Tax Cuts

[telcoman]

I ran across this in the latest Barrons and thought I would pass it along.

All I know is mine are too high and those earning millions should be paying more.



When Is a Tax Cut Really a Tax Hike? Usually By GENE EPSTEIN

Rollbacks feel good in the short term. But factor in government spending, and the total tax bite is now at one of the highest levels in decades. (Video) RHETORIC ABOUT TAX CUTS AND WHAT SEGMENT of society should get them is a predictable part of every presidential campaign.

As my colleague Jim McTague points out in the preceding story, that tradition is being upheld in the Obama-McCain clash. But while changes in tax rules are important because they can have a powerful short-term effect on an individual's finances, the modern history of U.S. taxation points to an unvarying truth: True long-term reductions don't exist for society as a whole. In fact, the total tax bite -- federal, state and local -- now stands at one of the highest levels in decades, despite the ostensible rollbacks of the Reagan and Bush years.

In the short term, tax-law changes do matter for individuals. If the amount that a person is allowed to deduct from the proceeds of the sale of a long-term primary residence, were, say, quadrupled, from the current $250,000 to $1 million, anyone unloading a pricey house or condo would immediately benefit. In the long term, however, Uncle Sam would almost certainly try to make up the revenue lost from this by raising some other levy in some other part of the economy. Pay me now or pay me later, as the transmission-repair ad used to put it.

William Waitzman The total tax bite -- federal, state and local -- is now at one of its highest levels in years. Don't look for it to get any less painful. In addition, other forces are at work to keep taxes up.

The late, great free-market economist Milton Friedman once asked: "When is a tax cut not a tax cut?" His answer: "When the so-called tax cut is accompanied by a larger rise in government spending than in prices." By this reasonable standard, over the past half-century, at least, there have been no real federal tax reductions. The Kennedy, Reagan and more recent Bush tax cuts were all accompanied by a larger rise in federal spending than in prices.

The underlying reason they were only so-called gets back to what we might call Friedman's Law: "The real cost of government," he wrote, "is measured by what government spends, not by the receipts labeled taxes. The goods and services it buys are not available for other use." So, for example, however the war in Iraq has been funded, its direct cost is measured by the men, women and material that otherwise would have been available for peacetime uses, not by the receipts labeled taxes.

Why are taxes only part of the story? "Suppose," Friedman argued, "government spends $400 billion and raises $350 billion in funds labeled taxes. Who do you suppose pays for the $50 billion difference? The tooth fairy? Hardly. You do."

His point, made in 1977, remains pertinent. The federal government is due to spend more than $3.1 trillion in 2008, up from $2.3 trillion in 2003, according to its own statistical agency, the Bureau of Economic Analysis. That $800 billion, or 35%, increase is much greater than the rise in prices over the same period.

Much of that $800 billion increase wasn't financed through funds labeled taxes. But one way or another, the taxpayer, not the tooth fairy, has made up the difference -- in other words, been taxed indirectly. Since federal spending has risen much faster than prices since the federal tax cuts were put in place in 2002 and 2003, they weren't cuts at all.

Barron's Economics Editor Gene Epstein talks about his article on taxes and government spending. Can the presidential candidates tame Fed spending? (Aug. 23) The tax burden, broadly defined, is best tracked not by the taxes government receives, but by what government doles out. If real (inflation-adjusted) spending keeps rising, then the tax cut is bogus. The chart on the next page tracks federal, state and local government spending as a percentage of current-dollar U.S. gross domestic product. By definition, the increase in current-dollar GDP captures both the rise in prices and the growth of real GDP. By this standard, then, the full tax burden isn't quite as high as it once was, but is still much closer to the highs than it is to the lows.

BASED ON THE RECORD SINCE 1960, as the chart shows, current-dollar federal spending alone as a share of current-dollar GDP ran consistently lower than 20% until 1975, when the guns-and-butter programs installed by previous administrations finally began to bite. Since 1975, the share has been 20% or higher in all but three years, with virtually no connection to whether a Democrat or Republican has been in the White House.

In 2008's first half, the share was around 22%, up from 21.5% in 2007. Since both figures represent an upward creep since 2002 and '03, federal spending in the wake of the tax cuts hasn't just increased faster than prices, but faster also than prices plus the rate of real GDP growth. The so-called tax cuts, therefore, sound closer to tax increases.

As the chart also shows, current-dollar total spending on all levels of government (federal, state and local) as a share of current-dollar GDP has been on a long-term upward trajectory since 1960.

To treat federal spending as separate from state and local spending is somewhat artificial. States and localities are subject to federally mandated programs that go partially unfunded by Washington, although cash transfers from federal coffers to states and localities account for more than 20% of total state and local expenditures. Medicaid, for example, is a program that is funded by all levels of government. Government spending's share of GDP ran 34.2% in the first half of this year -- nearly as high as its 1992 peak of 35.1% and far higher than its 1960 low of 26.1%.

Until our elected officials grapple with the spending side of the ledger, talk of "tax cuts" is just newspeak. This is not to deny that those who live in low-tax states pay less than others; or that particular tax cuts can help ease the burden on some folks. But unless real spending is cut, a tax cut for some necessarily means that others pay more; there's no tax cut for all taxpayers.

Why has government spending almost always risen faster than inflation, and generally faster than current-dollar GDP? Some might say there's been a legitimate need for government to spend more. But even they might concede that other factors are at play, too.

One is that the tax system itself is such a hydra-headed monster that if growth of one source of receipts slows, another usually tries to pick up the slack. For example, on the federal level the slowed increase in the take from individual income taxes has been at least partially offset by a steady rise in receipts from payroll taxes.

A second factor is the enormous capacity of the U.S. to borrow money, at home and, increasingly, abroad.

A third factor: When taxing and borrowing aren't enough, the Federal Reserve simply can print money.

Perhaps even more important are politicians' reluctance to curb spending, except in the direst circumstances, and much of the electorate's belief in the false dichotomy between taxing and spending. It's a cliché of survey research that the same respondents who want lower taxes also want government to spend more on programs they believe in. Until they appreciate that when government spends more, it necessarily takes more in taxes, one way or another, the true total tax burden may never be eased.

One benefit of the so-called tax cuts is that they may be useful in slowing the growth of government spending.

Friedman posited what we might call the "teenager model" of government finance. Contrary to the myth that government arranges its finances by first determining how much it needs to spend, he argued that it's basically the other way around. Just as your average teenager will spend whatever he can lay his hands on, so, too, will government. The main difference is that government has more ways of getting access to funds.

One way is to enlist the aid of strangers. As of June 2001, outstanding federal debt stood at $3.2 trillion, of which about 30% was held by foreigners. By June 2008, the debt had jumped to $5.3 trillion, and foreigners held more than 50% of it.

Perhaps the most insidious tax of all is the sheer printing of money, produced through three main channels.

The first is by selling Treasury bonds not to the public, but to Uncle Sam's own central bank (a process often called the "monetization of debt"). From September 2001 to September 2007, the Federal Reserve "bought" an additional $217 billion of Treasury paper, for which it cut a check to the Treasury via its unique powers of money creation.

A second channel of monetized financing arises from the fact that the Federal Reserve holds approximately $750 billion in Treasury debt, and as such is entitled to the coupon payments on those holdings. But while it keeps some of this to finance its own operations, it doesn't need most of it. So what it does each year is "return" the unused funds by cutting yet another check to the Treasury.

Since the central bank is, after all, just a part of the federal government, the whole process is rather as though an individual were to put his own personalized IOUs into one pocket, while paying himself the interest on those IOU's into the other. For the government, what prevents this exercise from being a wash is that the pocket from which the payments come has the power to create money. According to the Office of Management and Budget, these "Deposits of earnings by the Federal Reserve System" totaled $173 billion from 2001 through 2007.

The third, more subtle way the government prints money is by inflating receipts via the larger process of monetary inflation. Through the printing of money by the central bank, wages, salaries, prices and asset values are all pushed up, inflating government receipts. The yield from this process was greater prior to 1985, when income-tax brackets were first indexed to prices. But there is still a kind of "bracket creep," as people earn more money within higher brackets. In any case, no other part of the tax code is indexed in this way.

One method of approximating the government's take from causing general inflation is to assume that the growth of receipts would normally pace the growth of real GDP; anything earned above that is then assumed to be due to inflation. On that basis, we can calculate that, at the federal level alone -- never mind the states and localities that also benefit -- receipts were artificially swelled by $428 billion from 2001 through 2007.

If past is prologue, the chances of the government ever enacting true tax cuts seem rather bleak. But people do have choices. Maybe that's what John McCain and Barack Obama should be debating.

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E-mail: [email protected]

Any tax genius' here?

Seems to me government spending must be drastically cut.

Telcoman

[szh]

All I know is mine are too high and those earning millions should be paying more.

And, I will say this just once more (see my previous post on the topic): THEY ALREADY ARE. Most millionaires pay way more in taxes each year than you (or I) earn each year.

Z

[AZhitman]

Howie doesn't comprehend that.

He's pissed that he's not wealthy, and he wants those who are to be penalized for making smart decisions in their lives.

Hey Howie - When the uber-wealthy get to drive on 50% better roads and get 50% better police/fire protection, then they should pay 50% more.

Until then, your Robin Hood nonsense is pure ghetto whining.

p.s. If you'd do your own taxes and take advantage of the opporunities available to you under the tax code, you'd pay a LOT less taxes. AND you'd avoid giving H&R Blockhead $200 per year.

But that would require thought and effort.

[ishkabibble]

They pay roughly the same effective rate as the middle class. The amount is obviously going to be different.

[AZhitman]

They pay roughly the same effective rate as the middle class. The amount is obviously going to be different.

Correct.

So, can someone explain to me what the problem here is?

And then explain to me what good it does to increase the effective rate on the wealthy? So they don't spend as much disposable income, thereby decreasing the need for goods and services provided by the lower to middle class? So they have less to invest, thereby driving stock prices lower? So they decide to hire less workers or outsource labor?

Tell me again how increasing the effective tax rate on the wealthy makes one bit of sense?

p.s. I know I won't get an answer from the OP, as he's looking for some other news story to cut and paste... Feel free to leave him hanging if you like.

[rn79870]

And, I will say this just once more (see my previous post on the topic): THEY ALREADY ARE. Most millionaires pay way more in taxes each year than you (or I) earn each year.

Z

Telco was referring to the percentage.

Greg, you continue to miss the point. What you call a Robin Hood mentality is simply looking at this issue fairly. Running this government requires money, and that money has to come from somewhere. Should it come from someone who has to choose between paying that tax or buying a loaf of bread for his family, or should it come from someone who has to forgo his 8th. family home to pay the tax.No sympathy here.

[rn79870]

And then explain to me what good it does to increase the effective rate on the wealthy? So they don't spend as much disposable income, thereby decreasing the need for goods and services provided by the lower to middle class? So they have less to invest, thereby driving stock prices lower? So they decide to hire less workers or outsource labor?

Let the rich keep their wealth and the lower classes will benefit because the rich will by more thusly creating more jobs by spending more of their assets and this will benefit the peons? Sorry, I no think so.

Driving stock prices lower by taxing the rich? What might suffer is the sale of 2nd. family homes, or fewer new MBs on the road and Cessna will probably have to lay off, and Luxury yacht sales will drop. I see the point.

[ishkabibble]

So, can someone explain to me what the problem here is?

The problem is that half the threads in this forum are now people just copying and pasting walls of text with no hyperlink to the original source.

[rn79870]

http://setup2.barrons.com/arti...+Main

[srellim234]

I'll preface this by stating that the tax plan I like needs a threshold lower limit so that people below a certain line shouldn't have to pay. Not sure where I would set it but I acknowledge that there are people in this country who are struggling at the bottem end of the income ladder.

The percentage should be a flat rate for everyone, no deductions given. You make a dollar, you know exactly how much the taxes for the federal government will cost you out of that dollar. 15 cents, 20 cents, whatever the rate that is set.

Want to work overtime and make an extra dollar? Same price. You know going in how much those taxes are, how much you'll take home and whether or not you want do do the extra work for the price.

Paid $10 an hour or $500k a year? Same price. We can't afford to have the politicians continuing to promote class warfare at the expense of America.

Investing and collecting dividends and profits? Same price. You decide if the risk is worth the price.

That way, if the government wants to spend more money as a percentage of what people are making, the politicians will face a united front, across party lines and classes, telling them to live within their means like the public has to do. Yes, it costs money to run the government but government spending is out of control.

[szh]

They pay roughly the same effective rate as the middle class. The amount is obviously going to be different.

Exactly my point.

Z

[szh]

Telco was referring to the percentage.

I know.

Z

[AZhitman]

Greg, you continue to miss the point. What you call a Robin Hood mentality is simply looking at this issue fairly.

Should it come from someone who has to choose between paying that tax or buying a loaf of bread for his family.

No sympathy here.

I missed nothing. Screw "fair". If the world was fair, the doofus sitting on his sofa all day watching soap operas and whining that he doesn't have a job would have a cabin in the Hamptons. Spare me that "fair" nonsense. It's as fair as it needs to be.

"Choose between paying tax and buying bread"? Oh, the tears are flowin' now.

If someone can't afford bread, they likely pay NO tax. How much tax preparation do you do, Bob? I dind't miss a thing - You thinking someone's tax liability keeps them from buying food tells me you missed something.

Besides, I'll be that person you're referring to has a pack of smokes in their pocket and a couple cases of Pepsi in the fridge. Spare me the tearjerking.

No sympathy indeed. Like I said, when the guy who pays a million dollars a year in taxes gets better roads, police and fire protection than the guy who pays $100 a year, let me know.

Until then, it's Robin Hood nonsense.

[AZhitman]

Let the rich keep their wealth and the lower classes will benefit because the rich will by more thusly creating more jobs by spending more of their assets and this will benefit the peons? Sorry, I no think so.

What does "I no think so" mean?

Does it mean you don't agree, despite the truth of the matter? Or does it mean you don't really know, and you're asking for someone to lay it out for you?

Regardless, it's the case. And it works.

BTW, all I needed to read was this:

Let the rich keep their wealth

We all know you socialists want to take it away. I think you forget who the money belongs to. How convenient.

[szh]

I'll preface this by stating that the tax plan I like needs a threshold lower limit so that people below a certain line shouldn't have to pay. Not sure where I would set it but I acknowledge that there are people in this country who are struggling at the bottem end of the income ladder.

The percentage should be a flat rate for everyone, no deductions given. You make a dollar, you know exactly how much the taxes for the federal government will cost you out of that dollar. 15 cents, 20 cents, whatever the rate that is set.

Want to work overtime and make an extra dollar? Same price. You know going in how much those taxes are, how much you'll take home and whether or not you want do do the extra work for the price.

Paid $10 an hour or $500k a year? Same price. We can't afford to have the politicians continuing to promote class warfare at the expense of America.

Investing and collecting dividends and profits? Same price. You decide if the risk is worth the price.

That way, if the government wants to spend more money as a percentage of what people are making, the politicians will face a united front, across party lines and classes, telling them to live within their means like the public has to do. Yes, it costs money to run the government but government spending is out of control.

I stand up and applaud this post!!! I am totally in favor of a flat tax system, and even with a reasonably high threshold for "poverty" - where you do not pay much in the way of taxes.

I am not rich, but not exactly hurting either. I graduated from college with $50 in my bank account, college loans (at high interest rates) to pay off, NO family money supporting me through college OR afterwards, and I worked my buns off to get where I am.

Over the past 30 years, I have paid a mess load of taxes - given our current graduated tax system. At the present time, the Feds collect about 18% of my total yearly income (I only have a Mortgage deduction, and that ain't much either - down to $12k a year of interest deduction because I am damn careful with my mortgages and my payments) and CA gets about 6%.

If we established a flat tax system that took 20% of my totals for the Fed and 5% of my totals for CA (with a threshold for real poverty levels), I would be fine with that ... even though my TOTAL tax dollars would still be way higher than you would think!

I certainly resent being informed that I am not doing my "fair share". Totally unacceptable BS.

Z

[rn79870]

What does "I no think so" mean?

Basically, it means I'm not buying what you're selling here. But, you made a good sales pitch.

[AZhitman]

What does "I no think so" mean?

Basically, it means I'm not buying what you're selling here. But, you made a good sales pitch.

I'm not selling anything.

I don't have to convince you that the sun rises in the east, and I don't have to convince you that taking money away from people who earned it (whether you like the way they did it or not) and reallocating it as you see fit is NO different than one person forcing their morals and values on another.

No different.

[Qwerty1942]

lol wow, AZhitman is devastating rn79870 .

[OriginalWheelman]

I'll preface this by stating that the tax plan I like needs a threshold lower limit so that people below a certain line shouldn't have to pay.

What? Do you comprehend your taxes? That already exists via EIC, Standard deductions etc... You total up your deductions, and subtract them from your taxable income before they even calculate your tax. Guess what? If you make less than your deductions add up to, you don't pay taxes.

[OriginalWheelman]

telling them to live within their means like the public has to do.

But the public doesn't. They can just spend themselves into debt, go bankrupt, and get the government to bail them out. Guess who pays for that? All those well off people who pay enough taxes to over budget the local police force for years and don't ever draw help from the government.

Yes, it costs money to run the government but government spending is out of control.

How do you know? When is the last time you read the national budget?

[OriginalWheelman]

Driving stock prices lower by taxing the rich? What might suffer is the sale of 2nd. family homes, or fewer new MBs on the road and Cessna will probably have to lay off, and Luxury yacht sales will drop. I see the point.

Right. Then we lose the tax on the Cessna fuel, the taxes paid to the hired help, the jobs of the hired help, the luxury tax on the yacht....

[ishkabibble]

There is no simple "threshold" in the current system. The lowest bracket is 10%, not 0%.

[OriginalWheelman]

What you call a Robin Hood mentality is simply looking at this issue fairly. Running this government requires money, and that money has to come from somewhere.

Exactly. Well then why don't we divide the cost of operating the government by the number of working people, and tax everyone that much. That would be the fairest way correct? That way everyone pays an equal share. Since this is obviously not possible, we have a scaled system and the rich pay more to live here than we do. I think we should thank them for taking up the slack already.

[ishkabibble]

How do you know? When is the last time you read the national budget?

What are you talking about? I though the budget deficit was common knowledge.

[OriginalWheelman]

There is no simple "threshold" in the current system. The lowest bracket is 10%, not 0%.

Taking a quick look at my copy of my 1040a, I see the single head of household gets $7,850 deduction. So, if you take the standard deduction, you do not pay taxes on the first $7850, or if you make less than that, you pay $0. You need to make an amount of taxable income in excess of the the standard deduction to even be put into the 10% bracket.

[OriginalWheelman]

What are you talking about? I though the budget deficit was common knowledge.

Deficit does not indicate out of control spending. It can also indicate a shortage of income.

[ishkabibble]

That's an awfully convoluted way to establish a threshold, and it's pretty low at that. I'm not sure what your point is here. One of the goals of a "flat" system is to simplify things.

[ishkabibble]

Deficit does not indicate out of control spending. It can also indicate a shortage of income.

Yes, it can, but...

(you know the rest)

[OriginalWheelman]

Yes, it can, but...

(you know the rest)

I do know the rest. It can, but it's more socially acceptable to hate the government than support it. It's easier to live with ourselves if we believe the problem is someone else's fault. That is the real problem in America, the lack of personal responsibility. However that is a whole other ball of wax that is for another time.

[srellim234]

What? Do you comprehend your taxes? That already exists via EIC, Standard deductions etc... You total up your deductions, and subtract them from your taxable income before they even calculate your tax. Guess what? If you make less than your deductions add up to, you don't pay taxes.

I comprehend my taxes. You obviously didn't read the sentence you quoted in the context of the entire post. The threshold I speak of has absolutely no relationship to the current tax structure and I made that very clear. You pulled it out of context and applied it to the current tax plan, which I wasn't even talking about.
Modified by srellim234 at 9:52 PM 8/25/2008