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Addressing the Deficit

11/26/2016

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According to Noam Chomsky in his recent book Who Rules the World?,
For the public, the primary domestic concern is the severe crisis of unemployment. Under prevailing circumstances, that critical problem could have been overcome only by a significant government stimulus, well beyond the one Obama initiated in 2009, which barely matched declines in state and local spending, though it still did probably save millions of jobs. For financial institutions, the primary concern is the deficit. Therefore, only the deficit is under discussion. A large majority of the population (72 percent) favor addressing the deficit by taxing the very rich. Cutting health programs is opposed by overwhelming majorities (69 percent in the case of Medicaid, 78 percent for Medicare). The likely outcome is therefore the opposite.

Reporting the results of a study of how the public would eliminate the deficit, Steven Kull, director of the Program for Public Consultation, which conducted the study, writes that “clearly both the administration and the Republican-led House are out of step with the public’s values and priorities in regard to the budget … The biggest difference in spending is that the public favored deep cuts in defense spending, while the administration and the House propose modest increases … The public also favored more spending on job training, education, and pollution control than did either the administration or the House.”

The deficit crisis has largely been manufactured as a weapon to destroy hated social programs on which a large part of the population relies. The highly respected economics correspondent Martin Wolf, of the Financial Times, writes, “It is not that tackling the US fiscal position is urgent.… The US is able to borrow on easy terms, with yields on 10-year bonds close to 3 per cent, as the few non-hysterics predicted. The fiscal challenge is long term, not immediate.” Significantly, he adds: “The astonishing feature of the federal fiscal position is that revenues are forecast to be a mere 14.4 per cent of GDP in 2011, far below their postwar average of close to 18 per cent. Individual income tax is forecast to be a mere 6.3 per cent of GDP in 2011. This non-American cannot understand what the fuss is about: in 1988, at the end of Ronald Reagan’s term, receipts were 18.2 per cent of GDP. Tax revenue has to rise substantially if the deficit is to close.” Astonishing indeed, but deficit reduction is the demand of the financial institutions and the superrich, and in a rapidly declining democracy, that’s what counts.

​Not even mentioned is the possibility, discussed by economist Dean Baker, that the deficit might be eliminated if the dysfunctional privatized health care system were replaced by one similar to those in other industrial societies, which have half the per capita costs and at least comparable health outcomes. 23 The financial institutions and the pharmaceutical industry, however, are far too powerful for such options even to be considered, though the thought seems hardly Utopian. Off the agenda for similar reasons are other economically sensible options, such as a small financial transactions tax. (pp. 61-63)
Obviously, none of the above is in line with what is likely to happen in the near future. As the link above to my recent article on Dean Baker's ideas shows, much of the deficit is fixable with changes to policies that govern the "free markets".

However, none of that matters as Republicans are very likely to try gutting education, pollution regulations, and medicare, while giving huge tax breaks to the rich. These would all seem to be the exact opposite way in which the majority of Americans would wish to see this done.
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"Taxing the 1%: Why the top tax rate could be over 80%"

11/13/2016

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Figure 2. GDP-per-capita growth rates and top marginal tax rates since the 1970s

​An article from VoxEU reports,
​Figure 2 shows that there is no correlation between cuts in top tax rates and average annual real GDP-per-capita growth since the 1970s. For example, countries that made large cuts in top tax rates such as the United Kingdom or the United States have not grown significantly faster than countries that did not, such as Germany or Denmark. Hence, a substantial fraction of the response of pre-tax top incomes to top tax rates documented in Figure 1 may be due to increased rent-seeking at the top rather than increased productive effort.

Naturally, cross-country comparisons are bound to be fragile, and the exact results vary with the specification, years, and countries. But by and large, the bottom line is that rich countries have all grown at roughly the same rate over the past 30 years – in spite of huge variations in tax policies. Using our model and mid-range parameter values where the response of top earners to top tax rate cuts is due in part to increased rent-seeking behaviour and in part to increased productive work, we find that the top tax rate could potentially be set as high as 83% – as opposed to 57% in the pure supply-side model.

Up until the 1970s, policymakers and public opinion probably considered – rightly or wrongly – that at the very top of the income ladder, pay increases reflected mostly greed or other socially wasteful activities rather than productive work effort. This is why they were able to set marginal tax rates as high as 80% in the US and the UK. The Reagan/Thatcher revolution has succeeded in making such top tax rate levels unthinkable since then. But after decades of increasing income concentration that has brought about mediocre growth since the 1970s and a Great Recession triggered by financial sector excesses, a rethinking of the Reagan and Thatcher revolutions is perhaps underway. The United Kingdom has increased its top income tax rate from 40% to 50% in 2010 in part to curb top pay excesses. In the United States, the Occupy Wall Street movement and its famous "We are the 99%" slogan also reflects the view that the top 1% may have gained at the expense of the 99%.
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In the end, the future of top tax rates depends on the public's beliefs of whether top pay fairly reflects productivity or whether top pay, rather unfairly, arises from rent-seeking. With higher income concentration, top earners have more economic resources to influence social beliefs (through think tanks and media) and policies (through lobbying), thereby creating some reverse causality between income inequality, perceptions, and policies. We hope economists can shed light on these beliefs with compelling theoretical and empirical analysis.
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