COMMENTARY:
In the latest twist of the on-going debt ceiling maneuvers between Timidcrats and Teapublicans today, July 19, the Senate’s ‘Gang of Six’ resurrected their proposals for resolving the current debates. Obama quickly embraced their views. What is not generally known is that he, Obama, the ‘Gang of Six’, and even House Teaparty radical, Paul Ryan, have all proposed a $4 trillion package deficit reduction! The only difference is how the amount will be distributed between spending cuts and tax hikes. In the post that follows, I predict the short term, immediate cuts in spending only being negotiated by Reid and McConnell in the Senate will go forward, and the resurrected $4 trillion Obama-Gang of Six proposals will quickly follow or be appended. The likely mix of spending to tax hikes will be 75%-87% in spending cuts and 13%-25% in tax hikes. The tax hikes will be loophole closings, but will be offset by more than corporate tax cuts in top corporate rates. Ditto for personal income tax loopholes and top rate reductions.
What Do Obama, the ‘Gang of Six’, and House Radical, Paul Ryan, All Have in Common?
by Jack Rasmus, copyright 2011
What do Obama, the Gang of Six, and House radical Teapublican, Paul Ryan, all have in common? They’ve all proposed a $4 trillion deficit reduction package. Does anyone think that is pure coincidence?
Obama’s tactical move today, July 19, along with the Senate Gang of Six, is to hitch his (and the gang’s) proposed $4 trillion proposed cuts to the current negotiations simultaneously going on between Reid and McConnell in the Senate to immediately cut spending by $1-$2 trillion in exchange for raising the debt ceiling.
Obama’s move shows clearly he does not want to take on deficit cutting piecemeal. He wants to get it all over at once and behind him before campaigning for 2012 begins in earnest. And he’s willing to offer big cuts in spending to get it done now, before the 2012 election cycle gets seriously underway after this summer.
The likely outcome of this ‘rush to get it done’ will be that the immediate, short term $1-$2 trillion in spending cuts being worked out by Reid-McConnell will still pass, while the longer term $4 trillion, now resurrected grand deal by Obama-Gang of Six will quickly follow. It may even be appended to the short term package.
While the short term package will be all spending cuts, the now revived $4 trillion grand deal package will contain some tax revenue raising. However, as previously noted, the tax revenues will be primarily tax loophole closings that are often difficult to collect and verify, while the tax code revision will include major reductions in the top personal and top corporate tax rates, both currently at 35%.
What might the likely relative proportion between spending cuts vs. tax loophole hikes look like in the final package? If Obama’s previous grand deal is any indication, it could look similar to that prior deal’s 87% spending cuts to 13% tax hikes. Certainly no less than a 75% to 25% mix.
It is no accident that the Gang of Six package is not available to the public yet. It is being kept under close wraps in the Senate. But already it has leaked out that the gang’s proposal includes a reduction in the top personal income tax rate from 35% to 29%. (The House Republicans have been calling for a 25% rate from the beginning. So that’s more than half way there before bargaining even begins.)
Of course, even at the current 35% top personal tax rate, that’s not what the wealthiest 1% taxpayers actual pay in federal taxes. In 2007 their effective income tax rate–i.e. what they really paid–was only 16.6%. This compares to a top rate of 24.2% for the same wealthiest 1% in 2000. Reducing the current 35% to 29%, as proposed by the Gang of Six, will likely therefore reduce that effective top rate even further, to the 12%-14% range.
Its not yet reported what the Gang proposal is for the corporate tax. But it is highly likely it proposes to reduce the top corporate tax rate by at least as much as the top personal income tax rate–i.e. from the current corporate top rate of 35% to a 29% rate; perhaps even lower in stages over several years. Business interests have been consistently calling for a 20% top corporate rate for the past year. If the top corporate rate is reduced to 29%, the net gain in after tax income realized by corporations will exceed the loophole closing measures. And if its reduced to less than 29%, to a low of 20%, it will far exceed the loophole closings.
The Obama-Gang of Six package also closely resembles the original proposals of the Simpson-Bowles Commission made public last November. Obama has always been comfortable with much of their recommendations. The Gang of Six’s original proposals were worked out last December, in an attempt to legislatively operationalize the Bowles-Simpson recommendations in the Senate. But the Gang did not press forward with their proposals while the House radicals were preoccupied with cutting the 2011 budget last spring by $38 billion.
It is likely the intent was to wait until after the debt ceiling was raised to reintroduce the Gangs proposals. But events became telescoped with the House radicals intent on provoking a near-default by playing chicken with the debt ceiling, and both Biden and Obama failing to get a deal with Boehner-McConnell last week.
So now we see the real plan once again emerging. All the House radical, teaparty huff and puff has been mostly theater, from the beginning up to the latest version of their ‘cut, cap, and balance’ proposal and balanced budget nonsense. That’s been just playing to audience at home. But all the radical theater did conveniently provide excellent ‘crazy rightwing’ cover to Simpson-Bowles-Obama-Gang of Six proposals now once again coming to the fore. It has made the latter’s draconian $4 trillion package that is about to drive through Congress appear rational and reasonable.
In the end, however, the $4 trillion, mostly spending cuts, will devastate the economy. And when combined with the other three still unresolved mini-crises preventing sustained recovery of the US economy–i.e. jobs, housing-foreclosures-fiscal crisis of local government–will all but ensure a double dip recession on the horizon.
Jack Rasmus
Dr. Jack Rasmus @drjackrasmus
Jack Rasmus 
OXYMORON CONFLICT: Raising taxes and lowering taxes is bad economics, yet raising taxes and lowering taxes is good economics.
Raising taxes on the middle-class and lowering taxes on the top 2% would be very poor economics. (See below)
Raising taxes on the top 2% and lowering taxes on the middle-class would be excellent economics. (See below)
The economics of a given venue depends upon the demand wherewithal and energy of that venue. If the demand wherewithal and energy is increased, the economics of that venue should be increased.
Congress controls the logistics of our income taxes. The adjustments of the logistics should affect the demand and energy wherewithal. There are five scenario options:
1. No change of taxation policies.
2. Lower income taxes on everyone.
3. Raise income taxes on everyone.
4. Raise taxes on the middle-class and lower taxes on the top 2%.
5. Raise taxes on the top 2% and lower taxes on the middle-class.
The probable results of these options:
1. No effect.
2. Should materially increase demand, increase employment, but should have a net adverse effect upon the budget.
3. Should materially decrease demand, decrease employment, and have a questionable effect upon the budget.
4. Should materially decrease demand, decrease employment, and have a negative effect upon the budget.
5. Should materially increase demand, increase employment, and have a very positive effect upon the budget.
The most beneficial option appears to be #5.
The first legislative action to take should be to reverse the Bush tax error of 2001, based upon questionable (at best) testimony by Alan Greenspan on January 25, 2001, before the Senate’s Committee on the Budget.
mz
INCOME TAXES
A few TRUISMS (promulgated by “talking heads” and many politicians):
1. Increasing tax rates would inhibit people from working, since they would keep less per dollar earned.
2. Tax cuts and tax credits for small businesses would be stimulative to our economics.
3. Tax increases would inhibit businesses from making capital investments.
4. During a recession, no income taxes should be increased, including on the very wealthy.
5. “Death” taxes are unfair and inappropriate, because income taxes have already been assessed.
6. The rich pay most of the income taxes.
Discussions regarding these “truisms”:
1. Increasing tax rates on individuals would have the opposite effect, i.e., to maintain one’s standard of living one would have to work more. If one’s take-home is reduced, he or she will have to work longer hours, seek another job, ask for a raise, take a second job, cut standard of living (negative for the economy), et cetera. If one’s take-home pay is increased, due to a tax reduction, some may decide to work less, e.g., spend more time with family.
2. Tax cuts and tax credits for small businesses would only increase the bottom lines of those businesses, i.e., it would not create additional demand for products and services. Job #1 for any business is to create or find additional demand for its goods and services.
3. Capital investment decisions are based upon projected “pre-tax” income, i.e., the tax rate is a negligible factor. The ‘test’ to determine if an investment should be made depends upon the projected return on that investment, e.g., if the ROI were insufficient, an income tax rate of zero would not stimulate one to make such an investment.
4. Obviously, not all income tax increases or decreases are the same. An income tax increase on bottom 90% of the populace would have an adverse effect upon macro demand, thus would be damaging to our economics, whereas decreasing income taxes on that demographic would have a positive effect upon our economics. An income tax increase or decrease on the extremely wealthy (top 0.1%) would have a negligible effect upon our economics, thus should be only used for equity (fairness…., that ship has sailed, long ago) purposes. Therefore, based upon these assumptions, income taxes should be raised on the “wealthy” and recycled to the 90%, which would stimulate our economics and would be beneficial to the “wealthy”, insofar as earnings from management and capital would be benefited. During the past 30 years (since John Hinckley), the reverse has occurred, i.e., there have been massive transfers of wealth from the middleclass to the extremely (top 0.1%) wealthy, which has reduced the capitalistic energies of the middleclass, and has been a critical factor that has contributed to our current economics.
5. The “Death” tax AKA estate tax is a revenue source and if that source were reduced, all other phenomena being equal, income taxes would have to be increased. Furthermore, the estate tax is assessed upon wealth, which includes assets that have increased in value and that incremental value has never been taxed.
6. All income taxes, all costs of production of goods and services are paid at the point of purchase. Further, social security and Medicare taxes are income taxes, i.e., they are taxes on income. Congress has legislated a massive shift of wealth from the middle-class to the top 0.1% based upon tax legislation during the past 30 years.
The above is food for thought.
I will appreciate responses, thereto.
Bon appetite……..…
MZ
Original: 09/12/10
Previous revision: 12/05/10
Last revision: 04/22/11
Thank you for your educated thoughts. Balancing the budget on the backs of the poor and middle class makes the Gang of Six the GANGSTERS of Six. And Obama is the Godfather.