Tuesday, September 20, 2011

The phoniness of the President's budget plan

As Philip Klein points out, Obama has decided to throw out any hope of compromising with the Republicans and instead produce a campaign document that will solidify his liberal support. Instead he introduced a plan that included more of the same sorts of stimulus ideas that have failed already along with tax hikes and some modest spending cuts. He ignores entitlement reform. On top of it he includes phony claims of budget reduction.
[H]ere's how he tries to claim $4.4 trillion in deficit reduction. First, he includes in his plan the $1.2 trillion in discresionary cuts that already passed in the debt ceiling compromise, plus another $1.1 trillion in phony war savings from winding down the wars in Iraq and Afghanistan -- both of these policies would happen regardless of whether or not his new plan is adopted. So what we're actually left with is $577 billion in savings on mandatory spending, $436 billion in reduced interest payments and $1.6 trillion in tax hikes.

During the debt ceiling talks, there was a lot of talk about Obama proposing three or four dollars of spending cuts for every dollar of tax hikes (of course, details of the supposed offer were never made public beyond leaks to some media outlets). But with today's plan, Obama is proposing the opposite -- 2.7 dollars in tax hikes for every dollar in proposed spending cuts.
As Charles Krauthammer said last night, why stop there? There are all sorts of savings we could claim by ending military spending that we had no intention of actually spending. Why not claim savings for our non-invasion of Canada? And then add in all the other countries that we're saving money by not invading?

Of course, the whole argument behind the so-called Buffet Rule is faulty. Mark J. Perry of the University of Michigan demonstrates this with the following chart.Buffett refers only to his income tax while not including the other taxes that the "super-rich" pay.
For federal income taxes, most secretaries would probably be paying an average federal tax rate of 9-12%, and most of the "super-rich" bosses with incomes of $200,000 or more would be paying average federal income tax rates about three times higher than their secretarial staff members, i.e. 25% or higher.

3. Even if we account for payroll taxes (which the chart below does for 2007 using CBO data), Buffett's tax analysis still doesn't make sense. Most "super-rich" taxpayers are paying federal taxes (income, payroll, corporate and excise) at a rate of 25-30% of their income (much higher than Buffett's 17.4%), and the middle-quintile and second-highest quintile groups are paying average tax rates of only 14%-17% (about half of the 33-41% Buffett's employees are paying, assuming they fall in those income groups).
So where does Buffet get the evidence that is being used as the foundation for the President's tax proposal?
Bottom Line: We now have a proposal for a tax policy - the "Buffett Rule" - based on Warren Buffett's anecdotal "evidence" of his and his employees' tax burdens. But that "evidence" seems pretty far-fetched and not consistent with: a) average federal income tax rates available from the IRS, nor b) average tax rates for all federal taxes paid, from the CBO. Buffett's anecdote has to be an outlier or exception, because under the current federal tax system, the average "super-rich" taxpayer pays taxes at a rate 2-3 times the average secretary. Instead of raising tax rates, we should probably figure out what kind of loopholes allow Warren Buffet to pay taxes of only 17.4% on his $40 million income last year.
As the WSJ points out, there is a basic fallacy in the President's desire to raise capital gains tax rates.
The problem is that this is a tax increase on capital investment, which the U.S. already taxes at prohibitive rates thanks to our high corporate tax rate of 35%. Capital gains and dividends are taxed twice, first as corporate profits and then as payouts to individuals. Their real capital gains tax rate is closer to 45% than 15%, which is why politicians of both parties have long supported a capital-gains rate differential.
And what do you think that investors will do if their taxes on investment gains are raised? Is what we really want to do when we are facing such dismal numbers in economic growth? Discourage investment? Obama and the Democrats have been pushing for higher taxes on the wealthy since he came into office. Obama's continued demagoguery of the wealthy is just the sort of talk that FDR used during the Great Depression. And then both seem mystified that employers are holding back on expanding their businesses.

Ross Douhat notes that Obama has abandoned all hope of appealing to the center.
Based on the actual details of the deficit plan that the administration just released, though, I would like to retract that analysis. Between the size, scope and design of the tax increases and the skimpiness of the entitlement reforms (nothing on Social Security, minimal tinkering on Medicare), it seems that the president will be running for re-election as Nancy Pelosi instead. The White House is essentially proposing to raise taxes on the wealthy (and only the wealthy) in not one but three different ways — higher rates, fewer deductions, and the so-called Warren Buffett tax on millionaires who draw most their income from capital gains — in order to keep our entitlement system almost exactly as it is. Or, more aptly, in order keep our entitlement system almost exactly as it is for a few extra years, since nothing in the proposal is commensurate with the size of our long-term fiscal gap.
Obama is even losing his cheerleader, David Brooks.
I’m a sap, a specific kind of sap. I’m an Obama Sap.

When the president said the unemployed couldn’t wait 14 more months for help and we had to do something right away, I believed him. When administration officials called around saying that the possibility of a double-dip recession was horrifyingly real and that it would be irresponsible not to come up with a package that could pass right away, I believed them.

I liked Obama’s payroll tax cut ideas and urged Republicans to play along. But of course I’m a sap. When the president unveiled the second half of his stimulus it became clear that this package has nothing to do with helping people right away or averting a double dip. This is a campaign marker, not a jobs bill.

It recycles ideas that couldn’t get passed even when Democrats controlled Congress. In his remarks Monday the president didn’t try to win Republicans to even some parts of his measures. He repeated the populist cries that fire up liberals but are designed to enrage moderates and conservatives.

He claimed we can afford future Medicare costs if we raise taxes on the rich. He repeated the old half-truth about millionaires not paying as much in taxes as their secretaries. (In reality, the top 10 percent of earners pay nearly 70 percent of all income taxes, according to the I.R.S. People in the richest 1 percent pay 31 percent of their income to the federal government while the average worker pays less than 14 percent, according to the Congressional Budget Office.)

This wasn’t a speech to get something done. This was the sort of speech that sounded better when Ted Kennedy was delivering it. The result is that we will get neither short-term stimulus nor long-term debt reduction anytime soon, and I’m a sap for thinking it was possible.
Yeah, Mr. Brooks, you are a sap. You kept wanting to believe the image of Obama that you had crafted in your imagination by believing he meant all those smooth things he said while running for president. You ignored his entire record before his election and all that he has done since being elected. You're a slow-learning sap, but better late than never.

It's pretty bad when Obama's class demagoguery loses even Chuck Schumer.
Schumer said the $250,000 limit is unacceptable since it will hit the metropolitan area disproportionately because of the high cost of living here.

“$250,000 makes you really rich in Mississippi but it doesn’t make you rich at all in New York and there ought to be some kind of scale based on the cost of living on how much you pay,” Schumer said.
So he wants to tax the rich, just not those living in New York.

We'll have to see if this sort of old-time bash-the-rich rhetoric still works with the American people. The President has laid down his liberal markers. We'll see if it deceives the independent voters.