The Republic of T.

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Not As They Do: Conservatives and the Deficit, Pt. 3

Conservatives who squawk about the deficit — and Democrats who should know better, but squawk anyway — tend to do so selectively. That is, they tend to focus only on spending. But spending is only half of any deficit equation. After all, a deficit is “the amount by which expenditures or liabilities exceed income or assets.” When it comes to the government “income” really means “revenue,” and that means if we’re going to have an honest discussion about the deficit we have to talk about about taxes.

That half of the deficit equation — income or revenue — rarely enters the discussion, but the reality is the surest way to create a deficit is to increase spending while deliberately decreasing income or revenue. Who would do something like that? Something so obviously unsustainable?

Part of the answer goes back to the Bush administration’s tax cuts, and the politicians who squawk about deficits and spending now — as the Obama administration and Democrats are finally looking for ways to invest the nation’s assets in bailing out the other 99% of us — but stayed curiously silent then. Citizens for Tax Justice noted this last year, when it reported that the Bush tax cuts were more expensive than the Democrats health care reform proposal. (Not to mention they’re also more expensive than the president’s $950 billion health care reform proposal.)

Newly revised estimates from Citizens for Tax Justice show that the Bush tax cuts cost almost $2.5 trillion over the decade after they were first enacted (2001-2010).1 Preliminary estimates from the non-partisan Congressional Budget Office show that the House Democrats’ health care reform legislation is projected to cost $1 trillion over the decade after it would be enacted (2010-2019).2

And yet, many of the lawmakers who argue that the health care reform legislation is “too costly” are the same lawmakers who supported the Bush tax cuts. 3 Their own voting record demonstrates that health care reform is not a matter of costs, but a matter of priorities.

It’s difficult to see how the Bush tax cuts could provide us with two and a half times the benefits of health care reform. In 2010, when all the Bush tax cuts are finally phased in, a staggering 52.5 percent of the benefits will go to the richest 5 percent of taxpayers. President Bush and his supporters argued that these high-income tax cuts would benefit everybody because they would unleash investment that would spark widespread economic prosperity. There seems to be no evidence of this, particularly given the collapse of the economy at the end of the Bush years.

But wait, tax cuts don’t cost anything? Do they?

That depends.

Opportunity Cost

There is an economic term that ought to be applied to taxes: opportunity cost.

The true cost of something is what you give up to get it. This includes not only the money spent in buying (or doing) the something, but also the economic benefits (UTILITY) that you did without because you bought (or did) that particular something and thus can no longer buy (or do) something else. For example, the opportunity cost of choosing to train as a lawyer is not merely the tuition fees, PRICE of books, and so on, but also the fact that you are no longer able to spend your time holding down a salaried job or developing your skills as a footballer. These lost opportunities may represent a significant loss of utility. Going for a walk may appear to cost nothing, until you consider the opportunity forgone to use that time earning money. Everything you do has an opportunity cost (see SHADOW PRICE). ECONOMICS is primarily about the efficient use of scarce resources, and the notion of opportunity cost plays a crucial part in ensuring that resources are indeed being used efficiently.

The “opportunity cost” for the country may be health care reform. It may be any number of programs that help the needy, the jobless, the hungry, the homeless, the “underwater,” etc. The flip side of the opportunity cost would have to be some reward that outweighs or offsets the opportunity cost for making a particular choice. The individual, then, absorbs the opportunity cost, but also at some point enjoys a reward that makes the opportunity cost worth it. The person training as a lawyer, for example, might accept the opportunity cost of holding a salaried job in exchange for the reward of perhaps having a larger salary later and/or a more satisfying career.

In this case, however, the people enjoying the rewards are not the ones living with the opportunity cost, and the people living with the opportunity cost are definitely not the ones reaping the rewards of the Bush administration’s choice to cut taxes for the wealthiest Americans.

But wasn’t the idea behind the supply-side economics that ultimately just about everyone would benefit? From Reaganomics to Bushonomics, the tax cuts were supposed to benefit us all by encouraging people to produce more good and services and thus create jobs, etc. Call it “supply-side economics,” “voodoo economics” or “trickle-down.” Basically, once the cups of the wealthiest among us finally runneth over, the rest of us would be — more or less generously — “trickled upon.” All that prosperity had to go somewhere, right? That much supply would have to create enough demand for something to keep the rest of us gainfully employed, and afloat on that rising tide.

Well, we know that didn’t happen. At least not the way we were told it would.

 

Trickled On

We know now that the Bush tax cuts mostly benefited the rich. We know that families earning more than $1 million a year saw the biggest drop in federal tax rates, while middle-income families actually saw their tax rates creep up in 2004, while rates for the highest earners continued to fall. We know that The Bush tax cuts offered the biggest benefits to the top 1% of income earners. (And these aren’t figures pulled out of the air. they come from the Congressional Budget Office.)

But, wait a minutiae. While the wealthiest Americans enjoyed a record low income tax rate, they paid a larger share of taxes than the rest of us That’ because they really did get richer become more prosperous as a result of those tax cuts. The rest of us, not so much.

Based on an exhaustive analysis of tax records and census data, the study reinforced the sense that while Mr. Bush’s tax cuts reduced rates for people at every income level, they offered the biggest benefits by far to people at the very top — especially the top 1 percent of income earners.

Though tax cuts for the rich were bigger than those for other groups, the wealthiest families paid a bigger share of total taxes. That is because their incomes have climbed far more rapidly, and the gap between rich and poor has widened in the last several years.

Actually, the rest of us ended up paying a higher percentage of our income in taxes. If the rich paid a bigger share of taxes, that’s because they got richer while the rest of us got poorer or worked harder just to keep from losing ground.

…America’s most affluent 1 percent now pay, on average, just 6.4 percent of their incomes in state and local taxes. But they actually pay even less than that, since they can deduct their state and local taxes from their federal tax bill. The state and local tax burden on America’s rich, after taking this offset into account, drops to 5.2 percent.

…All American households — poor, middle, and rich — have lost wealth since the subprime mortgage collapse and last fall’s financial meltdown. On average, since 2007, Americans have lost 26 percent of their total net worth.

But low- and middle-income households under age 50 haven’t just lost a big chunk of the wealth they held in 2007. These households have actually lost all the wealth they had gained since 1983, the first year with Federal Reserve family wealth data available.

Meanwhile, Bush era cuts in the capital gains tax and reductions in the estate tax created so much prosperity that

The income of the 400 wealthiest Americans swelled in 2006, soaring nearly 23 percent from the previous year, to an average of $263 million, according to data released Thursday by the Internal Revenue Service. Since 1996, this group has nearly doubled its share of all income earned in the United States.

The top 400 paid just more than $18 billion in federal income taxes in 2006, or an average of $45 million, on a record $105 billion in total income — the lowest effective tax rate in the 15 years since the agency began releasing such data.

That compares with nearly $1 trillion paid by all other individual taxpayers in 2006.

The gains for the richest took place amid a booming economy, in which hedge funds and private equity firms blossomed and the subprime lending machine went into high gear.

But that’s alright, because that much wealth is all but certain to “trickle down” to the rest of us. Right? They almost certainly would have used that wealth to purchase goods and services keep those of us busy if we were already working, and get us busy if we were out of work. Right?

Theoretically, more Americans working means more taxpayers, which means those cuts “pay for themselves” in the form of the jobs all that prosperity creates and/or supports. Right? I mean, it’s only natural. Right? Whereelse would all that money go? What else would they possibly do with it?

Again, not so much. Pay close attention to the last sentence in the quote above.

The gains for the richest took place amid a booming economy, in which hedge funds and private equity firms blossomed and the subprime lending machine went into high gear.

Oh.

Where’s That Prosperity?

It’s no surprise, or shouldn’t be, that the richest Americans gained incomes hedge funds, private equity funds and subprime lending were booming. After all, they had a windfall and they invested. Just not in the rest of us.

“Until recently, we had a financial system that rewarded investors, and we have a tax system that does as well,” said Robert S. McIntyre, the director of Citizens for Tax Justice.

Now wealthy people, he said, pay income tax rates well below those of working-class citizens because of a myriad of tax breaks. A lower capital gains tax, now at 15 percent, down from 28 percent in 1997, benefits investors with big portfolios.

The growth in income came primarily from dividends and interest income, not rising salaries and wages. Capital gains income jumped to 63 percent of the adjusted gross income of the richest 400, up from 58 percent in the previous year.

That, most likely, is where the money from their tax cuts went — either invested in institutions and schemes that create wealth without creating much else, or socked away in tax shelters with curious connections to a conservative former Senator whose efforts at deregulation made much of the above possible.

Of course, I mean Phil Gramm.

Gramm, the Republican former chair of the Senate Finance Committee, where he authored much of the deregulatory legislation at the heart of the current banking meltdown, has for the six years since he left office helped lead a foreign-owned bank specializing in tax dodges for the wealthy. These schemes by the Swiss-based UBS not only force the rest of us taxpayers to pay more to make up the government revenue shortfall but are blatantly illegal. In February, UBS admitted to having committed fraud and conspiracy and agreed to pay a fine of $780 million. Republican “Tea Baggers” take note: Offshore tax havens do not equal populist revolt.

In the UBS “deferred prosecution agreement” with the Justice Department, the bank agreed to turn over the names of its secret account holders to avoid a criminal indictment. The complicity of top executives in this far-ranging scheme to use foreign tax havens to cheat the US treasury of billions in uncollected taxes was noted at the time in a Justice Department statement: “Swiss bankers routinely traveled to the United States to market Swiss bank secrecy to United States clients interested in attempting to evade United States income taxes.”

What did Gramm think all of those Swiss bankers from his firm were doing over here? Was he totally clueless? The Justice Department statement suggests otherwise: “UBS executives knew that UBS’s cross-border business violated the law. They refused to stop this activity, however, and in fact instructed their bankers to grow the business. The reason was money–the business was too profitable to give up. This was not a mere compliance oversight, but rather a knowing crime motivated by greed and disrespect of the law.”

Is it conceivable that this “knowing crime,” so widespread within the UBS enterprise, was unknown to Vice Chairman Gramm–even though it primarily involved US tax evasion, and he had been hired by the company because of his expertise in American law, some of which he helped to write? As Gramm said when he was hired in 2002 by UBS, the position “will provide me with the opportunity to practice what I have always preached. I have been involved in every major financial debate since I’ve been in the Congress.

As Robert Scheer points out above, the various forms of tax evasion —and the consequences — are merely what Gramm described as an “opportunity to practice what I have always preached.” It also gives the lie to the idea that simply cutting taxes will increase prosperity across the board. Money socked away in offshore tax shelters doesn’t re-enter the economy any more than money invested in exotic financial instruments designed to “make” more money to invest in more such instruments. More to the point. money taken out of the system, and money invested in creating more individual wealth without creating broader prosperity — without putting anyone to work outside of Wall Street –is the end result of tax cuts for the wealthiest Americans.

Taxes either cut or uncollected generally don’t get invested in things that would invigorate the economy by creating jobs. Instead it gets invested in the very institutions whose activity brought us the current crisis; or invested in schemes and institutions designed to make money without making much else — to increase individual wealth without increasing overall prosperity through the kind of investing or spending that creates jobs on Main Street.

Revenue In Reverse

Should it come as any surprise, then, that there’s a deficit if the rest of us have less and are earning less, though what income we have is taxed at a higher rate? What else could one possibly expect?

Seriously, this is math that my first grader — who, I admit, has enough of a knack for it — can understand.

Go back to the definition of a deficit above —”the amount by which expenditures or liabilities exceed income or assets” —and let’s deal with the income and assets part of the equation. (Taking on expenditures, including the equivalent of putting a war on the family credit card and then hiding the bill until you’ve moved out, will have to wait for another post.)

What happens when your expenditures either stay the same or increase, but you deliberately reduce your income or revenue, and make no other adjustments?

We know that, too, now.

But it will have to wait for the next installment in this series.

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