I was asked a question about tax rates on another forum. Here is the question and my answer:
What do you think the tax rate that maximize revenue is?
Great question and it depends on circumstances, including what kind of deductions (loopholes) we have. Today, we have deductions that don't contribute to the overall health of the country.
Federal tax revenues have ranged from a little over 17% of GDP to a little over 19% of GDP for a few decades. This includes when the top rate was 70% and when the top rate was 28%.
Bush lowered tax rates without eliminating tax deductions. Reagan never did that. When Reagan lowered tax rates twice (top rate went from 70% to 50% in 83 and then to 28% in 86) he also eliminated deductions.
After Reagan, tax rates increased and more deductions proliferated. We had a recession. Then Clinton / Gingrich cut the capital gains rate. We had an economic boom as a result.
The problem today is that most politicians are economic illiterates. The left says punish the "rich" with high taxes and the government will have money to spend on "social justice". The right claims that cutting any taxes will stimulate an economic boom. Neither of these positions is correct.
The best approach is to lower tax rates and reduce tax deductions. Reagan believed this. Bill Bradley believed this. Jack Kemp believed this. Jerry Brown believed this. And now Obama's debt commission believes this. It's a bi-partisan belief. Economic illiterates don't understand this. They are in control. That's the problem.
I will trade tax deductions for lower rates any time. I will also trade consumption taxes for taxes on innovation and production anytime. These are the right things to do for the country. Unfortunately, there are politicians who are either too stupid or too power hungry to do this. That's the problem.
Thursday, November 11, 2010
More on Radical Tax Reform
More on Obama's Deficit Commission...
The idea of simplifying the tax code by lowering tax rates and eliminating deductions is not a new one.
In the 1970s, an economics professor from Canada (Art Laffer) demonstrated that there are two rates that will produce the same revenue. A tax rate of 0% will produce the same revenue of a tax rate of 104% or higher, namely ZERO revenue. However, a 10% rate and a 90% are not inequivalent. Imagine a skewed bell curve. A 10% rate might produce the same revenue as 80% or 90% or 95% or some other high rate. It depends on a lot of things. Reducing rates can produce higher revenue by stimulating economic activity, but it depends on where the rate is in the context of the condition of the economy.
Second, there are a lot of serious people who believe that the current tax code severely distorts economic activity to the detriment of America. Should we give people a tax break for buying a big house? Probably not. Should we give them a break for taking a risk and investing in a new business? Yes, if we care about the long-term competitiveness of the U.S. economy. Unfortunately, the current tax does the opposite. We deduct big mortgages and tax capital gains. That's part of the problem.
The GOP was almost in complete agreement while Reagan and Clinton were Presidents that we needed radical tax reform in this direction -- either a flat rate income tax with limited deductions or completely replacing the income tax with a national sales tax. Jerry Brown agreed with this in 1992 too (Art Laffer was his economic advisor.)
We all had great hope when the GOP took control of the Presidency while keeping control of both Houses of Congress for the first time since before the Great Depression. Unfortunately, all discussion of radical tax reform died a quick death during the Bush administration. Bush was too busy creating new social programs like Medicare Part D and No Child Left Behind to be bothered with such trivia as the long term competitive nature of America.
The idea of radical tax reform is not dead. It has now made a surprising comeback in the Obama Deficit Commission.
Sure, there are partisan hacks like Sean Hannity who will piss and moan about the proposals just because Obama created the commission. However, it will be the left-wing of the Democrat Party who will have the biggest problems with this proposal. They are already out in force.
The idea of simplifying the tax code by lowering tax rates and eliminating deductions is not a new one.
In the 1970s, an economics professor from Canada (Art Laffer) demonstrated that there are two rates that will produce the same revenue. A tax rate of 0% will produce the same revenue of a tax rate of 104% or higher, namely ZERO revenue. However, a 10% rate and a 90% are not inequivalent. Imagine a skewed bell curve. A 10% rate might produce the same revenue as 80% or 90% or 95% or some other high rate. It depends on a lot of things. Reducing rates can produce higher revenue by stimulating economic activity, but it depends on where the rate is in the context of the condition of the economy.
Second, there are a lot of serious people who believe that the current tax code severely distorts economic activity to the detriment of America. Should we give people a tax break for buying a big house? Probably not. Should we give them a break for taking a risk and investing in a new business? Yes, if we care about the long-term competitiveness of the U.S. economy. Unfortunately, the current tax does the opposite. We deduct big mortgages and tax capital gains. That's part of the problem.
The GOP was almost in complete agreement while Reagan and Clinton were Presidents that we needed radical tax reform in this direction -- either a flat rate income tax with limited deductions or completely replacing the income tax with a national sales tax. Jerry Brown agreed with this in 1992 too (Art Laffer was his economic advisor.)
We all had great hope when the GOP took control of the Presidency while keeping control of both Houses of Congress for the first time since before the Great Depression. Unfortunately, all discussion of radical tax reform died a quick death during the Bush administration. Bush was too busy creating new social programs like Medicare Part D and No Child Left Behind to be bothered with such trivia as the long term competitive nature of America.
The idea of radical tax reform is not dead. It has now made a surprising comeback in the Obama Deficit Commission.
Sure, there are partisan hacks like Sean Hannity who will piss and moan about the proposals just because Obama created the commission. However, it will be the left-wing of the Democrat Party who will have the biggest problems with this proposal. They are already out in force.
Obama Deficit Commission Leaks Recommendations - Surprising Tax Rate Reduction
Yesterday, Obama's Deficit Commission leaked some of their proposed recommendations.
The Deficit Commission is bi-partisan group created by President Obama to come up with recommendations on how on to reduce (and presumably eliminate) deficit spending over the next decade. The commission's members were appointed by the President as well as the Democrat and Republican leaders in the House and Senate. Some of the GOP's rising stars, including Congressman Paul Ryan and Senator Tom Coburn, are members of the commission.
The draft proposal calls for cutting $4 trillion from the projected deficits over the next 10 years. Nancy Pelosi, Congressman Rick Weiner, and many others on the left immediately declared the draft as unacceptable. To date, most Republicans have had a more cautious reaction.
The spending cuts in the commission's report aren't even close to being deep and broad enough to balance the budget in 10 years. They didn't touch Obamacare because the members had "healthcare fatigue" after last year. They are waiting too long (2075) to make very minor changes to Social Security. They don't do much about spending in the Departments of Agriculture, Commerce, Eduction, Energy, and Labor. Yes, they are proposing to close 1/3rd of U.S. overseas military bases and bravo to them for that. But, the proposal will NOT balance the budget in 10 years. They need to propose more to be credible.
However, their tax proposals are much more interesting.
Obama's deficit commission proposes to reduce the top income tax rate to 23%. That's a 36% cut from the current 36% top rate and a 42% cut from 39.6% (where the rate will be if the Bush tax cuts expire). It would also collapse the current six income tax rates (10, 15, 25, 28, 33, 36) to three rates (8, 14, and 23). Plus it eliminates the alternative minimum tax and cuts corporate tax rates. The U.S. currently has the second highest corporate tax rates in the world. Obama's commission proposes to reduce the top corporate tax rate from 36% to 26%.
Mostly, they propose to "pay for it" by eliminating deductions.
The GOP has wanted to flatten rates and eliminate deductions for 30+ years. Reagan did this twice -- once at the beginning of 1980s when the top rate was cut from 70% to 50% -- and again in 1986 when President Reagan teamed up with Democrat Senator Bill Bradley to cut the top rate from 50% to 28%, while eliminating deductions.
One deduction Obama's commission wants to eliminate is the deduction for jumbo mortgage loans over $500,000. Subsidizing consumption at the expense of innovation and production (including the purchase of expensive homes) is not the right thing to do if we want to have a healthy, competitive, economy. But this is exactly what the current U.S. tax code does. Of course, people certainly should be able to buy a million dollar plus home if they can afford it, but the tax code shouldn't subsidize consumption over innovation and production.
The commission's report is very mixed. On the one hand, it demonstrates cowardice because they propose to wait until most of us are dead to fix Social Security. On the other hand, it demonstrates some courage given that they were created by a Democrat President and still propose to dramatically reduce income tax rates, including rates on the "rich". Overall, I am actually encouraged by this report. But they need to do a lot more on spending.
The Deficit Commission is bi-partisan group created by President Obama to come up with recommendations on how on to reduce (and presumably eliminate) deficit spending over the next decade. The commission's members were appointed by the President as well as the Democrat and Republican leaders in the House and Senate. Some of the GOP's rising stars, including Congressman Paul Ryan and Senator Tom Coburn, are members of the commission.
The draft proposal calls for cutting $4 trillion from the projected deficits over the next 10 years. Nancy Pelosi, Congressman Rick Weiner, and many others on the left immediately declared the draft as unacceptable. To date, most Republicans have had a more cautious reaction.
The spending cuts in the commission's report aren't even close to being deep and broad enough to balance the budget in 10 years. They didn't touch Obamacare because the members had "healthcare fatigue" after last year. They are waiting too long (2075) to make very minor changes to Social Security. They don't do much about spending in the Departments of Agriculture, Commerce, Eduction, Energy, and Labor. Yes, they are proposing to close 1/3rd of U.S. overseas military bases and bravo to them for that. But, the proposal will NOT balance the budget in 10 years. They need to propose more to be credible.
However, their tax proposals are much more interesting.
Obama's deficit commission proposes to reduce the top income tax rate to 23%. That's a 36% cut from the current 36% top rate and a 42% cut from 39.6% (where the rate will be if the Bush tax cuts expire). It would also collapse the current six income tax rates (10, 15, 25, 28, 33, 36) to three rates (8, 14, and 23). Plus it eliminates the alternative minimum tax and cuts corporate tax rates. The U.S. currently has the second highest corporate tax rates in the world. Obama's commission proposes to reduce the top corporate tax rate from 36% to 26%.
Mostly, they propose to "pay for it" by eliminating deductions.
The GOP has wanted to flatten rates and eliminate deductions for 30+ years. Reagan did this twice -- once at the beginning of 1980s when the top rate was cut from 70% to 50% -- and again in 1986 when President Reagan teamed up with Democrat Senator Bill Bradley to cut the top rate from 50% to 28%, while eliminating deductions.
One deduction Obama's commission wants to eliminate is the deduction for jumbo mortgage loans over $500,000. Subsidizing consumption at the expense of innovation and production (including the purchase of expensive homes) is not the right thing to do if we want to have a healthy, competitive, economy. But this is exactly what the current U.S. tax code does. Of course, people certainly should be able to buy a million dollar plus home if they can afford it, but the tax code shouldn't subsidize consumption over innovation and production.
The commission's report is very mixed. On the one hand, it demonstrates cowardice because they propose to wait until most of us are dead to fix Social Security. On the other hand, it demonstrates some courage given that they were created by a Democrat President and still propose to dramatically reduce income tax rates, including rates on the "rich". Overall, I am actually encouraged by this report. But they need to do a lot more on spending.
Friday, November 5, 2010
What Should Obama Do Now?
After Tuesday's historic election, the pundants and politicians are all speculating on whether or not Obama will "pull a Clinton" by moving to the center and working with the GOP.
There is a lot of speculation on what that might look like.
I have a suggestion. Obama's deficit commission is due to report on Dec 1. He should take their report and dump it in Boehner's lap. Then Obama should do a hard sell, telling the American people that: A.) it is a bi-partisan recommendation, B.) it reduces the deficit, and C.) and we need to pass it now to fix the economy.
That would put the GOP on the spot. They would be forced to come to grips with the bill and either pass it or try to explain why they won't.
Unfortunately, I don't think Obama will do this because there will be spending cuts in the bill that Obama won't like. So, it is very likely that he will muck with recommendations by gutting the spending cuts and adding more taxes. At that point, the GOP will be in the driver's seat until 2012, because they will be able to correctly claim that Obama only cares about growing government, not balancing the budget and fixing the economy.
Why do I believe that Obama won't "pull a Clinton"? Because Obama and Pelosi are already running around claiming that the election was not a referendum on their failed policies. In spite of the fact that Obama has been on television morning, noon and night for the past 18 months selling his stimulus and healthcare bills, the Democrats keep claiming that the American people just don't get it.
It's not the American people who don't get it. It's Obama and Pelosi. Their delusional state doesn't bode well for America over the next two years.
There is a lot of speculation on what that might look like.
I have a suggestion. Obama's deficit commission is due to report on Dec 1. He should take their report and dump it in Boehner's lap. Then Obama should do a hard sell, telling the American people that: A.) it is a bi-partisan recommendation, B.) it reduces the deficit, and C.) and we need to pass it now to fix the economy.
That would put the GOP on the spot. They would be forced to come to grips with the bill and either pass it or try to explain why they won't.
Unfortunately, I don't think Obama will do this because there will be spending cuts in the bill that Obama won't like. So, it is very likely that he will muck with recommendations by gutting the spending cuts and adding more taxes. At that point, the GOP will be in the driver's seat until 2012, because they will be able to correctly claim that Obama only cares about growing government, not balancing the budget and fixing the economy.
Why do I believe that Obama won't "pull a Clinton"? Because Obama and Pelosi are already running around claiming that the election was not a referendum on their failed policies. In spite of the fact that Obama has been on television morning, noon and night for the past 18 months selling his stimulus and healthcare bills, the Democrats keep claiming that the American people just don't get it.
It's not the American people who don't get it. It's Obama and Pelosi. Their delusional state doesn't bode well for America over the next two years.
Wednesday, November 3, 2010
Voters to Obama: Take Your Spending and Shove It
The voters sent a clear message last night: We don't like what Obama and the Democrats have done to us over the last two years. We're not going to take it any longer. So, take your big government spending and shove it.
The breadth and depth of the Democrat's defeat was unimaginable just a couple of months ago.
The GOP will pick up 63 to 65 House seats -- the largest turnover since WWII. Not only were the Democrat classes of 2006 and 2008 largely purged from the House, several long time Democrat Congressmen (like Ike Skelton) were defeated.
The GOP won almost 700 state legislative seats. (I thought I was being optimistic when I predicted at least 300). 20 or 21 state legislatures will change party control, just in time for redistricting. North Carolina and Alabama have GOP state legislatures for the first time since the 1870s.
Several governors races are still too close to call, including Oregon and Minnesota, which the Democrats were supposed to win handily.
The GOP won at least 6 Senate seats. Rand Paul won by double digits. Marco Rubio had a larger than expected margin. One of the most liberal members of the Senate (Russ Feigngold) was handily defeated. We'll see what happens in Colorado and Washington.
The GOP elected the first female Latino governor (Susana Martinez), the first female Indian governor (Nikki Haley), and two other women governors (Mary Fallin and Jan Brewer). The GOP also elected three Latino Congressmen, including a woman (Jaime Herrera) from my state. They also elected and two black Congressmen. We'll see if they are allowed into the Congressional Black Caucus.
The only bad news for the GOP is that three successful business women (Meg Whitman, Carly Fiorini, and Linda McMahon) went down in flames as did Christine O'Donnell, and Sharron Angle. What a surprise given that they were viciously attacked as extremists, whores, bitches, psychos, and worse by the Democrats and their cronies in the media. Feminists everywhere must be so proud of their great triumph in defeating these women with their vulgar slurs.
The big question is what will Obama do now? Will he try to work with the GOP House like Clinton did after the GOP picked up 54 seats in 1994? My guess is that he won't. Obama is too much of a leftist ideologue. He also doesn't have any experience working with an opposition. Obama will likely try to use executive orders to push through his radical agenda on things like carbon emissions, while continuing to demonize the GOP as obstructionists.
Democrats who predict that the GOP will just sit back and do nothing are kidding themselves. That may be what Mitch McConnell wants, but he isn't calling the shots. The House is in charge of the GOP agenda. There are enough Tea Party candidates elected last night to push through pretty much whatever they want and send it to the Senate.
There are 21 Democrat Senators up for reelection in 2012. Many of them are in solidly red states while others are in states that swung heavily to the GOP yesterday. That includes Joe Manchin of West Virginia who just won a special election by running television ads in which he used a rifle to shoot holes in Obama's cap-and-trade bill. It's doubtful that they will continue to follow Obama off of a cliff.
On the GOP side, people like Rand Paul, Marco Rubio, Jim DeMint and others will not be content to simply block and filibuster legislation. These people have an agenda and they are they are going to try to push it.
It would not surprise me at all to see a coalition of scared Democrats and GOP Tea Partiers in the Senate pass a fair amount of legislation on taxes, spending cuts, and fixes to Obamacare.
We should also expect to see the new GOP Governors and State Legislators push through their own reform agenda to fix their economies, failing schools, and tort systems.
Last night was an election of historic proportions. Now, the real work begins.
The breadth and depth of the Democrat's defeat was unimaginable just a couple of months ago.
The GOP will pick up 63 to 65 House seats -- the largest turnover since WWII. Not only were the Democrat classes of 2006 and 2008 largely purged from the House, several long time Democrat Congressmen (like Ike Skelton) were defeated.
The GOP won almost 700 state legislative seats. (I thought I was being optimistic when I predicted at least 300). 20 or 21 state legislatures will change party control, just in time for redistricting. North Carolina and Alabama have GOP state legislatures for the first time since the 1870s.
Several governors races are still too close to call, including Oregon and Minnesota, which the Democrats were supposed to win handily.
The GOP won at least 6 Senate seats. Rand Paul won by double digits. Marco Rubio had a larger than expected margin. One of the most liberal members of the Senate (Russ Feigngold) was handily defeated. We'll see what happens in Colorado and Washington.
The GOP elected the first female Latino governor (Susana Martinez), the first female Indian governor (Nikki Haley), and two other women governors (Mary Fallin and Jan Brewer). The GOP also elected three Latino Congressmen, including a woman (Jaime Herrera) from my state. They also elected and two black Congressmen. We'll see if they are allowed into the Congressional Black Caucus.
The only bad news for the GOP is that three successful business women (Meg Whitman, Carly Fiorini, and Linda McMahon) went down in flames as did Christine O'Donnell, and Sharron Angle. What a surprise given that they were viciously attacked as extremists, whores, bitches, psychos, and worse by the Democrats and their cronies in the media. Feminists everywhere must be so proud of their great triumph in defeating these women with their vulgar slurs.
The big question is what will Obama do now? Will he try to work with the GOP House like Clinton did after the GOP picked up 54 seats in 1994? My guess is that he won't. Obama is too much of a leftist ideologue. He also doesn't have any experience working with an opposition. Obama will likely try to use executive orders to push through his radical agenda on things like carbon emissions, while continuing to demonize the GOP as obstructionists.
Democrats who predict that the GOP will just sit back and do nothing are kidding themselves. That may be what Mitch McConnell wants, but he isn't calling the shots. The House is in charge of the GOP agenda. There are enough Tea Party candidates elected last night to push through pretty much whatever they want and send it to the Senate.
There are 21 Democrat Senators up for reelection in 2012. Many of them are in solidly red states while others are in states that swung heavily to the GOP yesterday. That includes Joe Manchin of West Virginia who just won a special election by running television ads in which he used a rifle to shoot holes in Obama's cap-and-trade bill. It's doubtful that they will continue to follow Obama off of a cliff.
On the GOP side, people like Rand Paul, Marco Rubio, Jim DeMint and others will not be content to simply block and filibuster legislation. These people have an agenda and they are they are going to try to push it.
It would not surprise me at all to see a coalition of scared Democrats and GOP Tea Partiers in the Senate pass a fair amount of legislation on taxes, spending cuts, and fixes to Obamacare.
We should also expect to see the new GOP Governors and State Legislators push through their own reform agenda to fix their economies, failing schools, and tort systems.
Last night was an election of historic proportions. Now, the real work begins.
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