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Damned Either Way
It’s a pretty good bet that Congress and the Administration are going to
try to come up with a solution on what to do with the expiring Bush tax
cuts and the AMT (Alternative Minimum Tax) before the Thanksgiving
holiday. Time is running out and hard choices have to be made.
If we “do nothing” and let the taxes sunset our budget deficit profile
will improve significantly. On the flip side, if we raise taxes across
the board on Jan 1 the economy will hit a wall. We are damned if we do and we are damned if we don’t.
The Administration has said it wants all tax increases to be pushed into
the future for at least two years. Congress (I thought) was of a
similar mind. There is now some doubt as to what they are collectively
thinking. I believe that in the end, our legislators will roll over and
give Obama what he wants; two more years to kick the can down the road.
The Congressional Budget Office looks at the impact of any legislation.
Doug Elmendorf, the boss at the “non-partisan” CBO gave a speech on
Friday on the topic of what to do with taxes. It’s not a pretty picture.
Consider this slide that attempts to define the consequences on
employment of a variety of actions the government could take.
Two observations:
A) Reducing taxes in 2011 has the least ‘bang for the buck’ in
terms of creating long-term full employment. Given that this is the
least effective alternative you have to wonder why it is being
considered.
B) Except for reducing taxes none of the other options are
politically feasible for the foreseeable future. We have congressional
gridlock. There will no stimulus package in 2011 from our new
legislators. So extending the Bush tax cuts is the only option. And that
is why it will become law.
Of course nothing is free. If we don’t get our house in order and
eliminate what was promised to be temporary cuts by Bush, the deficit
will go up. By how much? According to the CBO it will double:
In summary, look forward to a patch on taxes that accomplishes very
little in terms of future growth, one that has the least efficacy in
addressing the underlying unemployment problem and the one that will
insure that a fiscal explosion is not so far off in our future. I think
Elmendorf sums it up pretty well:
Just a question: When do we address the question of the “Fundamental disconnect”?
We haven't done that at anytime in the past. We aren't going to do it
in the present. We will only do it in the future if there is a crisis
that forces us. The conclusion is that another crisis is inevitable
because what we are doing is unsustainable. I wonder if our
congressional leaders read the stuff from the CBO. If they are, they are
ignoring it.
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Maybe if your senior citizens include (Hank Paulsen, Lloyd Blankfein,et al) ...
Wow, steady on there Bruce, you are posting some serious strategic data there in an informed and contextual manner! I expect you to get a job offer from the Fed, the Treasury and/or the Tea Party as a strategu consultant!
Seriously though, good article; insightful, to the point and thought provoking.
My fix (strategically) is, in military term, to retreat to a position of strength, rehabilitate the wounded, repair the damaged equipment and only then co-ordinate a revised battle plan.
I am still at a loss as to why deflation is bad, when prices (for houses, cars, kitchens, paper clips) have been so clearly inflated over two decades. What is the point in waiting til a nice spreadsheet line of no inflation over ten years allows a final 2% per annum for a forty year period ending in 2030? I am not even going to begin to postulate that Chinese holdings of Treasuries are simply the transfer pricing effect of selling Chinese labour rates to produce goods valued in US consumer terms, aided and abetted by the resiting of an entire swathe of americans to the food stamp queues and chinese farmers into cities. (Thanks to that drunken lecher Clinton).
I am also at a loss why economic contraction is bad, when economic growth was based on an over leveraged asset base and we have too much of everything (houses, cars, etc etc).
I tear my hair out as to why the Pentagon shouldn't be cut to pre-Bush levels, when the only conflict to fight is the one where the US is the aggressor (in Iraq and Afghanistan) and we can't afford the metal casings or fuselages or the hulls or the pay rates or the veterans benefits. I mean, what is right about creating veterans and invalids for a lost cause when we don't have the money to pay for enough food stamps? Thanks to that God cursed moron Bush!
The health reforms are about as popular, understandable and affordable as 365 consecutive nights at a chicken ranch with doctors ready to inject vitamins.
Anyway, thanks again Bruce. I say the solution does not lie in incremental adjustments to a broken system based on corrpution of the worst kind. I say it is based on measurement and employment of reliable resources using logistics and transparent alternatives (that can be voted on).
Keep up the good work.
A. Guns
B. Butter
C. A promising future
Pick only two of three, because that's ALL you're gonna get!
Isn't the problem in Europe showing us that we can only pick 1?
Greece may have overspent, or in reality undertaxed as the upper class and rich there pay no freaking taxes due to no enforcement....but what of Ireland...they did not overspend, when their economy tanked, they went toe austerity fast, and it just contracted their economy more, so deficits did not go lower...Ireland needed a bailout to bailout our their banks, not their unions, not their social safety net spending. Banks will be made whole, while govt spending for people will be haircut to the point of baldness.
And what of France and Germany, their banks have problems, but those coutnries are way more solvent than US...their businesses are quite competitive globally even while they pay relatively high taxes and wages...how is it Germany beats us as an exporter while still have strong regulations, environmental laws, taxes/social safety net spending?
good points
i very strongly disagree that our economy "will hit a wall" [it already has] if we let the tax cuts expire. as a matter of fact, i think it would usher in great relief for the economy and markets if/when we do let them expire. i am a republican. the knee jerk 'tax cut' mantra from so-called republicans is because most of them are too stupid to do anything other than regurgitate political dogma. big big spending cuts would be nice too, beginning with military - why shoudl we pay for global security for everyone else? -- we can't.
WTF, over?
The "Bush tax cuts" are a whopping $70B in a $1.6T deficit.
$1.35T / 10 == $70B?! (you're only off by 96%)
And then, why are people like Palin claiming the sunset of this lunacy would be a "$3.8T tax increase" over 10 years?
Somebody needs some remedial math courses, methinks.
Well, using your number, $1.35T/10 = 135B, so no I'm not "off by 96%" dumb ass. The $70B is the annual amount of the tax cuts, not some bullshit projection from kos.
But hey, I'll be generous and give you the whole $135B. Tell us how that means diddly squat when the annual federal deficit is $1.6T.
Is this a trick quesion? If not the answer is: Political corruption. Same reason the system is going to fail because the politicians are so corrupted that they can neither raise taxes or cut spending to any material degree while they run huge deficits and the Fed prints the money.
Hard to decipher the CBO's Double the Deficit chart by 2020. But it looks like SS stays proportionately even with the baseline, despite boomers by the millions entering the SS payoff pool. I guess CBO believes all runaway spending will be harnessed....yuk yuk.
Anyway, all 10 year projections are completely useless, but especially the ones coming out of .gov.
Congrats on being sure to refer to CBO as " non-partisan ".
"letting tax cuts expire" is not a "solution." a massive Federal sales tax potentially is...a START at least...so is "a default on every Federal obligation save Social Security and the war in Afghanistan with massive bailouts to the States to protect bondholders." To be honest I don't see how the latter can be avoided "with the trillion dollar jam down" coming from the "expiring Congressional Terminators." I imagine "the actual representational form of government will still exist along with the Court system and the Pentagon" should there be a determination that "crimes were committed" and "we should do something about that." Go long General Motors and the Humvee. They could be "coming to a street near you in short order."
Providing aid to states is also just throwing money down a hole in bankrupt states like here in Cali. Our state and local politicians for the most part are completely insane and in deep capture to the public employee unions, the money gets spent in the worst possible ways like on buff pensions.
And the 2020 projection seems rather optimistic the SHTF well before that.
America is looooong past the point of no return, anything short of WW3 and it will drown in debt very soon, and the people of this country are either too ignorant or stupid to get it
Brainwashed. Sure there is a mix of stupid and ignorant, but a lot is good old fashioned brain washed. Reds are brainwashed into believing that unlimited military spending is the key to Americas greatness. Knew a guy who honest to God thought we needed to double mil spending from what it is now, and of course he was in the Air Force. And the Blues are brainwashed into believing that Uncle Sugar must care for everyone and be Santa. I've also known a lot of people who think the state should dole out a "livable wage" to everyone to make sure no one is poor. Our politicians leverage this brainwashing by posing to their group and then looting for the people who paid for their campaigns.
WW3 won't help us. Our military is a paper tiger. In a real fight we would be out of it in months. We have no depth or ability to replace losses. Any country with 2 brain cells would try to get us into a war of attrition and grind us down if they were fighting us.
We are already drowning in debt. The death knell I'm waiting for is you foreigners to tell us to kiss off and send the dollars back here. Our main export is war and inflation. Once the dollar goes that's it, all over but the crying.
Paper Tiger? You don't understand. With a large nuclear force anyone who fights us is fighting a boxer who only hits and blocks with one arm. But the other hand is holding a hand grenade with the pin pulled. If he punches you out it's a bad loss and if you punch him out it's a worse loss.
All majors are nuke powers. So why have a military at all? Really if nuking is on the table why even have a military? Wouldn't keeping a world killing amount of nukes on standby be much cheaper then a huge military and a planet killing amount of nukes?
Also pretty sure if we nuked a minor it would be bad for us globally. After all who would want to trade with us then, and threatening the world with nukes won't work to well, not even the Soviets tried that.
yeah redneck, trash junked you. The only spending authorized by the constitution is for defense. CONgress has funded all else under "general welfare" as in it is for the general welfare to search your house house because all bombers have operated out of housing.
The courts have phased out the Constitution, died it's last death in the 60s, but there is a good argument that it was all over in the 30s. Wickard v, Fillburn basically gave the Fed Gov unlimited power. The most used excuse for Fed Gov power is the commerce clause. Since all human action can be related back to commerce the current interpretation grants unlimited power. Hell the drug war is being fought through the commerce clause! I've never done an illegal drug in my life (not even pot) but I think it's silly that they are forced to go to the commerce clause for that.
Shameful, I think you hit the nail on the head: brainwashed is the real issue. People change the meaning of facts in their mind to fit their belief system versus understanding the meaning of the facts and modifying their beliefs based upon new information. This is kind of like a knee jerk reaction, but it is different. With a knee jerk reaction, new information just kind of bounces off their brain. It is like a defense mechanism that immediately does away with the new information, because it is counter to their belief system.
Some information cannot be ignored however. For example, people disliked the bailouts for good reason, but many have twisted the meaning of the bailouts into a reason that support calling Obama a Marxist. This is really odd. I cannot think of one Marxist movement that bailed out the banks (nationalize them yes, but bailout no). Since people could not ignore the bailouts, they had to absorb them in a manner that fit their belief system. The same occurs for many pro-Obama people. If you ever read the comments on HuffPost, you will see that anyone that makes a statement against Obama must be some kind of troll or tea bagger. These pro-Obama people cannot handle any criticism of Obama, because it conflicts with their belief system. Rather than understanding fact based criticism, they rationalize that the critic must have a failing in order to protect their belief system often ignoring the facts altogether.
I now wonder just how prevalent this is. Is it 20 to 30%; 80 to 90%; or an even higher percentage of the population.
+1000
I fear the 80 to 90% number may be the truth. This is why there will be no solution to ANY of our problems.
I don't like the author but this article he got right
http://finance.yahoo.com/banking-budgeting/article/111364/a-war-of-the-w...
Oh it totally can happen like flipping a light switch. I actually expect it to be a more gentle glide into poverty. Seems the world is ok with the US writing these checks so as long as they keep accepting our bad checks we can continue our controlled descent into bankruptcy and poverty. Big moves tend to cause chaos, and I think the guys calling the shots are trying to prevent chaos and stay in charge.
Don't think we would get a public warning from China, think they would just pull the trigger. Sure they would take HUGE losses but ti would also destroy the US dollar, and with it the main source of the US global dominance.
What you say is true with the exception of the looooong part. We had it mildly together as late as 1998. But the past dozen years and two shill Presidents have sealed our fate. Irrespective of how we got here though here we are and 12 trillion is too much to pay back forget the unfunded obligations.
"Irrespective"
Unkown.
Sarc on>
Yeah, what gives--handing out the dole will increase employment?!?
By the way, continuing the current level of (ultra high) taxation is not a tax "cut".
Econometrics is to economics what scientology is to science. Even if Art Laffer did not publish his (I assume) famous findings that increasing taxes does not necessarily increase gov't revenues, and may decrease it, common sense would tell you that a tax increase will push marginal businesses under. Common sense will tell you that those who have some discretion over their work hours will cut their work at the margin. Like doctors with office hours Thursday evening. If the marginal rate they pay on that marginal income is 65% (federal, state, city, FICA, etc.), why bother??
And how about new business formation. This takes risk capital. Investors in early-stage companies have exactly the opposite proposition of the big banks. With the banks, it's privatized gains and socialized losses. With early stage investors, any losses are all theirs, but if the company actually succeeds, they pay how much? Today it's 15% federal and, say ion average, another 5% state. Their punishment for their success is "only" 20%. OK, but what if they raise the federal capital gains tax rate to 28% (I am unclear what will happen if the Bush cuts expire). Some states, like AZ, use a proportion of the federal rate, so in this case 5% would become around 9%. So federal+state would be 37%.
Some businesses that would have made sense to start on a risk-adjusted return basis now do not make sense to start.
Let that sink in. And then tell me again how if they raise the tax rate, there is a simple linear increase in tax revenues!
Here goes,
My gross has dropped to 21k. My take home is less 42% of gross. Two of my employers who fall in the "higher tax bracket" will fire me to protect their margins. Hmmm. Yep, you screw them, I give up all hope and become a zombie. Brains, brains, I want your brains. BOOM.
Bearster
"Yeah, what gives--handing out the dole will increase employment?!?"
I guess you never heard Abbot and Costello's Mustard skit.
http://www.youtube.com/watch?v=Q24mfUn9HFU
OK. I will explain it to you. You obviously need help.
First, would you admit that if there were no taxes that there would no government revenue and the system would shut down? If the tax rate is increased from 0% to 1%, would the government not see an increase in revenues? So, would you not then understand that some taxes are necessary for a functioning goverment and that the real question is what is the right tax rate? Would you agree that 100% taxes is the same as communism and would be too much? Would you agree that raising the tax rate 1% to 2% would likely increase tax revenues for the government just as lowering the tax rate from 99% to 98% would also likely increase tax revenues? So would you agree that your linear reasoning above is retarded.
Deficits don't matter.
Thanks, Dick!
could we all grow up a bit here? the tax cuts are being extended to help with the completion of the transfer of the US Treasury and all the savings of the peasantry to the power elite.
it really is that simple.......and anyone who doesn't get it now is hopelessly naive.
Thank you. The cynical, too-cool, "it's my money, damn it" attitude of most of the commenters tends to obscure the fact that further tax cuts for rich people WHO WILL NOT SPEND is just stupid.
PWD:
Unjunk here. We've got to start living within our means.
After two years of trying, I am finally in a position from trading where the loss of the tax cuts will affect me. But I'm willing to pay a bit more as long as those above me in the food chain do too.
My solution: for every $1 of tax increases, I want $2 of spending cuts - and the MILITARY is the best place to start.
What business do we have being "in-country" in 130 places around the world, when we can't guard our own borders, all the while spending more for our military than the next ten most significant countries COMBINED ?
Just doesn't make sense anymore.
Unwashed: so let me get this straight. Tax *cuts* transfer our savings to the power elite. But tax *increases* don't?
Up is down, black is white, and ignorance is bliss. Don't let anyone tell you otherwise.
Were you one of those kids in high school who said "I am never going to need this stuff?" when talking about algebra? And you never did figure out when you could have used it?
Why anyone would want taxes to be increased (not decreased) is beyond my comprehension. CONgress and this Administration will not quit spending no matter how much money they get. So let's keep our own money so we can benefit ourselves - giving CONgress less money in taxes just brings Bondzilla sooner. As far as I'm concerned, Bondzilla is LONG overdue.
+1
The sooner we default, the sooner the US will get shut out of the bond market and the sooner the government will have to pass a budget that matches tax receipts. Let's get the debt repudiation started!
Oh no, there goes ol'Frisco -- here comes Bondzilla! :>D
Huge tnx. You made me flash.
First off we really can't trust CBO numbers, you know that. The idea that passing money out to the unemployed is the best thing for jobs $ for $ is absurd. Are these unemployed people going to take their check and start a business?
Second those tax impacts will slow grow, and really the increase in revenue will just encourage the spending to ramp up. After all the markets are ok with trillion plus yearly deficits, and it's so cheap. Just read any argument from Krugman.
Third, who cares? Not to be nihilistic but who cares? We are watching the country being actively pillaged. It's like a guy losing the house and ripping the copper out of the walls. We can't come back from this without radical change, change that won't happen in the system. Crank the tax rate up to 100% won't solve our spending problem.
Fourth, I think they like causing uncertainty. A big problem in the Great Depression was gov/regulatory uncertainty. When The gov acts like a maniac and wildly changes it's crazed mind turns out people don't want to put their hard earned capital on the line when due to a whim the gov can take it or make their line of work impossible. With this and other regulatory hurdles only a masochist or a lunatic would open a business or expand in the US.
Shameful, Wife and I started a business 3 years ago (construction engineering - mainly roadways) and yes I could be considered a masochist (we are also a unionized shop - Chicagoland). Business is doing well however I keep warning our employees to save for the future as we can not guarantee jobs the following year. The future is very uncertain.
Good luck.
My best friend's dad is a plumber (25+ years exp) out that way and things got tight for him. He had to go do a stint in a Canadian mining town to get back to making what he was. Had his own crew and had to let them go, and the Union wouldn't even let him take his own son on as an apprentice, and guy is 2nd gen union himself.
I'd love to see a atmosphere where people could get out and create businesses, make wealth, and employ people. I'm just not seeing it. Especially with NAFTA and the other trade treaties, cheaper labor and less regulatory uncertainty/overhead. No TVs are made in the US, when the industry was born here. No Cell phones either. Not sure how this "knowledge" economy can last.
You're right...the 'service economy' is a dead end...we won't be able to stay ahead of say India in that fight for long either.
The simplest thing would be to prevent multi-nationals from repatriating their booty for nada.
Good article from Baseline Scenario, and good comments:
How Are the Kids? Unemployed, Underwater, and Sinking
Posted: 20 Nov 2010 07:34 PM PST
This guest post is contributed by Mark Paul and Anastasia Wilson. Both are members of the class of 2011 at the University of Massachusetts-Amherst.
The folks at the CBO read this. Your thoughts will make their day:
First off we really can't trust CBO numbers, you know that. The idea that passing money out to the unemployed is the best thing for jobs $ for $ is absurd.
Hope they do read it. I'd love to see accurate numbers out of them for a change. I know the way it's structured they are more a political animal then anything else.
I'd actually like to know their methodology for figuring out the job growth numbers. After all it's not like science where we can control for the variables. About that only way I can think that passing money to the unemployed would be to get them in school to get them off the unemployed rolls. Doesn't actually make them employed but it cooks the books and pushes the problem into the future. And speaking as a young man in university it's crazy expensive and a lot of the degrees are of dubious value. Women's Studies or Philosophy anyone?
And if they spend those dollars at existing businesses (as opposed to buying $80k worth of CDs or bullion)?
You are majoring in what, precisely?
Another worthless degree, law, so I know worthless degrees! :)
If I stay in the states I'll probably tack on a computer engineering degree. My employer is talking about paying for it if I want it (working as software dev). And they would have too, tuition prices have doubled (yes doubled I have the numbers) for instate in the 3 years since I graduated the first time around (Accounting, less worthless but not hard science). Hearing there is a worldwide shortage of engineers and I know there is a shortage of CE guys. Turns out no one wants to do the science. I could have but kept picking bad, partially due to listening to family...but then I blame being a dumb kid :)
I'm lucky I have a skill that I can use to make money outside my degree. A lot of my fellow classmates did take philosophy, women's studies, religious studies, etc. They are stuck more or less, no other options. A massive amount of malinvestment in school right now, and I'm guilty of it as well.