Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Thursday, December 06, 2012

A Worthwhile Tax and Spending Proposal

With the fiscal-cliff standoff between President Obama and Speaker Boehner continuing—the pair haven’t spoken in a week—two questions arise: How will the stalemate be broken? And what should an agreement look like?

The most likely answer to the first question is still some sort of last-minute deal that raises tax rates, but not all the way back to the levels of the Clinton era, cuts spending a bit, and defers the really tough issue of how to prevent Medicare from swallowing the federal budget over the next thirty years. As I pointed out a few days ago, before the latest round of mutual recriminations, the Republicans have hardly any leverage: eventually, they will have to cave. With the White House also keen to avoid going into the New Year without an agreement, at which point the Bush tax cuts would expire and the automatic spending cuts would kick in, a compromise is the logical outcome.

About the only alternative—one floated on the front page of Wednesday’s Times—is for the Republicans to capitulate early, agreeing to Obama’s call for a bill extending the Bush tax cuts for all rates up to the one that affects only the richest two per cent of households. The G.O.P.’s thinking there would be that, with the prospect of a tax increase for middle-class Americans removed, it could take its stand on raising the debt-ceiling limit, which will need to be done sometime in January or February. Such a strategy might well make political sense to Boehner and other Republican leaders in Congress. However, it would also involve the G.O.P. accepting that many taxes of concern to upper-income households, including the levies on dividends, capital gains, and inheritances, would revert to Clinton-era levels, something many House conservatives may be unwilling to stomach.

To me, the second question, about what a deal should look like, is the more interesting one, because it raises the larger issue of what we want the tax and spending system to look like over the coming decades. The conventional wisdom, expostulated by the Bowles-Simpson commission and supported by most neoclassical economists, is that we should opt for a simpler, flatter income-tax system, with lower rates and fewer deductions. The model here is Ronald Reagan’s 1986 tax reform, which consolidated the bands that had been in place into just two rates: a top rate of twenty-eight per cent, and a lower rate of fifteen per cent. On the spending side, the common admonition is “cut, cut, cut,” with little regard to the short-term impact on demand or the long-term impact on innovation and productivity growth. But there is also another option, which gets less support from the economics profession and the pundits. It involves making expenditures in areas key to economic growth, and sticking with the progressive tax system, which has served this country—and many others—well for more than half a century, while at the same time making it work more effectively.

On Tuesday, a number of luminaries who served in the Clinton Administration, including Robert Rubin and Larry Summers, put forward such a plan to resolve the fiscal-cliff crisis. Under the auspices of the Center for American Progress, a center-left think tank that was set up by John Podesta, who served as President Clinton’s chief of staff, they outlined a series of proposals to raise $1.8 trillion in new revenues over ten years, which is $600 billion more than Obama has proposed and $1 trillion more than Boehner has proposed. At the same time, the Clintonians endorsed $1.8 trillion in spending cuts—most of which Congress has already agreed to as part of the 2011 agreement to raise the debt ceiling. Add in a further $500 billion in savings from lower interest payments on the national debt, and the entire package would reduce the deficit by $4.1 trillion over ten years.

On the tax side, where it is most detailed and consequential, the plan would involve returning to the top rate on income and dividends that Clinton introduced in 1993: 39.6 per cent. On this, the Obama Administration and the authors of the plan are of one mind. But the new revenue-raising suggestions also go beyond the White House’s proposals. Indeed, in several ways, they go well beyond the policies of the Clinton Administration—as formulated, to a large extent, by Rubin, Summers, and Podesta. For example, the new plan would raise the top rate on capital gains from fifteen per cent to twenty-eight per cent, which is where Reagan left it in 1986. (In 1997, Clinton signed a Republican bill that reduced the rate to twenty per cent.) By reforming the current system of practically unlimited exemptions and deductions—most them would be converted into uniform credits that would be equally valuable to all taxpayers—it would also greatly constrain the ability of upper-income taxpayers to limit their tax bills.

For those who are interested, the full report has a lot more details about how the plan would work. The reason I like it is that it addresses all three of the major issues facing the U.S. economy—fiscal discipline, economic growth, and rising inequality—without sacrificing any of them.

The $4.1 trillion of deficit reduction over ten years isn’t an arbitrary figure. According to the Congressional Budget Office, the established arbiter in these matters, it’s about the minimum needed to stabilize the country’s debt-to-G.D.P. ratio, which has risen sharply in the past few years and is now about seventy per cent. Countries such as Japan have supported much higher debt levels than this. But for the United States, which relies on foreigners to finance its deficit by purchasing Treasury bonds, the prospect of allowing the debt-to-G.D.P. ratio to rise indefinitely is an ominous one. The Clintonites’ plan wouldn’t solve the long-term debt problem. However, it would stabilize things for a decade or so, giving policymakers more time to tackle the big drivers of the deficit—Medicare and Medicaid—down the line.

Meanwhile, it would provide some much-needed support for the economy, in the form of $400 billion in stimulus spending: things like infrastructure projects, hiring more teachers, and extending the payroll tax holiday. With taxes rising and earlier stimulus programs expiring, there is a danger that a program of fiscal consolidation could tip the economy back into a recession, or near one. The plan would reduce the risk of such an outcome, while still keeping overall federal spending under control. (The $1.8 trillion in cuts over ten years are net of the $400 billion in stimulus spending.)

Finally, the plan is a model of progressivity. There would be five income tax rates: fifteen per cent on income up to $100,000; twenty-one per cent between $100,000 and $150,000; twenty-five per cent from $150,000-$200,000; thirty-five per cent from $200,000 to $422,000; and 39.6 per cent for all income above $422,000. The bottom rates would be higher than the current levels, but so would the income thresholds. Most people earning less than $100,000 a year would end up gaining slightly relative to current policy, especially if they were eligible for the expanded earned-income tax credit. People earning between $100,000 and $250,000 a year would face a very small tax increase—on the order of 0.3 per cent. The biggest losers would be those earning more than $500,000 a year, who would have to pay about three per cent more in taxes, on average, and those earning more than a million dollars a year, who would pay about five per cent more.

Given the enormous income gains that the wealthy have made over the past couple of decades, that doesn’t seem like an unreasonable price to pay for resolving the current crisis and setting Washington’s finances on a more sustainable course. The plan clearly demonstrates that in order to do something sensible about the challenges facing the country you don’t have to rip up the tax laws and start again, or crusade for a balanced-budget amendment. But that, of course, is a message many Republicans don’t want to hear.

Original Article
Source: new yorker
Author: John Cassidy

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