Tax workers - or the rich?
Obama's plan to soak high earners may hurt the economy less than broad-based tax hikes, writes TD Bank
Tax workers – or the rich?
Joseph N. DiStefano
With Obama re-elected, "will the fiscal cliff be avoided in 2013 and the economy spared?" asks Beata Caranci, economist at Toronto-based TD Bank, whose U.S. headquarters is in Marlton, in a note to clients.
For the lame-duck government and the new, similar gang, "the first order is to avoid the fiscal cliff," which is intended to cut the deficit in the long term, but also expected to stall the economy and hiring in the short term. "The second order is to evaluate the economic impact of the policies that will ultimately be put in its place ...
"If everything that is legislated to expire in the New Year actually took place, many private sector forecasters and the Congressional Budget Office estimate the drag to real GDP growth next year would be in the 3-4 percentage point range.
"There is little debate among politicians and economists that this would return the U.S. economy to recession.
"While the President shepherds the discussion, Congress ultimately decides the path of fiscal consolidation and the ability to reach agreement is crucial to this outcome ... Even with a majority Republican House, a Democrat Senate and a Democrat President, the prospects of a recession should prove distasteful to all and act as a catalyst towards compromise among rational individuals ...
"We view the odds of running off the cliff and remaining in complete free fall to be relatively low (at 10% or less) ... A (more) probable scenario is to kick the can down the road, temporarily extending deadlines to allow for more extensive discussions within the new Congress."
Obama's victory makes it more likely tax hikes will focus on the rich, not the mass of working people -- and that's a good thing for the economy as a whole, Carangi adds:
"It may be surprising to some that Obama’s more numerous tax increase proposals – health care, high income earners, dividends, capital gains" result in less "drag" on gross domestic product than broad-based tax hikes, because "the economic drag from a tax hike on an individual earning $500,000 is less than that of one earning $50,000.
"The reasons are numerous, but a key factor is that consumption among high income earners tends to be less sensitive to changes in income than middle and low income earners. Second, mathematically, high income earners make up a smaller portion of the population. So the biggest single economic drag from taxes next year comes from the expiration of the temporary two percentage point reduction in payroll taxes that affects all workers and tops out at $110,000 in labor income ...
"An Obama White House may be open to the possibility of new middle-class tax breaks to replace the payroll tax cut. Republicans may find this agreeable ...
"Fiscal consolidation in the U.S. is absolutely necessary and unavoidable, but the dispersion of forecasts among students of fiscal policy argue strongly in favor of a go-slow approach," so we don't end up like Europe, where the shock of budget cuts has slowed economies without giving any sign, so far, that the long-term gain is worth the pain.
We've been sold a bill of good by both sides.
The Republicans claim that reducing taxes on the wealthy will give them incentive to hire more employees. That's pretty well debunked by history. Employers hire employees to meet their customers' demand for their goods and services, and demand is way down these days.
The Democrats are selling the false notion that taxing the rich will allow us to keep spending like drunken sailors and painlessly support all kinds of wonderful public programs using "other people's money." The problem is that there aren't nearly enough millionaires and billionaires to pay the tab. Taxing them at 100% will run the Federal government for about six days. The inevitable solution will be to become more "inclusive" in our definition of "wealthy" -- which will simply have to include what we now consider "middle class." Of course, they'll do it gradually, hoping we don't notice. An equally bogus "solution" is that business should pay big tax bills. But business doesn't really pay taxes -- they pass them on to their customers or go out of business. We tax production; other countries tax consumption -- that's part of the reason that imports (from countries that don't tax their manufacturers, thereby encouraging exports) are less expensive here. We have a mess, and it seems that the American public won't have the stomach to deal with it until there are some draconian choices to be made.
The simple fact is that they're both feeding us nonsense. Sooner or later we (and especially our children) will have to pay the piper.— Don_M- The President said repeatedly you cannot close the deficit loophole without increasing taxes on the middle class. Just wait until the Fed starts raising interest rates and all those retirees savings go down the crapper. Fun times.— theodotius
- we have a middle out economy. we need to stop with this cult of reagan supply side economics. it has been disastrous for the middle class and the country as a whole. the rich cannot keep getting richer if there is no middle class purchasing power to buy the [stuff] they make.— Ryan
- Do what you want, but do not touch the DROP program. That is one program that is working for us all.— TEMPLE55
- Penalize any corporation that outsources.— gordon7
- Tax the rich till they don't exist. That will show them. Then what?— CD75
- i'm sure now that the bamster has been safely reelected we will start getting stories all the time about how bad the economy is— rysagr
- You said it brother. Now the press will surely tell us all how screwed we are. The media in this country is a absolute joke.
- Just take a look at the stock market the day after....there's your answer. We all now work for 'the company store" (those of us that pay taxes anyway).— dogman5
- It's widely accepted that [...] “When the people find they can vote themselves money, that will herald the end of the republic.” Think about that sentence. The entitled voted themselves a pay raise yesterday.— jerryk2b
- Tax the people who earn it, risk their capital and hire other people. Give it to the people who dont pay anything aand contribute nothing and never get any better. bye bye America, it's been nice knowing you.— tr88
- Keynes 101: When private capital dries up, the government must step in to make up the difference. Austerity measures fail because they just take money out of the system. Taxes would normally stay level or drop, except when a previous cut is part of the problem as is the case with the Bush Tax cuts.
The problem with Keynes isn't stimulus and recessions, it's taxes and booms. To make up for the recession spending, taxes must be raised during boom times to make up for the recession deficits. Few politicians have the balls to do this.
The fed and the states need to spend money to survive this recession. The stimulus was weakened by states using it to cover austerity measures. But overzealous tax cuts are also hurting the recovery. Raising taxes on working americans would just hurt the recovery, but the idle wealthy can afford higher rates, especially give how massively their rates have dropped over the past few years and decades.
Remember, in those wonderful baby boomer days of the 50s and 60s, The wealthiest Americans were paying 90% taxes, capital gains were taxed as income, Union membership was at peak levels, and the nation spent billions (probably over a trillion in todays $) on vital infrastructure projects like highways, bridges, dams, water and sewage treatment.— Pelti - Now the Sheep are writing about and discussing an economy they know absolutely nothing about! Continue to follow your leaders! Baa! Baa!— Street Sense13
- Jconrad-that's the biggest load of horse[...] I have seen in a long time [...]. Your not only a sore loser, you're just a loser.— Raindog1973
- I'm a Conservative but I think there may be some good to removing some of the loopholes the wealthy use to avoid taxes. For instance, Bruce Springsteen, Jon Bongiovi and Barbara Streisand have ranches and raise thotougbred horses they use as tax shelters. Streisand's horses are living in a 25,000 sq. ft. air conditioned and heated barn as well. I've joked I wanted to be reincarnated as a dog in a home like my own but I'm thinking of coming back as a rcih person's horse. Sprinsteen's daughter just spent $8,000,000 for a horse. How's that for a tax shelter? These loopholes are abuse of the rest of us working hard to earn a living.— Bob Calvin
