Tag Archives: taxes

Bailouts

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Spiegel Online International carried a disturbing story Monday on the subject of bailouts.

The proximate item is Greece’s economic strait, and this is what Spiegel is reporting about that.  The current troika—the IMF, the European Commission, and the European Central Bank—are proposing

[a]nother partial default.  That, indeed, would seem to be the conclusion that Greece’s main international creditors have come to.  According to information received by SPIEGEL, representatives of the so-called troika—made up of the European Central Bank, the European Commission and the International Monetary Fund—proposed just such a debt haircut at a meeting last Thursday held in preparation for the next gathering of euro-zone finance ministers.

But half-measures simply prolong the problem and continue Greece’s addiction to handouts while at the same time providing no mechanism for getting the Greeks to self-sufficiency other than leaving them to their own, already failed devices—both those that drove them to this strait and those of the last three years that have had no useful effect.

Worse, though,

This time around, public creditors would be involved, meaning that taxpayer money from those countries which have stood behind Greece would vanish off the books.

But where is the justice in this?  Indeed, where was the justice, originally, in forcing the taxpayers of entirely separate jurisdictions—other nations—to indemnify the Greeks (and the Irish, and by extension, the Spanish, Italians, and Portuguese) against their own foolish decisions?  Indemnify rather than help, since no meaningful accountability mechanisms were applied.

That’s in the past; those innocent taxpayers already are dragooned into the existing bailout.  The primary question remains, though: where is the justice in compounding that prior error by extending it, by forcing responsible taxpayers to pay for continuing this folly?  And how does this enabling help the Greeks (and Spanish, Italians, and Portuguese; although these three already are attempting preemptive measures so as to avoid their own humiliation)?

Indeed,

Athens has only introduced 60 percent of the reforms [already] demanded by the European Union.

Yet,

The troika has already agreed to give Greece two extra years to meet its austerity goals, a delay that will likely result in a need for up to €30 billion in additional aid, according to the ECB and European Commission.  The IMF believes the funding gap will be closer to €38 billion.

Thus, the EU and the IMF know they’re proposing throwing money down a rat hole, and they’re proposing that anyway.  It’s true enough that cutting the Greeks off from further bailout moves will jeopardize the taxpayers’ money already committed.  However, it’s the nature of bankruptcy—which the Greeks will be better off going through—that such debts get written off and the creditors lose out.  But that’s the only way to stanch the bleeding here.  There’s no useful purpose in committing additional taxpayer funds to this failed effort.

Take careful note of the similarities to our own situation.  Failures here, too, says the current administration, need to be propped up with taxpayer money and, in our case, favored investors protected from the consequences of their decisions.

Death Tax Failure

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The death tax, aka “estate tax” was, briefly, 0 for 2010, then rose to 35% of an estate’s value above $5 million for 2011 and 2012.  Next year—in addition to the fiscal cliff of the Obama tax increases and the Obama sequestration that occur on 1 Jan—the death tax is set to rise again, to a usurious 55% of anything above $1 million.

Never mind that this theft of a parent’s hard-won legacy, intended to be for the benefit of the his sons and daughters, simply leads to market distortions by those rich enough to be able to follow the Warren Buffet example of transferring wealth to, for instance, charitable organizations (good for them, though), and so avoiding—legally and appropriately—sending revenue unnecessarily to the Federal government.

Consider the choices lesser lights—Joe the Plumber with his business, for instance—are forced to make instead.

When [Mr Wurzelbacher] begins to consider retirement with perhaps $10 million of lifetime wealth, he can reinvest the profits in the business (which means growth and more workers) or live lavishly in retirement and spend the money down to zero.

In the first case, he is smacked with federal…death taxes that can take away half of the wealth.  In the second instance, he pays no tax.  A new study by the Joint Economic Committee Republican staff estimates that because of this disincentive to save and invest “the estate tax has cumulatively reduced the amount of capital stock in the US economy by roughly $1.1 trillion.”

Democratic Presidential Candidate Barack Obama insists that this is entirely fair—that death tax is needed for his redistribution programs.  Despite those choices and loopholes.

As the WSJ notes, though (the above link), there is a moral question here, too:

The levy makes Uncle Sam up to a half-partner in the proceeds of successful businesses.  That is on top of the property and income taxes and other assessments that owners pay year after year.  … What is truly unfair is when a family-owned enterprise has to be sold at auction to pay the death tax to the IRS.

Obama has yet to address this moral question in any serious fashion.  Keep that in mind as you go to the polls.

The Current State

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…of our economic “recovery.”

Here are some numbers, from The Walls Street Journal.

  • GDP grew at a (preliminary) 2% rate in the third quarter…
  • That rate means that growth for the first nine months of this year was only 1.7%
    • Slower than last year’s 1.8%
    • Which was slower than the year before’s 2.4%
  • Consumer spending provided most of the third-quarter lift…but consumers can’t continue if the overall economy doesn’t grow fast enough to raise incomes faster
  • The other big third-quarter growth driver was Federal government spending
    • Rose 9.6%
    • Overall government outlays rose 3.7% and accounted for about 0.7 percentage points of that 2% GDP increase
  • Economist David Malpass calculates that growth in private output was closer to 1.3%. The private economy isn’t “doing fine…
    • Non-housing related investment contracted by 1.3%.
    • But business investment is a leading indicator of future job and wage growth.

Finally,

  • [T]he typical growth rate at this stage of the previous nine recoveries (13 quarters) averaged 16.8%
  • The rate for this recovery is 7.2%.
  • That’s about $1.2 trillion in foregone output.

Consumption and Inequality

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Some on the left worry about income inequality as though that matters.  It is, though, equality of opportunity that provides everyone the path to increasing prosperity.  Even though we begin life with an equal endowment of inalienable rights—including the right to seek our own happiness as John Adams described it—it is the implementation of those rights, equality of opportunity, that lets us capitalize on and so to maximize, our unequal endowments of ability, temperament, luck.

One way to assess the increasing prosperity of all is to look at consumption.  Hassett and Mathur do this in their paper, “A New Measure of Consumption Inequality,” a copy of which can be found here.

Some numbers will illustrate.  First, a snapshot of the general situation:

Per cent of Total US Consumption

 

Year 2000

Year 2010

Bottom Fifth of Households by Pretax Income

8.9%

8.3%

Middle Fifth

17.3%

17.1%

Top Fifth

37.3%

38.6%

That’s remarkably stable.

Now, the trend in consumption:

Increase in US Consumption from 2000 to 2010

Bottom Fifth

14%

Middle Fifth

6%

Top Fifth

14.3%

Despite the recessions of the early 2000s and since 2008, household consumption actually has increased, and the bottom fifth by pretax income increased their consumption by quite a bit, despite the claimed unfairness of income inequality.

Now, some illustrative items of consumption, focusing on the bottom fifth of American households:

Per cent of Households with the Indicated Item

 

Year 2001

Year 2009

Computer

19.8%

47.7%

Dishwasher

17.6%

30.8%

Microwave

74.9%

92.4%

Washing Machine

57.2%

62.4%

Air-Conditioning Equipment

65.8%

83.5%

6 Rooms (Other than bath) in the House

21.9%

30.0%

 

Odd, that—overall relative share, by those unequal income groups, of consumption of items like these has remained quite stable across over time.  Moreover, despite that income inequality (which has grown, as it typically does, during recessions, does not act as a limiting factor in consumption capacity.  Apparently unequal incomes don’t matter that much to well-being.  Household quality of life for is improving for all groups.

Of course, this does not mean that the lower income groups don’t need help—they often do, especially during economic dislocations; their resource margins are much thinner.  But that help is most effective as temporary hands up, not in the form of permanent wealth redistribution programs.  The latter simply address a non-existent problem.

Pick One

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David Wessel, writing in a recent Wall Street Journal, reports that

Chief executives of more than 80 big-name US corporations…in a statement to be released on Thursday, say any fiscal plan “that can succeed both financially and politically” has to limit the growth of health-care spending, make Social Security solvent and “include comprehensive and pro-growth tax reform, which broadens the base, lowers rates, raises revenues and reduces the deficit.”

Then Wessel himself makes this remark [emphasis added]:

The declaration differs sharply from those of several other business groups, which urge Washington to deal with the deficit and avoid across-the-board spending cuts and tax increases set for year-end—but avoid any stance on the politically charged issue of raising taxes.

This is an all too common conflation of two separate questions, but it’s amazing to see it coming from a Pulitzer Prize-winning economics journalist.

Of course raising tax revenue is different from raising taxes: the latter is merely one way to achieve the former.  But Wessel compounds his confusion by repeating it:

The CEOs who signed the manifesto deem tax increases inevitable no matter which party succeeds at the polls in November. “There is no possible way; you can do the arithmetic a million different ways” to avoid raising taxes, said Mark Bertolini, CEO of Aetna.

Notice that: Wessel directly contradicts the CEOs in their statement, which he quoted above.  And then he carefully provides his confused “paraphrase” of raising taxes outside another direct quote.  Yet Wessel then notes the following:

The executives didn’t endorse Mr. Obama’s proposal to raise the marginal income-tax rates for the top 2% of taxpayers or any other proposal.  Rather, they called for an overhaul of the tax code that, among things, would eliminate or reduce deductions, credits and loopholes (known as “broadening the base”), and one that also would bring the Treasury more revenue than the existing code does.

It’s no wonder Americans are having trouble sorting through the question of tax reform when the so-called experts can’t even trouble themselves to keep matters straight in their own writings.