Sunday, September 30, 2012

On Tax Increases and Spending Cuts

"The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself."
-- Franklin D. Roosevelt

In this lamentable election season there is no end to the tired refrains, "raise taxes" (as in, income taxes) and "cut spending."  And it's peculiar that Americans are willing to rally around either of these messages. But that's just how effective parties and politicians are at fooling people.

The American people don't have the luxury of believing what the party bosses are telling us. These days, it's not just mortgages that are underwater. It's the entire United States of America.

The idiom "underwater" refers to owing more for an asset than the asset is worth.

Why do some Americans want their taxes to be raised? They are taking notice of the monstrous public debt and conclude that a tax increase is the only solution. They're the ones who don't realize how much Americans are being taxed already. Some of these taxes are not called "taxes." A savings account that only gets a quarter of a percent interest is a tax. It's a decision made by people in government to stimulate banks by allowing them to keep money that they'd otherwise have to give back to consumers in the form of interest on savings. And when the interest rate is less than the rate of inflation, people who save money are in fact losing money, little by little, and seeing it fall into the hands of bankers. A fine time to be talking about privatizing Social Security.

Other Americans take notice of the public debt and want the government to cut spending -- and sure, there's plenty of spending that ought to be cut, but it's a sure bet that what's most in need of cutting won't be cut, and the things that shouldn't be cut will be cut. When the cuts arrive, children will get less education and a greater number of our elderly will struggle to stay warm and fed. But rest assured, money will still be spent on military jets that can't fly and bridges that don't go anywhere and subsidies for financial firms that are making record profits.

In reality, raising taxes will not reduce the public debt. Cutting spending will not reduce the public debt. Austerity measures will usher in austere living conditions, but they won't reduce the public debt. Allowing the sanctity of contracts to be violated without redress, that will only lead to the ruin of our country, and it won't reduce the public debt.

So, what will succeed at reducing the public debt? After studying this question for a while, I've discovered that there is a tried-and-true method for lowering the public debt and even generating surpluses. To explain how this works, let's start by discussing the idea of twin deficits.

It turns out that public debt and trade deficits go hand in hand. For a while, economists had doubted this and argued against this conclusion, but recent research using more sophisticated methods shows that this is a robust and reliable relationship (source). When America has a trade surplus, chances are, America will also have a budget surplus.

The last time this happened was during the early 1990's. America's advances in information technology resulted in increased exports, and the trade deficit shrank. It didn't last for very long because, in no time at all, Asian companies began to compete in the electronics sector. Now, years after the horse has escaped the barn, politicians are worried about intellectual property rights. But the point here is that the early 1990's was also the last time the United States enjoyed a budget surplus. This had nothing to do with Bill Clinton's leadership. To the contrary, he promoted high-risk mortgages and ill-conceived free trade agreements. His administration was instrumental in creating the dire situation that Americans are facing today.
Increased technology exports in the 1980's reduced the trade deficit.
Since the 1990's, things have been going south (source)

There are many historical examples of the positive relationship between a favorable balance of trade and reduced debt. But, rather than try the reader's patience with a recitation of these examples, it suffices to say that there is nothing mysterious about why there's a relationship between the two. When America is exporting at a rapid pace, unemployment rates shrink. When more Americans have jobs and industries are growing, the government earns more revenue from taxes. And you may have noticed that, right now, China is benefiting from a favorable balance of trade and by all accounts their economy is doing pretty well.

Each time a United States company pulls up its roots and hires people in China, that company is increasing the trade imbalance between the U.S. and China. Companies like Dell Computers have single-handedly contributed billions of dollars to the size of our trade deficit. Fewer Americans are employed; thus, they are not only too poor to pay taxes but they are receiving government aid in the form of unemployment and Medicaid.

There are two reasons for China's success that are worth noting. First, the Chinese government makes it nearly impossible for its citizens to make foreign investments. This has the effect of keeping currency within the country. Secondly, the Chinese government taxes imports. When American goods enter China, a 35% corporate tax and a 17% Value Added Tax (VAT) are imposed, making American goods more expensive. When Chinese goods enter the United States, there are no taxes at all on the imports. Not a penny (source).

The liberals' argument that public debt is irrelevant, and both parties' loving embrace of so-called "free trade" policies, are both mistaken. And conservatives -- being famously tax-averse -- won't want to hear this, but it is about time that the United States instituted a VAT on imported manufactured goods. A VAT will increase the cost of Chinese imports, encourage businesses to return manufacturing to America, keep currency at home, and reduce unemployment. By reducing unemployment and increasing revenue through the VAT, the public debt won't be a problem.  The only reason that neither of the two parties is willing to champion a VAT is because the people who pay for their campaigns benefit from the situation being the way that it is now.

Sunday, September 23, 2012

On Canards: I. Taxation

A canard is a lie, but it is a particular kind of lie. To believe a canard is to accept a ride from a stranger. Once the invitation is accepted, the dupe will be plied with lies and the truth will become increasingly remote. In time, the truth, like the hope of safety, will dissolve in a cloud of unknowing.
The 47 Percent That Do Not Pay Taxes

During this election cycle, one of the popular canards is the claim that 47% of Americans do not pay federal income taxes. Now, it is true that nearly half of Americans do not pay income tax, but what is deceptive about this claim is the implication that these Americans are entirely spared the burden of federal taxation, and do not contribute in any way toward the general revenue. Two thirds of Americans who do not owe federal tax still owe payroll tax. Payroll taxes fund programs such as Medicare and Social Security. Of those who pay neither income tax nor payroll tax most are elderly Americans (many of whom have paid income taxes for most of their lives), and others are desperately poor (source).

Of course, Americans become emotional on the subject of taxation, and even those who pay no income tax claim that their taxes are too high. To complain about taxes has become a sort of ritual; the aim of the ritual is to give vent to the concern that one’s earnings are insufficient, and no matter how hard one tries to hold onto these insufficient earnings, the money dwindles away like water in a leaky bucket.
Tax day in an undemocratic society

If Americans blame taxes for the insufficiency of their income, then the true nature of the canard reveals itself. The canard that says “47% of Americans do not pay federal taxes” is a trick; a means of misdirection to divert attention away from the real reasons behind stagnating and falling income. The real reasons for the gradual impoverishment of Americans are these: first, American business leaders have decided to pit American workers against Chinese slave laborers and Mexican sharecroppers to see who can manufacture least expensively. Secondly, American political leaders are dependent on business leaders for their continued wealth and power, and are therefore willing to advance the interests of business leaders even though their interests are at odds with the interests of most Americans.

Ironically, if it were true that 47% of Americans were spared entirely the burden of taxation, this would be just as the Founding Fathers intended. As Thomas Jefferson once said, “Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise (letter to James Madison, 1785).”

What’s the Matter with Kansas?

Liberals have enthusiastically embraced the canard articulated in Thomas Frank’s book, What’s the Matter of Kansas? The book argues that low income conservative voters vote in a manner that is transparently at odds with their self-interest. The reasoning may be summarized thusly: “many conservatives depend on social programs such as Social Security, Medicaid, and Medicare, but demand that the government spend less on social programs.” It is technically accurate to say that many opponents of government spending are beneficiaries of government spending. It is also technically accurate to say that “red states” such as Alabama and Mississippi receive a greater share of federal money than they contribute in taxes. And it is accurate to say that “blue states” donate a greater share of federal money than they receive in the form of programs and services (source).

In what respect is the notion “low income conservatives vote against their self-interest” a canard? Again, it is a matter of misdirection. To illustrate the point, consider the fact that the state of West Virginia receives more than twice the amount of federal money than it contributes in the form of taxes. And yet, a low-income West Virginian can be forgiven for believing that federal dollars are being spent poorly – or at least, the money is spent with little effect. Their roads are unpaved and their highways are crumbling. Nine counties experience unemployment in excess of 10%; 7 counties experience unemployment that is between 9 and 10%. The state has the fifth highest poverty rate in the United States (source; source). Adults are not eligible for Medicaid unless they are below 33% of the federal poverty line – for a family of 2 that amounts to less than $10,000 yearly income (source). Because the transportation infrastructure is poor and because many residents cannot afford the costs of transportation, even those who are eligible for Medicaid are unable to take advantage of the medical care that is available to them. West Virginia ranks among the top 5 states in terms of the percentage of residents suffering from serious chronic diseases such as diabetes and high blood pressure (source).

In terms of understanding the economic plight of West Virginians, it is useful to consider what they pay in state and local taxes. Here, the estimates vary depending on how tax burden is assessed. Tax Foundation data indicate a misleadingly rosy picture. However, if one looks at the extent to which a state exploits all possible revenue sources (e.g., sales taxes, use taxes, the imposition of fees), and if one considers the extent to which these taxes are regressive (the burden falls disproportionately on the poor), it turns out that West Virginia ranks 7th highest among all U.S. states in terms of the thoroughness with which state and local government deprive residents of wealth (source).   

It is predicted that WV will vote Republican this fall.
Thus, if the perception “we are being taxed too much” is based on the perceived benefits of government programs and services, West Virginians are justified in believing that government is “too big” – that is, the revenue it collects does not translate to an improved quality of life. It is entirely appropriate to be concerned if there is an apparent gap between the amount of money collected by government and the amount of tangible good the money achieves. New Yorkers may be proud that they donate more federal money than they take, but this pride is disingenuous if the money does not make a positive difference in the lives of the poor.

Here again, Thomas Jefferson offered a valuable perspective. He endorsed Montesquieu’s belief that, “The public revenues are a portion that each subject gives of his property in order to secure or enjoy the remainder.” Thus, what individuals spend in taxes ought to have a direct relationship with increased security and personal satisfaction. Jefferson believed that taxes should only be owed by individuals whose “first wants” are satisfied – individuals who have enough to eat, who can pay basic living expenses, and able to afford medical care and a secure retirement (source).   

Benjamin Franklin made a similar point -- only more forcefully. In a 1783 letter to Robert Morris he wrote, 

All Property, indeed, except the Savage's temporary Cabin, his Bow, his Matchcoat, and other little Acquisitions, absolutely necessary for his Subsistence, seems to me to be the Creature of public Convention. Hence the Public has the Right of Regulating Descents, and all other Conveyances of Property, and even of limiting the Quantity and the Uses of it. All the Property that is necessary to a Man, for the Conservation of the Individual and the Propagation of the Species, is his natural Right, which none can justly deprive him of: But all Property superfluous to such purposes is the Property of the Publick, who, by their Laws, have created it, and who may therefore by other Laws dispose of it, whenever the Welfare of the Publick shall demand such Disposition. He that does not like civil Society on these Terms, let him retire and live among Savages. He can have no right to the benefits of Society, who will not pay his Club towards the Support of it.
This was the balance the Founders struck between an extreme redistribution of wealth on one hand and extreme inequality of wealth on the other. Americans, they believed, should be free to earn and keep property. However, Americans should not be blind to the fact that if they achieve great wealth, it is because their country has given them the opportunity to do so.


Seen through a partisan lens, taxation is viewed as an unmitigated evil by many conservatives, whereas many liberals view taxation as a means to the end of improving the lives of the disadvantaged. Partisans on both sides are mistaken. Taxes ought to be viewed as the moral obligation of those who have achieved prosperity. And, revenue that is obtained by taxes ought to be spent with great care and with close attention to the tangible benefits of these expenditures as measured by increases in general prosperity. 

Saturday, September 15, 2012

On September 11th, Belatedly

Another anniversary of September 11 has passed. We mourn the loss of life and wish the best for the families of those who died. We spend some time thinking about the aftermath of that day. American troops have been sent to Iraq and Afghanistan. It is appropriate at this anniversary to mourn the loss of live of American soldiers who have gone to these places in the hope of seeking justice or preventing further cowardly and murderous attacks against our country. 

I find myself reminded that, shortly after the events of that day, there was a ban on aviation, and when the flights resumed, the sight of commercial flights passing above sent a cold chill. In the weeks and months following the terrorist attacks, the American people stood united. Every American felt a sense of personal tragedy. It wasn’t just the wounded pride of a powerful nation. For the first time in many years, the American people remembered that what happens to New Yorkers in Lower Manhattan matters to every American. We felt that loss of life, whether we lived in Kansas, Florida, or California, whether we were abroad or at home, whether we were country folk or city folk.  

Heroism is to risk one's own life and still believe that you haven't done enough.

This is also an election year. It’s now political fodder to note that Paul Ryan voted against a relief act aimed at people who were injured on September 11th, or that President George W. Bush had access to intelligence briefs that indicated an imminent attack. And some will note, with evident satisfaction, that President Obama also had access to intelligence briefs indicating imminent attacks in Libya and Egypt, but ignored them. There is no limit to the cynicism of politicians and muckrakers, and if the strong disapproval of the American people is not voiced, they will continue to defile the memory of September 11th, 2001 for their own petty purposes.   

So here is my modest proposal. Let us remember, during future anniversaries of September 11th, that old metaphor of the ship of state. What happens to this ship affects everyone on board, regardless of what God they worship or what their political views happen to be, the color of their skin, whether they are wealthy or poor. 

But it is not enough for us to remember that all exemplary Americans are personally affected by what befalls our country. It is equally important to remember that people who are not personally affected are not exemplary Americans. Those who remain callously indifferent to the fates of Americans, and seek only to ensure their personal safety and comfort, and who will not be harmed or inconvenienced should some calamity befall the ship of state, cannot be relied upon as leaders. 

What is lacking today is wisdom: specifically, the wisdom to recognize when the fate of others will eventually determine our own fate. This particular piece of wisdom is an example of one of those truths that resonate whenever they are spoken. It resonates because the human heart immediately grasps that it is the truth. It also resonates because it is the kind of truth that daily life causes us to forget, and therefore, we must continually remind ourselves. 

Many of us are familiar with the words of Martin Niemöller, even if his name is not familiar:

First they came for the Jews
and I did not speak out
because I was not a Jew.
Then they came for the Communists
and I did not speak out
because I was not a Communist.
Then they came for the trade unionists
and I did not speak out
because I was not a trade unionist.
Then they came for me
and there was no one left
to speak out for me.

In historical context, Niemöller, a Protestant minister in Germany during the Nazi Era, was talking about the gradual usurpations of power by the Nazi Party. But the words strike a responsive chord because they remind us of that fugitive realization that we are not isolated social atoms, but are dependent on one another. Stepping back a little further into the past, there are the words of John Donne, 

No man is an island, entire of itself; every man is a piece of the continent, a part of the main; if a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as if a manor of thy friend's or of thine own were; any man's death diminishes me, because I am involved in mankind, and therefore never send to know for whom the bell tolls; it tolls for thee.
What is it that causes us to forget this wisdom, and remain always in need of reminding? In part, it is because the press of daily life focuses our attention on more immediate concerns. We worry about finding or keeping a job, paying the mortgage, getting the kids to school on time, about tax increases and the price of gasoline. There is little space left over in our thoughts for reflection. 

In part, this forgetfulness is the result of partisan politics. The words “petty” and “partisan” have been linked since the time of Confucius. A union school teacher will respond to the Democratic Party’s message; a business owner struggling with the costs imposed by bureaucracy will respond to the Republican Party’s message. White males who lack a college education and lack steady employment will feel threatened by immigrants and by policies supporting Affirmative Action, and experience feelings of aversion toward the Democratic Party. Likewise, immigrants and members of minority groups will be attracted toward the Democratic Party. In short, the two parties have learned to subsist upon the motivating power of self-interest. 

Who is there, anymore, to speak about what is in the best interest of all Americans? Who is there, anymore, who can inspire Americans to overlook the things which divide usand cling to the things which unite us?