Tag: taxation

The Case for Social Security Personal Accounts

There are two crises facing Social Security. First the program has a gigantic unfunded liability, largely caused by demographics. Second, the program is a very bad deal for younger workers, making them pay record amounts of tax in exchange for comparatively meager benefits. This video explains how personal accounts can solve both problems, and also notes that nations as varied as Australia, Chile, Sweden, and Hong Kong have implemented this pro-growth reform.

Social Security reform received a good bit of attention in the past two decades. President Clinton openly flirted with the idea, and President Bush explicitly endorsed the concept. But it has faded from the public square in recent years. But this may be about to change. Personal accounts are part of Congressman Paul Ryan’s Roadmap proposal, and recent polls show continued strong support for letting younger workers shift some of their payroll taxes to individual accounts.

Equally important, the American people understand that Social Security’s finances are unsustainable. They may not know specific numbers, but they know politicians have created a house of cards, which is why jokes about the system are so easily understandable.

President Obama thinks the answer is higher taxes, which is hardly a surprise. But making people pay more is hardly an attractive option, unless you’re the type of person who thinks it’s okay to give people a hamburger and charge them for a steak.

Other nations have figured out the right approach. Australia began to implement personal accounts back in the mid-1980s, and the results have been remarkable. The government’s finances are stronger. National saving has increased. But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. This interview with Jose Pinera, who designed the Chilean system, is a great summary of why personal accounts are necessary. All told, about 30 nations around the world have set up some form of personal accounts. Even Sweden, which the left usually wants to mimic, has partially privatized its Social Security system.

It also should be noted that personal accounts would be good for growth and competitiveness. Reforming a tax-and-transfer entitlement scheme into a system of private savings will boost jobs by lowering the marginal tax rate on work. Personal accounts also will boost private savings. And Social Security reform will reduce the long-run burden of government spending, something that is desperately needed if we want to avoid the kind of fiscal crisis that is afflicting European welfare states such as Greece.

Last but not least, it is important to understand that personal retirement accounts are not a free lunch. Social Security is a pay-as-you-go system, so if we let younger workers shift their payroll taxes to individual accounts, that means the money won’t be there to pay benefits to current retirees. Fulfilling the government’s promise to those retirees, as well as to older workers who wouldn’t have time to benefit from the new system, will require a lot of money over the next couple of decades, probably more than $5 trillion.

That’s a shocking number, but it’s important to remember that it would be even more expensive to bail out the current system. As I explain at the conclusion of the video, we’re in a deep hole, but it will be easier to climb out if we implement real reform.

Republican Sellout Watch

Grousing about the GOP’s timidity in the battle against big government will probably become an ongoing theme over the next few months. Two items don’t bode well for fiscal discipline.

First, it appears that Republicans didn’t really mean it when they promised to cut $100 billion of so-called discretionary spending as part of their pledge. According to the New York Times,

As they prepare to take power on Wednesday, Republican leaders are scaling back that number by as much as half, aides say, because the current fiscal year, which began Oct. 1, will be nearly half over before spending cuts could become law.

This is hardly good news, particularly since the discretionary portion of the budget contains entire departments, such as Housing and Urban Development, that should be immediately abolished.

That being said, I don’t think this necessarily means the GOP has thrown in the towel. The real key is to reverse the Bush-Obama spending binge and put the government on some sort of diet so that the federal budget grows slower than the private economy. I explain in this video, for instance, that it is simple to balance the budget and maintain tax cuts so long as government spending grows by only 2 percent each year.

It is a good idea to get as much savings as possible for the remainder of the 2011 fiscal year, to be sure, but the real key is the long-run trajectory of federal spending.

The second item is the GOP’s apparent interest in retaining Douglas Elmendorf, the current director of the Congressional Budget Office.

Many of you will remember that the CBO cooked the books last year to help ram through Obamacare. Under Elmendorf’s watch, CBO also was a relentless advocate and defender of Obama’s failed stimulus. And CBO under Elmendorf published reports saying higher taxes would improve economic performance.

But Elmendorf’s statist positions apparently are not a problem for some senior Republicans, as reported by The Hill.

The new House Budget Committee chairman, Rep. Paul Ryan (R-Wis.), gave a very public endorsement of the embattled head of the Congressional Budget Office during his first major speech as committee head Wednesday night. …“You’re doing a great job at CBO, Doug,” Ryan said after receiving the first annual Fiscy Award for his efforts at tackling the national debt. He added that he looked forward to crunching budget numbers with him in the future.

In the long run, the failure to deal with the problems at CBO (as well as the Joint Committee on Taxation) may cause even more problems than the timidity about cutting $100 billion of waste from the 2011 budget. Given the rules on Capitol Hill, it makes a huge difference whether CBO and JCT are putting out flawed numbers.

I’ve already written that fixing the mess at CBO and JCT is a critical test of GOP resolve, and I actually thought this would be a relatively easy test for them to pass. It is an ominous sign that Republicans aren’t even trying to clean house.

Taxpayers Got a Big Christmas Present Yesterday, but It Wasn’t the Tax Bill

There’s a lot of attention being paid to yesterday’s landslide vote in the House to prevent a big tax increase next year. If you’re a glass-half-full optimist, you will be celebrating the good news for taxpayers. If you’re a glass-half-empty pessimist, you will be angry because the bill also contains provisions to increase the burden of government spending as well as some utterly corrupt tax loopholes added to the legislation so politicians could get campaign cash from special interest groups.

If you want some unambiguously good news, however, ignore the tax deal and celebrate the fact that Senator Harry Reid had to give up his attempt to enact a pork-filled, $1 trillion-plus spending bill. This “omnibus appropriation” not only had an enormous price tag, it also contained about 6,500 earmarks. As I explained in the New York Post yesterday, earmarks are “special provisions inserted on behalf of lobbyists to benefit special interests. The lobbyists get big fees, the interest groups get handouts and the politicians get rewarded with contributions from both. It’s a win-win-win for everyone — except the taxpayers who finance this carousel of corruption.”

This sleazy process traditionally has enjoyed bipartisan support, and many Republican senators initially were planning to support the legislation notwithstanding the voter revolt last month. But the insiders in Washington underestimated voter anger at bloated and wasteful government. Thanks to talk radio, the Internet (including sites like this one), and a handful of honest lawmakers, Reid’s corrupt legislation suddenly became toxic.

The resulting protests convinced GOPers — even the big spenders from the Appropriations Committee — that they could no longer play the old game of swapping earmarks for campaign cash. This is a remarkable development and a huge victory for the Tea Party movement.

Here’s part of the Washington Post report on this cheerful development:

Senate Democrats on Thursday abandoned their efforts to approve a comprehensive funding bill for the federal government after Republicans rebelled against its $1.2 trillion cost and the inclusion of nearly 7,000 line-item projects for individual lawmakers.

…Instead, a slimmed-down resolution that would fund the government mostly at current levels will come before the Senate, and Reid and Minority Leader Mitch McConnell (R-Ky.) said it will pass by Saturday.

…The majority leader’s surrender on the spending bill marked a final rebuke for this Congress to the old-school system of funding the government, in which the barons of the Appropriations Committee decided which states would receive tens of millions of dollars each year.

…Almost every Senate Republican had some favor in the bill, but as voter angst about runaway deficits grew before the midterm elections, Republicans turned against the earmark practice.

This is a very positive development heading into next year, but it is not a permanent victory. Some Republicans are true believers in the cause of limited government, but there are still plenty of corrupt big spenders as well as some Bush-style “compassionate conservatives” who think buying votes with other people’s money somehow makes one a caring person.

In other words, fiscal conservatives, libertarians, and Tea Partiers have won an important battle, but this is just one skirmish in a long war. If we want to save America from becoming another Greece, we better make sure that we redouble our efforts next year. Eternal vigilance is the price of liberty.

Encouraging Polling Data on Spending Restraint vs. Deficit Reduction

When big-spending politicians in Washington pontificate about “deficit reduction,” taxpayers should be very wary. Crocodile tears about red ink almost always are a tactic that the political class uses to make tax increases more palatable. The way it works is that the crowd in DC increases spending, which leads to more red ink, which allows them to say we have a deficit crisis, which gives them an excuse to raise taxes, which then gives them more money to spend. This additional spending then leads to more debt, which provides a rationale for higher taxes, and the pattern continues – sort of a lather-rinse-repeat cycle of big government.

Fortunately, it looks like the American people have figured out this scam. By a 57-34 margin, they say that reducing federal spending should be the number-one goal of fiscal policy rather than deficit reduction. And since red ink is just a symptom of the real problem of too much spending, this data is very encouraging.

Here are some of the details from a new Rasmussen poll, which Mark Tapscott labels, “evidence of a yawning divide between the nation’s Political Class and the rest of the country on what to do about the federal government’s fiscal crisis.”

A new Rasmussen Reports national telephone survey finds that 57% of Likely U.S. Voters think reducing federal government spending is more important than reducing the deficit. Thirty-four percent (34%) put reducing the deficit first.  It’s telling to note that while 65% of Mainstream voters believe cutting spending is more important, 72% of the Political Class say the primary emphasis should be on deficit reduction. …Seventy-four percent (74%) of Republicans and 50% of voters not affiliated with either of the major parties say cutting spending is more important than reducing the deficit. Democrats are more narrowly divided on the question. Most conservatives and moderates say spending cuts should come first, but most liberals say deficit reduction is paramount. Voters have consistently said in surveys for years that increased government spending hurts the economy, while decreased spending has a positive effect on the economy.

I wouldn’t read too much into the comparative data, since the “political class” in Rasmussen’s polls apparently refers to respondents with a certain set of establishment preferences rather than those living in the DC area and/or those mooching off the federal government, but the overall results are very encouraging.

Oh, and for those who naively trust politicians and want to cling to the idea that deficit reduction should be the first priority, let’s not forget that spending restraint is the right policy anyhow. As I noted in this blog post, even economists at institutions such as Harvard and the IMF are finding that nations are far more successful in reducing red ink if they focus on controlling the growth of government spending.

In other words, the right policy is always spending restraint – regardless of your goal…unless you’re a member of the political class and you want to make government bigger by taking more money from taxpayers.

So we know what to do. The only question is whether we can get the folks in Washington to do what’s right. Unfortunately, the American people are not very optimistic. Here’s one more finding from Rasmussen.

Most voters are still not convinced, even with a new Republican majority in the House, that Congress will actually cut government spending substantially over the next year.  GOP voters are among the most doubtful.

Killing Obama’s ‘Build America Bonds’ Is a Big Reason to Like the Tax Deal

There are plenty of reason to like and dislike the tax deal between President Obama and congressional leaders. On the plus side, we dodge a big tax increase for the next two years. We also replace a goofy and ineffective “make work pay” tax credit with a supply-side oriented reduction in the payroll tax rate (albeit only for one year, so there probably won’t be much economic benefit).

On the negative side, the deal extends unemployment benefits, which has the perverse effect of subsidizing unemployment. The deal is also filled with all sorts of corrupt provisions for various interest groups such as ethanol producers.

Then there are provisions such as the 35 percent death tax. Is this bad news, because it is an increase from zero percent this year? Or is it good news because it is much lower than the 55 percent rate that was scheduled to take effect beginning next year? That’s hard to answer, though I know the right rate is zero.

But here’s one bit of good news that has not received much attention. The tax deal ends the “Build America Bonds” tax preference, which was one of the most destructive provisions of Obama’s so-called stimulus. Here’s an excerpt from a Bloomberg report.

Senate Democrats backing the subsidy, which has helped finance bridges, roads and other public works, fell short in a bid to get the program added to a bill extending the 2001 and 2003 income-tax cuts. That failure was the latest in efforts to keep the Build America program alive beyond its scheduled end on Dec. 31. …While Obama and Democrats have supported prolonging the program, they have run into opposition from Republicans critical of the stimulus package. Extensions have twice passed the Democratic-controlled House only to stall in the Senate, where the Republican minority has sufficient power to block legislation. The U.S. government pays 35 of the interest costs on Build America bonds. …State and local governments, the U.S. Chamber of Commerce and representatives of the construction industry are among the program’s advocates.

Build America Bonds are a back-door handout for profligate state and local governments, allowing them to borrow more money while shifting some of the resulting interest costs to the federal government.

But states already are in deep trouble because of too much spending and debt, so encouraging more spending and debt with federal tax distortions was a very bizarre policy.

Moreover, the policy also damaged the economy by creating an incentive for investors to allocate funds to state and local governments rather than private sector investments.That’s a very bad idea, unless you somehow think (notwithstanding all the evidence) that it is smart to make the public sector bigger at the expense of the private sector.

In one fell swoop, Build America Bonds increased the burden of the federal government, encouraged a bigger burden of state and local government, and drained resources from the productive sector of the economy.

That’s stupid, even by Washington standards. So whatever we think of the overall package, let’s savor the death of this destructive provision.

The Good, the Bad, and the Ugly of the Tax Deal

Compared to ideal policy, the deal announced last night between congressional Republicans and President Obama is terrible.

Compared to what I expected to happen, the deal announced last night is pretty good.

In other words, grading this package depends on your benchmark. This is why reaction has been all over the map, featuring dour assessments from people like Pejman Yousefzadeh and cheerful analysis from folks such as Jennifer Rubin.

With apologies to Clint Eastwood, let’s review the good, the bad, and the ugly.

The Good

The good parts of the agreement is the avoidance of bad things, sort of the political version of the Hippocratic oath – do no harm. Tax rates next year are not going to increase. The main provisions of the 2001 and 2003 tax acts are extended for two years – including the lower tax rates on dividends and capital gains. This is good news for investors, entrepreneurs, small business owners, and other “rich” taxpayers who were targeted by Obama. They get a reprieve before there is a risk of higher tax rates. This probably won’t have a positive effect on economic performance since current policy will continue, but at least it delays anti-growth policy for two years.

On a lesser note, Obama’s gimmicky and ineffective make-work-pay credit, which was part of the so-called stimulus, will be replaced by a 2-percentage point reduction in the payroll tax. Tax credits generally do not result in lower marginal tax rates on productive behavior, so there is no pro-growth impact.  A lower payroll tax rate, by contrast, improves incentives to work. But don’t expect much positive effect on the economy since the lower rate only lasts for one year. People rarely make permanent decisions on creating jobs and expanding output on the basis of one-year tax breaks.

Another bit of good news is that the death tax will be 35 percent for two years, rather than 55 percent, as would have happened without an agreement, or 45 percent, which is what I thought was going to happen. Last but not least, there is a one-year provision allowing businesses to ”expense” new investment rather than have it taxed, which perversely happens to some degree under current law.

The Bad

The burden of government spending is going to increase. Unemployment benefits are extended for 13 months. And there is no effort to reduce spending elsewhere to “pay for” this new budgetary burden. A rising burden of federal spending is America’s main fiscal problem, and this agreement exacerbates that challenge.

But the fiscal cost is probably trivial compared to the human cost. Academic research is quite thorough on this issue, and it shows that paying people to remain out of work has a significantly negative impact on employment rates. This means many people will remain trapped in joblessness, with potentially horrible long-term consequences on their work histories and habits.

The agreement reinstates a death tax. For all of this year, there has not been a punitive and immoral tax imposed on people simply because they die. So even though I listed the 35 percent death tax in the deal in the “good news” section of this analysis because it could have been worse, it also belongs in the “bad news” section because there is no justification for this class-warfare levy.

The Ugly

As happens so often when politicians make decisions, the deal includes all sorts of special-interest provisions. There are various special provisions for politically powerful constituencies. As a long-time fan of a simple and non-corrupt flat tax, it is painful for me to see this kind of deal.

Moreover, the temporary nature of the package is disappointing. There will be very little economic boost from this deal. As mentioned above, people generally don’t increase output in response to short-term provisions. I worry that this will undermine the case for lower tax rates since observers may conclude that they don’t have much positive effect.

To conclude, I’m not sure if this is good, bad, or ugly, but we get to do this all over again in 2012.

Words I Don’t Say Very Often: ‘I Applaud Senate Republicans’

Much to my surprise, Senate Republicans held firm earlier today and blocked President Obama’s soak-the-rich proposal to raise tax rates next year on investors, entrepreneurs and small business owners.

I fully expected that GOPers would fold on this issue several months ago because Democrats were using the class-warfare argument that Republicans were holding the middle class hostage in order to protect “millionaires and billionaires.” Republicans usually have a hard time fighting back against such demagoguery, and I was especially pessimistic since every Republican senator had to stay united to block Senate Democrats from pushing through Obama’s plan for higher tax rates on the so-called rich.

But the GOP surprised me earlier this year with their united opposition to higher taxes, and they stayed strong again today in blocking a bill that would raise tax rates on upper-income taxpayers. Here’s an excerpt from the New York Times.

Republicans voted unanimously against the House-passed bill, and they were joined by four Democrats — Senators Russ Feingold of Wisconsin, Joe Manchin III of West Virginia, Ben Nelson of Nebraska, and Jim Webb of Virginia — as well as by Senator Joseph I. Lieberman, independent of Connecticut. “You don’t raise taxes if your ultimate goal, if the main thing is to create jobs,” said Senator John Thune, Republican of South Dakota, echoing an argument made repeatedly by his colleagues during the floor debate. The Senate on Saturday also rejected an alternative proposal, championed by Senator Charles E. Schumer of New York, to raise the threshold at which the tax breaks would expire to $1 million. Some Democrats said that the Republicans’ opposition to that plan showed them to be siding with “millionaires and billionaires” over the middle class.

Not only did GOPers stand firm, but they were joined by five other senators (including four that have to face the voters in 2012). This presumably means Democrats will now have to compromise and agree to a plan to extend all of the 2001 and 2003 tax cuts.

At the risk of being a Pollyanna, I wonder if the politics of hate and envy is falling out of fashion. Obama’s plan for higher tax rates hopefully is now dead, but that’s just one positive indicator. It’s also interesting that both of the big “deficit reduction” plans recently unveiled, the President’s Fiscal Commission and the Domenici-Rivlin Debt Reduction Task Force Report, endorsed lower marginal tax rates - including lower tax rates for those evil rich people. Both proposals also included lots of tax increases, so the overall tax burden would be significantly higher under both plans, but it is remarkable that the beltway insiders who dominated the two panels understood the destructive impact of class-warfare tax rates. Maybe they watched this video.