Middle Class, Beware

by Joseph Sternberg

Federal expenditures have increased during President Obama's administration from a previous level of about 20% up to 25% of the Gross Domestic Product (GDP). This is an increase of $780 billion dollars a year. How is such an increase going to be paid for? 

Recently, President Obama submitted a budget for 2013 that calls for an increase of government expenditures, not a reduction, with a projected deficit of close to a trillion dollars. It is clear beyond any doubt that Obama is opposed to solving the debt problem by reducing expenditures. So what is the alternative?

Obama seeks to create the belief that if the rich paid their "fair share," there wouldn't be a deficit problem.There is a case to be made that the wealthy are not paying their "fair share." Over a long period of time, with both Republican and Democratic political support, the tax rate schedule has been progressive, calling for the wealthy to pay a larger percentage of their income in income taxes than less wealthy taxpayers. But because of all sorts of provisions and loopholes that have been written into the tax code, tax payments by the wealthy fall well below what is called for by the tax rate schedule. Obama proposes to fix this by imposing a millionaires tax of 30% so that wealthy people pay their "fair share." It is estimated that this would bring in an additional $40 billion dollars a year in revenue. That still leaves $740 billion in increased expenditures.

Obama says his objective is to protect the middle class from an increase in taxes while addressing the deficit problem. He has proposed to decrease the deficit by allowing the Bush tax cuts enacted in 2001 and 2003 to expire, claiming that these tax cuts were tax cuts for the wealthy and violated the "fair share" principle. The IRS tax data shows that this claim is false. According to the IRS tax data for 2000 and 2004, the income taxes paid on the total AGI  (Adjusted Gross Income) for all taxpayers fell from 15.26% in 2000 to 12.10% in 2004, a reduction of 21%. At the same time, the percentage of taxes paid on AGI by the top 1% of taxpayers only fell by 15%. So if the Bush tax laws are allowed to expire, the middle class will have their taxes raised more than the top 1% and the bulk of the increase in taxes will be paid by the middle class.

Since the total amount collected in federal income taxes in 2010 was approximately $900 billion dollars, an increase of 21% by canceling the Bush tax cuts would add an estimated $188 billion to federal revenue. Adding together $40 billion and $188 billion still leaves $552 billion in expenditures not covered by tax revenue. For political reasons (not to mention economic reasons) Obama isn't seeking an across the board increase in income tax rates to cover this deficit.

Well there is always a Value Added Tax (VAT)  to be considered. In the European Union the VAT tax produces about 25% of the total tax revenue. Overwhelmingly, the middle class pays for this expenditure tax since the middle class spends a much higher fraction of its income for consumption than the upper 1%. Federal revenue in 2010 was 2.16 trillion dollars. A VAT tax designed to add revenue equal to 25% of this amount would  provide $540 billion dollars covering the remaining deficit of $552 billion.

So the inevitable conclusion is that the increase in expenditures from 20% of GDP to 25% of GDP by Obama  would have to be mostly paid for by the middle class. Trying to conceal this by class warfare in unconscionable.
____
Joseph Sternberg
Retired Professor of Physics
Naval Postgraduate School, Monterey, CA

Ask the Candidates About These Issues

by Joseph Sternberg

Most of the questioners at these so-called Republican presidential primary debates are of the left. That has some advantages for the candidates since they get exposed to questions that would be raised later. But the choice of topics and the way that they are presented is skewed. For instance, the questioners seem to want to pretend that the Paul Ryan budget bill does not exist, yet it is certainly a top issue. The candidates should be questioned to determine how they would deal with the issues in it (if they differ from what has been written). That would also help voters to understand the degree to which the candidates have thought about these problems (if in fact they have). Foreign policy issues are still to be formulated, although the approach of the candidates to foreign policy is a prime aspect of being president.

1. National debt

What is the candidates' approach to this issue?

The Republican House passed the Paul Ryan Budget Bill earlier this year. This is a specific attempt to maintain US solvency and advances an approach to entitlement reform. If a candidate doesn't like this bill, what alternative would they propose? This kind of focus is necessary to keep the candidates from evading this fundamental issue.

President Barack Obama pushes the view that we can stop the rising national debt by taxing the wealthy, rather than decreasing expenditures. What are the Republican arguments against this position? This is important because President Obama is sure to trumpet this argument. My previous blog entry on the president's position was an attempt to contribute to our understanding of this issue.

2. Energy Policy

The formation of an effective energy policy for the US is prevented by the concern that fossil fuels are loading up the atmosphere with carbon dioxide. The illusion that green energy can be substituted for fossil fuels to alleviate the concern is rampant. But the priority countries such as China and India put on economic development shows that the control of carbon dioxide cannot be achieved in this way. Carbon dioxide is a worldwide problem, and fossil fuels will be needed by the world for a long time, My previous blog entry explains the scientific problem and the solution that can be pursued. Green energy should find its place in the US energy mix without massive subsidies.

The US national security demands an increase in the domestic output of fossil fuels. There are three compelling reasons for this. First, the US economy is vulnerable to disruptions in the Mideast oil supply. We spend billions on maintaining force in the area. The vulnerability seriously compromises national security policy. Second, self-sufficiency in fossil fuels would have a large positive effect on the US balance of trade and thereby help relieve the pressure on the dollar. In 2011 the trade deficit is projected to be $550 billion dollars. During the same period, the cost of oil imports is expected to reach $400 billion dollars. And finally third, thousands of US jobs would be created.

We should hear from the candidates on all this.

3. Health Care Reform

All the Republican presidential candidates seem to agree that ObamaCare must be repealed. It may be declared unconstitutional but, if that does not happen, it should be repealed because it overwhelms the health care system with bureaucrats and the government and increases the cost of health care.  Republicans, however, cannot stop there.  Health care, as it is now organized, has serious problems.  Republicans should assemble a package, perhaps including items such as tort reform and allowing the sale of medical insurance across state lines.  Among all the candidates, this should be especially asked of Romney.

4. Avoiding another financial crisis.
       a) Housing

The US has had a bipartisan policy dating back many years to have the government intervene in the market to increase home ownership. It is clear that home ownership is not for everyone. The ability of homeowners to meet the financial requirements of home ownership, including down payments, cannot be bypassed. Government guaranteeing of mortgages where lending standards were debased led to trillions of mortgage-based securities flooding the market. Well over a trillion dollars worth of these securities are now resting uneasily in the possession of the Federal reserve. Fannie and Freddie were key agents in creating this debacle and so far have cost taxpayers $170 billion dollars. To allow these organizations to continue to operate is to insure a recurrence of the housing collapse.

      b) Ending too big to fail

The financial collapse started by the housing collapse showed another serious defect of the financial system. We have to prevent financial institutions from becoming "too big to fail." This is a failure of capitalism. Now we don't seem to have any serious trouble in deciding that a company is too big to fail. The problem is preventing them from getting to that point. Financial experts need to spell out ways that this can be done. Under the present circumstances, the incentives push in the direction of massive bets. If things go well, millions are earned. If the bets turn out to be bad, the new millionaires are gone and the taxpayers are faced with the debris.  And many of the super-rich whose incomes have soared into the stratosphere are in the financial sector.  Subsidizing these salaries is absurd, yet that is precisely what we’re doing.

If we measure the presidential candidates on these issues, we’ll have a good way of determining who is the best one.  Certainly a lot better than seeing who scores more points at a “debate.”

***

UPDATE: About foreign policy questions that the candidates should be asked, I would start with the famous quotation from Palmerston, " Nations have no permanent friends or allies, they only have permanent interests." So what do the candidates believe are our national interests in the Middle East, former satellites of Russia, Africa, China, etc. Such responses would help to understand how candidates would respond to developments and the degree to which they have thought about such matters.
____
Joseph Sternberg
Retired Professor of Physics
Naval Postgraduate School, Monterey, CA