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TAXATION
Barack Obama wants to sharply increase taxes on the wealthiest 5 percent of Americans and reduce taxes (and/or increase benefits) for lower and middle income families. Is this expansion in “soak the rich” policy warranted?
The middle class currently pays 3 percent of its before-tax income in federal income taxes (less than they spend eating in restaurants) while the wealthiest 5 percent pays 17.6 percent, a rate nearly six times as high. In fact, the top 5 percent actually pays 60 percent of all federal income taxes. It is difficult to see how fairness requires increasing the tax burden on the well-off and reducing it on the middle class.
Perhaps of greater importance is the effect of this change in the tax structure on the performance of the economy. Research shows that the current progressive income tax has reduced the average before-tax income of Americans by about 10 percent by reducing the productivity of the economy. Adopting Obama’s proposals would increase this loss, giving the middle class a small gain in the present that would be more than offset by losses in later years.
No country has ever redistributed its way to prosperity, but many have tried and failed. We shouldn’t count on bucking the odds.
DEFICITS
Do you think the federal government budget deficit, projected to be about $400 billion this year, is bad for the economy? Economists agree that deficits are bad, but the official $400 billion overstates the problem because it is not corrected for inflation. The inflation-adjusted budget deficit this year will be approximately zero.
Past deficits have given us an outstanding national debt of about $9 trillion, and have harmed the economy. But a much larger problem is the implicit debt building up in our unfunded retirement programs, Social Security and Medicare. This debt is not recognized in official statistics, but it is far larger than the official national debt, and now stands at $36 trillion. Past hidden deficits in financing Social Security and Medicare have given Americans a real debt that is four times as large as the officially recorded national debt.
The economic consequences of real budget deficits and the hidden deficits supporting Social Security and Medicare are the same. It is inconsistent to be opposed to the official budget deficit and at the same time to favor preserving these retirement programs in their present forms, no matter how many politicians find it expedient to take this position.
SOCIAL SECURITY & MEDICARE
Probably the most pressing economic problem confronting the U.S. is how to reform the federal government’s retirement programs, Social Security and Medicare. There will have to be major changes in these programs, as evident from the fact that they now involve spending equal to 7.3 percent of GDP, but without reforms that will grow to 15.2 percent by 2040. By 2040, if not before, taxes supporting these programs must be more than doubled or benefits cut by more than half (or some combination of tax increases and benefit cuts).
Which approach is preferable? Tax increases lock us in to a permanently larger tax-transfer mechanism for providing retirement benefits, and that will hurt future generations by lowering economic growth. Today, the average before-tax income of Americans is already 10 percent lower as a result of these programs’ effects on past economic growth, and doubling tax rates will increase the size of this loss in the future. (To put a 10 percent loss in perspective, estimates of the cost to the U.S. of unabated global warming are around one percent of our incomes over the next century, one-tenth the loss we are already bearing from Social Security and Medicare.)
Benefit cuts are preferable. However, benefit cuts must be gradually phased in since benefits cannot be reduced for people already retired. The longer we wait to start cutting benefits the more difficult it will be to choose this option, and the more likely we will have to sharply increase tax rates. Our politicians have been totally irresponsible in failing to address this issue, and our children and grandchildren will bear the costs of their negligence.
IMMIGRATION
There is no net gain on balance to Americans from immigration, legal or illegal. Immigrants receive in wages and government provided benefits approximately what they contribute to economic output, leaving no net gain for Americans.
But immigration does produce a massive redistribution of income among Americans, harming some and benefiting others. Immigration leads to lower wage rates and salaries for Americans, especially lesser skilled Americans, to the tune of a total annual loss of about $400 billion a year. Other Americans, however, benefit from this reduction in labor costs, but they are primarily high income persons who own most of the businesses employing workers. Thus, immigration increases inequality in incomes among Americans by harming the poor and benefiting the well-off.
Immigration also contributes to problems associated with poverty and the lack of health insurance. About 20 percent of those counted as poor by the federal government are immigrants, as are 25 percent of those who lack health insurance. Perhaps surprisingly, these figures include illegal immigrants. When the government reports that there are 37 million poor Americans and 47 million without health insurance, many of them are not American citizens at all.
POVERTY
We have been fighting the War on Poverty for 44 years. Each year the government spends more than $600 billion dollars on welfare programs, and several hundred billion more goes to low income families through programs like Social Security and Medicare. All told, upper income Americans transfer more than $1 trillion a year to low income Americans. That’s almost seven times the current cost of the War in Iraq.
So how is the War on Poverty going? According to the federal government, 12.3 percent of the population is poor, about the same rate as in 1970 when expenditures were a tiny fraction of today’s. How could we spend so much and get so little in the way of results?
Part of the answer is that the government mismeasures poverty. More than 80 percent of the welfare benefits received by the poor are not counted and do nothing to reduce poverty as officially defined. If these benefits were counted (and a couple of other technical problems corrected), the poverty rate would be more accurately measured at one to three percent rather than the official 12.3 percent.
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