We need tax simplification and tax reform as much as we need to increase revenue.

A comprehensive tax plan should deal with the AMT problem, set the estate tax appropriately, simplify figuring taxes (perhaps by taxing all income the same regardless of source) and update the tax brackets to reflect modern income levels (Currently, the higher income brackets kick in much faster than they should.)

Wes Clark, when he was running for president, offered an interesting plan that set the first tax bracket as all income up to $50000, then the next bracket between $50000 and $150000 or something like that, and so on. Given the wide disparity in today's incomes and the much larger salaries in many cases, spreading the brackets out like that seems more appropriate than the way we currently do it.

And I think we could simplify taxes while making them fairer if we would stop making people figure out their tax based on the source of income. I go through my tax program now and it asks me a zillion questions like did you have income from rent, tips, self-employment, investments, capital gains, etc.

Just ask what's your total income minus allowed deductions and then tax it appropriately. Also, set a limit on the total of all deductions anyone can take in a year. That will keep people from having so many deductions they pay no tax.

This would also make things more fair because you wouldn't have investment income being taxed at a lower rate than income from labor the way you do now.

No Democrat in his or her right mind would consider raising taxes anytime before 2009. Who are these madmen and losers Hundt is spending time warning us against?

...Democrats would be ill-advised to pick the downturn in the economic growth cycle as the moment to increase taxes.

Why? I mean, aside from the fact that there is no increase in income taxes that a Democratic Congress could pass that Bush would not veto? (He would, of course, sign a tax increase that fell largely on poor people) If you are suggesting that an increase in the income taxes paid by the wealthy would hurt economic growth in some way, you are profoundly mistaken.

Let's try to get it into our heads that the Republicans have been 100% wrong in claiming that tax cuts provide an economic stimulus and that tax hikes will retard growth. The first thing we need to understand is that "Economic Growth" is equivalent in meaning to "an increase in aggregate spending." That is what GDP is a measurement of: total spending levels in the economy. Any time there is a recession, it is because there is a reduction in total spending (usually investment spending). Whenever there is an economic recovery and growth, it is because an increase in total spending has occurred.

A tax hike causes either of two macroeconomic events to happen:

(A) no increase at all in aggregate spending will occur (least likely), or

(B) a net increase in aggregate spending will occur (most likely).

(A) happens when all of the tax increase is collected from poor people who would have spent all of the money if they had not handed it over to the government, instead, to pay their tax bill. When this happens, the amount of consumer spending in the economy will drop by exactly the same amount that the government's spending increases. The net result is a wash. Neither a stimulus nor a contraction occurs.

(B) happens when at least some of the money that the government collects from a tax hike comes from rich people who would have saved the money if they had not used it to pay their increased tax bills, instead. When this happens, the result is a net increase in aggregate spending and economic growth because money that would have been taken out of the economy (saved) is injected into the economy (spent) by the government, instead.

Contrary to the mythology preached by the Republican Party for decades, tax hikes will always produce an economic stimulus so long as at least some of the money the government collects in taxes would have been saved instead of spent. Is that something the Democratic Congress should "try" to make happen, even though Bush would veto such an economic stimulus? Only if they can make it clear to the electorate that the economic recovery that would follow is the direct result of the Democrats' decision to increase the tax bills of the wealthy.

Democrats should make a diligent effort to make sure the electorate understands that the economy's current recovery occurred in spite of the Bush tax cuts and not because of them. (The only reason why their big tax cuts for the wealthy did not throw the economy into recession is because the Republicans countered the contractionary effect of their tax cuts by increasing the government's total spending of borrowed money. All else equal, increases in deficit spending will cause economic growth to occur just as effectively as a tax hike on the wealthy will. Either way, money is spent that would not have been spent.)

We really need to invest some time in exposing the flaws of the Republican Party's economic mythology.

The Misunderstood Relationship Between Savings and Investment

There are two sides to the coin. Revenues can be increased by various tax changes (like fixing the preferential rates on estate taxes and unearned income).

But the other side of the coin is the half trillion dollar military budget. If we weren't spending so much money on the destruction industries we could afford many of the programs that are being shortchanged. People resent high taxes because, essentially, half of their federal taxes are going to militarism. The direct benefit to society is nil. A bomb doesn't put food on the table, educate a child, cure a disease or rebuild the Gulf Coast.

Here is a graphic on where the budget really goes:

Pie Chart

I proposed eliminating payroll taxes as a way to "fix" the funding of social programs and make the income tax more progressive. Here are the details:

Save Social Security

By adding a few percentage points to each bracket (omitting the lowest) and changing the income ranges it would be possible to raise revenue and provide relief for those with the least amount of income.

Tinkering with taxes without looking at where the money is going is inadequate. Why do we need to spend as much on militarism as the rest of the world combined? Doesn't Germany get a steady supply of fuel without having 750+ foreign military bases?

--- Policies not Politics
Daily Landscape

I am quite sure that no major cut in "defense" spending will occur in my lifetime. Far too much money is being made by some very wealthy people for this to ever be a consideration. It is just too easy to convince Americans that the whole world is not only out to get us, but has the ability to do so, thus we need to buy more and more "stuff" to defend ourselves with. Tackling that albatros now is a way to put the Republicans back in power in two years.

I'm a little surprised, but not much, that our Congressfolk to be are not talking up a solution to the healthcare cost crisis in our country. Now there is a problem that can be solved, and solved without much trickery being involved. As the joke goes, first we kill the insurance salesmen (lawyers).

Hoppy in Sacramento

I would agree that focusing on making structural improvements to the economy rather than raising taxes is a preferred approach. However, one must not lose sight of the fact that inherited wealth is the single greatest threat to freedom and democracy. Increased taxes on inheritance and unearned income should be a key part of any tax cuts package. Spending on defense is also much higher than it needs to be. Finally, it is important do something about the national debt. My preferred solution would be to allocate the debt Bush has created to republican campaign donors. This could be done in the form of a planetary use tax. Pay up immediately or get off the planet.

In the early 90s, widespread belief that there should be a "peace dividend" allowed for modest reductions in defense spending. These days, such arguments won't fly. Remember, even under the Clinton administration, we spent billions on a "missile defense" system that was much like "Star Wars." These days, it's easier to make a phony argument for such spending.

thosethingswesay.blogspot.com

I think you're right that economic growth is, basically, aggregate spending. But, since 2000, all of that spendinf has come from American consumers, not business. During most of the last 6 years, American public companies have recorded record cash on their balance sheets and record profits. Businesses have not spent that cash, for the most part. They've hoarded it or have used it to make acquisitions that have eliminated, rather than created, jobs.

The spending that's kept the economy afloat has come from the average consumer. The consumer has been encouraged to borrow money for purchases because the Federal Reserve kept interest rates almost ridiculously low. The Fed meant to entice businesses to borrow in order to expand but what happened was that businesses held onto their cash while individuals either purchased goods at favorable (but variable) credit rates or they bought homes (also at favorable but usually variable rates).

The tax cuts had nothing to do with consumer spending. Easy credit greased those wheels. And consumer spending has held the economy up.

What we face now is a crisis... consumer debt and even home owner debt, is too high. The wages those consumers earn has been so stagnant that it has barely kept up with even modest inflation... The consumer is the key and the consumer, now over-leveraged, is now faltering.

Anecdotally, I can say this: I have a balance on one credit card right now. I called them to make sure a payment had been received. On that call, they offered me, without me asking, an upgrade that will eliminate all finance charges for a year and will charge less than I'm paying now thereafter. I haven't been charging to this card, have been trying to widdle down my balance... my credit card company (Citibank mastercard) basically turned desperate and is trying to induce me to borrow more by giving me FREE credit. Citibank would not do that if they weren't facing a drop in demand.

The consumers who have propped up the economy are backing off now. They liked the easy credit, but they have borrowed too much. The lenders, like Citigroup, know it. If the willingness of consumers to buy on credit falters, the entire economy will collapse.

This economy is based on working people borrowing beyond their paycheck to paycheck means. Any economic policy that doesn't both encourage their consumption while helping them reduce their debt will do harm.

www.thosethingswesay.blogspot.com

Must cut from the middle and down for two reasons: 1) a tax cut for the middle on down would create majority solidarity for the cut. 2) The middle are the consumers that drive the economy. Cutting from the middle down will likely make tax receipts increase as the middle class will spend more of the wages they keep. That sounds like trickle down, but trickle down almost kind of works. Trick is, you can't start it too high up the wage scale -- the higher you start it, the more people grab money on the way to the bottom. A cut based on median income will be stimulative but also won't start so high up that the benefits will dissapear on the way down.

Also, I'd add a moral angle: middle class citizens are overtaxed. They deserve the break.

www.thosethingswesay.blogspot.com

Hoppy -- you're right, we're not all middle income. But, I think that the problem is that we use national income figures for federal taxes, even though the cost of living is very disparate throughout the US.

For example: $70k a year in my home town of Albuquerque is a handsome salary that implies comfortable, upper-middle-class living.

That same salary in New York City or San Francisco implies... comfortably middle class, but scraping by to remain that way.

A fair national tax policy would account for local purchasing power. Sure, some would object that folks who choose to live in expensive, urban environments, get an unfair break, but it's really a wash -- such folks are already parted with more of their money than the average American, just to buy basic services (such as renting an apartment).

If the idea behind successful tax reform is to put more money in the hands of consumers, the real drivers of the economy for more than a decade, then regional cost of living differences need to be taken into account.

thosethingswesay.blogspot.com

What about inflation? Our real inflation rate is around 9 percent. Is everyone aware of the tricks that are used to calculte the government's statistics? You think the gov. only lies about WMD's? Taxes will be the least and smallest of our worries in the future. This country is bankrupt, as anyone should have guessed when they told us there will be no money in social security. The only thing keeping us afloat at present is the fact that all the other nations holding our debts don't want to see a precipitous fall in the dollar. Already our shameful foreign policy and irresponsible money policies are cuasing these countries to edge towards the door, exchanging dollars for something else, what they label as "diversifying Holdings". Any small event could trigger a stampede the reult of which would be a completely worthless currency and hyperinflation. Whether or not taxes are raised will be a very small matter then.

While government spending can, assuming the economy can meet the demand, increase GDP, it always gets the marginal revenue it spends from the rich -- by borrowing or taxing.

Yes, Ellen, that's quite correct. Uninformed rich people usually prefer to lend the government their money rather than simply hand it over in the form of taxes. What they don't realize is that no sacrifice whatsoever is imposed on them [in terms of lost purchasing power] when they are required by the state to pay even steeply progressive income taxes.

The problem in managing a downturn is that the government may have insufficient projects to spend money on.

I can't imagine such a thing happening. There are always some improvements in the nation's infrastructure that can be made. If the federal government put up the money to double the number of teachers in every school district, it would be possible to cut classroom sizes in half, significantly improving the quality of education that marginal students receive. Then double the investment again.

It's under those circumstances that a tax reduction -- for example, a short-term FISA amnesty -- which puts cash into the pockets of spenders (low and middle class wage earners) can be effective in maintaining or increasing GDP.

I just have to point out that such tax cuts can only be stimulative if the government does something else to maintain its spending. If it were to reduce spending by the amount of the tax cut---something it would have to do if it didn't want to borrow any money to maintain its spending---then the amnesty would not produce any net economic stimulus.

I stress the importance of separating the distinct contractionary effects of income tax cuts from the expansionary effects of deficit borrowing because Republican conflation skills have given policy makers a false understanding of the details of fiscal policy. I imagine our public debates would be quite different if everyone understood that---all else equal---(1) tax cuts are almost always contractionary, (2) they are never expansionary, and (3) the more the rich benefit from tax cuts, the more contractionary they are.

If you combine a contractionary fiscal initiative like a tax cut with an expansionary initiative like "spending more borrowed money", then you may end up with a net economic expansion, but it is patently false to claim that the "tax cutting part" of this combo-fiscal-policy contributes in even a small way to the expansion that is generated by the government's increased spending of borrowed money.

Must cut from the middle and down for two reasons: 1) a tax cut for the middle on down would create majority solidarity for the cut. 2) The middle are the consumers that drive the economy.

This reminds of the talk from the great unelected President, Gerald Ford, who was hired to pardon Nixon. Ford was the fellow who fought inflation with WIN buttons (Whip Inflation Now).

When asked why his tax refund to stimulate the economy generally excluded the poor, Ford explained that the middle class would spend the money on manufactured items to keep the factories working while the poor were likely to spend their money on food.

Ford BTW put his own tax refund in government bonds.

After eliminating cigarette and liquor taxes, the only way I know to accommodate the middle class and down is to cut the Great Non-Tax, Social Security Tax. That your plan? Sounds great to me but I fear you and I are the only ones to go for it.

Or is the WIN button genius more your kind of thinking?

I say if you want spending, give the money to people on the front lines. If there is one thing the poor know how to do, it is spend money.

Best, Terry

Well, I certainly wasn't trying to sound like Ford! But, I take your point, which was well argued.

I DO happen to agree with you, though, that the social security tax is a big problem, mostly because it's regressive and more burdensome on the poor and the middle class. I would like to see tom tax cuts there.

But then, how to fund social security? My suggestion is that we could invest a pool of money, the same size as what we've spent in Iraq, in order to meet future social security obligations. It's always irked me that we seem to have enough money to invade Iraq, but not enough to make social security solvent. It's not a matter of lacking money, it's all about priorities.

thosethingswesay.blogspot.com

how to fund social security?

You really want me to commit hari kari on Josh's blog by answering that? :-)

Well why not? I am very old and long ago outlived any conceivable usefulness.

The economic consequence of having money flow from the bottom of the economic pile to the top is not exactly the best form of taxation whatever the justification. It is much like sin taxes with laudable aims but bad consequences.

While privization compounds the problem, tinkering with eligibility and enlisting all sources of income at best only delays reckoning, at worst destroys Social Security.

The Hallinan Law of Reform comes into play. It states all reform is simple. When one rightwinger showed the forklift bringing in the reforms in one reform of income tax, his point was unchallengeable.

Brushing aside all the cobwebs, fraud and mythology of the middle class entitlement that we paid for and therefore earned; ending the huge bureaucracy and lap dog panting of politicians with a new gimmick for favored constituents; ending the flow of money from bottom to top while safeguarding the social contract to care for the aged and disabled should be the aim should it not?

The question then answers itself. Throw out eligibility, forget the non-existent lockboxes, fire all the bureaucrats, get the politicians' hands out of the cash register. Send a check to those old enough or disabled enough to receive it and ignore all other status. Call it "Ending Socialism as We Know it." That should relieve the rightwingers of their concerns, especially if we don't pay for it. Emphasize the rich, who live longer, benefit most and you will have even Texans eating out of your hand.

Best, Terry