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Wednesday: Americans pay too little in taxes?

I’ve heard this from Paul Krugman and Fareed Zakaria recently and now some new dude is claiming that Americans pay too little in taxes. From David Leonardt’s article this morning at the New York Times titled, “Why Taxes Will Rise” (NYTimes, limited free access), we get this:

Polls show that most Americans are opposed to raising the federal debt ceiling. Even when the Pew Research Center included the consequences in its question — a national default that would damage the economy — slightly more people were against raising the ceiling than were for it.

How could this be? Above all, I think it reflects a desire to return to the good old days. Not so long ago, nobody was talking about tax increases or Medicare cuts, and the federal budget seemed to be in fine shape. If only we could get back to the past — get spending under control, as the cliché goes — we’d be O.K. The debt ceiling, with its harsh finality, offers the chance.

Unfortunately, this nostalgic view depends on a misunderstanding of the budget. It imagines a budget in which the United States indefinitely has the world’s highest medical costs, its largest military, an aging population and, nonetheless, taxes that are among the world’s lowest. Economists have a name for that combination: a free lunch.

Free lunchism is ultimately the problem with the no-new-taxes pledge that so many politicians have adopted. A refusal to raise taxes, no matter how principled, cannot take us back to the good old days. It would instead lead to a very different American society. For taxes to remain where they are, Washington would need to end Medicare as we know it, end Social Security as we know it, severely shrink the military — or do some combination of the above.

Free lunchism?

Maybe he doesn’t have any friends or colleagues from France, Germany or Britain. My French colleague was astonished at the high taxes she paid here in the US. In her opinion, Americans pay a lot in taxes compared to the French. While salaries were more modest in France and taxes are high, the average worker there doesn’t have to pay sky-high health insurance premiums. In France, the government provides a stipend for new children, maternity benefits are generous and child care is high quality, plentiful and cheap. If you want to attend university after high school, tuition is about the same amount as a student activity fee in the US. You don’t graduate with debt the size of a mortgage on a starter home. Unions protect many jobs in France and while this makes it much more difficult to find a job there, once you have a job, it’s much harder to get rid of you. The government responds to workers and protects them in a way that we Americans can only dream about. But if you do manage to lose your job in France, chances are much greater that you will get a generous early retirement, if you’re old enough, or your unemployment benefits will last 2 years with something like 80% of your salary. Let’s say you make it to retirement age and the French version of Social Security. You can retire in France at age 62. Think about that. In a country that is experiencing high unemployment, retiring people at 62 frees up a lot of positions.

She said that what French workers take for granted, we Americans pay and pay and pay. Everything costs a lot of money here. That’s because instead of using the government’s economy of scale to purchase and regulate health insurance, for example, we are forced to buy it at inflated prices from for-profit insurance companies on the open market. Our mass transit system is a wreck, we pay outrageous bridge and turnpike tolls, our car insurance is ridiculous compared to that in France where suing for every little thing is unheard of and child care in the United States is so expensive that many young families live paycheck to paycheck to pay for it.

What do we get for our money? Well, we get two unnecessary and money sucking wars in Iraq and Afghanistan. Don’t get me wrong, I have relatives in the military and I don’t have any problem paying for military readiness. But did we really need to spend trillions of dollars in central Asia? We have a defense department budget that only a military contractor could love.

If we really want to reform Medicare, and let’s face it, it is a money pit, we need to regulate providers as well as consumers. I don’t have a problem looking at the cost of Medicare and making intelligent decisions about care as long as it doesn’t fall exclusively on the backs of senior citizens. The cost of Medicare, and health insurance in general, is so high because everyone sees health care as a profit making machine. But even pharma can be brought to heel with an in-depth look at what ailes the industry and good planning. It is possible for people to make a profit without that profit being insanely greedy and obscene. The question is, do we have the political will to look greedy people in the eye and tell them “Enough!”? Recent history says no but the era of unfettered greed and deregulation may be coming to an end.

And don’t even get me started with Social Security. It is one of our government’s crown jewels. It’s is run fantastically well with low overhead and provides millions of seniors with income to keep them from starving. The money seniors receive goes back into the economy through their purchases of goods and services. The idea that we would mess with success is just so insane most people I’ve talked to can’t believe that Democrats would even contemplate it. I really resent the idea that something I have paid into my entire working life to serve as my insurance policy in the event that something goes horribly wrong with my worklife is now considered a “free lunch”. What exactly would people like Leonardt have us do when we get old? Some of us don’t even have pensions and the 401K is a lousy way to save for retirement if everything hinges on a volatile stock market.

What I think we see here with Leonardt and Obama and the Steny Hoyer’s of this world is a profound disconnect from current reality. My theory is that they see Americans as separated into winners and losers in the socioeconomic market. If you are well educated, a professional or a member of the “creative class”, you don’t need the “entitlement” of social security. You can fend for yourself. Just be more prudent with your savings. If you’re in the “old coalition” and social security is your only refuge from poverty, then social security becomes more like a welfare program. We want to provide for the poor working class but Obama doesn’t see his base supporters *in* the poor working class. That explains why he keeps putting an emphasis on more education and more STEM jobs. He still sees that as the path to freedom from “entitlements”. But we aren’t creating those kinds of jobs here in the US. We are letting those jobs go to Europe where the highly educated workforce is protected or to Chindia where the highly educated workforce is exploited. Here in the US, the highly educated workforce is left to fend for itself and is no better off than the grocery store cashier, subject to the whims of a volatile free market supply and demand cycle and stupid MBAs.

This recession is different. In New Jersey, there are plenty of hard-working, dedicated professionals with armloads of advanced degrees who are now falling into that poor working class category. If the unemployment situation isn’t dealt with soon, there will be a lot more of us depending on social security in a couple of decades. The Republican and Obama administration policies are going to make the problem worse. And we’re not looking at social security as a free lunch. We’re looking at it as the insurance policy it was designed to be.

There’s a lot to be said about the surly French and their attitudes towards their work-life situation. They take long vacations throughout their lives and they don’t feel the optimal amount of stress on the job to make them compete. (heads up to those workers across the pond: when you get projects from your laid off American colleagues, that means that YOU are now responsible for figuring them out. Expecting the laid-off American to give you all the answers in advance is probably unrealistic.) Working in France is not all a bed of roses. But here in America, we’ve pegged the stress level to 11, produced like crazy and have bloody little to show for it. Our vacations are short, our family lives overwhelming, our social safety net non-existent and our taxes are *still* high because so much of what those taxes should be providing is now privatized and in the hands of greedy rent seekers.

So, please, Paul, Fareed and David, please don’t roll out that old chestnut about how low our taxes are compared to other countries. We’re getting reamed no matter how you slice it. The middle class wants something of value in exchange for the taxes we pay. The Republicans seem determined to deny us that and the Democrats are just fricking clueless. If taxes must rise, raise them on people making more than $250,000/year. *They’re* the ones who are making out like bandits and treating the US Treasury as their own personal revolving credit account.

One final thing struck me as oddly out of touch in Leonardt’s piece. It was about the mortgage interest deduction:

The mortgage interest deduction, for example, saves more than $5,000 a year for the typical household in the top 1 percent of earners. Most middle-income households don’t benefit from the deduction at all, because they instead claim the standard income tax deduction. And the mortgage deduction is the second-largest tax break for individuals, costing about $80 billion a year, more than the budgets for the Education Department and Justice Department combined.

Are you kidding me?? Everyone I know uses the mortgage interest deduction and I don’t know anyone in the top 1% bracket, or the top 5% for that matter. It’s the only thing that makes buying a house possible. If we don’t get a break on our mortgage interest we might as well rent and there goes the housing market. What would be the point of buying an expensive, money sucking house? How old is David Leonardt anyway? Does he know that the vast majority of Americans have discovered the internet and use PCs and can figure out how to use Turbo Tax to itemize and to import their W-2s and mortgage company’s tax statement for the previous year? Does he think we still do all that crap on paper with an adding machine or something so that it’s sooooo much easier to just do the short form? The mortgage interest deduction is practically the only break the middle class gets in taxes these days. Without that and the state tax deduction, we’d be descending on Washington right now. Don’t go there, David. Really.

20 Responses

  1. RD, that was one of your best. Totally agree with your ideas on this. I’ve always felt we pay to much in taxes for the actual benefits we derive (as a people). We need more bang for the buck. Of course, there are some fantastic programs out there such as the school lunch program that really make a difference and those always seem to be on the chopping block in favor of killing brown skinned people in far away lands. What I really wonder about though is do the wealthy, politically elite “libertarian republicans” actually believe their insanity or is it just a guise in order to keep hording our assets and resources making themselves fabulously wealthy at the expense of their fellow citizens?

    • They have to believe their insanity or they wouldn’t be able to keep hoarding assets and resources to make themselves fabulously wealthy at the expense of their fellow citizens.

      • RD, your 1:09pm comment about the rentiers’ needing to believe their own insanity assumes that the rentiers have functional consciences.

        Why do you assume that? 👿

  2. terrific post

    It is possible for people to make a profit without that profit being insanely greedy and obscene…..

    yeah but where the fun in that?…

    But seriously:

    up till now we paid and paid to get

    now the ove lords want us to pay and pay and pay and NOT get

    we are to pay more taxes as they slash services

    as I tell folks, if you think no public services means less taxes, you are missing the point.

  3. This ” we need to be taxed more ” would be funny if the hyper wealthy did not just get 800 billion in Bush taxes cuts earlier this year. …on top of a decade of Bush tax cuts….I heard no “we’re broke! ” then .

    So let’s review.: Teacher salaries are too costly and selfish …but 800 billion to the wealthiest among us is fine …is that right ?

  4. Usually, I agree with your postings. However, in this case, I feel there are a few fallacies is using the French (or any EU) comparison.

    Most EU person don’t really see the full impact of how much they actually spend in taxes. This is largely due to the VAT (value added taxs) on goods and services being embedded in the the price. This is typically in the 16 percent range. When you purchase a 100 Euro item, you are really paying 84 Euros for the goods and 16 Euros in taxes. If folks in the US saw a 16 percent sales tax on their purchases, they would revolt. European don’t because they have been conditioned to this.

    As for the financial health of France, and many other EU countries, they are rather shaky. I’ve seen enough reports that put them not far behind Spain, Portugal, Ireland and Italy in the list of EU member states that are in financial peril. Much of this is due to the conbination of lack of jobs, aging workforce with their impending retirements, and other social entitlements. France is not a great example. Germany might be better, but not that much so. The Germans have even higher income taxes. Add the VAT and they are effectively spending over half their earnings on taxes. They have to be able to pay for the entitlements somehow.

    Today’s Business Insider (http://www.businessinsider.com/jeff-gundlach-presentation-now-what-2011-7?op=1) has a piece that illustrates how little (relatively) the Federal Government takes in in taxes versus GDP and debt. You’ll find that this really is not at the same level of many economies.

    What American’s will find is that their taxes are actually spread over so many different levels. That makes the “tax” burden much more obvious to us. But, it does not all fall on the Fed.

    • I beg to differ. I’ve had many conversations about the tax issue with French ex-pats. I didn’t even mention the fact that college tuition in France is about what US students pay in student activity fees.
      As for the Fed graph on taxes, the problem is that there were significant tax cuts during the Bush years but the people who got the biggest bang for their buck were at the top of the income ladder. For someone like me who used to have a pretty good salary but nowhere near the $250k mark, the tax cut was negligible. It didn’t help single people at my level at all.
      Then there’s the problem if living in a high tax state like NJ. We give and we give and we give but we don’t creak even when it cones to spending. Plus, my property taxes here are so high that your hair would stand on end.
      I don’t mind paying taxes. I like public education taught by happy teachers who can pay their bills and firefighters who know CPR and the social security personnel who were so nice to my mother recently when her check got lost in the mail. But we shouldn’t kid ourselves into thinking that we are getting anywhere near the benefits that the Europeans are getting. They pay less for medical care, they get almost free secondary education and they retire earlier. While we slave away, they’re enjoying their third or fourth vacation. Even the French joke about the ubiquitous German tourists.
      I want something for my tax dollar other than a break for rich people, a bailout for bankers and a war for the military contractors.
      If you want to raise taxes, why don’t you pick on the people who refuse to give up their bush tax cuts after their $250k per year? They should go first and after we assess whether the revenue has improved the bottom line, then we can consider raising it for everyone else. “trust but verify”.

      • Great post, RD.

        In order to have a fair comparison, on the US side, you need to consider costs of not only FIT (federal income tax), but SS & Medicare taxes (which come to quite a bit for the average worker), health insurance costs, and state taxes, including (where applicable) property taxes, income taxes and sales tax. I suspect our homeowners’ insurance is also higher but that may be affected by damage caused by tornadoes and hurricanes (where applicable). When considering all that, the VAT (bad though it is) pales and you are correct that the average American is not getting a whole lot for that.

        I also agree with you, RD, on the importance of the mortgage interest deduction. Very few in the US could afford a home without that and for many people, creating equity in their homes has been one sure way to build wealth. (Thus the impact of the housing crash.)

        But the relatively rich in America are not paying as much in tax. Capital gains are taxed at lower rates than income, Medicare and ss taxes max out. Time we raised the rates on folks making more than $250k (or if that catches too many firefighters, make it $300k).


    • Agree with everything you said. E.g. where I come from, a Social Democratic “welfare” state, on top of the rather high taxes, there’s a 25% sales tax on every purchase … i.e. everything you ever pay for. The rest of your comment is true too. The “welfare” is crumbling.

      • I’m not saying your taxes aren’t high. I’m saying you get much more for them. What does it cost to go to Oxford? 9,000£? And that was a hike of what? 300% over what it used to be two years ago? If my kid doesn’t score a scholarship, she’s going to owe close to $100000 when she graduates. What was your deductible for your medical expenses last year? Do you even have one? In your case, the welfare state is being undermined by your government’s bone headed austerity measures. You’re supposed to spend your way out of recession, not layoff as many civil service employees as you can. When people are unemployed, they become a burden to the bottom line instead of contributing to it.
        By the way, have you shopped in NYC lately?? Talk about taxes on everything. There’s a city tax and a county tax and a state tax and any one or all of them may apply to your purchases. New york state reserved the right to tax commuters from NJ when I first moved here. So, you get nailed by both states. Isn’t that special. Purchases here only looks like a bargain to Europeans because the dollar is relatively weak. It wasn’t too long ago that Brits and the French used to come here on shopping junkets. And my BFF’s property tax bill is even scarier than mine. Imagine a monthly tax that is almost equal to your already hefty mortgage.
        Until you actually live here and see how much you have to pay for what other countries’ citizens take for granted, you have no idea what a toll privatization has taken on our standard of living. We pay as much or more than you do. The difference is a lot of our money goes to middle men and other cronies of politicians who score government contracts or talk politicians into spinning off whole sectors of government to the highest bidder.
        Your salary will be bigger but you won’t have much left by the time the tax collector and the rentiers take their share.

  5. I saw Leonhardt once on The Daily Show. He appears to be in his mid-thirties, certainly young enough to understand that most people who are still paying their mortgage are computer literate.

    • Then why does he act like he doesn’t know any middle class people? Um, maybe it’s because he doesn’t know any middle class people.
      Hence the cluelessness.
      I see that he went to Horace Mann School and Yale. I don’t want to talk badly of Yale grads but the do breathe a different flavor of exhaust fumes.

      • Tuition at Horace Mann School is $37,000/year for high school students. There are no merit scholarships.
        David leonardt needs to get out more and mingle with the lower classes.

        • That’s roughly what four years at a state university cost me back in the day.

          I’d make a comment about the elitists who live on the coasts if my own home-grown governor weren’t such a thieving, union-busting, Lehman Brothers affiliated asshole.

  6. RD here I go again. Your analysis is spot on as always. And it is totally useless. The dialectic has ended. Progress exists in linear time and we are no longer in linear time. Your eloquent opposition will be absorbed and is !needed! by the system to make it stronger. Please read Vija Kinski’s Baudrillardian analysis in Cosmopolis.

    There is no budget. There is no debt ceiling. We are in the time of globally circulating currencies. There is no money as we have known it. There is no referent for that piece of paper in your wallet. It is only green paper. In the US that is. Different colors for different folks.

    These finances they talk about are only numbers circulating on a screen. In orbit like a satellite. When they bailed out Wall Street they didn’t drive up in a hundred thousand Brink trucks to move the oney into the banks. All they did was send numbers on a screen to the bank. The budget does not exist. It is a “floating” sign that they are talking about.

    It is Deterrence. The Medium is the Message, remember.

    The real message and the meaning of all this is that they are marginalizing huge chunks of the demographics in the US. High gas prices results i the confinement of large numbers of people. This means they lose solidarity with others. It isolates them, results in a solitary marginal existence. This is what they want.

    They want people to die so that SS will benefit. They want old people incarcerated in senior dormitories. They want the disabled confined. Read Foucault’s Discipline and Punish for all the past “cuts” in confinement. We are seeing an unfolding “cut” before our eyes and instead we are arguing about the content of the message, not the intent of the message. And goddamn it you are so good at what you do that it keeps you busy doing it.

    I need you on the other side. The side of Baudrillardian intellectual terrorism.

  7. The rentiers pay too little in taxes, but indeed the rest of us pay too much.

  8. Also, our security forces (I include civilian agencies such as the CIA as well as the armed forces) are bankruptively expensive, partially because of corruption, but also partially because their proper function of defending the USA has been superseded by their role as gendarmes of global plutocracy–a role that was thrust upon the citizens of the USA by “scaring the hell out of them”, as Senator Vandenberg recommended to President Truman.

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  10. Agree with most of this except the comment about the mortgage interest deduction, a regressive policy that mainly benefits the moderately-rich to rich and also helped contribute to the housing meltdown (incidentally, using real estate/housing as a way to build wealth is a lousy idea that led to the current catastrophe of over-inflated prices, easy credit, and inevitable meltdown). Studies find that half of homeowners don’t even use the deduction–they don’t make enough money and have enough other deductions to itemize so it isn’t worth it to them.

    Across the board, research from both left-, right- and “neutral” organizations have found that the deduction favors the wealthy at the expense of the less well-off. (It’s not often that the Urban Institute and the IMF agree on anything so when they do, it’s worth noting.)

    Going back to your comparisons with Europe, Canada and other countries where people live far, far better than they do here — none of those countries have a mortgage tax deduction. In fact, iirc, in some European countries you pay MORE in taxes if you own a home (have to double check this) yet that hasn’t had a negative impact on ownership rates.

    The deduction also screws over renters, of course, but nobody gives a damn about that since we renters are all pathetic losers who don’t cocount.

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