And interesting article in the New York Times details a recent development in and around our nations capital. During the past 10 to 15 years, there is been a massive economic boom within Washington DC, and the surrounding counties in Maryland and Northern Virginia.
How Washington managed this transformation, however, is not a story that the rest of the country might want to hear, because we largely financed it. As the size of the federal budget has ballooned over the past decade, more and more of that money has remained in the District. “We get about 15 cents of every procurement dollar spent by the federal government,” says Stephen Fuller, a professor of public policy at George Mason University and an expert on the region. “There’s great dependence there.” And with dependence comes fragility. About 40 percent of the regional economy, Fuller says, relies on federal spending.
Congress may have passed legislation to avert the middle-class tax increases of the so-called “fiscal cliff,” but it has only postponed what is known as the “sequester” — $1.2 trillion in budget cuts. And that’s on top of several hundred billion dollars in cuts that the Pentagon has already agreed to. The capital’s boom days, in other words, might be over. “Rather than leading the nation, we’re going to be lagging it going forward,” Fuller says.
The author goes on to explain why this came about, pinning much of the blame on the Reagan administration (curiously). Arguably, there are the multiple years of trillion plus dollar deficits that probably had an effect as well, though that is not emphasized very much in the article. The Cato Institute , in it’s usual clear style, add the following to say in the article:
David Boaz, executive vice president of the Cato Institute, told me: “Washington’s economy is based on the confiscation and transfer of wealth produced elsewhere. Out in the country they’re growing food, building cars and designing software — all these things that raise our standard of living. Here in Washington, everyone is writing memos to each other about how to take some of that money and which special interest should get it.” I asked him if he liked living in the city, which has become undeniably nicer. Boaz sputtered a bit. “I can’t walk to lunch from my office without having to avoid the construction projects!” he said. “For Washington, it does mean better restaurants and better entertainment, and the potholes get filled faster. But for the country as a whole? I don’t think it’s a good thing for America.”
You may have caught this on Drudge already, but Joseph Curl, writing in the Washington Times, has an interesting take on the recent tax increases being felt by Obama supporters. Here are a few of the (kind of funny) quotes that he obtained:
“I know to expect between $93 and $94 less in my paycheck on the 15th,” wrote the ironically named “RomneyLies.”
“My boyfriend has had a lot of expenses and is feeling squeezed right now, and having his paycheck shrink really didn’t help,” wrote “DemocratToTheEnd.”
“BlueIndyBlue” added: “Many of my friends didn’t realize it, either. Our payroll department didn’t do a good job of explaining the coming changes.”
“My paycheck just went down. So did my wife’s. This hurts us. But everybody says it’s a good thing, so I guess we just suck it up and get used to it. I call it a tax increase on the middle class. I wonder what they call it. Somebody on this thread called it a ‘premium.’ Nope. It’s a tax, and it just went up.”
“$86 a month is a lot. That would pay for … Groceries for a week, as someone said. More than what I pay for parking every month, after my employer’s contribution to that. A new computer after a year. A new quality pair of shoes … every month. Months of my copay for my hormones. A new thick coat (on sale or at discount place). It would pay for what I spend on my dogs every month … food, vitamins, treats.”
These reactions are in response to the social security payroll tax holiday that held the rate at 4.2% until the fiscal cliff deal mandated that it go back up to (normal) 6.2%. These samples are anecdotal to be sure. The majority of citizens out there probably understand (at least they should once it is explained) that the social security tax holiday wasn’t permanent and would eventually need to snap back to the 6.2% it was before.
Avik Roy writes in Forbes that the recalcitrant GOP representatives may be right in resisting the current “Plan B” as put forth by John Boehner. If we go over the “fiscal cliff” there are some aspects of the cuts and tax increases that, though painful, might be wise. First, he summarizes what are the main two components to the fiscal cliff:
Fiscal cliff component #1: Tax increases
The first aspect of the fiscal cliff is that taxes will go up. Income tax rates will revert back to the rates we had under President Clinton, leaving aside the additional $1.2 trillion in tax increases that Democrats passed under Obamacare. The top income tax rate will rise to 39.6 percent from 35 percent.
In addition, there are a number of other temporary tax provisions that will expire. Congress steps in every year to add an inflation adjustment to the Alternative Minimum Tax, because the AMT was not originally indexed to inflation. Without an inflation adjustment, more people will meet the income threshold for the AMT.
The deficit impact of extending these provisions, as people on both sides of the aisle want to do, is $330 billion in 2013, and $420 billion in 2014, according to the Congressional Budget Office.
If Congress were to extend all of these temporary tax provisions except for the lower tax rates on individuals with incomes above $200,000, as President Obama has advocated, the deficit impact would still be steep: $288 billion in 2013, and $382 billion in 2014.
Fiscal cliff component #2: Spending cuts
The second aspect of the fiscal cliff is that, if we go over it, spending will go down. Temporary payroll tax holidays, which reduce the Social Security and Medicare payroll taxes paid by employed individuals, will expire. In addition, the “temporary” extension of unemployment benefits undertaken during the recession will finally end. Continuing those temporary tax holidays and temporary unemployment benefits will increase the deficit by $108 billion in 2013, and $150 billion in 2014.
Importantly, Medicare’s Sustainable Growth Rate will take effect, reducing Medicare’s payments to physicians by tens of billions of dollars. This provision, and a few others, will reduce federal spending by $40 billion in 2013, and $61 billion in 2014.
In addition, the Budget Control Act—the law passed last year during the epic debt-ceiling fight—automatically sequesters, or reduces, defense spending by $24 billion in 2013 and $51 billion in 2014.
Next, he analyzes why it might be better to suffer through the above-outlined events rather than hash out a deal that Obamacare-esque in its integrity:
Much of the Republican behavior on Capitol Hill has been driven by fear of how the electorate will view Republicans if they don’t continue to pass temporary tax cuts. But reducing the deficit will have to happen sometime, and whenever it happens, it is likely to have some negative impact on the economy. If Republicans don’t want to reduce the deficit two years away from the next election, under a Democratic President and a Democratic Senate, they’ll never reduce the deficit. The time to reduce the deficit is now, before a real fiscal crisis emerges, one that makes Greece look like a picnic.
By leaving town and letting America go over the fiscal cliff, Republicans don’t have to vote for tax hikes that they justly oppose. Economically counterproductive spending, like the unemployment benefit extension, will come to an end. And an enormous amount of irresponsible accounting gimmickry, like the annual wrangling over the Medicare “doc fix,” will end also.
And once Democrats gain their generational victory—returning to the Clinton-era tax rates—what case will they be able to make for even higher tax increases next year? Instead, the conversation will move back to what it always should have been about: the fact that the government spends too much taxpayer money, money it doesn’t have.
Arthur Brooks describes why increasing taxes won’t help facilitate economic growth. The three main reasons, he argues, are (1) there’s no evidence such increases have helped other countries (or in the past), (2) tax hikes on small population segments don’t raise significant amounts of revenue, and (3) the targeted tax rate group happens to be small businesses. Obama likely knows this, so why the push? In a word: “fairness.”
As far back as the 2008 presidential primaries, Obama said he’d be willing to raise capital gains taxes — even if it lost revenue — in the interest of “fairness.” In his famous speech in Osawatomie, Kan., last year, employed the term “fair” or “fairness” some 14 times in his arguments to raise taxes. He has spent months demanding that “millionaires and billionaires … pay their fair share.” Meanwhile, just a few days ago on the Today show, billionaire investor Buffett — a major proponent of his namesake tax proposal –argued that tax hikes on the rich would “have a great effect in terms of the morale of the middle class.”
In other words, taxes are an issue of “fairness,” not economics, to these gentlemen. And they see raising taxes on the wealthy as a good in itself. President Obama’s use of the term denotes equalizing economic outcomes more than at present — that is the nature of defending redistributive taxation as fair, per se. But this is not in line with the way most Americans understand true fairness.
Michael Barone argues in his recent Washington Examiner column, that higher tax rates won’t support the entitlement state. If the current programs limp along without reform, no amount of tax increases will fund them. The primary reason for this is because people who make the most money (the famed “1%”) don’t actually make enough money.
Over that period of nearly three-quarters of a century, federal receipts have never exceeded 20.9 percent of gross domestic product. That was the number for the war year 1944.
The highest number since was the 20.6 percent of GDP in 2000, the climax of the dotcom boom. In the Obama years, federal receipts have hovered at 15 percent of GDP.
That’s just because tax rates are too low, Obama backers reply. Just raise the rates on high earners and the problem will be solved.
Actually, high earners don’t make enough money to close the current budget deficit. You’d need to raise taxes on middle-income earners too.
But we have had higher income tax rates in most of the years since World War II. What history and Table B-79 show is that even much higher rates — like the 91 percent marginal rate on top earners imposed from the 1940s to the 1960s — have never produced federal receipts higher than 20 percent of GDP.
Why is that? As the late Jack Kemp liked to say, when you tax something, you get less of it. When the government took 91 percent of what the law defined as adjusted gross income over a certain amount, not many people had adjusted gross income over that amount.
The American Enterprise Institute knocks down another media outlet’s attempt to muddy the waters regarding Romney’s tax plan and whether it can be deficit neutral.