05 August 2011

The Debt Deal: Three days old and already a failure....so let's fix it

Well, we got a deal. And what a deal it was. No new revenue, nothing to create (and a lot to kill) jobs, no reform of entitlements, no long-term solutions to the underlying debt issues. In short, the perfect Republican deal. Obama caved yet again. And three days later, it has already failed: S&P is cutting our rating anyway, claiming we still don't have our debt act together.

So why did we fail? It's because we accepted a false premise. Ever since Obama caved last year on Bush tax cuts for the wealthy – despite the fact that a huge majority of Americans supported his position that the wealthy shouldn’t get more tax breaks – the left has essentially ceded the point that lower taxes=more growth. This idea, which became popular under Reagan, persists to this day as the gospel truth. There's only one small little problem: it's never been supported by facts. But it is so appealing on an intuitive level that few people question it. It just makes sense: government takes less, people spend and invest more, more jobs are created. And if it weren't for the pesky little fact that there is no evidence to support this thesis (and plenty to refute it), I'd agree with it. But if you stop for a moment and give it further thought (something inconvenient in a world of sound-bites, I know), it really doesn't make all that much sense. Consider the reasoning more closely: if I raise taxes and leverage them to create a more redistributive system, lower, middle and upper-middle families get more, the wealthiest get less. Now consider what happens when I give an extra dollar to a wealthy family: they don't need this money to pay bills or even buy new things; their material needs are already met. So they can just put it aside and keep it on the side lines (along with the trillions in wealth already sidelined in this country). But a family lower down the scale will run out and spend it on all the things they need and/or want.

Ah, but the Republicans counter, it's the wealthy who create jobs! It will trickle down. Well, except they don't. Corporations create jobs; the wealthy just benefit from the profits of those corporations through their investments. So it's corporations we should stop taxing altogether and the wealthy we should tax more, to the degree necessary to balance the budget and give more to the lower classes who will actually go out and spend that money to create jobs. In short, it's the lower through upper-middle classes (through their spending) and the corporations (driven by that demand from said spending) who are creating jobs in this country, while the wealthiest simply reap the benefits. So why is it Republicans want to give the most to this class that needs the least and contributes the least? Because, as George Bush said in a rare moment of frankness, that's their base.

If Obama were miraculously to grow a spine, he should propose this to save our credit rating: 1) Eliminate the corporate tax entirely (leaving just the payroll tax). 2) Raise marginal income tax rates on all households whose annual income from all sources is greater than $200,000 (and include an automatic inflation index) so that it starts where it is now for $200,000 and ramps up slowly such that at the highest end of the margin, the rates are up to 75%. (Don’t panic! That’s the marginal rate, the rate you pay only on that part of the income that falls into that bracket, not on all your income once you enter that bracket.) Make the corresponding brackets for dividends and capital gains increase at the same brackets, but make them slightly lower, in order to encourage investment. 3) Raise the Social Security and Medicare retirement age to 70, with the change phased in over time, and introduce means-testing for families with net worth over $10 million (in 2011 dollars, pegged to CPI).

That would be sound fiscal policy and would not only eliminate the year-on-year deficits, but actually put us into a position to slowly eliminate the overall deficit. What's more, it would be pro-growth. In exchange for agreeing to this overhaul, Democrats could even agree to a balanced-budget amendment, assuming it contained responsible language to make exceptions under certain circumstances (e.g. war, certain economic conditions, etc.).

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