The Sequester: A Small, Dull Meat Cleaver

It looks like the sequester will go through, at least for a while, before Congress gets their act together (if they ever do).   Republicans refuse to budge on the issue of tax giveaways for the rich (which makes them responsible for any fallout the sequester may bring to the economy), and Democrats are simply not bold enough to do what really needs to be done.  But what exactly is the sequester, and why is it so bad for the economy?

First of all, the sequester consists of across-the-board, inflexible, automatic budget cuts as far as discretionary spending is concerned.  Half of the cuts will come from defense spending, and the other half from non-defense spending.  The size of the cuts (5% overall across the board each year for the next 10 years, 8.2% for defense) may not seem large, but the indiscriminate nature of these cuts won't just cut out the fat, but also bone and muscle as well.  If the doctor tells you that you need to lose weight, you wouldn't chop off one of your hands.  But that's exactly the kind of effect the sequester would have, and it won't be pretty.

Secondly, our economy is still very weak, and cutting too much too soon would likely push our economy back into recession.  The direct effect of these cuts would mean at least 750,000 public sector jobs would be lost this year alone, and the multiplier effect would mean that many private sector jobs would be eliminated as a result, making the total of jobs lost well over 1 million in 2013.  And we need that like we need a hole in the head.

Thirdly, many of the so-called "cuts" are not really cuts at all, but reductions in the growth of spending over time.  Thus, even if the sequester remains in effect for a whole decade, the net effect is that federal spending (and the national debt) will continue to grow significantly over the next decade.  But it would still do significant damage to the economy since these "cuts" are indiscriminate and inflexible.

Finally, although Congress clearly has a problem with spending like drunken sailors (regardless of who is in power), there are better alternatives to the sequester that would not only reduce but eliminate the deficit rather quickly.   The TSAP has repeatedly proposed better ways of balancing the budget and dealing with our massive national debt.  Right now, the deficit is really not our biggest problem, but it still must be dealt with.  And while our ideas will probably not come to fruition in today's Congress, the sequester is still one of the worst possible ways to deal with the deficit and any alternative must be put in place very soon.   For example, simply modifying the sequester to allow the heads of various agencies the flexibility to decide how to make their cuts (as long as the overall amount cut remains the same) would achieve the exact same effect on the deficit, but with far less collateral damage.  And Obama's plan to combine spending cuts with increased revenues (from removing various tax loopholes for the rich and corporations) is better still, though not quite as good as the TSAP's plan.

But it looks like the sequester will go through nonetheless, much to our chagrin.  The Republicans have rejected Obama's last offer for an alternative deficit-reduction plan, and in doing so they have revealed (yet again) that they really only care about the ultra-rich and mega-corporations.   Hopefully Congress will wise up before too much damage is done.

UPDATE:  The sequester has already begun as of noon on March 1.  While most of the impact will not be immediate (it will take at least several weeks to feel it), the pain will be real for those affected.  And millions of Americans will be affected in one way or another eventually.  But the silver lining is that Obama and the Democrats now have the upper hand should a belated deal be made in the days to come.  And the Republicans would get blamed for any fallout should a deal not be made in the near future.

If no deal is possible in the near future, the least-worst choice of all would be for Congress to simply repeal the sequester entirely with no strings attached.  Yes, they can do it if they want to, and at this point it is clearly in America's best interest to do so.  But they probably won't unless a critical mass of Americans credibly threatens to vote every single one of them out of office in 2014.

UPDATE II:  Looks like the sequester is already starting to kill jobs as of the first week of April, one month after the sequester began.  And the much-anticipated furloughs have officially begun.  But remember, the worst is yet to come if the sequester remains in effect.

The Ideal Tax

What exactly is the ideal type of tax?  It depends, of course, on your definition of "ideal", but most folks would probably agree that the ideal tax is one that would would meet all of the following criteria:

• Lowest possible rate on the broadest possible base
• Painless for virtually everyone, yet everyone has some "skin in the game"
• Progressive (the rich pay a higher proportion of their income than the poor)
• No loopholes
• As simple as possible (but not simpler)
• Efficient (raises lots of revenue without hurting the economy)

So what type of tax would meet all of these seemingly contradictory criteria?   Certainly neither our current 77,000+ page Byzantine tax code, nor any of the specific types of taxes in it, would suffice.  The so-called FairTax (national sales tax) would also fail to meet all of the criteria, as would introducing a value-added tax (VAT) to replace all or part of our current tax code.  Ditto for virtually every other idea out there.  It seems like a rather impossible feat, until...

Enter the Universal Exchange Tax (UET).  This idea, taken from an anonymous website by a mysterious stranger, is very similar to Dr. Edgar Feige's idea for the Automated Payment Transaction Tax (APT), which we have discussed in a previous post.  It would be a very tiny tax, likely somewhere between 0.05% and 0.1%, on all automated (electronic) transactions between entities, period.  With a tax base of over $4 quadrillion dollars, such tiny rates can raise impressive sums of revenue:

0.01% = $400 billion per year
0.025% = $1 trillion per year (nearly the entire federal deficit)
0.05% = $2 trillion per year (half the federal budget)
0.1% = $4 trillion per year (the entire federal budget)

This idea is the logical conclusion of the ideas of economists such as Tobin and Keynes, since it is the lowest possible rate on the broadest possible base.  And while it may not appear to be progressive at first glance, it is actually highly progressive in practice since the rich have a much higher volume of transactions than the rest of us, while the poor have a relatively low volume of transactions.  Or, as the mysterious stranger would put it, "the more you play, the more you pay".  And the tiny rate would be painless and barely even noticeable, unless of course you're a rabid speculator.  Then it hurts a bit, as it should since excessive speculation imposes negative externalities on the rest of us.  Finally, something both progressives AND libertarians can embrace as far as fiscal policy is concerned.

The TSAP supports the introduction of the UET at the federal level (and possibly even at the state and local levels) as revenue-positive replacement for many of our current taxes.  Specifically, we would like to see a massive overhaul of our tax code in which the following changes are made along with the UET:

• The income tax for individuals is drastically simplified and truncated to apply equally to all forms of income with no loopholes, but no tax on the first $100,000 per year.  Suggested marginal rates are 10% for each dollar over $100,000 and 50% for each dollar over $1 million.
• The income tax for corporations is drastically simplified and truncated to apply equally to all forms of income by all entities with no loopholes, but no tax on the first $1 million per year.  A good rate would be 20-25%, and only undistributed profits would be taxed.
• The FICA (Social Security and Medicare) payroll taxes are eliminated entirely for both employers and employees, since the UET would replace these taxes as well.
• All giveaways (tax expenditures) in the old tax code would either be jettisoned entirely or replaced by direct (and transparent) subsidies from the spending side of the ledger.
• State and local governments should give serious consideration to adopting the UET as a full or partial replacement for their own sales, income, and property taxes.  It would not be difficult to "piggyback" on the federal UET once it is in place, and the feds should make it as easy as possible to do so.

The benefits of such changes are astounding.  The massive simplification, reduced costs, larger paychecks, and relative lack of distortion would be like a giant B12 shot for our economy, which is currently stuck in neutral.  Our budget would be balanced for the first time in over a decade, and we would have a massive surplus to invest in our country.  Social Security will finally be put on a sound footing for the foreseeable future once a few more tweaks are made.  And for the vast majority of Americans, April 15 would be just another spring day.  In other words, nearly all Americans would be much better off as a result (except perhaps speculators and the ultra-rich 0.1%).

It's time to adopt a 21st century tax code, and to '86 the obsolete Internal Revenue Code of 1986.

The American Dream is Dead

It's time to face the brutal truth.  The so-called American Dream is dead.  Finished.  Defunct.  Kaput.  C'est fini.   Except for the top 1% of course.  And it has now turned into a nightmare for the rest of us.

Why do we say this?  Just look at the facts:

• Unemployment remains persistently high despite over three years of "recovery", nearly double what it was in 2007.
• Even as unemployment has begun to slowly ebb and people are returning to work, they are taking lower-wage and less secure jobs than before.
• As a result, poverty has increased in recent years, especially among the working poor.
• The middle class continues to shrink nearly every year. 
• Meanwhile, the rich continue to get richer.  Corporate profits and the Dow Jones are at or close to record highs.  And the top 1% now owns over 40% of the nation's financial wealth.
• In fact, a mere 400 individuals have more wealth than the bottom 50% of Americans combined.
• Statistically, an individual is more likely to go from riches to rags than rags to riches.  Social mobility has mostly one direction now--DOWN.  
• The problems of unemployment, poverty, inequality, and downward mobility are especially true for today's under-30 generation, as America continues to ruthlessly eat its young.

It does not have to be this way forever.  There are several things that will, over time, reverse these negative trends and restore at least some semblance of the American Dream.  Just take a look at our party platform for a list of such ideas.  But the entrenched special interests that control our government want these pernicious trends to continue, and they will not stop until there are only two classes:  master and serf.   That, at least for now, is the true state of our union.