Bloomberg Businessweek: "'Job-Killing' Tax Hikes May Not Be So Deadly"

Back in its September 26-October 2, 2011 weekly issue (I'm running a bit behind with this post), the Bloomberg Businessweek's "Politics & Policy" section addressed a common conservative myth that increasing taxes for upper income brackets kills jobs, a crucial question in our still flailing U.S. economy. The article (1) was responding specifically to Republican House Speaker John Boehner's cry that Obama's recently-announced deficit-reduction plan, which proposed a tax increase on the wealthy (the article does not specific how wealthy), would hurt the very people that create jobs for our economy in great need of them.

The article cites the conclusion of one of former President Reagan's senior tax economists -- even he asserts that increasing personal income taxes on the reach is unlikely to reduce hiring, and conversely, that cutting taxes for the rich is unlikely to increase hiring in the short-term. Therefore, it seems that increasing income taxes for the rich would not, in fact, be a suicidal move as some claim as a method to close massive budget deficits, regardless of the delicate state of our economy (to put it modestly).

An Occupy Wall Street message 

Source: Yahoo.com, possibly from AP, uncredited

The article goes on to explain the common principle that with tax cuts for lower- and middle-income brackets, we actually get more economic bang for our buck - in terms of immediate economic stimulus - because those are the very constituencies that are most likely to spend the additional income right back out; the wealthy, on the other hand, are more likely to save or invest the additional funds from tax cuts, because the extra amount coming in is already above and beyond this group's living, and even leisure, expenses. These types of upper-income savings and investments, the article explains, may support the economy in the long-run, but in the short-term, stimuli to the lower and middle classes do more to boost growth and jobs. The Congressional Budget Office found in its own study using economic multipliers that the tax cuts for low- and middle-income families stimulate an economic demand over twice as strong as that drawn from tax cuts for upper income families. (1) Quite simply, the author states, "The No. 1 reason small business owners say they're not hiring is poor sales." In short, if more people are buying, business owners have a reason to employ workers to manage those sales.

Ultimately, the article concludes with the point that, regardless of the evidence that tax cuts for the poor and middle classes are more effective than for the rich when attempting to stimulate immediate recovery, a budget that funds any tax cuts with debt is not doing the economy any favors.

An interesting case to analyze in order to address this question might be the Bush Jr. 2008 stimulus bill, which, while it increased spending in the immediate term, many argue led to inflation and higher oil prices in the long-term. Why? As a Huffington Post article from late April, 2008 explains, when Bush financed those $168 billion worth of tax rebates and stimulus checks through debt, he decreased the purchasing power of the dollars that those tax payers were receiving -- in effect raising the cost of goods and services in the economy without increasing wages or interest rates on savings.(2)

The Bloomberg article cites a former U.S. Treasury tax economist, "Despite all the rhetoric that tax cuts promote economic growth," (which the C.B.O. report seems to prove that they do, at the very least in the short term), "that is not the case when the tax cuts are not paid for."(1)

So, in short, there's nothing wrong with increasing income taxes on the rich in a time when we're trying to both balance our budget and recover our economy -- evidence demonstrates that it's highly unlikely to hurt job creation (also consider that in the booming 1950's the top marginal tax rate was up to 91%) (1). When it comes to using tax cuts for lower income brackets to effect recovery, however, we should be careful not to embed ourselves in further problems of increasing the deficit and triggering inflation by financing the cuts with public debt.


(1) Dorning, Mike, "'Job-Killing' Tax Hikes May Not Be So Deadly," Bloomberg Businessweek, September 26 - October 2, 2011, p. 40.

(2) Keiser, Max, "Why You Shouldn't Spend Your Stimulus Check," The Huffington Post, Sunday, April 27, 2008, http://www.huffingtonpost.com/max-keiser/why-you-shouldnt-spend-yo_b_98812.html.

Problem Set 1, Answer to Q#1

PS1, Q1 ANSWER:


Overall, our government spending as a percentage of GDP is low compared to many other countries (in contrast to the Tea Party's claims of "big government", as Alec pointed out in our first class). This lack of investment may, in fact, be a detriment when we look to the countries we tease about being our over-achiever, "A+" cross-Atlantic classmates: the social democracies of Northern Europe. A new OECD study reports that Denmark, Finland, and the Netherlands have the happiest people (by various survey questions) amongst OECD member countries (www.commondreams.org/further/2009/05/11-4). If the OECD - the classic symbol of global capitalist machinery - itself is publishing this report, can we finally agree that macroeconomic wealth does not equal happiness, or even quality of life?!


Defense Spending:


The CIA World Factbook estimates that US federal defense spending in 2005 was 4.06% of GDP; www.globalsecurity.org publishes the figure at 5.25% in 2007. According to comparative data from that time, based on spending as percentage of total GDP, the U.S. ranked 25th amongst world countries (www.globalsecurity.org), rather high but not as high as expected given what many consider its egregious military spending. However, we must consider that many of the highest ranking countries (e.g. Equitorial Guinea coming in at #9) come up top on the list because even a relatively small dollar amount of investment in defense appears large as a percentage in countries with relatively low GDP's; in the United States, military expenditures are large and have continually grown in real terms, but an exceptionally high and almost continually growing GDP masks the extent of our spending as a percentage of GDP, such that military spending appears to have gone down as a percentage of GDP and the U.S. ranks at 25 on the country comparison list of federal defense spending.


From the perspective of a percentage of total government spending, "Defense" as a category eats up a whopping 24.2% of the national budget. After accounting for Veteran services (3.2%) and Foreign economic aid (1.2%), the percentage goes down to 19.6. However, this percentage doesn't reflect actual total defense spending, which can be spread out across various areas of the federal budget and may not be obvious to the uninformed eye. For example, spending on nuclear weapons appears under expenses for the Department of Energy ("Budgeting for Empire," www.independent.org/pdf/policy_reports/2007-01-30-budgeting.pdf). Most significantly, Bush's post-9/11 Department of Homeland Security receives its own, large budget apart from the Department of Defense. Furthermore, as military spending expert Chris Hellman of the National Priorities project notes, American taxpayers are also paying interest on debt used to finance military activity, which of course comes up in the budget not as "Defense" but as "Interest". In Hellman's calculations, defense spending is actually double what it ostensibly appears to be in the federal budget. Hellman's statement is quite believable given that his calculations are specific and based on FY2012 budget numbers. ("The Real U.S., 'The Real U.S. National Security Budget The Figure No One Wants You to See'," at www.tomdispatch.com/archive/175361/).


Health Care (including Medicare and Medicaid): 


Unlike "discretionary" defense spending, Social Security and Medicare fall into the category of "mandatory" spending accounts and are dictated by law. (*all numerical budget data from this point forward can be cited to www.usgovernmentspending.com except where otherwise specified. The website sources budget data from the White House Office of Management and Budget.)


The FY2011 federal budget allocated 23.4% of a $3.819 billion ($3.8 trillion) budget toward "Health Care", of which 1% is for R&D and an insignificant amount for "Public health". The major expenditures are:
1) Medicare, comprising 13% of the FY2011 Federal Budget; and
2) "Vendor Payments", at 9.3%, which include operating costs (I presume) for public agencies AND
       a.  Medicaid grants to states, at 7.7% of total FY2011 Budget.


At nearly one quarter of the federal budget, health care expenses are an extraordinary burden on public spending and represent the costs of our country's health care system more than the equity of services provided (as we all know, we have many uninsured individuals who do not receive government benefits and therefore whose would-be expenses are not captured in these budget numbers). Also, the fact that Medicare expenditures are almost 40% higher than Medicaid may reflect the same issue we've been needing to address with SSI, which is the inability to keep up financially with the needs of our country's aging population.


Public Assistance:


"Welfare" investments represent 12.3% of the FY2011 federal budget and include:
Food and nutrition assistance at 2.7% of total budget; Unemployment compensation at 2.8%; Workers Comp. at a negligible percentage; Housing assistance (programs and grants) for a total of 1.7% of total budget; and 5% for a lumped category of "other income security" (still under the umbrella of "Welfare"), which includes such benefits as Social Security Disability payouts, foster care services, other direct welfare, and most significantly, tax rebates/tax credits for the poor (e.g. payments where the Earned Income Tax Credit exceeds tax liability represent 1.2% of total federal spending). One could look at this number and say our country is investing a fair amount in social services for the poor in 2011; on the other hand, when you consider, again, the disproportionate spending on defense and health care, as well as the rising inequality and poverty rate in this country, it wouldn't be unreasonable to invest more, especially in housing and community development programs, as most people know that there are never enough affordable housing units to meet the need and that such investments can reduce expenses in other areas like Medicaid and nutrition assistance, or even homeless and police services.

Education: 


Federal investment in education in FY2011 came in at an embarrassing 3.7% of the total budget. By the end of this year, we will have spent 6.5 times as much on defense as we have on educating our children and adolescents, and if Chris Hellman is correct, the number is actually closer to 13 times as much. The message appears rather clear: we can more about American hegemony, and the longevity of our economic dominance (i.e. protecting our oil interests in the middle east) than we do about providing equal opportunity and enrichment for new generations of American children. 


On the other hand, of an average $1,303 billion ($1.3 trillion) budget, states investing 18% of their budgets, on average, in education, 31% in health care, 12% in welfare and 12% in pensions. One could argue that the federal government invests so little of its total budget because it relies on the States to provide quality education; one could also argue that the reason state and local education systems are so broken is precisely because they don't receive more federal support.

This year, 6.5% of the total federal budget went toward interest on public debt, which means we will have spent over double what we do on education on paying our creditors, and actually, our total interest paid out is off-set by interest payments received. 

Environment:

Meanwhile, we spent 0.3% on pollution control and abatement, 0.3% on "Protection of Biodiversity and Landscape", which breaks down to the same 0.3% concentrated in the lone category of "Conservation and Land Management", 0.1% of which includes "farm security and rural investment" (arguably antithetical, in some cases, to environmental protection), and 0.0% on Environmental R&D and 0.0% on other Environmental Protection. We did spend 0.3% for Energy Conservation (including the "Advanced Technology Vehicles Manufacturing Loan Programs), plus another 0.1% somewhere in there for tax rebates for investing in "innovative" technology (though that could include gas or so-called "clean coal", so it's probably most accurate NOT to count it here...) So, we've spent one quarter of our budget protecting ourselves from human enemies but approximately 0.8% attempting to protect ourselves from global climate disaster.

State Spending:

Our state budgets are left to suffer for the federal government's disproportionate spending priorities. Local budgets in urban areas with robust economies tend to have some autonomy with allocating funds, but rural townships might suffer because of lack of state funds to support social services state-wide, and social service agencies that rely disproportionately on state grants are especially vulnerable to state budgets. 

When comparing state by state government spending as a percentage of Gross State Product, spending appears larger in some notoriously poorer states, such as Alabama, Arkansas, Kentucky, Mississippi, and Montana; on the other hand, some states with high spending as % of GSP (e.g. Vermont, Hawaii) may actually invest more in social services, in the same way that socially democratic countries demonstrate high levels of investment of GDP in government; for example, Kentucky, Rhode Island, South Carolina, and Montana all rank extremely close to each other in government spending as a percentage of GSP, but Rhode Island expends $6,039 government funds per capita, where South Carolina, Kentucky, and Montana all expend over a thousand dollars less per capita -- in other words, they invest less in public services; state government there is "smaller", whether because they cannot afford it or because they prefer it that way. 

Local Spending:


On average, 39% of local budgets go toward Education, 8% Health Care, 6% Welfare, 8% Transportation, 11% "Protection" (presumably, police services), 2% Pensions, 4% Interest, 3% "General Government" (presumably, operations, including salaries), and 20% "Other", which includes: Sanitation and Water services, Community Development programs, Recreation, and environmental programs (though, again, several things can fall into the category of "Environment"...). One could argue that local budgets are eaten up unnecessarily by education expenses, when the Federal budget could do more to support education and leave the State with more resources for education and social service agency funding and then local budgets with more to go around for investment in community development and transportation projects, investments that support economic development and could promote increased socio-economic equity. 

Conclusion:

Clearly, our federal budget does not reflect forward-thinking values. As is said many times over, we heavily discount the future in this country, and it will likely lead to heavy costs moving forward, whether through our excessive debt, our ailing health care and social security systems, our lack of investment in education, or our indifference about the serious and cyclical environmental impacts of our production, distribution and consumption (or our inability to compromise to make a commitment to do something about it). Our budget today does not reflect the costs of the future.

Test Post #1

My first personal blog post in life. It only took me 3 weeks to figure out...

Testing 1,2,3