Day of Infamy

Like a string of Christmas lights bursting into color or a full Menorah displaying its nine flickering candles, a host of provocative titles lit up my brain this morning, December 7, 2010.

Should I label this article "Happy Days," recalling the halcyon high school adventures of Richie Cunningham and Fonzie Fonzarelli, since, indeed, who among us should not be mindlessly blissful at the prospect of savory tax treats graciously bestowed upon us for the holidays by our indulgent President and his suddenly amicable Republican cohorts -- except for a handful of liberal Grinches, like me?

Or how about "Height of Hypocrisy," since, while sanctimonious Congressmen and Senators from both parties -- but particularly Republicans eager to flay their opponents at every opportunity -- and the White House have been almost unanimous in "warning about the existential threat posed by large deficits and mounting federal debt," (Christopher Hayes, The Nation, December 9, 2010) no one expressed undue concern that the just-consummated tax deal will add $900 billion to a two-year accumulated deficit of $2 trillion?

Or how about "Kick the Can" (down the road), the simple game we have all played in our youth (which required only a well-worn tennis shoe and a discarded soda can), since once again our cowardly politicians, looking no further than their next campaign, have refused to face up to the fiscal facts of life and chosen to defer their responsibilities to future generations, whose burden was just made a little more onerous?

Or how about "Blackmail," since no less odious a term can be applied to the process by which the Republican leadership negotiated with President Obama, threatening an "all or nothing" expiration of the Bush tax cuts of 2001 and 2003, which compelled him to keep them all in place, even for high-income earners, lest he renege on his promise not to raise taxes on families making less than $250,000?

But I finally settled on "Day of Infamy," with no disrespect to the 2403 Americans killed in Japan's surprise attack on Pearl Harbor sixty-nine years ago. Because if December 7, 2010, will soon be forgotten -- indeed has already been forgotten -- the deal struck that day -- if it stands, which it surely will, despite sporadic fulminations by a few feckless Democrats (and an eight-hour filibuster by one) -- says as much about the sorry state of our Republic as World War II did about its enduring grandeur, now consigned to history.

While Obama staggers under attacks from the Left, who accuse him of spinelessness and betrayal for abandoning his principles, and from the Right, who resent his characterization of them as "hostage takers" and still didn't get their wish list complete -- the tax cuts made permanent and the unemployment benefits "paid for" by spending cuts -- I believe he will emerge from this battle unscathed.

Democrats can posture and protest until Santa Claus flies over the Capitol, and some even vote their conscience, but enough will support the bill to assure its passage, loath to forgo the sackful of bounty lavished upon their lower and middle class constituencies. On the other side of the aisle, even the most glib commentators seem flummoxed -- even outfoxed -- by their enemy's tax-cutting oneupmanship, and have been reduced to a vacuous critique of his rhetoric and demeanor.

The two-year deal sets the stage for a showdown in 2012. The Republicans, emboldened by their success, will argue that if the economy is still soft, it's no time to raise taxes (it never is), or if conditions have improved, lower taxes were the reason. Obama's position is more problematic; having conceded on "tax cuts for the wealthy," he will be hard-pressed to revive it as the centerpiece of his reelection campaign.

Undoubtedly, both parties will decry the escalating federal debt -- which by that time will have reached an unfathomable $15 trillion -- and the looming insolvency of Social Security and Medicare, bemoan the burden being foisted upon our grandchildren, blame each other for the deplorable situation -- and persist in piling deficits upon deficits. Because whether Tax-and-Spend Democrats or Borrow-and-Spend Republicans are steering the titanic ship of state, it's headed for a perilous day of reckoning.

As best I can determine, according to Department of Treasury Revenue Estimates, the tax cut deal will add $540 billion to an already bloated 2011 budget deficit and a somewhat lesser amount in 2012 assuming its one-year provisions (the payroll tax reduction and the unemployment benefits extension) are terminated.

Reducing the payroll tax, whose trust fund is already stuffed with Government IOU's, from 6.2% to 4.2% will cost $120 billion.

Extending unemployment benefits for thirteen months will cost $55 billion.

Maintaining the Bush marginal tax rates will cost $90 billion, $30 billion more than if the rates were kept for all but the high (over $250,000) earners.

Maintaining capital gains and dividend tax rates at 15% rather than allowing them to revert to pre-2003 levels (20% for capital gains and the taxpayers' ordinary income rate for dividends) will cost $30 billion.

Fixing the Alternative Minimum Tax, which would impact 24 million additional households, will cost $70 billion.

Continuing the Earned Income Tax Credit, the Child Tax Credit, the American Opportunity Tax Credit, and certain business tax extenders will cost $40 billion.

Establishing an estate tax rate of 35% on spousal estates of $10 million and up (as opposed to the pre-2001 rate of 55% on estates of $1,350,000 and up) will cost $35 billion.

Allowing businesses to accelerate depreciation of new equipment purchases will cost $100 billion in 2011 (and $50 billion in 2012).

As this schedule reveals, the current contentiousness over "tax cuts for the wealthy" is largely a distraction. While $100 billion -- their sum total -- is hardly a pittance, it's only 20% of the whole package, which includes some juicy new delicacies as well as some old favorites. For years Congress has failed to address the Alternative Minimum Tax, which, like a creeping quicksand, would ensnare more unsuspecting families unless, once again, temporarily fixed. The two-year $150 billion price tag on accelerated depreciation is more like a loan than a credit, since it will all be recouped by the Federal Government in future years.

Although many economists and politicians -- most notably Dick Cheney -- have reassured a skeptical public that "deficits don't matter," common sense would suggest to a layman that they do.

While this may be a gross oversimplification, I understand that, because the dollar is the reserve currency of international trade, the United States is the only country that can print money at will to purchase its own government debt -- an activity which Mr. Bernanke is engaged in as I write, supposedly to ward off deflation. But all that cash floating around reminds me of a tinderbox, just waiting for a spark of recovery to ignite into a roaring inflation, a poisonous stealth tax I'm not sure Mr. Bernanke would be able to suppress in a timely manner.

Second, isn't borrowing just as pernicious a means of feeding the insatiable maw of the government beast as taxation? Both practices suck marginal investment dollars out of the private sector and deposit them into the public coffers, where they may not be allocated as efficiently.

Third, one would have to think that the Federal Government's voracious appetite for credit would at some point boost interest rates -- as indeed was the case after the announcement of the tax deal; mortgage rates surged fifty basis points, in contravention of the Federal Reserve's Quantitative Easing, which was supposed to have the opposite effect. Furthermore, rising interest rates in a healthier economic climate will unproductively consume an ever-increasing portion of the federal budget, enriching foreign bondholders and a domestic rentier class -- unless those foreigners should lose confidence in America's financial strength and seek other outlets for their savings, an even more frightening prospect.

Finally, a debt approaching $14 trillion is not the only liability weighing down the national balance sheet. The present value of projected scheduled benefits for Social Security and Medicare retirees exceeds the earmarked revenues for those programs by $46 trillion over the next seventy-five years -- not to mention the brand-new Health Care entitlement, which no reasonable person could view as a money-saver, in spite of Congressional and Presidential assertions.

How ironic that just one week before President Obama and Republican Congressional leaders hatched a plan to add $900 billion to the national debt, the co-chairmen of the National Commission on Fiscal Responsibility and Reform, Erskine Bowles and Alan Simpson, warned that the greatest threat to the economic and political stability of the United States is the fiscal crisis," a cancer that will destroy this country from within unless checked by tough action from Washington," and that "without the sacrifice [their report] calls for, the reckoning will be sure and the devastation severe."

Their draconian recommendations, which included the following, with some editorial comment, barely made it out of the starting gate before being savaged by self-interest groups and representatives from one end of the political spectrum to the other.

Eliminate the mortgage interest tax deduction on homes over $500,000. Why should the government subsidize this vulgar flaunting of wealth and egregious misappropriation of resources?

Make health care benefits taxable to employees. After all, it's a form of income; a 1099 form and a tax bill may encourage recipients to be more judicious in utilization.

Raise the Social Security eligibility age to 68 in 2050 and 69 in 2075. With people living longer, healthier lives, seventy in five years would be my target.

Raise the gasoline tax $0.15 a gallon, to foster a transition to more fuel-efficient vehicles and to finance infrastructure improvements.

Make capital gains taxable as ordinary income.

Raise the payroll tax cap rate to $190,000, a fair share for high-income earners.

Cut military spending and farm subsidies. Reduce Social Security benefits to wealthier retirees and offer less generous cost of living adjustments. Freeze the federal payroll for three years, and reduce the workforce 10% by 2020.

After paying obligatory lip service to this "take no prisoners" report, Obama and the Republicans filed it where the sun doesn't shine and turned their attention to a more pleasant pastime -- doling out more Stimulus, although that terminology was avoided like the plague, which is not surprising, considering the dismal track record of the first go round, and, indeed, when one looks back, of the entire Bush tax-cutting regime. As others far wiser than I have opined, "If these things work so well, where are all the jobs?"

Low marginal tax rates are a relatively recent phenomenon. In the early 1960's, high income earners paid as much as 91%, with hardly an objection from Democrats or Republicans, including President Eisenhower, who said, "The only way to make more and more tax cuts is to have bigger and bigger deficits and borrow more and more money. This is one kind of chicken that always comes home to roost. An unwise tax cutter . . . is no friend of the taxpayer."

From 1953 to 1963, U.S. Real Gross Domestic Product grew an average of 3.o6% a year, jumping to an average of 3.75% for the ten years after John Kennedy cut the marginal rate to 70% in 1965.

Ronald Reagan reduced the marginal rate to 50% in 1981 and then to 28% in 1986 -- although other provisions of the Tax Reform Act of that year partially offset the lower rate by eliminating some deductions. The fashionable argument that total federal revenues doubled during Reagan's two terms conveniently ignores the fact that they had doubled every single decade since the Great Depression -- and that part of the Reagan increase must be attributed to a rise in the FICA tax from 6.13% to 7.65%. Average GDP growth for the ten-year period was 3.33%.

In 1993, Bill Clinton and a Democratic Congress raised the marginal tax rate in three stages to 31%, 36%, and 39.6%. From 1993 to 2002, GDP grew an average of 3.48% per year, and 26 million jobs were created. By 1998, the $300 billion budget deficit Clinton had inherited had been turned into a surplus, which lasted until 2002.

In 2001 and 2003, George W. Bush and a Republican Congress implemented two rounds of tax cuts -- lowering marginal rates at all income levels and reducing the rates on capital gains (to 15%) and on dividend income (to 20%). They maneuvered around Senate rules regarding projected deficits by agreeing to a ten-year sunset provision.

These cuts contributed to federal revenues as a share of the economy dropping to their lowest level since 1950 -- and to a surge in the deficit even before the onset of the Recession in 2007. In 2002, receipts as a per cent of GDP fell from 19.8% to 17%, and to 16.4% and 16.5% in 2003 and 2004 before recovering to an average of 18% in the next four years. Accumulated deficits during the Bush years reached $2 trillion, a number that would be exceeded by 50% during the first two years of the Obama Administration, as government receipts fell 20% and spending exploded, the harrowing consequences of a Recession-driven perfect storm.

To whatever one might attribute the country's sudden and severe economic collapse -- an overheated housing industry precariously constructed on easy credit, artificially low interest rates, and irrational exuberance; the federal government's misguided subsidization and ill-conceived promotion of the ownership society; the greed and chicanery of Wall Street bankers and investment firms, who packaged mortgage-backed securities and invented abstruse instruments to trade and speculate on them -- the verdict is in on the Bush tax cuts.

From 2001 to 2010, U.S. Real GDP grew an average of 1.66% a year -- about half the average growth rate for the previous five decades since 1950. Even without the Recession, the average growth rate from 2001 to 2007 was still abysmal -- 2.39% a year.

Nor did lower taxes increase employment. In June 2001, when the first round of the Bush tax cuts passed, there were 132 million Americans employed; in November 2010, that number had fallen to 130.5 million. In all fairness, from June 2003 to December 2007, the number of Americans employed rose from 129.8 million to 138 million before contracting. But work force participation -- the percentage of the population 16 and over which is employed -- never grew at all during the Bush years, falling from a high of 64.7% in 2000 to 62.7% in December 2007 to 58.2% today, the lowest since 1983.

Wrote David Leonhardt in The New York Times, November 18, 2010: "The theory why tax cuts should create growth and jobs is a strong one. When people are allowed to keep more of each dollar they earn, they are likely to work longer and harder [and they will have more money to spend]. The uncertainty is the magnitude of this effect. With everything else that's happening in a $15 trillion economy, how large of an effect on growth do tax cuts have?"

Nobody like to pay taxes, including me. And as the owner of a business classified as Subchapter S Corporation -- the profits of which flow directly to my personal income tax return -- I fall into the "over $250,000" income level, which means my personal (and business) marginal tax rate would rise from 35% to 39.6% should the Bush tax cuts be repealed. In years when profits are good (which hasn't been recently), that difference translates into a substantial amount of money.

I'm not an economist, so I wouldn't pretend to speculate on the optimum rate of taxation, either on a macro- or micro-economic level. When Bill Clinton and the Democrats raised taxes in 1993 -- by one vote -- with the purported goal of balancing the budget -- which they did, six years later -- my business prospered, experiencing a period of sustained growth which reached a peak in 2006. With the advent of the Recession, sales fell 18%, until by 2009 the company's volume was exactly the same as it had been in 2001, when George W. Bush took office, and it was making considerably less money -- in spite of those lower tax rates.

While I'm happy when the government takes less of my profits, I can unequivocally state that in my forty years in retail furniture -- like the video business owner I saw quoted on television -- I have never considered the tax rate when hiring or deciding whether to open, close, or expand a store. Much more likely to influence me -- and other entrepreneurs -- are optimism about the future, market opportunities, management expertise, and the availability of credit.

The benefits that the Bush tax cuts provided to different groups varied dramatically. In 2004, households in the middle 20% of the income spectrum received an average tax cut of $647, an 8.9% share of the total cut, and a 2.3% increase in their after-tax income. The top 1% of households received an average tax cut of $35,000, a 24.2% share of the total cut, and a 5.3% increase in their after-tax income. And millionaires, the top 0.2% of the population, received an average tax cut of $124,000, a 15.3% share of the total cut, and a 6.4% increase in their after-tax income.

These statistics would seem to confirm the widespread suspicion that Conservatives are intent on dismantling this country's long-standing system of progressive taxation and thus further exacerbating a problem of growing income inequality. From 1950 to 1980, the share of the nation's income going to the top 10% of the population averaged about 35%. From 1982 to 1987, it spiked to 40%, and to 50% by 2010. During the same period 1950 to 1980, the inflation-adjusted average income for the other 90% grew from $17,719 to $30,941 -- where it remains today, thirty years later.

The richest 1% of Americans take home almost 24% of the income, up from 9% in 1976; the richest 20% own 84% of the nation's wealth. CEO's of the largest American companies earned 42 times as much as the average American worker in 1980 but 531 times as much in 2001.

According to Timothy Noah of Slate Magazine, the U.S. now may have a more unequal distribution of wealth than traditional banana republics like Nicaragua, Venezuela, and Guyana.

If some see no harm in this trend, others point to financial distress on a micro-economic level -- as people end up in debt and bankruptcy trying to keep up with their wealthier neighbors -- to an erosion of political consensus as economic self-interests fracture our common purpose, and to the crises of 1929 and 2008 as periods of our greatest income disparity. Is it not conceivable that exorbitant compensation -- and low taxes -- created strong incentives for executives to take excessive risks, engineering new and dangerous types of securities?

Sooner or later, Democrats and Republicans, and the voters who elect them, will have to acknowledge the uncomfortable truth that taxes -- for everybody -- have to rise. In my view, the most desirable outcome to last week's private palaver -- but one which I am not so gullible as to think even slightly possible -- would have been to do nothing , let all the Bush tax cuts expire, and thus "Do No Harm."

According to Alan Binder, writing in The Wall Street Journal, December 17th, reverting to pre-2001 tax rates would achieve budgetary savings of $4 trillion over ten years, an amount equal to that generated by the recommendations of the Bowles-Simpson Commission.

As coldhearted as it sounds, even the 2% payroll tax stimulus and the extension of unemployment benefits are problematic. Economists have argued that wage earners have a tendency to save -- not spend -- rollbacks and rebates which are temporary, and that the unemployed have a greater motivation to look for work when their checks run out.

But instead, on this Day of Infamy, in a Height of Hypocrisy, eager for Happy Days, succumbing to Blackmail, our lawmakers decided to Kick the Can further down the road. To ask why is to expose one's naivete, opacity, disingenuousness. Nevertheless, I offer this pathetic explanation: We have become a society of entitlements -- for the poor and for the rich. Which is why those who say the solution to this tax problem is simply to cut spending are blowing smoke.

For if the former want their earned income tax credits, their food stamps, their welfare checks, and their Medicaid, the latter want their Social Security at 65 with no diminution of benefits, their Medicare, even in the last hopeless months of life, their mansion mortgage deductions, cheap gas for their suv's, and their bank bailouts.

Wrote Uwe Reinhardt in The New York Times, November 18, 2010: "With the notable exception of the latter part of the 1990's, the American people have consistently demanded from their government more spending -- particularly in the form of benefits to older Americans -- than they have been willing to pay for with taxes, increasingly relying on foreign savers to fill the gap.

"They want to enjoy overpowering military might that can be swiftly projected to any corner of the globe.

"With one of the most unequal distributions of wealth and income in the industrialized world, they want ever-more expensive basic services -- education, justice, and health care -- available to all citizens on roughly equal terms.

"They never want to say no to any health care benefit, however small it is to the relative cost . . . Because about half of American health care is tax-financed, this preference requires added taxes." And let someone be so audacious as to mention rationing -- or end-of-life counseling -- and he is summarily scorned as a pariah and death merchant.

Yes, no one wants his piece of the pie purloined or his backyard uprooted. If the last three years have taught us anything, it is that, regardless of what Capitol Hill and the White House keep professing, we can't have it all -- without pain, sacrifice, and compromise. Somehow I have to hope that, in spite of this most recent Christmas present, most celebrants don't believe it either.