Mitt Romney’s remarks on the 47 percent of American who of the country “who believe that they are victims” has dominated the news cycle since the video leaked, with some pundits are claiming that the leaked comments are the death knell of the Romney campaign. Many on the left are quick to point out that many people receiving some form of government aid are retirees, students trying to pursue higher education, or veterans on disability, these people hardly resembling the less-than-charitable light Romney was trying to cast them in. But both Romney and his detractors miss the main point of the recent surge in government dependency.
It is certainly true that, as Romney claimed, 47 people paid no federal income tax, and equally troubling, 49 percent of Americans live in a household where somebody is dependent on federal assistance.
Romney claims these people “are dependent upon government . . . believe the government has a responsibility to care for them . . . that they are entitled to health care, to food, to housing, to you-name-it.” He views these ‘takers’ as a monolith, alike in their dependency and belief in the power of big government, but it does not necessarily follow that a retiree receiving Social Security benefits would believe in a bigger government role in promoting affordable housing, or that a veteran receiving disability payments would support a further surge in farming subsidies. It is not the case that should fifty percent plus one Americans receive some form of government aid, they will quickly move to take everything that in the makers vs. takers conflict he portrays. The danger is that on each of these myriad of policy issues, be it Social Security, student loans, agricultural subsidies, that the recent explosion in benefit amounts and number of recipients will tilt the balance in that particular policy, a result of the diffuse costs and concentrated benefits in each of these programs. A young farmer cares exponentially more about farm subsidies than he does about urban housing, he might not even support it. When Romney throws together everyone that receives government assistance into one block, he fails to recognize where the actual danger the recent surge in these government programs represents.
For each of these programs, as the concentrated benefits become greater, and the benefit rolls swell, the tipping point will be reached on a myriad of front. The interest, power and influence of these benefit groups will continue to increase in proportion to their ranks and the amount money at stake. Take the increase in spending and enrollment in SNAP, or food stamps. There remains a disagreement as to whether the effects of the recession are the primary driver of the growth of SNAP, or whether a loosening of eligibility requirements and increase in benefit generosity explain the surge in food stamp rolls over recent years; regardless of the cause, the swelling of the number of beneficiaries and the amount of money the program commands, mean that any attempts to change the program in the future to rein in costs will be met with entrenched resistance. This resistance will only grow stiffer as more beneficiaries are added to the rolls.
The fiscal health of America, already on life support due to the new normal of trillion dollar deficits and the mounting debt, will face death by a thousand cuts, as each of these interest groups passes a tipping point and becomes entrenched enough to resist any reasonable or necessary calls for reform. Demonizing aid recipients, or reducing them to some other, serves merely as an unnecessary and dangerous distraction from the real problem; whether its inevitable demographic changes as in Social Security, effects of the recession and increased benefit amounts like in SNAP, or whatever the cause, the problem is that fiscally responsible taxpayers will soon be overwhelmed on a multitude of fronts by disparate interest groups benefiting from different government programs just as their need to cut spending is the most dire. Rather than denigrate these people who receive government aid, Romney must make the case that specific programs must be reformed before their individual tipping points are reached, before the benefiting group in that policy issue is so numerous, and the benefits so generous, that they will overwhelm any attempt to make any changes. Romney, however inarticulately, may have stumbled onto something that can resonate.
In the Odyssey, the eponymous hero faces a choice between two threats when navigating the Strait of Messina. The six headed monster Scylla and the deadly whirlpool Charybdis were located close enough to each other that evading one meant facing the other. Passing too close to Charybdis meant the entire ship would likely be sunk, while some men would certainly be lost on the path through Scylla. The uninviting choice facing Greek voters going into the election this past weekend reflect the situation Odysseus faced; attempting to navigate the least harmful path forward with unavoidable danger looming. The two leading parties embody this uninviting choice for the Greeks; fear of a messy exit from the Euro against a desire relief from the harsh, prolonged austerity that has been taking its toll on the Greek people since the onset of the crisis. Radical anti-bailout party Syriza had vowed to tear up the previously agreed upon austerity package required by the troika, an action that would almost certainly lead to a rapid exit from the Euro, setting off a new crisis that could have wide-ranging and devastating consequences. A New-Democracy victory offers no similar threat of catalyzing the next crisis to ensnare Europe, they have stressed that a vote for them is a vote to stay in the Euro and not turn their back on the agreement with the troika.
Six weeks after a previous election failed to produce a governing coalition, worries among European leaders simmered that upstart party Syriza would ride the momentum from their unexpectedly strong showing in the previous round to snatch victory from the pro-bailout establishment. Center–right party New Democracy and their leader Mr. Samaras emerged victorious with 29.7% of the vote, about 3 percent more than Syriza and enough to attempt to form a coalition government. European leaders and Euro supporters hailed the results as a triumph. Mr. Samaras touted the win as a ‘victory for all Europe’ and President Obama hailed the results as a ‘positive prospect’ for Greece.
The celebration was short-lived, as the temporary exultation at narrowly avoiding a new catastrophe quickly gave way to sober realization. With the New-Democracy victory, Greece has managed to evade the Charybdis of a Syriza win, but while Greece avoided causing a new crisis, the election did nothing to solve the pervasive problems they have been struggling with since they were first locked out of capital markets in 2008. The day after the election, financial markets initially rallied on the news of the election results, but within hours, Spanish borrowing costs reached new euro-era highs and Italian bond yields were driven above levels considered sustainable. This continues the trend from the Spanish bank bailout, where the announcement of a $125 billion injection into troubled Spanish banks only calmed the markets for less than five hours before the upward pressure on the borrowing costs of Spain and Italy continued inexorably. While n the past, bailout announcements or positive election results would placate the market until the next crisis flared up, now the market panic returns the same day, as investors recognize that neither election results nor the next in a seemingly endless line of bailout announcements will solve the deep structural problems plaguing the Euro, only comprehensive reform could. Regardless of who won this past Sunday, Greece still faces a rigid labor market with high levels of unemployment, unsustainable levels of national debt and a crippling recession with no clear path back to prosperity.
In the more immediate sense, New-Democracy and the governing coalition that it looks likely to form with Pasok and Democratic Left faces the problem of securing the rest of the previously promised bailout funds the country needs to function while simultaneously trying to renegotiate the conditions to soften some of the austerity measures required to receive the funds. They will be hindered in their efforts by Syriza’s refusal to join the coalition, as the Syriza-led opposition will fiercely oppose continuing the bailout deal as it is, and will put increasing amounts of pressure on the governing coalition to renegotiate the deal. The list of measures that Greece needs to comply with under previous bailout agreements is long and substantial. According to the much discussed IMF Memorandum of Understanding “prior to the first disbursement of the new programme, the Government adopts the following measures, through a supplementary budget.” These measures amount to about €3bn, or 1.5% of GDP and almost 7% of GDP in additional measures will be needed to attain the 2014 fiscal target. Some EU officials had indicated that it might be possible to relax some of the deadlines, or soften some of the requirements, but German Chancellor Angela Merkel recently told reporters at the G-20 summit: “The important thing is that the new government sticks with the commitments that have been made, there can be no loosening on the reform steps.” It remains to be seen who will wield more leverage in the forthcoming negotiations between the newly formed government and the European powers that be, but significant changes to the agreed upon measures are far from a certainty.
The Greeks have managed to avoid plunging into a new crisis, evading the Charybdis of a euro exit, but there is still much pain an uncertainty ahead. Odysseus said that what he witnessed following his choice between Scylla and Charybdis was ‘the most pitiable sight’ he saw in his entire journey home. Hopefully with their version of Scylla and Charybdis, inescapable choice between the certain pains of austerity and the catastrophe of a likely Euro exit, the Greek people can avoid such a harrowing outcome.
Washington has never been the picture of harmony, but even by its own standards, the level of animosity between Democrats and Republicans has reached a fever pitch in recent years. Each side routinely vilifies the other. Accusations abound that the other side is putting party before country, that they do not have America’s best interest at hear, and that they are instead driven by motives of a more selfish and sinister nature. The vitriol found on Capitol Hill is far more abundant than jobs, providing cold comfort to the American people who just want to see solutions. Both parties have been quick to decry the other for these attacks, but neither side has any qualms about leveling such accusations when they decide the occasion calls for it.
All of this only serves to shift the conversation away from the issues and working towards potential solutions, placing the focus instead on finger pointing and shouting across the aisle. These lines of attack aim to demonize the other party in the eyes of the American public, but they result in neither party being able to recognize any potential legitimate concerns and critiques raised by the opposition; in this atmosphere, anyone who disagrees must simply not have the
right motives and merits no response. At its core, these vituperative attacks are a tactic to avoid addressing substantive critiques to their ideas.
Once Republicans have established that Democrats are driven only by their insatiable desire to expand the scope and size of government and not by concern for the welfare of the American people, they no longer have to explain the reasons they disagree with the initiatives of the Democrats based on the merits of those policies alone. After Democrats
determine that Republicans are consumed only with the aim of beating Barack Obama and retaking the White House in 2012, they do not have to deal with any serious concerns raised regarding their policies. By dismissing the other party, each side avoids having to engage in serious debate, both sides are talking to an empty room. The result is little substance and few results.
At the end of the day, both parties come off as hypocritical and petty; leading many Americans to conclude that neither party is really serving their best interests. The constant drumbeat of vilification and accusation inspires little confidence in Washington, and could explain some of why Congress’ approval rating is mired near historically low levels. Ordinary Americans are tired of the back and forth, they want to see Congress focus on the issues and finding solutions.
A good rule of thumb for these wayward politicians would be to never assume that anyone is motivated by hidden, malicious motives; thatthey instead pursue their agenda because they really believe it is in the best interest of Americans. To continuously suggest otherwise is an insult to this country and to the Americans who elected them.
All of this does not mean that there will suddenly cease to be bitter divides on the Hill, but it could mean that the focus would at least remain on the issues, and trying to find solutions.
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- Even Congress hates Congress (politico.com)
This past Tuesday, Rick Perry unveiled his tax reform proposal in an effort to regain some of the momentum his campaign has lost in recent weeks. It is the second such plan to come from a Republican candidate, joining Herman Cain‘s much discussed 9-9-9 plan.
Perry’s flat tax proposal would drastically change the current tax system, with the main component being the choice between a flat tax rate of 20% or their rate in the current system. The new flat tax would preserve mortgage interest, charitable and state and local tax exemptions for families earning less than $500,000 annually, and it increase the standard deduction to $12,500 for individuals and dependents.
So far, reactions have been mixed. Grover Norquist and the Wall Street Journal reacted favorably to the proposal, while the National Review was less enthused.
There are aspects of the plan that are appealing: there is a pretty wide consensus that the current tax code is overly complex, and has too many loopholes and exemptions that distort economic decisions.
Like Cain’s plan, Perry’s loses some of its seductive simplicity upon closer scrutiny.
One thing that is certain, the plan has reinvigorated a fading Perry, unleashing a deluge of much-needed media exposure, and doing something to address the oft-heard critique that he was light on policy specifics.
The most troubling aspect of this tax reform is not even directly related to the proposed changes to the tax code. It is the same specter that haunts Herman Cain’s 9-9-9 plan. Both candidates, in introducing their dramatic proposals that would overhaul the much-maligned tax code, have shied away from making any serious or specific proposals to rein in government spending.
Over the past 50 years, the marginal tax rates have fluctuated, from a top marginal tax rate of 91% as late as 1963, to the current top rate of 35%. In all that time, current recession excluded, tax revenues have fluctuated around 18% of GDP, showing little responsiveness in changes to the tax rates.
While both of these proposals would throw out the tax rate, and conceivably raise higher revenues, most analyses of the two proposals show them raising significantly less, raising questions as to how the two candidates would carry out their proposals without raising the already burdensome annual budget deficit.
All of this serves only to distract from the real issue, which is not the tax system, inefficient as it might be. but spending. Federal spending in 2011 will be around 24% of GDP, and the Congressional Budget Office generously projects that it will stay in this 23-24% of GDP range for the next decade, although the recent trend in government spending since Clinton suggest it is far more likely that the percentage will continue its steady march upwards unless serious steps are taken to rein it in.
It remains unclear what steps the any of the aspiring candidates would take to address this monumental gap between the historic 18% revenue and current 24% spending, and it is not hard to see that a recurring annual deficit of 6% is in no way sustainable, especially with the high level of debt the US is already facing.
Perry at least acknowledges the issue of runaway government spending, albeit he does not propose anything definitive or specific, saying only that his plan will seek:
a clear goal of balancing the budget by 2020. But that growth is what will get us to balance, if we are willing to make the hard decisions of cutting… We should start moving toward fiscal responsibility by capping federal spending at 18% of our gross domestic product, banning earmarks and future bailouts, and passing a Balanced Budget Amendment to the Constitution
While it is a positive sign that he seems to recognize that controlling government spending, and that there will be hard decisions in terms of cuts, but he unsurprisingly demurs from making any of these hard decisions in his plan.
Milton Friedman concisely articulated the correct response to tax reform proposals, explaining that while the intent of these reform was admirable, and often they had good content:
the big problem is not taxes, the big problem is spending. The question is, “How do you hold down government spending?”
Unfortunately, at least for now, we will all have to wait to find out the answer.
Related articles
- Rick Perry to Herman Cain: Two can play the crazy tax plan game (dailykos.com)
- Perry tax plan means “substantial” revenue loss – CBS News (news.google.com)
- Rick Perry unveils flat tax plan (bbc.co.uk)
- Perry’s Flat Tax gets a B+ (Daniel Mitchell)
- Rick Perry’s Rough Draft (National Review)
Herman Cain is the most recently anointed top-tier candidate who will challenge Mitt Romney for the Republican nomination. His Florida straw poll win and a string of solid debate performances have seen him surging in the polls, and he is consistently polling second.
The driving force behind Cain’s rise has been his tax reform plan, the drumbeat of 9-9-9 can be heard in most of his debate answers, and nearly all of his interviews and speeches.
Part of the appeal of his plan, aside from that it was a (relative to the other candidates) concrete plan for tax reform, was its apparent simplicity. The plan seemed so simple that Cain was even able to reduce it to a soundbite, 9-9-9. Cain even sought to capitalize on his plan’s seeming simplicity by contrasting it with Romney’s 59 point economic plan, dismissing the former Governor’s plan as too complex. In reality, the ‘9-9-9’ plan is not nearly as simple as Mr. Cain would have you believe.
The 9-9-9 plan is actually only an intermediary step in Mr. Cain’s plan for tax reform. The first step would actually be to reduce individual and business taxes to a statutory maximum of 25 percent from their current maximums of 35%. Mr. Cain would also Mr. Cain would eliminate all taxes on profits earned by multinational corporations outside the United States and abolish all taxes on capital gains.
Mr. Cain would put these three measures into effect immediately without offsetting the lost revenue, with the stated claim of promoting economic growth.
Only then would step two of his tax plan be implemented, the payroll tax would be eliminated, and the vaunted 9-9-9 plan would be put into effect.
The work at this point, is still not over. In the next and final phase, Cain would call for the quick exit of the 9-9-9 plan and introduce a fair tax at a rate of 25-30%.
So the seemingly simple plan, the one that fits so neatly into the 9-9-9 soundbite, is much more complicated when Cain’s entire tax reform plan is drawn out. It would require two transformational tax reform laws, presumably in the space of four years. The monumental nature of this task is hard to convey, getting to the intermediary 9-9-9 phase would require the most comprehensive tax reform seen in recent times.
When asked how he would attempt to push through these tax reforms, a task that would be Herculean even if the GOP controlled one of the chambers of Congress, Cain claims that the American people will be so strongly in favor of the 9-9-9 plan that they will put overwhelming pressure on their representatives to pass the reforms.
This seems to be at odds with the situation in reality. As Bruce Bartlett points out regarding phase 1, where the maximum corporate and personal tax rates are lowered and the capital gains tax is eliminated:
No mention is made on the site of a tax cut for those now in the 10 percent, 15 percent or 25 percent brackets. This means that the only people who would get a tax rate cut are those now in the 28 percent, 33 percent or 35 percent brackets. According to the Joint Committee on Taxation, only 4 percent of taxpayers pay any taxes at those rates… [and] two-thirds of all capital gains are reported by those with incomes over $1 million
It is hard to see the logic behind the claim that the average American is going to clamor for phase one of the plan that would largely benefit the most wealthy Americans, while not even remaining revenue neutral at a time when the country is running up some of the largest deficits in its history.
The 9-9-9 plan itself hardly leads one to think that the citizen body will be so in favor that it would bring so much pressure on legislators that they would be forced to pass it. The burden of taxation would be increased on the vast majority of lower-income Americans under the new plan. As many politicians on the right are fond of pointing out, 47 percent of Americans pay no federal income taxes, and the poorest are not liable for payroll taxes either, as when income is low enough, the earned income tax credit offsets this obligation as well. These Americans would all see their tax burden rise substantially, while wealthier Americans would see a lower effective tax rate. Value judgements of whether ensuring that all Americans pay some taxes is wise aside, it is illogical to think that they will be in favor of it. Mr. Cain’s plan would face nearly insurmountable odds in getting any of the phases passed.
The multiple phases also raises the question as to whether even those in favor of 9-9-9 or the fair tax would support the initial phase, what would happen if after the maximum tax rates were lowered, the next phase of reform that would usher in the 9-9-9 plan was forestalled, and we were left with a system taking in drastically less revenue while not lowering the tax burden for the poorest Americans.
More questions arise regarding the tax reforms effect on other aspects of American society. What will fund the entitlement programs like Social Security and Medicare in each phase of the plan? How does Mr. Cain explain his support of the Chilean model for Social Security, in which younger workers would be able to opt out of Social Security and its payroll taxes in favor of personal savings accounts, if there is no longer a payroll tax to opt out of? Would younger workers of my generation pay something like 9-9-7.5? How can he in any way that later Presidents and Congresses will not simply raise the rates, causing the plan to become the x-x-x plan with ever-increasing rates?
A closer analysis of the 9-9-9 plan leads to many more questions than it answers. One thing is for certain, the surface simplicity of 9-9-9 quickly melts away under the glaring light of closer scrutiny.
Related articles
- FactCheck.org on Herman Cain’s 9-9-9 Plan (taxprof.typepad.com)
- Cain says he won’t reveal more policy advisers (politicalticker.blogs.cnn.com)
- Bruce Bartlett: Inside the Cain Tax Plan
- Outside the Beltway: The utter folly of Herman Cain’s “9-9-9” plan
- Daniel Mitchell “More Problem’s with Cain’s 9-9-9 plan
- Thinkprogress: Cain’s 999 plan would cause largest deficits since WWII, while increasing taxes for most Americans