Soak the Rich with Lower Tax Rates

Ever since the supply-side tax rate reductions of 2003, the economy has prospered and this has generated a windfall of tax revenue for the Treasury. The Wall Street Journal notes [$] that the lion’s share of this new revenue is from upper-income taxpayers.

There are many factors that influence the economy’s performance, so this does not necessarily prove that the 2003 tax cuts “paid for themselves.” But the windfall certainly bolsters the argument that the right types of tax cuts (lower marginal tax rates) have a positive impact on growth and that this means at least some revenue feedback.

Writes the WSJ:

Since the Bush tax cuts of 2003, the budget deficit has fallen by $217 billion mostly because of a continuing torrid pace of revenue growth. …For the Bush tax cuts to have been a give-away to the rich, people paying the higher marginal tax rates would have to be carrying a smaller share of the income tax load. But the IRS data indicate that they are not paying less. Instead, they are paying more — lots more. More surprisingly, the richest 1%, 5% and 10% of the taxpayers are shouldering a larger percentage of the income tax burden at the federal level than the tax estimators said they would had the Bush tax cuts never materialized. …The amount of tax paid by those earning more than $1 million a year increased to $236 billion in 2005, up from $132 billion in 2003, the year of the tax cut. This was a 78% increase in taxes paid by millionaire households.

…[L]ower tax rates on capital gains and dividends also caused a huge jump in reported income. The National Bureau of Economic Research found an “unprecedented surge in regular dividend payments after the 2003” Bush tax cut. Likewise, the lowering of the capital gains tax was followed by a 150% increase in the amount of capital gains unlocked by the 15% tax rate. Lower tax rates expanded the tax base.

…The supply-side revenue effects on the rich are remarkable: Tax rates on higher incomes have been halved, but the federal tax share of the top 1% has nearly doubled.

Romney Abandons RomneyCare

Mitt Romney unveils a new health care proposal today that completely abandons the plan he signed into law as governor of Massachusetts and has defended on the campaign trail. His new proposal is a vast improvement, focused on changing federal tax law in order to empower individuals to buy health insurance outside their employer, and incentives for states to deregulate their insurance industry. He is also expected to block grant both Medicaid and federal uncompensated care funds to encourage greater state innovation. There will be no provision for either an individual mandate or a managed-competition style “connector,” both central features of his Massachusetts plan.

Of course Romney runs the risk of this being seen as another flip-flop, but on health care it is much better to be John Kerry than Hillary Clinton.

The World Is Our Domino!

President Bush’s decision to talk about Iraq in the context of Vietnam has engendered some (predictably) contentious commentary on that conflict. Here’s Ross Douthat at The Atlantic responding to his colleague Matt Yglesias:

the Communist victory in Vietnam did lead to the rest of Indochina going Communist, as the domino theorists predicted, and it played a role in the Soviet advances across the Third World during the rest of the 1970s - from Ethiopia and Mozambique to Afghanistan and Nicaragua, with various other proxy wars thrown in for good measure.

This is factually inaccurate. First of all, what the domino theorists were arguing was not that “Laos and Cambodia would go Communist and therefore we couldn’t abandon our/the French position in Indochina.” Rather, it was that basically all of Asia, from India to Japan, was going to go Communist, which would indeed have been an incredibly bad development. George Kennan was warning in 1948 that we should be worried about Indonesia, since, if it fell, “it would only be a matter of time before the infection would sweep westward through the continent to Burma, India, and Pakistan.” John Foster Dulles in 1953 testified before the Senate foreign relations committee, telling them ominously that Japan was a likely domino. Kennan later came to his senses. Dulles never did.

Douthat continues:

our enemies in al-Qaeda, Iran and elsewhere probably won’t make the kind of gains that, say, Rick Santorum and other feverish voices anticipate if we pull out of Iraq, and they simply aren’t strong enough to pose an existential threat to the U.S. over the long run. But they will win a real victory, just as Soviet Communism won a real victory in the early 1970s, and that victory will have real repercussions around the globe. I think we were right to pull out of Vietnam when we did, and wrong to be there in the first place, but it’s too simplistic to say that the domino theory looks “completely wrong” or “crazy” in hindsight; there are an awful lot of dead people in Indochina, Latin America and Africa who would quibble with that assessment.

What does Douthat mean by “a real victory”? A propaganda victory? Iran and al Qaeda will hail it as a sign of our weakness? You bet. But no one’s arguing that. The fact that people in Indochina, Latin America and Africa died after we left Vietnam says little about the domino theory, just as the fact that millions died during our war in Vietnam says little about the strategic judgment of the war. The question is about who predicted the results, and whose theory was vindicated. I think we have a clear enough result here that “completely wrong” or “crazy,” while shrill, could apply. If we don’t, then I don’t know how clear it would have to be.

Finally, Some Not-So-Bad News on the Budget

The big surprise in the Congressional Budget Office mid-year budget estimates released today isn’t that the year-to-year deficit shrank again.  Or that the long-term liabilities in Medicare and Social Security continue to impend. 

The surprise is that federal spending will only grow about 3% in the current fiscal year that ends this October.  That’s a big improvement over the annual average 7% growth we’ve seen since the first day of the George W. Bush presidency.

How did that happen?  Those familiar with my previous research will probably not be surprised to hear that the new political reality – divided government – has something to do with it.

True, agriculture subsidies are lower this year as a result of higher crop prices.  And the run-up in spending on a variety of programs in 2006 – like the payouts on flood insurance policies after Hurricane Katrina – was temporary.  The most remarkable factor in the trends, however, is that non-defense discretionary spending has been frozen for the first time since the maiden budget of the “Republican Revolution” Congress.  (If the trends CBO estimates hold for the remainder of the year, such spending might actually decline by $1 billion.) 

Sure, part of this is also the result of a decline in spending on federal Katrina relief.  But there’s something else going on, too.  Earlier this year, the new Democratic Congress decided to put the federal budget on auto-pilot until October.  Instead of passing new appropriations bills to fund the government for the entire year, they passed what is called a “continuing resolution” to keep the government operating. 

This didn’t happen because the Democrats were all that interested in spending less money.  They just wanted to get the old budget work left to them by the outgoing Republican Congress off the table so they could get on with more ideological-base-friendly legislation, like the minimum wage increase.  And the Democrats knew that the president might finally start vetoing legislation, too.  A protracted battle over the budget wasn’t something they wanted to spend their energy on in the first half of the year.  Thus, the auto-pilot continuing resolution: a piece of legislation that keeps the government running at basically the inflation-adjusted level of the previous year. 

With the White House veto strategy finally a credible threat*, it looks like we might have a similar sort of outcome on spending this year, too.  Isn’t divided government wonderful? 


* As I told David Jackson of USA Today a few weeks ago, George W. Bush “dislikes Democrats more than he likes big government.”

French Government Proposes Global Financial Regulation to Counter “Typical Excesses” of American Capitalism

Joined by Germany (gee, what a surprise), France is calling for more regulation of financial markets. But politicians are not hopelessly stupid. They understand that they will drive even more money offshore or underground if they increase the relative burden of government in France. So they want other nations to agree to the same misguided policies. The International Herald Tribune reports:

France said Wednesday that the recent turmoil in credit markets had strengthened its case for tougher regulation of global financial markets and that it would press ahead with proposals at a fall meeting of Group of 7 finance ministers. …Lagarde said during an interview that she had not yet discussed the initiative with the United States or Britain, members of the G-7 who have been reluctant to ponder any regulation of financial markets in the past. But she said that France and Germany, two countries she described as being “at the heart” of the initiative, were determined to use the current crisis as a catalyst for a stricter global rule book. …”There is a growing case for better state involvement on a coordinated basis in various areas, one of which is stock markets and financial markets,” Lagarde added. …Economists and investors expressed skepticism as to how governments could enforce more transparency in markets that trade in such a vast variety of financial products, arguing that the correction in markets was a more effective way of forcing banks and investors to reassess and reprice the risk in their portfolios. …Lagarde…has blamed the crisis on the “typical excesses” of American capitalism. She said that a gambling culture in the markets was simply more widespread on the other side of the Atlantic.

More Thoughts on Trade Enforcement

In addition to the sock safeguard action against Honduras, the U.S. government recently requested arbitration over alleged violations by Canada of the 2006 Softwood Lumber Agreement.  (We’ve written about this long-running dispute here, here, and elsewhere). Under the SLA, Canada is required to restrict the volume of its exports or impose an export tax (or some combination of the two) when the prevailing monthly price falls below U.S. $355 per million board feet.

The deal, which the Canadians signed with guns to their heads, was agreed during a period of a robust housing market and relatively high lumber prices.  With the decline of the U.S. housing market, lumber prices have gone south, and the stipulation that Canada intervene in the lumber market has kicked in.

Enforcement in this case, then, means that the housing market slump will endure longer than it has to.  Builders will be less capable of offsetting rising mortgage rates with lower priced homes, as the cost of their most important input remains artificially high.

Even the cost of nails should be expected to rise and for the same reason –  enforcement.  On Tuesday, the U.S. International Trade Commission determined preliminarily that imports of certain steel nails from China and the United Arab Emirates (co-winners of the 2006 Congressional Pinata of the Year Award) are being sold at less than fair value in the United States and causing material injury to domestic producers.   Additional duties are likely to be formalized by the end of the year. 

Thus, the administration’s indulgence of Congress’s demands for more trade enforcement will have the noble effect of making life more difficult, in particular, for Americans at the lower end of the income spectrum, who will need to devote more of their limited resources to housing and socks.  More often than not, trade enforcement is just another term for regressive taxation.