Monday, May 24, 2004

 

America deserves better #6

Dear Friends, 3/16/04

I have told you what events impelled me to write these letters, but I have not tried to list all of the things I find wrong with this administration. You can infer from my prior letters that 2 of the major issues are the war in Iraq, and the pattern of misdirection and dishonesty. Probably the biggest issue is economic. You don't have to be an economist to know that the Bush tax-cuts are wrong-headed and will impose an unprecedented burden on our children and grandchildren, while benefiting only the richest members of our generation. However it doesn't hurt to have the view of one of the world's best economists. I agree with Akerlof that this is the worst administration that this country has ever seen.

On CNN (Lou Dobbs) last night they showed that the bottom 50% of income earners have experienced a slight tax increase over the last few years, while the top 1% have experienced a 40%+ drop. Also over the last 20 years the bottom 50% have experienced a gain in income of about 5% while the top 1% have gained 256 time as much percentage wise, ie over 1200%. Now we have Alan Greenspan telling us that the only way to reduce deficits is to cut SS benefits. Of course he meant, if we don't reimpose some of the tax cuts and don't reduce military spending, and Bush is pushing to lock in his tax cuts.

Read a top economist's view, and I think you will agree that "America deserves better". Best regards, Murray

PS: Also read the column at http://www.amconmag.com/2_16_04/feature.html. Note that this is from Pat Buchanan's magazine, so can't be ascribed to democratic propaganda. Murray

"A Form Of Looting"

"Der Spiegel", Interviews George A. Akerlof, co-winner of the Nobel Prize in
economic sciences.

SPIEGEL ONLINE: Professor Akerlof, according to recent official projections, the
US federal deficit will reach $455 billion this fiscal year. That's the largest
ever in dollar terms, but according to the President's budget director, it's
still manageable. Do you agree?

George A. Akerlof: In the long term, a deficit of this magnitude is not
manageable. We are moving into the period when, beginning around 2010, baby
boomers are going to be retiring. That is going to put a severe strain on
services like Medicare, Medicaid and Social Security. This is the time when we
should be saving.

SPIEGEL ONLINE: So it would be necessary to run a budget surplus instead?

Akerlof: That would probably be impossible in the current situation. There's the
expenditure for the war in Iraq, which I consider irresponsible. But there's
also a recession and a desire to invigorate the economy through fiscal stimulus,
which is quite legitimate. That's why we actually do need a deficit in the short
term - but certainly not the type of deficit we have now.

SPIEGEL ONLINE: Because it's not created by investment, but to a large extent by
cutting taxes?

Akerlof: A short-term tax benefit for the poor would actually be a reasonable
stimulus. Then, the money would almost certainly be spent. But the current and
future deficit is a lot less stimulatory than it could be. Our administration is
just throwing the money away. First, we should have fiscal stimulus that is
sharply aimed at the current downturn. But this deficit continues far into the
future, as the bulk of the tax cuts can be expected to continue indefinitely.
The Administration is giving us red ink as far as the eye can see, and these
permanent aspects outweigh the short-term stimulatory effects.

SPIEGEL ONLINE: And secondly, you disagree with giving tax relief primarily to
wealthier Americans. The GOP argues that those people deserve it for working
hard.

Akerlof: The rich don't need the money and are a lot less likely to spend it -
they will primarily increase their savings. Remember that wealthier families
have done extremely well in the US in the past twenty years, whereas poorer ones
have done quite badly. So the redistributive effects of this administration's
tax policy are going in the exactly wrong direction. The worst and most
indefensible of those cuts are those in dividend taxation - this overwhelmingly
helps very wealthy people.

SPIEGEL ONLINE: The President claims that dividend tax reform supports the stock
market - and helps the economy as a whole to grow.

Akerlof: That's totally unrealistic. Standard formulas from growth models
suggest that that effect will be extremely small. In fact, the Congressional
Budget Office (CBO) has come to a similar conclusion. So, even a sympathetic
treatment finds that this argument is simply not correct.

SPIEGEL ONLINE: When campaigning for an even-larger tax cut earlier this year,
Mr. Bush promised that it would create 1.4 million jobs. Was that reasonable?

Akerlof: The tax cut will have some positive impact on job creation, although,
as I mentioned, there is very little bang for the buck. There are very negative
long-term consequences. The administration, when speaking about the budget, has
unrealistically failed to take into account a very large number of important
items. As of March 2003, the CBO estimated that the surplus for the next decade
would approximately reach one trillion dollars. But this projection assumes,
among other questionable things, that spending until 2013 is going to be
constant in real dollar terms. That has never been the case. And with the
current tax cuts, a realistic estimate would be a deficit in excess of six
trillion.

SPIEGEL ONLINE: So the government's just bad at doing the correct math?

Akerlof: There is a systematic reason. The government is not really telling the
truth to the American people. Past administrations from the time of Alexander
Hamilton have on the average run responsible budgetary policies. What we have
here is a form of looting.

SPIEGEL ONLINE: If so, why's the President still popular?

Akerlof: For some reason the American people does not yet recognize the dire
consequences of our government budgets. It's my hope that voters are going to
see how irresponsible this policy is and are going to respond in 2004 and we're
going to see a reversal.

SPIEGEL ONLINE: What if that doesn't happen?

Akerlof: Future generations and even people in ten years are going to face
massive public deficits and huge government debt. Then we have a choice. We can
be like a very poor country with problems of threatening bankruptcy. Or we're
going to have to cut back seriously on Medicare and Social Security. So the
money that is going overwhelmingly to the wealthy is going to be paid by cutting
services for the elderly. And people depend on those. It's only among the
richest 40 percent that you begin to get households who have sizeable fractions
of their own retirement income.

A likely effect of the deficits is this: If there's another recession, we won't be
able to engage in stimulatory fiscal spending to maintain full employment. Until
now, there's been a great deal of trust in the American government. Markets knew
that, if there is a current deficit, it will be repaid. The government has
wasted that resource.

SPIEGEL ONLINE: Which, in addition, might drive up interest rates quite
significantly?

Akerlof: The deficit is not going to have significant effects on short-term
interest rates. Rates are pretty low, and the Fed will manage to keep them that
way. In the mid term it could be a serious problem. When rates rise, the massive
debt is going to bite much more.


SPIEGEL ONLINE: It seems that the current administration has politicised you in
an unprecedented way. During the course of this year, you have, with other
academics, signed two public declarations of protest. One against the tax cuts,
the other against waging unilateral preventive war on Iraq.

Akerlof: I think this is the worst government the US has ever had in its more
than 200 years of history. It has engaged in extraordinarily irresponsible
policies not only in foreign and economic but also in social and environmental
policy. This is not normal government policy. Now is the time for people to
engage in civil disobedience.

SPIEGEL ONLINE: Of what kind?

Akerlof: I don't know yet. But I think it's time to protest - as much as
possible.


Der Spiegel, Interviews George A. Akerlof, an economics professor at the
University of California, Berkeley, who was named the 2001 co-winner of the

Comments:
I am curious as to how Lou Dobbs came up with those figures. According to the CBO, the top 1% (and top 5%) of income earners have had a steady increase in the percentage of taxes paid. Unless my figures are wrong, the overall tax revenue has been increasing. Thus, it would be hard for me to mathematically justify a 40% decrease. Either way, I feel the current income tax is a horrible way to collect taxes fairly.

A much better solution, IMHO, is a National Sales Tax or a variation of the VAT. A tax structure similar to the one in Texas. Texas has no income tax. They do have have a fairly steep property tax, but this could be resolved by a larger percentage sales tax. There are certain items that are not taxed. Such as esential food items that make up a larger portion of the disposable income of lower income individuals. A National Sales tax would bring a lot of the underground economy into our tax system. Our tax collectors would be our local check-out girl. Nefarious types such as the drug dealers would now be brought into the system willingly or not.

I am not a fan of the Flat Tax. It is just a variation of our current system. Too much opportunity for abuse at a later date. The NST or VAT is much more difficult to manipulate.

What are your thoughts?

Signed,

NeoConstrictor (Let's squeeze the life out of the NeoCons!)
 
I have to confess I do not know if Lou Dobbs was right or not. I think he is careful in his reporting, and took him at his word. That said, I think the existing tax system is a total travesty. Taxing income is wrong to start with, and using taxes to try to influence individual behavior is beyond ridiculous. VAT seems to work well in Europe, but they kept an income tax also, which just makes things worse. A sales tax seems like a form of VAT to me. I am in favor of a variable VAT with luxuries taxed at a higher rate than necessities, accompanied by some way to "tax the bads", with the bads being mainly energy inefficiency. Murray
 
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