Archive for April 12th, 2011

Fixing the Budget

The debate about balancing the budget and dealing with the fiscal crisis facing the US is intense and warped.  It is warped because the two things that need to be done — a) significant entitlement reform and b)  tax increases — are resisted every step of the way.   First, taxes.  Please consider the following charts:

1) The percentage of income earned by the top 10% of Americans
2) The GINI index representing income distribution before taxes and transfers
3) The GINI index representing income distribution after taxes and transfers  (0 = perfect equality 1.00 = maximum inequality)

OK, note a couple of things.   The relative percentage of income held by the top 10% of the population has been steadily increasing since the late seventies, now at a level greater than any other time in history.    As I noted in my post last December on the tax debate, this correlates with a decrease in tax rates for the wealthiest.  Moreoever, while there has been little real growth in wealth for the poorest, the richer you are, the more your wealth has increased in the past three decades.   The wealthiest 10% of Americans are wealthier than anyone other country’s top decile, while the bottom 10% are way back, below Greece.  (Charts for this stuff can be found on that December post).

Next, consider the Gini co-efficient.   Created by Italian sociologist Corrado Gini, it is a well regarded statistical analysis of the distribution of wealth in a society.   To reach 1.0 all wealth would be in the hands of one person; to reach 0 everyone would have equal wealth.   Note that the OECD average before taxes is 0.45, while the US is at 0.46.  This suggests that the pre-tax distribution of wealth in the US is pretty close to average for the industrialized world.   However, after taxation and transfers the OECD average is 0.31 while the US is at 0.38.   Taxes have meant a transfer of some wealth to the poor, but not a lot.   The US is in fact last among the OECD states in that regard.

US taxation appears to be the least progressive of any industrialized state.  Portugal is tied at .38, but it’s pre-tax/transfer level was .54.  Poland is next at .37, but pre-tax/transfer it was .57.    Some like Germany begin at .51 and taxes and transfers move them to .30.

Note the following map:

As far as the Gini index is concerned, the US has more in common with China, Venezuela, Mexico and Argentina than Western Europe and Japan.

What does all this mean?  Combined with the argument I made last December I believe this is a strong argument for significant tax reform.   I agree with blogger Vern Kaine that the “tax the rich” mantra is often used purely for emotion, and that tax increases to the wealthy tend to be accompanied by deductions and loopholes that do them no harm.   That is why simply increasing the percentage taken from those earning higher may do little to improve the problem.

I could use this information to argue for greater transfers of wealth through taxation and government spending in order to move us further towards equality on the Gini index.  I am not doing that now.   Right now I’m arguing that the evidence is strong that given our budgetary mess we can ask the wealthiest Americans to contribute a bit more.

There is significant tax revenue that can be gained relatively easily, and likely with little harm to the economy. According to a New York Times “balance the budget” application, there are ideas already on the table to do that.  Going back to the Clinton era estate tax would bring in $32 billion by 2015, $104 billion by 2030.  Allowing the Bush cuts to expire on those earning over $250,000 would bring in $54 billion by 2015, $115 billion by 2030.   Payroll taxes for money earned over $106,000 would add $50 billion by 2015, $100 billion by 2030.  A 5.4% millionaire’s surcharge would add $50 billion by 2015, $95 billion by 2030.  A plan to eliminate loopholes would gain $136 billion by 2015, $315 billion by 2030.   Reducing the mortgage benefits for high income families would gain $25 billion/$54 billion, and a consumption tax would bring in $41 billion/$280 billion.   These together could bring in $488 billion by 2015, and over $1 trillion by 2030.

If we added this with entitlement reforms such as raising the age of retirement, limiting social security payments to wealthier individuals, and limiting the growth in medicare payments, we’d be in the black easily.  If we combine that with cutting military spending, recognizing that in the 21st century we don’t need a 20th century style military behemoth, we’d have excess money to invest in creating a productive future and ultimately we could reduce tax rates for everyone.

Tax increases and entitlement reform tend to be lose-lose issues.  Yet no budgetary solution is possible without a mix of those.   For taxes, I’d NOT recommend simply passing the tax increases I list above.  That was just to demonstrate that money is available.   Instead I’d recommend a reform of the system that eliminates most deductions and loopholes and is at least slightly more progressive.   At least until we get our fiscal house in order we need more taxes.

Entitlement reform finds Democratic opposition, often in the form of denying there really is a problem.   Wisconsin Representative Paul Ryan’s solution that relies on incentives for finding low cost care runs into the same problem — you can’t wish this away.  Most costs are near end of life, and aren’t related to wasteful use of funds.    Is it really necessary to spend so much right at the end of life, trying to squeeze out a few more months on the planet, while neglecting to cover so many who have real problems in the middle of life?  With life expectancy rates higher than ever, what is wrong with increasing the retirement age?   And with the country facing potential economic crisis, why should the wealthy get transfer payments from social security?

Ultimately our problems are not that severe.   Common sense tax increases, spending cuts, and a new approach to military and defense policy could put us in a position not only to balance the budget but to invest in infrastructure to rebuild productive capacity for the 21st century.   We could explore the potential of alternate energies, technologies so solve or avoid problems emerging in the environment, and be prepared for an increasing rate of global and domestic change.   We are not facing an existential crisis if we have the courage to embrace a few politically difficult choices and recognize that the only feasible path will be bi-partisan, will require painful compromises, but can yield a much brighter future.