Sunday, December 2, 2012

Evan Soltas and Who's Afraid of the Fiscal Cliff

     If Soltas' piece at Bloomberg was meant to scare us about the terrible impact if we go off the fiscal cliff, it failed miserable. I'm joking-Soltas has no agenda to do that, he's just doing a straight forward analysis.

     Although the young monetary prodigy has been at Bloomberg for months I still always look for him at his own blog as I never no how to find him at Bloomberg. In any case listen to this description of the fiscal cliff:

     First he describes the Bush tax cuts:

     "Bush's 2001 law reduced marginal income-tax rates across the board. The top rate was scaled back from 39.6 percent to 35 percent. The 36 percent, 31 percent and 28 percent brackets fell by three percentage points. The 15 percent bracket on the lowest incomes was split into two to include a 10 percent bracket at the lower-income end."

     "It doubled the child tax credit from $500 to $1,000 and made it refundable -- that is, it would still count if it resulted in a negative income-tax liability. It also increased the dependent-care tax credit: One could deduct up to 35 percent of expenses to a maximum of $3,000 per child for no more than two children, compared with a previous limit of 30 percent of expenses up to $2,400 per child."

     "The law also eliminated the threshold incomes above which personal exemptions and itemized deductions are phased out, and sought to reduce the so-called marriage penalty in the income-tax code by making the size of the standard deduction for married couples double that for singles. And it changed the calculation of the earned income tax credit in a way that further lowered the marriage penalty."

      Now the impact:

      "The Bush tax cuts were sharply regressive -- that is, people with high incomes benefited far more as a percentage of their income. The expiration of the cuts would be correspondingly progressive, with large increases in the tax burden on high-income and wealthy families and individuals."

     "If all the tax cuts were allowed to expire, after-tax income of the lowest income quintile will fall 0.5 percent, and the middle-income quintile's income will decline 2 percent. For the top-income quintile, however, after-tax income will fall by $7,119, or 4.1 percent. And the top 1 percent by income bears the brunt of the change, paying an extra 6.4 percent of income, or $70,746."

     Note he's saying that if all the tax cuts were to expire this would be sharply progressive. I'm not calling for this-no Democrats are-just noting it. The Reagan tax cuts were similary regressive and over the last 30 years we've seen this shift in taxes towards greater regressivity.

     The GOP is seeing the dissolution of their long term strategy on tax cuts. They've always put just enough sweeteners in the tax cuts for the middle class and the poor to be able to plausibly claim to have done something for them. In truth, both groups have seen their economic positions deteriorate.

      I was recently reading a little about gas prices-it's interesting to me that while we feel that $4 gas is so intolerable, it's half of what many other countries pay-like Germany. All our European counterparts pay at least 50% more than $4.00 per gallon. Why is this? There is the environmental lobby which wants gas to be more expensive so as to discourage too much use of cars and burning of oil and fossil fuels. It also doesn't help that Europeans produce so little oil for themselves.

      Yet, putting aside evironmental concerns, it also funds things for those with modest income like universal college education. Bush may have cut the poor's taxes-though by a measly 0.5%, but would they be better off with it or a return of  welfare pre-1996?

      So there are tradeoffs. As far as the poor are concerned it's not clear that tax cuts are always the best way to help them. Would they be better of paying higher gas prices but getting a government funded college education thereby giving them and their children a better shot at not being poor?

     Of course, a lot of this is due to the kind of tax cuts we've seen. The way to really cut taxes for both the poor and the middle class-most Americans actually, would be to permanently reduce the payroll tax-making up for this by raising it on the rich. Either raising or removing the low cap on Social Security taxes would be a great start.

     P.S. In large part it seems that the way Euro countries like Germany, France, and Sweden provide such a generous social safety net is through taxation that is not only high, but highly regressive. The tradeoff is basically highly regressive taxes for highly progressive government transfers.

    It is true that comparably the U.S. tax code is comparably more progressive than in Europe. Just the same it's social spending is much more meager. On balance who comes out better? It's a good question.

    I personally think we should make the U.S. tax code even more progressive and that Obama's current tax agenda will be a healthy start towards this.


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