Hey look: The whole Federal tax system is progressive

We know that the Federal income tax is progressive, while the payroll tax is regressive, and that these are the main two sources of Federal tax revenue (around 81% in 2012).

The TPI has some interesting stats about the overall progressivity of the Federal tax system.

First, the lowest quintile (20%) of earners pay almost no Federal taxes. Their average income tax rate is negative and almost completely offsets their payroll tax rate. They earn around 4% of income and pay around only around 0.2% of Federal taxes.

Second, the highest quintile of earners earn around 53% of total income and pay around 68% of all Federal taxes.

Before seeing these numbers, I would have said that the regressive nature of the payroll tax makes overall Federal taxes much less progressive than the income tax. But it turns out that the overall Federal tax burden is (too my mind at least) still pretty progressive.

Sequester this!

The sequester doesn't actually cut federal spending, episode 113.

This one comes from the Congressional Budget Office (CBO):

(clic the pic for an even more savage image)

The full document is available here.

Outlays/Spending are recorded in the second line of the table, and yes this includes the sequester!

Federal Spending is expected to be flat between 2012 and 2013 at around $3.55 trillion before beginning to rise again. It rises each and every year of the sequester.

Spending hits $4,000,000,000,000 in 2016, $5,000,000,000,000 in 2020 and flirts with $6,000,000,000,000 in 2023

People, these are the "savage cuts" that are going to wreck havoc on the American economy. This is Paul Krugman's "doomsday machine".

They are not actual cuts at all, but simply a lowering of the planned growth in Federal spending.

If this level of "cutting" is not politically possible, then we are all doomed.

Peter Orzag wants to sell you a bridge

Over at Bloomberg, Orzag assures us that stimulate now, cut later is a realistic strategy because it has worked well in the past.

The piece is titled, "History Shows the US can Stimulate Now, Cut Later"!

His examples? Well there's really only 1 given:

"From 2017 to 2022, Social Security’s normal retirement age is scheduled to gradually increase to 67. And I’ll bet that not only happens as planned, but does so with little fanfare -- which is pretty much what happened several years ago when the age rose from 65 to 66."

Oh, man. I stand corrected. A phased in over 5 years one year increase in the normal retirement age is going to happen? Well of course we can run a big stimulus now and pay for it with cuts later!

People, this is just so wrong in so many ways. First, this is a tiny "cut". Second, it wasn't part of a deal that included increased spending in the present. Third, as Krugman and others have pointed out recently, the US Congress is the most polarized it's been in recent history. Fourth, that example is a pretty thin reed on which to base "History Shows".

Orzag goes on to cite a 2009 study showing Medicare cuts were largely implemented. But they weren't implemented as part of a deal to allow increased current spending nor was there a long time delay between the legislation and the enactment.

Current Congresses cannot bind future ones. Sure the filibuster or veto threat can create some status quo bias, but a law saying let's spend a bunch more right now but don't worry, we'll cut in 10 years in basically just a con game.

I am not aware of any examples in peacetime (sorry I know we have "wars" going on vs. drugs and terror) US history where the Federal government rationalized an immediate spending increase of 500 billion to 1 trillion dollars in a time where the deficit was already over 1 trillion dollars by promising to cut spending 5 to 10 years in the future and actually did it.

I am pretty sure if Peter Orzag actually knew of such a case, he'd have mentioned it in his piece.

twisted sister

People, I don't believe that we receive the privilege of being Americans from our government. I believe that government officials receive the privilege of their jobs from us Americans. Nor am I a big fan of Tim Geithner and his curious inability to practice what he preaches.

However, Lawrence Lindsey really pulled a fast one on Geithner in the WSJ editorial page today.

Here's Lindsey's version of what Geithner said:

Last week Treasury Secretary Tim Geithner said that the "most fortunate Americans" should pay more in taxes for the "privilege of being an American."

Here's what Geithner actually said:


"That’s the kind of balance you need," said Geithner. "Why is that the case? Because if you don't try to generate more revenues through tax reform, if you don't ask, you know, the most fortunate Americans to bear a slightly larger burden of the privilege of being an American, then you have to -- the only way to achieve fiscal sustainability is through unacceptably deep cuts in benefits for middle class seniors, or unacceptably deep cuts in national security."

Umm, that's not all that close.

"Slightly larger burden of the privilege OF being an American" does NOT equate to Lindsay's paraphrase of "should pay more in taxes FOR the privilege of being an American.

I disagree with Geithner. But Lindsey's column is a hatchet job.

I actually like how Tim apparently inadvertently lays out a preferable alternative. Why are "middle class seniors" a protected benefit class? Why is the military a protected benefit class?

If we can attain fiscal sustainability by deep cuts to middle class seniors' benefits and the military, then let's do it!

Here's the video:



This post was updated to correct a spelling error.

One step closer to sending in the gunboats

Germany is sending over 150 volunteer tax collection experts to Greece to "help" them clamp down on tax evasion.

Really.

Story is here.

What could possibly go wrong?

Krugman almost backs down on US "austerity"

Amazing.

The whole article is big fun, but I got a meeting with the dean this morning (I'm in TROUBLE!!!!!) so let's just focus on one bit:

"Meanwhile, countries that didn’t jump on the austerity train — most notably, Japan and the United States — continue to have very low borrowing costs.... "

But then he said this:

"That’s true even in America, which has avoided full-fledged austerity at the federal level but has seen big spending and employment cuts at the state and local level."

So close, Paul, so close. Just take out "full-fledged" and "big" and add "over the last 18 months" at the end.

Author! Author! The EYM

The EYM comes up with a couple of nice policy pieces.

On the Raleigh Convention Center....

On Privatization....and Not, in NC Counties

Great thanks and respect to Dr. Michael Sanera, the lead author, for letting Kevin tag along.

Is this what austerity looks like?

The graph above shows Federal spending (in blue) and State and Local spending (in red). The gray shaded area is the NBER's dating of the last recession. The numbers are NOT adjusted for inflation

Federal spending is still than 30% higher than it was in January of 2007. State and Local spending is still around 12% higher than it was in January 2007.

Is this really austerity?

Can government spending really never come down? Isn't it over 2 years since the end of the recession?

Aren't all the people talking about fiscal drag and government spending cuts slowing down the recovery just arguing from accounting identities like they yell at the right wingers for doing?

Can we really run a trillion dollar deficit and bemoan austerity simultaneously?

Lagarde vs. Lagarde

Chrissie, you got some 'splainin' to do!

 The head of the International Monetary Fund warned that in addition to cutting yawning budget deficits Europe needs to do more to promote growth and stop the crisis from spreading to the world economy. "It is about avoiding a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand," IMF Managing Director Christine Lagarde said before the German Council on Foreign Relations. "A moment, ultimately, leading to a downward spiral that could engulf the entire world," she said. 

 People, one of the most effective remedies for the "1930s problem" was for countries to exit the gold standard and devalue their currencies (you are allowed to agree with this even if you favor a gold standard by simply believing that they'd chosen the wrong parities). The situation in Europe is eerily similar. The PIIGS need to exit the Euro-zone and devalue their currencies! As far as I can see, the IMF is dead set AGAINST this proven remedy to "1930s problems"

 Instead, the IMF is actually a big part of the forced austerity movement! The IMF is part of the group threatening further payouts to Greece unless they do what? INCREASE AUSTERITY!!

The IMF is making Greek negotiations with private creditors much harder by refusing to take any haircuts on their own loans to Greece (the IMF's insistence on being paid in full makes the required private haircut to hit the IMF's 120% debt in 2020 target even harder).

 In other words, as is usually the case in a financial crisis, THE IMF IS PART OF THE PROBLEM.

The only viable alternative to self defeating austerity is exit and devaluation. I believe that IMF economists know this, but the leaders of the organization are more concerned about French and German banks than they are about economic performance and living standards in Greece and Portugal, so we get these ridiculous & hypocritical lectures.

 

Austerity & Growth

There is a lot of discussion on the question of whether austerity is growth enhancing or not. While it's an entertaining debate, I get the feeling that the subtext is that European austerity only makes sense if it's growth enhancing, and I don't think that's true.

To my mind, Greece has two choices, default and devalue or continue on a path of ever greater austerity. Why they seem to be choosing option "b" is beyond my comprehension, but given they don't exit the system, what other option do they really have? Obviously they have no monetary levers. Obviously, they cannot borrow to finance further spending "stimulus". Obviously they cannot compel Germany to just pay up or the ECB to apply the monetary level system wide.  Obviously, they are not going to export their way to prosperity in the near term. So it's pretty much austerity uber alles for them.

Italy is in largely the same boat, except their borrowing rates have not hit Grecian heights due to ECB interventions. Their only options are austerity or exit.

As for the US of A, the idea that we are practicing fiscal austerity is risible. You can't even see austerity from where we are currently standing.

Alan Blinder channels St. Augustine

 You know, "Lord, grant me chastity, but not just yet"!

In today's WSJ, Alan writes, "it would be smart to borrow, say, another $500 billion this year and then pay for it, say, 10 times over, with $5 trillion in deficit reduction spread over 10 years—starting, say, in 2014."

People say this all the time, Blinder, Christina Romer, Mark Thoma, but it doesn't make sense. All Congress can commit to doing is what they actually do in the present. Does anyone really think the coming "draconian sequesters" on defense will actually happen?

The "cuts are coming around the corner" language is just boilerplate, designed to inoculate the writer from the charge of fiscal irresponsibility when they advocate increasing current federal spending.

Current Congresses cannot bind future Congresses. If they really want to cut spending, the only way to do it is to (sorry in advance) JUST DO IT in the here and now.

Don't hold your breath.

Your Euro Death Watch update

Spanish 10 year bond yields hit 6.975% today.

YIKES!

With no growth in sight for Greece Italy and Spain, high re-financing costs like this will make their debt ratios grow even if they manage to balance their budgets. Only large surpluses will stabilize those debt ratios if their cost of funds is 7% or above and economic growth is weak.

lettuce spray

The only negotiations more screwed up than Hunter-Stern are those between the Dems and Reps on the (not so) Supercommittee on deficit reduction.

They are charged with producing $1.2 trillion in cuts and revenues over 10 years. That is $120 billion per year. Federal spending is running around $3.6 trillion PER YEAR. The deficit is over $1 trillion PER YEAR.

In other words, $1.2 trillion is peanuts.

We could take the full $1.2 trillion out of defense and never miss it. Defense spending is around $900 billion PER YEAR, so we'd be "crippling" the Pentagon by only giving it $780 billion PER YEAR.

The Canadians would probably pour over our border and conquer us at that point, eh? Well not really, because the cuts are not really cuts from today's levels but from a baseline of future increases. If sequester went into effect, the Pentagon budget would still grow over the next 10 years.

And yet we read this in today's WSJ:

With Congress's deficit-reduction supercommittee barreling toward a deadline for striking a big budget deal, both parties are reaching for accounting gimmicks to help reach their target of $1.2 trillion in savings over 10 years.

Some tools are familiar to old Washington hands, such as massaging budget assumptions and painting rosy economic scenarios. Others include taking credit for "saving" money on wars that are ending and putting off until next year what lawmakers don't want to deal with now.

All told, none of these efforts make the fundamental policy changes needed for a long-term budget fix. "Suddenly everyone is talking not about deficit reduction but deficit-reduction gimmicks," said Stanley Collender, a budget expert and former congressional aide.

Give me that old time sequester, give me that old time sequester, give me that old time sequester, it's good enough for me. It was good enough for Gramm-Rudman, it was good enough for Gramm-Rudman, it was good enough for Gramm-Rudman and it's good enough for me.

The answer to the question is "nothing"

Tyler asks, What happens in the Super Committee Fails?

I answer, Nothing of any significance.

Less than $1 trillion in actual cumulative total spending cuts ($167 billion is "interest savings") starting in Fiscal 2013 and going on for the next 8 years after that.

Pretty much nothing happens to entitlements. Defense is cut an average of $50 billion per year (from a base level of around $900 billion +).

Look, we are spending $3.6 trillion + every year! Knocking $95 billion/year off for 9 years is really less than chump change.

Of course the Super Committee will fail; failure is basically costless.

Giving Stimulus a bad name since 2009

President O's $447 billion stimulus, er, I mean jobs bill has been rejected by Congress. Now the pieces are coming up in the Senate, one at a time.

The first was a proposal to give $35 billion to State and Local governments to support salaries for teachers, cops & firefighters. It's paid for by a surtax on people earning more than $1 million a year.

People, when did stimulus come to mean shoveling money to public employee union members only? when did stimulus come to mean tax increases?

According to WAPO, $30 billion of the money would "Support almost 400,000 education jobs for one year".

Notice that the word "support" in there means they are not claiming almost 400,000 new jobs; this is the old "create or preserve" rhetoric.

Suppose the bill really could deliver 400,000 new teaching jobs for one year. At $75,000 per job/year that would be a marvel of government efficiency. But why teachers? why not $37,500 for 800,000 construction workers? Or cut a check for $18,750 to 1.6 million unemployed people selected by lottery? or $9,375 to 3.2 million unemployed people?

This isn't stimulus; this is simple redistribution from a likely pro GOP group to a likely pro Democratic Party group. No wonder the Republicans are against it.

(Yes I know that one can argue schoolteachers have a higher MPC than do "millionaires", but that would be at best a second order effect, and this effect would be bigger if the money went straight to more unemployed people)

Cut cut cut, cut cut defense!

People, the federal government wastes a crap-ton of money. Let's get serious about cutting spending over the next 10 years. Here's a start:

Defense: Cut $200 billion a year. That's two trillion over 10 years. Don't worry, we'll still have a freaking huge military as current spending is north of $700 billion per year.

TSA: Eliminate it. That's $50 billion a year or 1/2 trillion over 10 years.

Agricultural Subsidies: Eliminate them. That's maybe $25 billion a year or 1/4 trillion over 10 years.

Homeland Security: Cut it in half. That's another $25 billion a year or 1/4 trillion over 10 years.

People, that's $3 trillion of REAL cuts. Easy-peasy. No entitlement reforms (which I favor as well), no cutting Obama's choo-choos and windmills, just declining to screw ourselves quite as much as we have been doing.

Anyone have numbers on other low hanging Federal fruit we can harvest?

Hey Tyler: Taxes ARE going up

A lot.

The "Bush tax cuts" expire. Obamacare incorporates a myriad of substantial tax increases that come on line very soon.

Plus, our President has now figured out how to package tax increases on the wealthy as a jobs program (sorry President O. I didn't mean it. Please don't drone me)!

Yet Tyler says Republicans are silly to not make an additional tax deal, even if the stuff they want is unlikely to materialize because "taxes will eventually go up in any case, because they must"

I can't see why it's so obviously correct to be advocating for more tax increases than the one we already have on our plates.

I for one am strongly in favor of tax cuts relative to the current policy path we have.

Barack Obama comes out of the closet

Wow. President O is planning to ask for $1.5 Trillion in new tax revenues with no changes to Social Security and perhaps no changes to Medicare either.

Finally the bullsh*t is over and the cards are on the table.

You know, if this doesn't kick-start the economy, I don't know what will!!

Germany's role in the PIIGS bailout in one easy collage

A foolproof plan to balance the budget and stimulate the economy

As you may know, one of the ideas tossed around for dealing with the debt limit was to have the Treasury mint a trillion $ coin and then have the Fed "buy" it from them.

It is not well known, but totally true that Congress has already put the Fed on such a path since 2005 with an extra economic stimulus twist.

The Fed is mandated to buy new "presidential" dollar coins every year from the Treasury. It costs $0.30 to make them so Treasury is making bank. Plus, no one wants to use them so the Fed has to find/build storage facilities to house the unwanted coins.

I am not making this up!

Currently the Fed is holding over a billion of these coins in 28 different storage facilities.

People, all we need to do in these troubled times is double down on this excellent starter program. Make the Fed buy, say a trillion of these coins every year and store them.

That's $700 billion a year in new revenue and lots of construction jobs building new storage facilities. Plus those facilities will need managers, forklift operators, maintenance workers, security guards...

Hey, maybe the Treasury could make the coins even bigger!

I really don't see what could go wrong here.

Hat tip to 7im.