Krugman is more Keynsian than the man himself. He is a liberal of the first degree. What is needed are tax cuts to get business spending and consumers buying. We are about to cripple this country with the tax increases that are coming against the backdrop of high unemployment that has no end in sight. This economic situation is unlike any I know about in history, particularly given the buffoon in the White House with no knowledge or experience in how business really works or what made this country a great economic powerhouse. More government spending of the type we have seen in the last two years is the last thing that we need.
I am in agreement with you on all points.
Unfortunately, the tax bill passed in 2000 and signed by President Bush contained a return to the tax rates of 1999 as a basic provision. That bill had that part in it as part of the “Pay-Go” law that demanded a neutral budget, i.e. one that did not increase the deficits. I do find it a bit interesting that most of the people who so strongly object to the sunset provision in the Bush Tax-Cut bill are also incensed by the level of deficit the U.S. is running.
There was an attempt earlier this year to pass a compromise which would have limited the tax increase on estates, but it was thoroughly defeated.
Frankly, I am not sure that the revision to the 1999 tax rates will have a profound effect on the economy. The increases are going to be in effect at the top brackets primarily on the earned income side. The capital gains and dividend increases will be more significant, but again that will be at the upper end of the income scale. At the moment, nationally, upper income people are in “saving” mode and are not spending anywhere near as much of their income as they commonly do. In order to have a negative effect on the economy the increased taxation will need to reduce spending. Since those who are going to have the lion’s share of the effect are currently not at all in a spending mood, the net effect will probably be quite low. The consumer spending in the economy is currently coming from the bottom of the economic scale and the problem is that with unemployment this high that is limited.
When the 2011 tax rates hit, the average family in the United States will be paying almost exactly the same percentage of income to the federal government as they were after the 1982 Reagan tax cuts (21 cents per dollar). The top 20% of earners will be paying 26 cents compared with 24 cents in 1982, but the lowest 20% will be paying a lot less in taxes. Given that the amount of total income spent rather than saved grows as one goes down the economic ladder, based on pure tax rates, that should produce a net increase in spending.
In 2011 that may not be as true as the debt overhang and unemployment and underemployment issues are most severe at the lower end of the income scale as well.
I, by the way, am in that 20% at the top of the income scale, so I fully well understand that my taxes will be higher next year. We have a potentially serious problem that must be addressed though. In 2011 there are no stimulus bills or other domestic spending issue on the table. What we will be facing is a truly huge military expenditure that is growing each year, a Medicare cost structure that is expanding at an astonishing rate, and the ever-present Social Security obligation.
A 50% cut in defense spending has got to happen, and if we don’t get that quickly then it will have to be more. The Medicare tax on investment income scheduled to hit in 2014 has at least the potential to move us closer to being able to pay for that, presuming at least some of the medical cost reductions work. Social Security will need to be a means tested benefit or it will become unsupportable.
While I am no fan of tax increases, there is a reality here that is very counter-intuitive. When President Reagan’s administration created an overall tax rate in 1982 that equated to 21 cents on the dollar, the economy boomed. Under President Clinton in 1993 the rates were increased and the economy sagged. The tax reductions that followed the take-over of Congress by the Republicans decreased the federal income tax back to an effective rate of 21 cents and the economy once again boomed. Effective in 2001, under President Bush, tax rates were lowered to about 19 cents and the economy sagged.
That pattern actually goes back a long, long way. Arthur Laffer was one of the principal architects of the Reagan tax cuts and noted that 21 cents was the “sweet spot” or “Laffer Point” where taxes produced the maximum revenue to the government. If taxes were higher, then revenues would lag and if taxes were lower then government services would suffer or we would accumulate structural deficits. It appears he was right.
I really do not think it is politically feasible to reduce Medicare, Social Security, military retirement pay, or civil service retirement pay by any significant amount. We have a minimum we need to spend on defense, including certain Homeland Security functions (Coast Guard, Border Patrol, etc.). By the time we add up all those expenses and add 10% for debt service, we are not currently paying enough taxes to balance the budget, even with a defense reduction of 50%. At 21 cents on the dollar, IF we can get the economy to grow (and I believe it already is), and we can means test Social Security in the relatively distant future, we can bring the budget back into balance and over the next two or three decades, pay down the debt levels we have accumulated.
Believe it or not, what I have outlined above is a conservative view. It includes a return to the 1999-2000 tax brackets (adjusted for the inflation we have incurred along the way), a 50% defense cut, and a means test for Social Security. It also notably includes an end to stimulus spending beginning next year. There are a lot of “ifs” in all of that and an assumption of economic growth as well.
By the way, the Obama administration has proposed cutting corporate domestic income tax rates and if that proposal becomes law it has the potential to more than offset the tax increases on capital gains and dividends.