A Better Than Nordic-Style Social Welfare State With Less Than Florida Taxes

A friendly reminder to all readers:  contrary to popular opinion, it is entirely possible to have a better than Nordic-style social welfare state with less than Florida taxes.  Why?  (You really may want to sit down before reading any further.)

Because federal taxes do NOT fund federal spending, that's why!  Not the individual income tax, not the corporate income tax, not FICA, not the various excises, duties, and tariffs, not estate or gift taxes, nor any other federal tax for that matter.  It is all a Big Lie illusion to prop up the oligarchy, especially the big banks, via artificial scarcity of dollars.  As Rodger Malcolm Mitchell famously notes, and echoed by Dr. Joseph M. Firestone, the federal government is Monetarily Sovereign, that is, being the issuer of it's own currency, it by definition has infinite money.  Any money they receive, through taxes or otherwise, is effectively like bringing coals to Newcastle, in that it disappears into infinity (thus de facto destroyed).  And whenever they spend money on anything, they create each dollar on an ad hoc basis to pay as they go.  

Switching to what Dr. Firestone calls "Overt Congressional Financing (OCF)" is LONG overdue.  On August 15, 1971, the gold standard effectively ended for good, but the method of Congressional financing remains more or less stuck in the past.

Meanwhile, the so-called "National Debt" (TM) is also an illusion, in that it consists of Treasury securities that are only spuriously linked to federal spending due to arcane and archaic rules left over from the now-defunct gold standard that ended over half a century ago.  Each T-security is effectively equivalent to a CD savings account for those who choose to invest in them.  Additionally, the idea that money can only be created with interest or other "strings" attached to it is yet another part of the Big Lie as well.

(It could literally be paid off in one fell swoop at zero cost to anyone, in fact.  And it's technically not even "borrowing" at all.  Infinite money, remember?)

Ditto for the Social Security, Medicare, and other federal "trust funds", which are literally nothing more than accounting gimmicks based on artificial scarcity.  They could fund all of that and more by simply creating the money on an ad hoc basis.

As for inflation, that is generally caused by shortages of goods and services, NOT by printing too much money.  It is ultimately a supply-side problem that requires supply-side solutions, including (counterintuitively) more federal spending targeted to incentivize more production of scarce goods and services.  Thus, rationing dollars via austerity measures and/or raising interest rates to fight inflation and/or recession is like applying leeches to cure anemia.  It is a fundamental category mistake that does far more harm than good on balance.

Of course, the oligarchs want to condition We the People to accept mere crumbs from the tables of the rich.  That way they can keep widening the yawning gap between the haves and have-nots, givng the oligarchs more power to lord it over us all.

Bottom line: all of these gimmicks are completely artificial, contrived, and designed to deceive us all.  The ONLY purposes of taxes in a Monetarily Sovereign government that issues it's own currency (like the federal government, but not (yet) state and local governments) are 1) to control and regulate the economy by encouraging or discouraging various behaviors and activities, 2) to (crudely) fight inflation, 3) to create demand for the currency, and 4) to prop up and give credence to the Big Lie.  But the supposed need to raise revenue is NOT one of them at all.

Thus, with the stroke of a pen, Congress can very easily square the circle of a better than Nordic-style social welfare state with less than Florida taxes.  They gave the FERAL Reserve its power in 1913, and they can just as easily take it away today if they chose to.  But of course, their oligarch masters would NOT want that at all!  Most Congresscritters save for a tiny few, are of course bought and paid for by the big money interests.  Thus we need to throw the bums out!

So what are we waiting for? PAGING DR. FIRESTONE!  NEEDED IN WASHINGTON, DC, STAT!

Time To "86" The Federal Tax Code

The federal tax code has become increasingly Byzantine in its complexity, and the very rich easily get away with paying next to nothing due to the loopholes that they themselves write into the code.  The TSAP believes it is best to overhaul it entirely. 

That's why any serious tax reform idea needs to begin with, "The Internal Revenue Code of 1986 is hereby repealed".  And then replace it with something much, much simpler and more efficient:

The Universal Exchange Tax (UET) is one potential thing to replace it with.  A tax of typically 0.1% or less on (practically) all electronic transactions, and only on the destination or deposit side.

Another similar idea is the Automated Payment Transaction Tax (APT), from Dr. Edgar Feige.  This one taxes both sides of each transaction, and posit a higher rate than the UET due to less optimistic assumptions about the tax base, among other subtle differences.

Another similar idea is the Automated Deposit Tax (ADT, aka the "Tiny Tax"), from Dr. William J. Hermann, Jr.  Formerly one of the largest supporters of the APT above, he later came up with an even simpler idea, that only taxes the deposits into financial institutions.  Given a smaller base, as "within account" transactions would not be taxed, the revenue neutral rate is expected to be around 1% to replace all federal taxes and 1.2% to replace all federal, state and local taxes.  A more optimistic assumption would of course put the tax base much higher, and thus put the tax rate even lower still.

Keep in mind that, unlike the UET and APT, the ADT (Tiny Tax) would be unlikely to result in any significant shrinkage of the theoretical tax base in practice, since most if not all of the predicted shrinkage in the former, would result from fewer high-frequency stock, bond, and derivative trades within accounts (which are far more sensitive to that).  That is, what the latter lacks somewhat in the relative size of the tax base, it largely or entirely makes up for in relative lack of shrinkage. And switching to any of the three of course removes all of the compliance costs, distortions, finagling, and deadweight losses from the status quo, resulting in significant savings right there.

All of the above are the logical conclusion of the "lowest possible rate on the broadest possible base" with the latter idea adding "with the least complexity" as well.  All of these taxes are also surprisingly progressive, since the rich transact disproportionately more money than the non-rich, thus they pay disproportionately more in practice.  And yet it is not a particularly heavy burden on anyone, rich, poor, or anyone in between for that matter.  In fact, it's equivalent to everyone getting a raise, we can still afford to have a robust social safety net (if not the entire progressive wish list), AND America still becomes a global tax haven nonetheless.

It's a win-win-win situation for everyone but the oligarchs at the top that benefit from the status quo at the expense of the rest of us, in other words.

Some plans aim for revenue neutrality, while others aim for a balanced budget or even a surplus.  But what if there was a way to make the concerns about balanced budgets completely obsolete and irrelevant?

PAGING DR. FIRESTONE!

Enter Dr. Joseph M. Firestone, a proponent of one flavor of Modern Monetary Theory (MMT).  He argues that Congress can simply pay off the entire fictitious "National Debt" in one fell swoop and simply create the money ad hoc to pay all of its expenses, without needing to raise revenue at all.  He calls it "Overt Congressional Financing" (OCF), and can be done by a simple Act of Congress and/or the Treasury minting a high value platinum coin (i.e. valued in the trillions).  As does Rodger Malcolm Mitchell (of Monetary Sovereignty fame) and Ellen Brown as well.

That's not to say that taxes are completely useless.  There in fact are a number of reasons for them.  They 1) create demand for the currency, 2) help control inflation to some extent as an automatic stabilizer, and 3) control the economy to one degree or another to encourage and discourage various things (also known as social engineering).  And they can also be used for less than lofty motives as well to rig the game for the oligarchy, of course.  But for a government that can issue it's own currency, like our own federal government (but unlike our state and local governments), simply raising revenue is NOT of them.

So how do we retain the desirable features of taxes without the drawbacks?  Pigouvian taxes, such as vice taxes and eco taxes, for example, can then be added (back) in after repealing the old outmoded tax code.  Ditto for perhaps a limited "rich-only" or "very rich-only" individual income tax like the sort that prevailed prior to World War II, or alternatively an excise tax on executive compensation (like Bernie Sanders advocates) exceeding a maximum pay ratio between executives and their average or lowest-paid employees, in order to reduce the yawning chasm of inequality these days.  And perhaps a "too big to fail" tax on any bank or corporation that is so large and interconnected that it poses the externalities of systemic risk as well.

So what are we waiting for?

UPDATE:  One mild criticism right off the bat is that jettisoning the income tax entirely would also inherently jettison the proven poverty-fighting Earned Income Tax Credit and Child Tax Credit as well.  The answer?  Until we implement a Universal Basic Income (UBI), we can and should implement a "Reverse Payroll Tax" that tops up wages by matching wages in each paycheck dollar for dollar up to a point (say, the first $200 per week), which is actually much simpler than the EITC and CTC.  As for the criticism that tax-free municipal bonds will lose their luster in terms of investment incentives, and municipalities will suffer as a result, the Monetarily Sovereign federal government can simply provide more federal aid to municipalities so they don't have to borrow at high interest rates.  And regardless of what the feds do, municipalities and states can also set up their own public banks (like the famous Bank of North Dakota) as well and borrow money interest-free, of course.

UPDATE 2:  Even if the Tiny Tax is implemented, there is nothing to prohibit maintaining (and increasing and harmonizing) the SEC Fee on Wall Street transactions, if one wishes to implement a sort of "gaming tax" on speculation as well.  

Raise The Floor, And Also Trim The Top

It is well known that excessive inequality is very harmful to both the economy and society at large.  Even before we learned the truth about Monetary Sovereignty (MS) and Modern Monetary Theory (MMT) in 2018, the TSAP has long supported both a Universal Basic Income for all, and has also supported hiking taxes on the rich as well.  And even after learning about MS and MMT, we still support hiking taxes on the ultra-rich, and for good reason.

Some may be scratching their heads.  Why do we even need federal taxes at all, if our Monetarily Sovereign federal government has infinite money?  They clearly don't need taxes to pay their bills.  But taxes also have other useful functions as well:

• Taxes compel the use of the official currency, thereby giving it value in the first place.  
• Taxes automatically "claw back" excess liquidity in the money supply due to the "velocity of money", thus to an extent crudely preventing demand-pull inflation before it happens.
• Taxes can be used for social engineering (think vice taxes and Pigouvian taxes) in ways that are otherwise difficult, impossible, illiberal, illegal, and/or unethical to do by other means.
• And finally, progressive taxes can be used to "trim the top" when levied on the top 0.1%, thus reducing inequality without leading to runaway inflation.  Rodger Malcolm Mitchell compares this to a "trophic cascade", such as when wolves (i.e. the federal government) keep elk populations (i.e. the oligarchs) from getting out of control and devouring everything in sight.

So what sort of federal taxes would be suitable for this purpose, knowing what we know now?

• A rich-only, steeply progressive income tax like the kind that prevailed before WWII.  At least the first $100,000 to $500,000 would be exempt, and the new brackets would include marginal rates of 50% above the first $1 million, 70% above the first $10 million, and perhaps 90% above the first $100 million.  With NO LOOPHOLES this time. 
• Tax dividends and capital gains the exact same as ordinary income, but index the basis to inflation for capital gains.
• For the largest corporations, especially those who are "too big to fail", a top tax rate of at least 50%, with NO LOOPHOLES this time.  Tax only retained earnings.  Smaller corporations should not be taxed at all.
• The Universal Exchange Tax, i.e. a tiny tax of 0.1% or less on all electronic transactions.  It would actually be highly progressive in practice since the rich make a disproportionately high amount and number of transactions compared to the non-rich.  "The more you play, the more you pay."
• Various vice taxes (alcohol, tobacco, cannabis, etc.) and Pigouvian taxes (pollution and resource depletion).
• Land value taxes and severance taxes on natural resources such as oil and gas.
• And, of course, the estate tax needs to be made more progressive as well.

State and local governments, of course, are not Monetarily Sovereign, and thus need to raise revenue to pay their bills.  And they can piggyback on the aforementioned federal taxes and levy their own, especially the Universal Exchange Tax and the land value tax and severance taxes, and thus reduce or eliminate their currently regressive sales and property taxes.  Additionally, federal aid to the states should be increased for precisesly the same reason.

A UBI would indeed abolish absolute poverty, no doubt about that.  And that alone would have numerous individual and social benefits.  But without progressive taxation of the top 1% and 0.1%, it would do nothing to reduce relative poverty, and may paradoxically increase inequality.  And inequality in itself is harmful, over and above the effects of poverty.  Thus, it is not enough to either raise the floor or trim the top, we need to do both.  Yesterday.

Thus, Rep. Alexandria Ocasio-Cortez essentially has the right idea as far as taxes go.  And of course, the oligarchs and their sycophantic lackeys are coming down hard on her, but that just goes to show how effective her ideas are in terms of reducing the Gap between the haves and have-nots, which the oligarchs utterly depend on.  All the more reason to do it.

UPDATE:  Elizabeth Warren recently proposed a wealth tax of 2% on the assets of those with a net worth of $50 million and up (that is, on the top 0.1%), and up to 3% above the first billion.  Only the amount over the first $50 million would be taxed.  Controversial as it is, it actually makes a lot of sense, and the TSAP would certainly not oppose it. 

The $21+ TRILLION Question

Although the government shutdown and debt-ceiling brinksmanship has been averted (for now), the $21+ TRILLION question remains:  what are we going to do about the national debt?  Especially now that it is set to skyrocket even further into the stratosphere due to both massive tax cuts (mainly for the rich and mega-corporations) and spending increases, including on our already over-bloated and over-extended military.  It is now mathematically impossible to pay it off at this point.  So what is the solution, then?

Obviously, if we find ourselves in a hole (especially one as deep as this), the very first thing we should do is stop digging.   That is known as the First Law of Holes.  That means no more deficit spending for the foreseeable future, period. But unfortunately, that's a lot easier said than done. Taxes will have to go up and spending will have to go down--dramatically.   And that would do more harm than good at the levels it would need to be done.  There is really no way around that.

However, there actually is a painless (albeit unconventional) method of paying off the debt in one fell swoop.  Not just this year's deficit, but ALL of the cumulative $21 trillion of the debt. It's called the Noble Solution (named after its creator, Richard E. Noble) and does not involve any significant tax hikes or spending cuts. So what is it? It's something we never would have advocated just a few years ago:  printing (electronically creating) money out of thin air to pay it off all at once.  Alas, the genie is out of the bottle now, as the Feral Reserve has been creating money out of thin air for decades (including that recent whopping $16 trillion secret bailout of the banks, which eventually rose to nearly $30 trillion) so we might as well put this practice to productive use.  Money is really nothing more than an accounting entry nowadays, so let's make the entry and be done with it for good.

But wouldn't that lead to hyperinflation? Not if it is properly done with due diligence.  Noble points out that while creating money is undoubtedly inflationary, using it to pay off the debt (which is in Treasury bonds and is thus already part of the money supply) would be deflationary in that it would shrink the money supply by an equal amount. Thus, the two effects would cancel each other out, as paper (electronic data) would be exchanged for paper (data). Of course, we would have to bypass the Feral Reserve to avoid creating more debt in the process, such as #MintTheCoin. Or better yet, abolish or nationalize the FERAL Reserve entirely and return the power of money creation to its rightful owners, our elected representatives in Congress and the Department of the Treasury.  America would then be free and clear for the first time in history since Thomas Jefferson.

Of course, while doing it once may not be harmful, doing it regularly can be.  To make sure we never have to do this again, we must make sure the debt never, ever, reaches such stratospheric levels again, period.  In addition to nationalizing the Feral Reserve to make it a public national bank that creates interest-free currency, fiscal policy must be tightened after the Noble Solution is implemented and the debt is paid off.  We have already outlined in previous posts what must be done as far as taxes and spending are concerned.  Alternatively, or in addition to the above, there is also the legendary Warren Buffett's clever idea:  make a law that anytime the budget deficit exceeds 3% of GDP, all sitting members of Congress are ineligible for re-election, period.  Problem solved.

Of course, the longer-term drivers of future debt obligations are the programs that make up so-called "entitlement" spending, mainly Social Security, Medicare, and Medicaid.   But even here, there is less than meets the eye.  For Social Security, that can be resolved by 1) scrapping the wage cap on FICA taxes (or raising it to an arbitrarily high level like $1 million or $10 million), 2) indexing initial benefits to prices or median wages instead of average wages, and 3) very gradually raising the full retirement age to 70 for those born after 1980 or so.  In fact, if we did all those things plus a very slight 0.2% hike in the FICA tax, we could even expand Social Security (and perhaps briefly lower the retirement age a bit in the short term) while still keeping it solvent for the foreseeable future.  For Medicare and Medicaid, the only real long-term solution to their burgeoning fiscal woes is a truly universal single-payer healthcare system that can bend the cost curve downward by taking the profit out of healthcare and especially tackling the price-gouging of Big Pharma.  Any other proposed solutions are mere window-dressing at best.

Of course, Rodger Mitchell has an even better, more fundamental idea that makes it so the government would never need to borrow a single penny ever again, and it doesn't require raising taxes OR cutting spending.  Not only that, but it would guarantee that Social Security and Medicare, and any other program, would remain fully funded indefinitely as well without the use of FICA taxes (or any other tax for that matter).  The solution, in his exact words:

The best way is to eliminate the federal budget deficit and debt: Ending government borrowing. The government has the unlimited ability to create and spend money without borrowing. The process will be: 

1) Congress will create an account called "Money." 

2) Congress will determine how much money this account contains. The process will be similar to the way Congress now determines the debt ceiling. 

3) Federal agencies will write checks against this account according to budgets decided by Congress. If any federal agency needed additional funds, Congress would decide whether or not to allow this spending, in the same way that Congress votes for additional spending by the military et al. 

This would eliminate concerns about "our grandchildren paying for the federal debt." There would be no federal debt.

And as long as such money were created without any interest or related fees (as per Ellen Brown) such a solution would actually work.  Modern Monetary Theory indeed supports such an idea.  But before we can do that, of course, we must first have an independent Treasury and/or a public national bank in place of the privately-owned FERAL Reserve.  (And since he mentioned the debt ceiling, that is another thing we should really get rid of as well in the meantime, since it does far more harm than good.)

But the bottom line is that the debt must be defeated, and soon.  We simply cannot afford to continue kicking this can further down the road.  Otherwise we may very well go the way of the Romans.  The greatest tragedy of which being the fact that it was all 100% contrived and therefore 100% avoidable all along.

Corporate Tax Cuts Won't Boost Wages Or Improve America's Economic Well-Being

A scathing new report by the Economic Policy Institute confirms what progressives have already known:  corporate tax cuts will NOT boost wages or have any practically significant net benefits for the non-rich.  This report is rather timely, given that a massive corporate tax cut is a key component of the Trump-led Republican tax reform agenda that is currently under debate in Congress.

In a nutshell, the top corporate tax rate had hovered around 50% for decades until 1986 when Reagan cut it to 34%, and to this day it remains at 35%.  And while there were always loopholes for both individuals and corporations, the number of loopholes for corporations also increased dramatically since Reagan's 1986 tax code overhaul, to the point where many large corporations pay zero or even negative taxes!  And all the while, workers' wages have lagged behind both corporate profits (since around 1990) and labor productivity gains (since 1973 and especially since 1980), often not even keeping up with inflation for those at the bottom of the scale.  And trade deficits, foreign tax havens, and foreign cash holdings in such havens have only increased, along with outsourcing and offshoring.

Thus, the idea that further tax cuts for large corporations would benefit American workers is nothing but the latest incarnation of trickle-down voodoo economics, plain and simple.  By all means, close all the loopholes.  Give tax breaks and cuts to truly small businesses.  But cutting the marginal rate on large corporations would do nothing but make the already rich even richer, while blowing a massive hole in the federal budget as well.

In the past, the TSAP recommended cutting corporate taxes while simultaneously closing loopholes.  Currently, though, we no longer recommend any tax cuts for corporations whose annual profits are in the seven figures or higher.  In fact, we now recommend making the corporate tax code that much more steeply progressive, with the top bracket restored to 50%, with NO LOOPHOLES this time, and the very smallest businesses paying no tax at all.  We also support the corporate tax applying only to retained earnings (i.e. profits less any dividend payouts) while taxing dividends and capital gains for individuals at the same rate as ordinary income.  And as we have noted before, the top marginal tax rate for individuals should be at least 50% beyond the first million dollars per year and perhaps 70% beyond the first ten million, again with NO LOOPHOLES this time.  Any overhaul of the tax code that we would support should really include all of these features.

End This Depression NOW--For Real This Time!

The latest news shows that the Dow Jones recently reached a record high, and remains above 16,000.  Corporate profits are at a record high, and even the unemployment rate has FINALLY dropped to a 5-year low of less than 7%.  So by these numbers, some people seem to think that the recession is finally over for good.  Happy days are here again!  So cue the music, Maestro:

HALLLELUJAH!  HALLELUJAH!  HALLELUJAH, HALLELUJAH, HALL.....er, wait a minute.  Seriously?  This is the kind of thing that passes for "recovery" these days?  Please.  The majority of Americans would certainly NOT consider happy days to be here again!  Certainly not with sobering statistics like these:

• A real unemployment rate (U6) that is actually in the double-digits (13%), and not falling nearly quickly enough.  In fact, when long-term discouraged workers are included and added to U6, it reaches nearly 25%, and has actually risen since the phony "recovery" began in 2009.
• A labor force participation rate that has fallen to a 35-year low, reflecting (in part) those discouraged workers who simply gave up looking for a job.
• A poverty rate that remains stubbornly higher than in 2009, as evident in the record number of people on programs like SNAP (food stamps).
• Near-record levels of income and wealth inequality, approaching Gilded Age levels.  The top 1% controls nearly half of the nation's wealth, while the bottom 80% are left to fight over crumbs.
• Falling real wages, with a real minimum wage that is at least 30% lower than in the late 1960s despite a doubling of productivity.
• Cities declaring bankruptcy.  Detroit is the canary in the coal mine.
• Record levels of student loan debt ($1 trillion), combined with considerable unemployment and underemployment of college graduates.
• A national debt of over $17 trillion, and growing despite fairly harsh austerity measures.
• A real inflation rate that is nearly 10% when measured the way it was in 1980 and earlier.  Combined with the real unemployment rate, the real "misery index" would be a whopping 22-33.  Ouch!

So by just about any rational measure, we are still stuck in a pretty deep depression.   In fact, the progressive site Daily Kos coined a new term to describe it:  stagpression (a combination of stagnation and depression).  So why the huge disconnect between corporate profits and the stock market with the reality on the ground?  The answer is pretty simple.  Our government has been giving money, favors, and tax cuts to the rich and mega-corporations for years now, and what have the plutocrats done for us in return?  Sit on their massive cash, pay CEOs more, cannibalize their workforces, and buy back (i.e. manipulate) their own stock to paper over their declining sales.  And historically, what do they do if they get higher marginal tax rates?  Re-invest more in their own businesses and/or hire more workers.  Counterintuitive, yes, but it actually makes sense when you think about it.  As for "quantitative easing", the Feral Reserve has been printing trillions of dollars out of thin air, and nearly all of it goes to the big banks (i.e. the plutocrats) where it certainly does NOT trickle-down in any meaningful way.  To date, both fiscal and monetary policies have consisted of weak and inefficient half-measures, where the benefits accrue to the elites while the consequences (inflation, debt) accrue to the rest of us.  Thus, the rich get richer, the poor get poorer, and the middle class continues to shrink.  And the customers become too broke to buy anything, and the economy continues to stagnate or sink even further in a downward spiral.   No wonder our "recovery" has been so hollow!

So how can we break this vicious cycle for good, before the resulting bubble bursts leading to the next big crash?  The answer is really quite clear:  adopt the TSAP party platform ASAP.   But since it is unrealistic to expect either corporate party in the elephant/jackass duopoly to take up an entire platform that literally threatens their own interests, we have devised a list of the highest-priority measures to take before the inequality-fueled crash of 2016 happens:

1. Raise the top marginal tax rate to at least 50% (if not 70%) for incomes above $1 million, and simplify the tax code by removing loopholes geared towards the wealthy.
2. Reduce the corporate tax rate to 20-25%, remove all loopholes, and tax only retained earnings.
3. Reduce tax rates for the bottom 80% of Americans, and un-tax small businesses with earnings less than $100,000 per year.
4. Raise the minimum wage to at least $10/hour if not higher, and index it to inflation from now on.
5. Remove the "sequester" cuts ASAP, and sharply increase funding for infrastructure, education, green energy, and other crucial goals to put Americans back to work.

Of course, it would even better if the entire TSAP platform were adopted, but doing just these five things alone would probably be enough to, in the words of Paul Krugman, "end this depression now".  Because that's what this "recession" really is.  And ending it is long overdue--five years overdue to be precise.

But if we could do just one thing that could be done to end the stagpression quickly, it would be this:  replace "quantitative easing" (that really only benefits the rich) with direct payments of about $2000 per person or so to ALL Americans, yesterday.  It would take an Act of Congress to enable the Fed to do such a thing, but it would be well worth it.  Of course, followers of the TSAP know that we have long advocated a guaranteed basic income (citizen's dividend) for all Americans period with no strings attached, ideally funded via various kinds of tax revenue such as carbon taxes and financial transactions taxes.  But this alternative means to the same end would be the next best thing, at least temporarily until our other ideas get implemented.  And if it happens, the depression will be over and full employment restored within a year or two--provided it does not end abruptly without some of our other measures to replace it next year.  So what are we waiting for?

The Phony Recovery

A recent study, by the Wall Street Journal of all places, confirms what the bottom 99% of Americans have long suspected for years: the so-called economic "recovery" of the past five years was essentially a joke all along.  In a nutshell, corporate earnings are at a record high, while revenues have been flat for the past five years.  In other words, consumer demand is low because customers are broke, and companies have mainly been "growing" their earnings by cutting cannibalizing their workforce and buying back (i.e. manipulating) their own stock to paper over their flat or declining sales.  All while they sit on trillions of dollars.  It's a zero-sum game, and a vicious cycle.  Thank you, Captain Obvious! 

So how can we break this vicious cycle before the resulting bubble bursts leading to the next big crash?  The answer is really quite clear:  adopt the TSAP party platform ASAP.   But since it is unrealistic to expect either corporate party in Washington to take up an entire platform that threatens their own interests, we have devised a list of the highest-priority measures to take before the inequality-fueled crash of 2016 happens:

1. Raise the top marginal tax rate to at least 50% (if not 70%) for incomes above $1 million, and simplify the tax code by removing loopholes geared towards the wealthy.
2. Reduce the corporate tax rate to 20-25%, remove all loopholes, and tax only retained earnings.
3. Reduce tax rates for the bottom 80% of Americans, and un-tax small businesses with earnings less than $100,000 per year.
4. Raise the minimum wage to at least $10/hour if not higher, and index it to inflation from now on.
5. Remove the "sequester" cuts ASAP, and sharply increase funding for infrastructure, education, green energy, and other crucial goals to put Americans back to work.

Of course, it would even better if the entire TSAP platform were adopted, but doing just these five things alone would probably be enough to, in the words of Paul Krugman, "end this depression now".  Because that's what this "recession" really is.  And ending it is long overdue--five years overdue to be precise.

Deal or No Deal?

Looks like Congress finally passed a budget deal to get us through the next two years, just in time for the holidays.  The deal was made between Paul Ryan (R) and Patty Murray (D), and the compromise not only avoids another government shutdown in January, but it also alleviates some of the worst fears about austerity in the future.  Both sides grudgingly gave up a little bit of what they held dear in order to avoid larger sacrifices on their part, and even Bonehead himself went along with it.  As a result, the three most popular programs (Social Security, Medicare, and Medicaid) and Obamacare are no longer on the chopping block for now, and the most damaging sequester cuts are reversed (or at least made more flexible) for the 2014 fiscal year.  So, cue the music once again, Maestro:

HALLELUJAH!  HALLELUJAH!  HALLELUJAH, HALL.......err, wait a minute.  Seriously?  There is really nothing to be rejoicing about, since Congress merely did what they are normally supposed to do every year--pass a freaking budget on time to prevent a shutdown.  Furthermore, it's not like it's a particularly good deal either.  The budget includes cuts to military pensions, no extension of unemployment benefits, no reversal of November's food stamp cuts, and many remaining parts of the sequester--all to protect massive tax loopholes for the rich and mega-corporations, which remained untouched despite the need for new revenues.  And the looming debt ceiling showdown in February remains unaddressed, which the Repugnicans will most likely try to exploit once again when the time comes.  But all this is the logical consequence of negotiating a compromise between a right-wing extremist like Ryan and a moderate centrist Democrat like Murray--we end up splitting the difference and getting a deal that is, on balance, actually even further to the right of the status quo just to keep the ax away from our most crucial and popular social progams.  Long story short, Congress is still broken, and is clearly FAR from being fixed anytime soon.  So one more time, we will say it again to them:

"YOU'RE FIRED!!!"

Except for a very few of you (Elizabeth Warren, Bernie Sanders, Tammy Baldwin, and Alan Grayson), we will send ALL of you packing in 2014.  Goodbye, and good riddance!  Don't let the door hit you on the way out.

Simpson and Bowles Have Been Debunked

It's official.  The questionable study that was used to justify draconian austerity measures in several nations (including our own) and repeatedly cited as gospel by fiscal hawks like Simpson and Bowles has been debunked.   The shoddy Reinhart and Rogoff study was exposed by 28 year old grad student Thomas Herndon, who found that the authors had made a coding error in their Excel spreadsheet that they didn't bother to correct.  Correcting this error changed the results entirely, in a way that does NOT support the original specious claim that austerity is good for the economy.

But that did not stop Simpson and Bowles from continuing to promote ruthless austerity policies.  How ruthless you ask?  Well, there's a reason their commission was nicknamed the Catfood Commission, since that is what the most vulnerable Americans would end up having to eat if such policies come to fruition.   This time around, they are focusing even less on new revenues and more still on spending cuts, including raising the eligibility age for Medicare.  Note also how even in their first two plans they conspicuously took off the table the option of raising the top marginal tax rate even by a little.  Basically, everyone's ox gets gored except the ultra-rich of course.  Because apparently growth for the sake of growth is good no matter what the cost (not), and the Simpson-Bowles plan promotes growth (not).

The TSAP plan does indeed call for spending cuts along with new revenues, but we are careful to distinguish between wasteful and useful spending, and we are well aware that cutting too much too soon will seriously hurt the still-too-weak economy (as we have noted about the sequester).   We are also aware that raising taxes on the rich (even by a lot) will not significantly hurt the economy, while raising taxes on the bottom 90% (even by a little) can and will hurt the economy if it is done while the economy is still weak.  And we recognize that the jobs deficit is a much more urgent problem than the budget deficit, though both problems eventually need to be solved.

We must remember that the draconian, sequester-on-steroids cuts that Simpson and Bowles are calling for will inevitably lead to a massive number of workers losing their jobs, period.  So before we even think about going down that road, let's start by firing the now-discredited Simpson and Bowles before their policies send the rest of us packing.

UPDATE:  Looks like Europe is finally starting to abandon austerity, now that the damage it has done is crystal clear.   Also, in the USA the February jobs number was higher than originally thought, implying that it is actually the sequester, not the tax hikes that began in January, that is hurting us right now.  Congress really needs to answer the "clue phone," as it is ringing louder than ever.

The Sequester, Part Deux

The sequester has now been in place for over a month, and it is already beginning to do damage to our still fragile economy.  As we have noted in a previous post, the sequester is a bad idea overall and must be repealed or replaced ASAP.  Both its direct effects as well as the fear it has created is hampering what little recovery our economy has experienced, and the worst is yet to come.

President Obama has now unveiled his new budget for 2014, and there is good news and bad news.  The good news is that, if approved, the budget would stop the sequester, implement alternative spending cuts, raise taxes on the rich by closing loopholes, increase much-needed infrastructure spending, and still shrink the deficit.  The bad news is that, as a concession to Republicans, it would change the inflation indexing formula for Social Security and other programs in a way that would understate inflation, which would hurt the most vulnerable Americans unless other measures are taken specifically to protect them from such benefit cuts.  Although Obama says that he will find ways to protect the vulnerable, this change in indexing (the so-called "chained-CPI") would make him the first Democratic president to even consider making any significant cuts to Social Security in the entire program's 78-year history.  Unsurprisingly, the budget has angered many Democrats in Congress along with Republicans.

While it is good that Obama is serious about entitlement reform, there are far better ways to do it, which include raising or eliminating the wage cap on FICA taxes, indexing initial benefits to prices rather than wages, limiting benefits for the wealthiest retirees, and very gradually raising the full retirement age from 67 to 70 for future retirees born after 1960.  Even better still would be replacing FICA entirely with an alternative funding source, such as the Universal Exchange Tax, along with the other tweaks listed above.  As for Medicare and Medicaid, which are in far worse shape than Social Security, the best way (if not the only way) to effectively reform them would be to create a single-payer healthcare system similar to Canada and most of the rest of the civilized world.  But as long as we keep electing spineless Democrats and greedy Republicans, it is unlikely that any of these better alternatives will come to pass in the foreseeable future, and we will be left with a false choice between screwing "merely" one or two generations versus screwing several future generations.

Although Obama's budget clearly leaves much to be desired, it is still far better than the sequester, and it may be the only way for our incompetent Congress to be willing and able to stop it before it's too late.  The budget's flaws can be (hopefully) solved at some point in the not-too-distant future, while the sequester is already doing real damage right now and must be jettisoned at once. 

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.

Fiscal Cliff Averted--For Now

It's now official.  The so-called fiscal cliff that had nearly everyone (especially Republicans) nervous has been averted due to a bipartisan deal in Congress.  The deal contains the following provisions in a nutshell:  no income tax rate hikes for those making less than $400,000 per year (but the top marginal rate is hiked back to Clinton levels on those making above that threshold), various tax deductions are capped at $250,000, the so-called "Obamacare taxes" are left untouched (and thus go into effect), unemployment benefits are extended, spending cuts are postponed by two months, and the payroll tax (i.e. FICA) rates are raised back to pre-stimulus 2009 levels.  So although most Americans will see slightly smaller paychecks in 2013 (due to the 2% payroll tax hike), thanks to the deal there will not be a massive amount of aggregate demand sucked out of the economy, and there will most likely not be another recession as a result--at least for now.

However, the deal only addresses one side of the ledger--revenue and taxes.  The other, bigger side--government spending--will not even be touched until February at the earliest.  Just in time for when the debt ceiling needs to be raised again, most likely in March.  So we can expect another "cliffhanger" around that time, albeit a somewhat smaller one.  But I guess that's the price we pay for kicking the can even further down the road.

To the President and everyone in Congress:  Please listen to what the True Spirit of America Party has to say, at least about economic policy and the national debt.   Our nation's future depends on it.

Now, Back to that "Fiscal Cliff"

Deal or no deal?  That is the question that still hasn't been answered.

But remember, no deal is better than a bad deal.   Obama is still holding firm thus far in the face of the Repugnicans who want to slash our social safety net to give millionaires and billionaires more undeserved and unnecessary tax breaks.  And Boehner seems to be sweating bullets.  If no deal is reached, it will not lead to financial Armageddon like the right-wing plutocrats claim.  The so-called "fiscal cliff" is really not a cliff at all--it's more like a staircase.  The full effect of the tax hikes (which occur on next year's income) and automatic spending cuts (which are phased in over a period of a few months) will not be felt right away, which clearly gives Obama the upper hand especially after January 1, 2013.   No wonder Boehner and his ilk are so nervous.

Even more importantly, the budget deficit is actually NOT the biggest economic problem our nation is facing.  The more pressing issue, of course, is the jobs deficit--the whopping 9 million Americans that are still out of work at the end of 2012, five years after the recession officially began (December 2007) and over three years after the recession officially ended (June 2009).  We are clearly stuck in a vicious cycle of persistently high unemployment and inadequate consumer and aggregate demand (remember that one person's spending is another person's income and vice-versa).  Remember that 70% of our entire GDP is consumer spending, and 20% is government spending.  And cutting the budget deficit too much too soon (at least by traditional means) would only make the jobs deficit worse, and the relative lack of revenue from the still-struggling economy is one of the biggest drivers of the budget deficit.   Basically, any significant tax hikes on the bottom 90% of Americans and/or any significant cuts in non-defense spending would only hurt our economy and make our future deficits (and national debt) that much worse in the long run.  If it turns out that these hikes and cuts must be done, and that is a very big "if", then they must be postponed until our economy is back to normal (i.e. two consecutive quarters of 3% GDP growth or higher and less than 6% unemployment).  Congress, you have been warned, so don't drink the Repugnican Austerity Kool-Aid.

Now, About that "Fiscal Cliff".....

With President Obama's re-election already won, the next hurdle to face is the so-called "fiscal cliff", which is a set of tax hikes and spending cuts that will automatically occur on January 1, 2013 if no action is taken.  While such a thing would clearly reduce the deficit, the Congressional Budget Office predicts that it would also likely trigger another recession given the already weak economy.  Specifically, it would be the middle-class tax hikes and some of the spending cuts that would be the real problem, not the tax hikes on the rich.  However, if we don't address the deficit at all, then we're in financial trouble as well, at least in the long run.   And to top it off, the debt ceiling will have to be raised yet again in late January or early February.  Seems like we're stuck between the proverbial rock and a hard place, between the devil and the deep blue sea.

Not really, though.  As UC Berkeley professor Robert Reich so cleverly points out, the real problem is House Speaker John Boehner and the rest of the Repugnicans in Congress who are willing to play chicken with the economy.   They will apparently do anything to avoid even a modest tax hike on the top 1% of Americans, even if it means ruining our country's credit rating and/or crashing the economy.   Basically, everyone's ox would get gored except the ultra-rich if the Repugnicans had their way.

The best thing for Obama to do is to start out bold and aim high, rather than start out with a compromised position.  According to Robert Reich, this means the following:

1)  Raise taxes on the rich--by a LOT.  Enough so the average millionaire would pay an effective rate of about 55% after all deductions and credits, as it was 60 years ago.  (The top marginal rate would have to be at least 70%, and every dollar above the first million would have to be taxed at 50% or more)

2)  Create a 2% wealth tax on the net worth of the top 0.5% of Americans.

3)  Create a 0.5% financial transactions tax.

4)  Raise the capital gains tax to match the rate on ordinary income, and cap the mortgage interest deduction at $12,000 per year.

5)  Eliminate special tax preferences and subsidies for Big Oil, Big Pharma, Big Agro, Wall Street, and so-called "defense contractors."

6)  Last but not least, let the Bush tax cuts expire for incomes between $250,000 and $1 million.

Doing all of these things would reduce the deficit by $4 trillion over the next ten years (the same as what Simspon-Bowles proposed), but without cutting any vital programs or raising taxes on the middle class.  This is the crucial difference between what Professor Reich proposes and what the Repugnicans propose.  And it wouldn't crash the economy, as the best studies have shown.

While Professor Reich acknowledges that some sort of compromise is inevitable, he also notes that any such "grand bargain" to avoid the cliff must contain the following stipulation:  any sort of tax hike on the middle class and any sort of spending cut must only be permitted with a triggering mechanism of two consecutive quarters of 6% unemployment or lower and 3% GDP growth or higher.  This caveat would ensure that we really are out of the woods before sucking any significant amount of aggregate demand out of the economy, echoing Keynesian economic theory.  It is also very important to note that, unlike last time, progressives actually have the upper hand right now--so let's not squander it.  No deal is still better than a bad deal.

Of course, there are other ways of accomplishing a similar or even greater deficit reduction, as the TSAP has repeatedly proposed.   In fact our own proposals would eliminate not just the deficit, but the entire national debt as well.  But much of what we have proposed dovetails rather nicely with what Professor Reich suggests, and that is an excellent start.   What better time than now?

New Study: Taxing the Rich Won't Tank Economy

We've been saying this before, and we'll say it again.  Contrary to what the top 1% and their lackeys like to claim, tax cuts on the rich do NOT create jobs or boost economic growth, and tax hikes on the rich do NOT destroy the economy.  And now a new study proves it yet again.  

In a nutshell, a 1%-of-GDP (i.e. $150 billion) tax cut on the bottom 90% of Americans boosts GDP by 2.7 percentage points over a two-year period, while a tax cut of the same size on the wealthiest 10% of Americans gives a statistically and practically insignificant boost of merely 0.13 percentage points (while significantly increasing economic inequality). So, if we really want to boost economic growth, we would cut (or perhaps even eliminate) the income tax on the bottom 90%, while raising rates on the top 10% and especially the top 1%.  That makes sense since 70% of our GDP is consumer spending, and the middle class are the ones who drive such spending.  The less money they have, the less they will spend.  And businesses will avoid hiring and making new investments and instead choose to sit on their excess cash (like they are doing now) when the consumer demand is simply not there.  It's not "class warfare," it's simple mathematics. 

But plutocratic Republicans never let mere facts get in the way of their greedy goals.

The Only Way to Defeat the Debt

Our national debt is approaching $16 TRILLION dollars, and our deficit remains well over a trillion, meaning that the debt is still growing rapidly. It is now mathematically impossible to pay off the national debt by conventional (fiscal) means--even the Donald Trump Tax would raise "only" about a trillion or so based on our back-of-the-envelope calculations. So what should we do?

Obviously, if we find ourselves in a hole (especially one as deep as this), the first thing we should do is stop digging. That means no more deficit spending for the foreseeable future, period. But unfortunately, that's a lot easier said than done. Taxes will have to go up and spending will have to go down--dramatically. There is really no way around that.

However there is a relatively painless (albeit unconventional) method of paying off the debt. Not just this year's deficit, but all of the cumulative $16 trillion of the debt. It's called the Noble Solution (named after its creator, Richard E. Noble) and does not involve any significant tax hikes or spending cuts. So what is it? It's something we never would have advocated in the past: printing (electronically creating) money out of thin air to pay it off all at once.  Alas, the genie is out of the bottle now, as the Feral Reserve has been creating money out of thin air for decades (including a recent whopping $16 trillion secret bailout of the banks) so we might as well put this practice to productive use.  Call it QE4 if you'd like.  Money is really nothing more than an accounting entry nowadays, so let's make the entry and be done with it. 

But wouldn't that lead to hyperinflation? Not if it is properly done with due diligence.  Noble points out that while creating money is undoubtedly inflationary, using it to pay off the debt (which is in Treasury bonds and is thus already part of the money supply) would be deflationary in that it would shrink the money supply by an equal amount. Thus, the two effects would cancel each other out, as paper (electronic data) would be exchanged for paper (data). Of course, we would have to bypass the Feral Reserve to avoid creating more debt in the process. Or better yet, abolish the Feral Reserve entirely and return the power of money creation to its rightful owners, our elected representatives in Congress.  America would then be free and clear for the first time in history since Thomas Jefferson.

Of course, while doing it once may not be harmful, doing it regularly can be.  To make sure we never have to do this again, we must make sure the debt never, ever, reaches such stratospheric levels again, period.  In addition to abolishing the Fed, fiscal policy must be tightened after the Noble Solution is implemented and the debt is paid off.  We have already outlined in previous posts what must be done as far as taxes and spending are concerned.  We will need to have a Balanced Budget Amendment added to the Constitution as well, with deficit spending permitted only in severe fiscal emergencies.  Fortunately, the latest news suggests that the deficit may already be shrinking as we speak as the economy improves (albeit very slowly).  After all, a significant portion of the fiscal gap is due to reduced revenues resulting from the Second Great Depression (because that's what it really is) as well as the several fiscal stimulus measures made necessary by the crisis.  (Nearly all of the rest can be chalked up to the wars and the Bush-Obama tax cuts, as well as various loopholes and tax-shelters.)

But the bottom line is that the debt must be defeated, and soon.  We simply cannot afford to continue kicking this can further down the road.  Otherwise we may very well go the way of the Romans.

The Laffer Curve Revisited (Part Deux)

In our previous post, we essentially debunked the right-wing talking points about the Laffer Curve.  We showed that, generally speaking, the peak of the curve for the top marginal tax rate is most likely 70% or perhaps even a bit higher.  That is, tax cuts (particularly at the top) can nearly always reasonably be expected to decrease revenue rather than increase it, and vice-versa. We also showed that there is another curve called the Kimel Curve, which illustrates that a top marginal rate of 60-70% maximizes economic growth based on empirical data.

But what about Hauser's Law?  For those who don't know, Hauser's Law (a supposed corollary to the Laffer Curve) postulates that federal tax revenue cannot exceed 19.5% of GDP for long regardless of what the marginal tax rates are.  Indeed, at first glance the empirical data from 1945 to the present do appear to agree, but it really doesn't stand up to closer scrutiny.  Part of it comes from lying with statistics to obscure significant swings in revenues, and part of it comes from omitting key facts about less obvious changes in the tax code over the years that confound the apparent (non)correlation.  Thus anyone who cites Hauser's Law (which it turns out is not really a law at all) is either ignorant or disingenuous at best.  Consider it debunked.

Another important question is whether the Laffer Curve differs depending on the type of income being taxed.  Conservatives frequently argue that the tax rate on long-term capital gains should be significantly lower than the rate on ordinary income, as is currently the case.  For example, they claim that the Laffer Curve peaks at a much lower rate due to the so-called "lock-in" effect (when investors hold onto their underperforming assets longer to avoid taxation) induced by higher tax rates, an effect that allegedly hurts the economy.  However, this appears to be primarily a short-term phenomenon that occurs when investors either anticipate the change in tax rate in advance and/or believe that the rate hike or cut will only be temporary.  Effects on economic growth do not appear to be large in the short or long term, and may even be perverse in the short term.  In fact, rather than encourage investment, one experimental study finds that taxing capital gains at too low a rate may, at least in some circumstances, encourage too much divestment (consumption) of capital at the expense of further investment.  This might be one reason why overall private investment was actually lower on average in the lower-tax 1980s than it was in the higher-tax 1970s.  Also, a lower rate on capital gains is a key part of many tax shelters, and adds unnecessary complexity to the tax code. Thus, taxing long-term capital gains at a lower rate does not appear to be justified.  And to avoid taxing illusory gains due to inflation, it would make more sense to simply allow taxpayers to index the basis for inflation (which is not currently the case) while taxing all forms of income at the same rate. 

In addition, one should also observe how nearly every single time the capital gains tax was cut, an asset bubble of some sort eventually followed.  These include the notorious 1920s stock market bubble (tax cut was in 1922-1925), the late 1970s commodities bubble (cut in 1978), the late 1990s NASDAQ/tech bubble (cut in 1997), and the 2000s housing bubble (cuts in 1997 and 2003).  The one exception was the 1982 tax cut, which occurred during a deliberately-induced (i.e. by the Feral Reserve) recession and was followed by an equally large hike in the capital gains tax five years later that restored the rate back to its 1981 value before another bubble had a chance to form.  (The relatively small stock market correction in 1987 represented only a minor bubble in the market.)  While correlation does not necessarily equal causation, it is uncannily suggestive to say the least.  Though a low tax rate may appear be investor-friendly on the surface, one should keep in mind all of those hapless investors that lost their shirts when the bubbles inevitably burst, and all the damage the fallout did to the general economy.

How about corporations?  It appears that the Laffer Curve for the corporate income tax peaks somewhere between 20-30%, which is significantly lower than is the case for individuals.  However, the current corporate income tax rate of 35% in the USA (supposedly one of the highest in the world) is largely a fraud--due to loopholes, most companies pay nowhere close to that, and two-thirds of them effectively paid zero (or even negative) rates in 2008-2010.  And most estimates of the Laffer Curve simply don't take that into account.  While cutting the rate to 20-25% may very well make America more competitive in the global economy, the loopholes absolutely must be closed, period.

We recently came across a website called EquityScore, which claims that cutting the corporate income tax to zero would actually increase revenue to the point that all other income taxes could also be eliminated except for the capital gains tax.  That is, they claim that taxing corporate profits suppresses market values, and the massive gain in market values would yield enough capital gains tax revenue (when the stocks are sold) from individual shareholders to more than offset the foregone revenue from eliminating the corporate income tax.  While there may be some truth to that, their calculations ignore the fact that the majority of corporations already pay an effective rate of zero (or close to zero) due to loopholes, and that typical corporations used to pay much more in the not-too-distant past than they do now.  A better idea to maximize revenue (and growth) would be to cut the corporate tax rate to 20-25%, close all of the loopholes, tax only the amount of profit left after dividends are paid out, and tax dividends (and capital gains) as ordinary income for individuals.  Not only would that raise more revenue directly, it would also allow companies to pay bigger dividends and attract more investors, thus increasing market values and indirectly raise even more revenue.  It would also make the "double taxation" argument moot as well.

In summary, we have shown that the supply-siders' conception of the Laffer Curve is largely a canard.  And for those who continue to eschew the notion of shared prosperity and still insist on the richest Americans and mega-corporations paying historically low (if any) taxes, we shall leave the reader with the following inspirational quote from a very wealthy businessman of many decades past.  This was the man who founded the famous Filene's department store and also founded the U.S. Chamber of Commerce.

"Why shouldn't the American people take half my money from me? I took all of it from them."

---Edward Albert Filene (1869-1937)

The Laffer Curve Revisited

Most people (at least those who took Econ 101) have heard of the Laffer Curve.  This idea is often attributed to economist Arthur Laffer in 1974, but similar ideas were put forth much earlier by John Maynard Keynes and Ibn Khaldun.  In a nutshell, it states that both a 0% tax rate and a 100% tax rate would both yield zero revenue, for obvious reasons, and that the level that would produce the maximum amount of revenue thus lies somwhere in between.  To wit:

However, this is a rather crude representation and the curve need not be symmetric or even single-peaked.  So where exactly is the (highest) peak of this curve?  That is the million-dollar question that has been nagging numerous economists ever since Arthur Laffer himself initially proposed it.  Different sources have given very different answers, and the true answer may very well vary from year to year and country to country.  Probably one of the most reliable estimates of the peak is the midpoint of the results of various studies, which according to the New Palgrave Dictionary of Economics is about 70% as of 2008.  Thus, the real curve would probably look something like this:

Of course, one source of variation of estimates has to do with whether or not you are talking about average rates or top marginal rates (i.e. the rate on the last dollar earned by those in the highest tax bracket), as well as where the threshold of the top bracket lies.  Most studies (and politicians) are more concerned with the top marginal rate, and both those rates and the thresholds for the top bracket have varied a great deal throughout history and from place to place.  The most recent study on the matter puts the peak for the federal top marginal rate at a whopping 76%, assuming no loopholes and all else being equal.  Thus, with a top marginal rate of 35% as of 2012, we clearly have plenty of room to raise it (even double it), close the loopholes, and still significantly increase revenue.  Policymakers should take note next time the issue of budget deficits comes up.

Of course, this is downright heresy to wealthy Republicans and their Tea Party lackeys, so when they aren't trying to deny it directly (which they often do) they at least try to argue that a higher top marginal rate will hurt economic growth and thus hurt all of us in the long run, even if it does raise more revenue in the short run.  But history doesn't really bear this out.  Recall that the top marginal rate hovered around 90% in the 1950s and early 1960s, and hovered around 70% from 1964 to 1981.  Some of the greatest economic growth we have ever had occured during top marginal rates north of 70%.  Which leads us to another, less well-known curve--the Kimel Curve.  Discovered by economics blogger Mike Kimel, this curve plots historical real GDP growth versus the top marginal tax rate and controls for several potential confounders.  And the peak of that curve turns out to be somewhere between 60-70% depending on how the model is specified.  Thus, a top marginal rate of 60-70% actually appears to maximize economic growth rather than hurt it! 

While this may seem counterintuitive to those who took Econ 101, it is entirely plausible that hoarding of wealth by the ultra-rich as well as excessive executive compensation has an adverse effect on GDP growth.  Inequality beyond a certain point appears to harm the economy--just look at the levels of inequality (and tax rates) immediately before both the first Great Depression and the current one.  And a top marginal rate north of 50% most likely discourages such hoarding and excessive executive salaries and bonuses, and encourages businesses to reinvest their profits in more productive ways.  This is similar to the rationale nicely summarized by Kimel himself:

At 70% tax rates, there is more of an incentive to reinvest in the business, creating more growth in the business in subsequent years, and more economic growth thereafter. 70% tax rates are more likely to generate faster economic growth than 25% tax rates precisely because people are self-interested and the higher tax rates induce people to continue investing in things they do well.

Indeed, another study of the 1920s and 1930s found high top marginal rates (even pushing 80%) did not appear to hurt business investments one iota, but possibly even slightly increased the formation of new businesses.  This was a time period in which the income tax was levied pretty much only on the wealthy (with the top rate applying only to the top 0.1%), the top rate varied a lot from year to year, and the tax code was a lot simpler with fewer opportunities for cheating and tax-sheltering.

In addition, there is always the fact that, contrary to popular opinion, sometimes the government actually spends and invests money in better ways than the ultra-rich and mega-corporations would.  Just think of public infrastructure, which enables the private sector to generate most of its wealth in the first place.  And the money for that comes from--you guessed it--taxes.

Thus, advocates of a more progressive tax system (as well as the more intelligent deficit hawks) should feel vindicated and motivated by the results of these studies.  And we can just hear the greediest members of society whining right now.  But taxes are the price we pay for civilization, and the alternative to civilization is far worse.

230 Million Unnecessary Returns

This tax day, April 17, about 230 million American taxpayers will file a federal income tax return if last year's numbers are any indication.  The federal income tax has been with us for nearly a full century, having been started in 1913.  It started out simple enough.  In the first few years, it was fairly straightforward, and only the wealthy really had to pay a significant amount.  Since then, our nation's tax code has grown into a convoluted 60,000 page mess filled with numerous loopholes and deductions.  Up until 1980, Americans typically believed that the income tax was the fairest of all taxes, but since then, most people now rate it as the least fair tax of all.  Originally intended to be progressive, it remains as such up to a point, but then actually becomes regressive above that point especially when other taxes are taken into account.  Just ask Warren Buffett.  And for corporations, 2/3 of them get away with paying zero federal income taxes (and sometimes even negative rates!) because of all the ridiculous special-interest loopholes and subsidies in our tax code.

Several thinkers believe that our tax code is in need of a major overhaul and thus have tried to come up with alternatives.  Americans for Fair Taxation, for example, believes that all our federal taxes can be replaces with one national sales tax of 30%.  Michael Graetz, on the other hand, believes that we can and should replace all income taxes for households earning below $100,000 and single individuals earning below $50,000 (i.e. 90% of the population) with a 10-15% value-added tax (VAT) and a 25% flat income tax for those earning above $50,000 or $100,000 as well as all corporations.  Others believe in a purely flat tax, and still others (such as the TSAP) believe we can and should retain a steeply graduated income tax with a generous personal exemption and no loopholes.  For the record, the TSAP would also support a plan similar to Graetz's if an additional 50% bracket were added for incomes north of $1 million or so and the VAT did not exceeed 10%.

However, we have recently discovered an even better way forward for the 21st century.  Enter the Automated Payment Transaction (APT) Tax.  The APT is a novel idea proposed in 2005 by economist Dr. Edgar Feige.   Basically, it would replace all of our current federal and state taxes (and possibly even some local ones) with one tiny little tax (say, 0.3%) on all automated transactions. This would essentially be the lowest possible rate on the broadest possible base, with no loopholes or finagling. It would actually be quite progressive in practice since the rich make a disproportionally large volume of transactions, and it is literally impossible to evade it or game the system. It is based on simple math, not half-baked voodoo economic theories. And the benefits to replacing the current messy, 60,000 page tax code with something so simple and easy are painfully obvious.  Finally, something most liberals, conservatives, and libertarians can actually agree upon!

Unlike Dr. Feige, however, the TSAP supports retaining an income tax on all individual incomes in excess of $1 million. The first million would be tax-free, while the amount over $1 million would be taxed, preferably at a rate of 50% or higher. Thus, 99.9% of Americans would pay any income taxes at all.  The TSAP also supports various luxury and vice taxes as well.  And to pay down our ludicrously high national debt, we support what should be called the Donald Trump Tax--a one-time wealth tax of 15% on individuals and trusts with net worths above $10 million.

However, if the APT does not come to fruition, the TSAP still supports a graduated, progressive income tax with no loopholes.  The TSAP would consider the following graduated scheme of marginal tax rates (loosely adapted from Robert Reich) to be fair:

Under $20,000: no income tax
$20,000 to $50,000: 5%
$50,000 to $90,000: 10%
$90,000 to $150,000: 20%
$150,000 to $250,000, 30%
$250,000 to $1,000,000, 40%
$1,000,000 to $10 million, 50%
over $10 million, 70%

Unlike the current Byzantine tax code, there would be no loopholes or any deductions other than for state and/or local income taxes paid, and a limited amount (up to 10% of income) for charitable donations. Also, all forms of income (wages, interest, dividends, and capital gains) would be taxed equally, unlike the status quo.   And a top marginal rate of 50% or even 70% is actually pretty tame compared to what it was in the 1950s and early 1960s, which hovered around 90%.   For those worried about the Laffer Curve, rest assured that the most recent study on the matter found that revenue peaks at a top rate of about 76%. 

For corporations, a 20% income tax with no loopholes would be infinitely better than the one we have now, with 2/3 or large corporations (including ExxonMobil, GE, B of A, and BP) currently paying zero income taxes while numerous unfortunate small businesses get hit with up to a 35% tax. Even better would be if the first $1,000,000 per year was tax-free, and only the amount of profit left over after dividends are paid out would be taxable if the company is publicly traded.

And as long as we have a FICA tax for Social Security and Medicare, the wage cap needs to be eliminated completely or set at a very high level such as $10 million or so.

At the very least, though, we definitely need something like the Buffett Rule for as long as we retain our 60,000 page mess of a tax code.  Of course, that doesn't go far enough, but at least it makes the tax code non-regressive at the very top.  50% for every dollar above $1 million with no exceptions would clearly be better, but the proposed 30% is a step in the right direction.

Those who oppose this idea can call us pinkos all they want, but they might just want to listen to Adam Smith, the man who is often considered to be the father of capitalism:

The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.  (Emphasis added)

And there you have it.  Even the father of capitalism himself essentially agrees with us, which really says something.