all live with that.

What would the rate be? Nobody knows. I believe it would likely be about 25%.

Here are some examples based on a family of four (not retired), comparing current tax rates that include self-employment taxes (Social Security, 10.4% and Medicare, 2.9% taxes up to $106,800) with a 25% flat rate:

Income

Subject to Tax

Total Tax

Effective Tax Rate

Subject to Tax

Total Tax

Effective Tax Rate

$17,000

$5,400

$3,961

23.3%

$0

$0

0.0%

$69,000

$57,400

$19,527

28.3%

$45,000

$11,250

16.3%

$139,350

$127,750

$49,042

35.2%

$115,350

$28,838

20.7%

$212,300

$200,700

$73,648

34.7%

$188,300

$47,075

22.2%

$379,150

$367,550

$139,324

36.7%

$355,150

$88,788

23.4%

$1,000,000

$988,400

$364,204

36.4%

$976,000

$244,000

24.4%

This is a serious outside-the-box suggestion to an extraordinarily complicated problem (click here for my suggestion for solving the immigration issue). I encourage you to ask your questions and express your concerns in the comment box. It is not perfect, but far better than status quo. If you like it, please send it to someone who can make a difference – a Congresperson, or a lobbyist.
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1 Allowable business expenses would need to be defined for such things as charity and political contributions, allowable travel and entertainment; employee benefits and executive compensation; deferred options; etc. Specialized taxes and fees for service (toxic waste clean up, FDA approval) would need to be reviewed separately.

2 $6,000 is an example. A balance would need to be struck between a progressive figure and one that simply recognizes the cost, including health insurance of non-income earning household members (BKA: children, disabled, retired, etc.) and the minimum cost of a residence. In large part, this deduction is intended to minimize the loss of the homeownership tax deduction for taxpayers who itemize and progressively address tax rates for middle to lower income taxpayers.

3 This limit is intended to incent charity without unfairly benefitting an economic group or a specific charity. I’m flexible here.

4 The requirement should allow for some retained income and reserves, and should be averaged over a number of years. Shareholders, including holding companies off-shore would be required to file tax US tax returns subject to the Federal tax rate.