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    Wednesday, December 8, 2010

    The Tax Deal: What's a Tea Partier to do?

    This week, President Obama and those dastardly Republicans reached a deal in principle, at least, on tax policy.

    At its core, the deal extends the Bush Tax Cuts 2 years for all Americans, keeping income tax policy where it is. If passed, it will result in no income tax increases for everyone, while the economy continues to struggle in a very weak recovery, which has been completely jobless so far.  Many conservatives and economists have been arguing that the uncertainty around this policy has held back investment.  I agree with that assessment, but, is two years really enough certainty to cause the investor class (that would be "the rich" to you Libs out there) to change their current behavior?  I don't know, but I know that a longer extension would go a lot further to spurring investment.

    Just discussing this policy, let's all stipulate that these taxes add nothing to the budget deficit.  The meme of the Left that these cost us $70B/year for the highest rates (and $300B/year for the rest) is wrong and disingenuous.  The truth is that the Left can't wait to get their hands on the money that increasing taxes would bring them.  I suppose if there were some kind of promise that any increase in tax revenue from raising taxes would go towards deficit reduction, it would be an easier sell.  But that is not what is happening, nor is it what would happen in reality.

    This cycle, the American people voted, and they were serious that we need to see some serious efforts at cutting spending before we start making attempts to increase revenues.  History tells us that increased revenues will only result in more government spending.  The bottom line is - want less government - you have to starve the beast.  Paradoxically, if we actually lowered rates, we might see more economic activity, more GDP growth, and ultimately, higher tax revenues.  That's been the case historically.  We've only run up big deficits where we have overspent.

    Had this exercise only been limited to an extension of these tax cuts, I, and I believe most Tea Partiers, would have been happy.

    However, the President couldn't control himself.

    He decided that as part of this deal, he needed to add in yet another extension of unemployment benefits, adding another 52 weeks to the already long time that they have been available.  And, he sees fit to do this without any spending offsets.

    The deal also includes an INCREASE in the Estate Tax, from it's current rate of 0% to 35% on estates over a certain value.  While this should be considered in the same vein as the Bush cuts (i.e. not as a tax cut), Dems treat this as a deficit increasing event.  In reality, it will decrease the deficit, since it will raise revenue not being collected today.  Washington, however, is a mixed-up, crazy world.

    Amazingly, he also brought out a 2% reduction for 2011 in the social security tax on the employed.  Politically, this is to offset the loss of the "making work pay" tax credit that was applied as part of Stimulus.  That tax credit was worth $800 to married couples and if it was left out of this, it would result in a tax increase on working families.  If that happened, Obama loses his campaign talking point that he hasn't raised taxes "one dime" on those making less than $250k.  Faced with a failed Stimulus, he turns to tax policy to put another stimulus into the economy (and allow him to keep at least one campaign promise).  Hey,. personally, I am all for this.  It's worth a lot more than $800 to my family, and with us losing half the child tax credit (it's only for kids under 18), and that making work pay credit, it makes up for it.

    Obama has included in this an extension of the various tax credits that were part of Stimulus.  I haven't seen the details on those, but I assume we're talking the energy tax credits and the credits for purchases of hybrid/electric and high-mileage diesel vehicles.  There are probably others that are being extended, too.

    The net is all those, plus the 2% social security payroll tax reduction, plus the unemployment benefits extension will add to the deficit.

    These things we should all worry about, as I believe the total cost to the treasury will be about $500B.

    Were I in Congress, while I would have endorsed the S/S reduction 2 years ago (and would probably have argued for a greater reduction, perhaps of the entire employee portion), today, I think it may be too little, too late to save the Obama presidency, and I would probably vote against this package.  I would support, right now, an extension of the tax cuts, and that's all.

    If forced, here's what I'd like to do now:
    1. Extend the income tax rates permanently.  No deficit implications.  Government gets the same revenues.
    2. Reduce the SS tax rates by 6.2% (equally split between employer and employee contributions) for 2 years - this would be my sop to stimulative effects.
    3. Reduce cap gains tax to 0% for 1 year - get businesses to invest, and now!
    4. Reduce all non-defense, non-entitlement spending to 2006 levels (not 2008, as the GOP pledged)
    5. To facilitate 4, begin the elimination of the Department of Energy, the Department of Education, and defund various non-essential discretionary items - Public TV, NEA contributions, cut foreign aid (like to the UN) and other wasteful and stupid spending.
    6. Bring back all unspent Stimulus funds - apply back to the Treasury.
    7. Get rid of all the various tax breaks in the Stimulus
    8. No extension of unemployment benefits, unless done under Pay-go rules (meaning you cut somewhere to pay for it).

    Some number crunching:

    • If we can reduce spending to 2006 levels, we could probably balance the budget given revenues return to their pre-recession levels.
    • Discretionary spending is slightly more than 1/3 of the total budget.  Since 2006, however, it has increased twice as fast as non-discretionary spending (Social security, medicare, medicaid).  Non-discretionary spending increases about 10% every two years, but discretionary spending is outpacing it.
    • Defense spending is about half of that discretionary spending.  From 2006 to 2008, it accounted for nearly all the increase in discretionary spending.   From 2008 to 2010, however, it only accounted for one quarter of the increase.The big increase in that time frame was in a category labeled other (was this elements of Stimulus?).
    Anyway, take it for what it's worth.  Not much.

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