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The President’s plan is solid: increase taxes on the wealthiest Americans

September 17, 2010

OP-ED: Mr. President: Get fully behind your tax plan and twist arms if necessary

We have not been shy about criticizing the President — especially over his handling of the BP Disaster. But we fully support his position on the Bush era tax cuts.

Mr. Obama’s proposal would allow the Bush tax cuts expire for the wealthiest  2 % of Americans, those with incomes greater than $200,000 (individual) or $250,000 (joint), but would preserve the tax cuts for the 98 % of Americans (individuals and families with lower than these break points).

Most Republican and a small but significant minority of Democratic lawmakers want to extend the tax breaks for rich as well as the middle class. The latest ploy is a “compromise” deal by Senator John Cornyn (R-Texas) — this would extend the Bush tax cuts for taxpayers of all incomes on a temporary basis. However, the President should fight and fight hard for his plan. See recent Paul Krugman NY Times Op Ed on the politics of the battle.

Retaining the tax break for the wealthy will add some $700 billion to the budget deficit over the next 10-years. And guess what, the wealthy aren’t hurting while the middle class may soon be added to endangered species list.

The following chart by Ezra Klein of the Washington Post shows how the Obama vs. Republican plans would affect families at various income levels. The chart shows that with the Republican plan the more you earn, the bigger the break. The nation’s 315,000 millionaire households would save more than $100,000 in 2011.  See article by Washington Post’s Lori Montgomery. (Click graph to enlarge)

Tax cuts per year: (left, Obama plan, eliminates Bush tax cuts for wealthy/ right: Republican plan would extend tax cuts for the wealthy.

What about small businesses? Tax-break-for-the-rich advocates (ala Grover Norquist) are running around saying that the Obama proposal would be a fatal blow for small businesses. However,  according an article in today’s NY Times, data from the Internal Revenue Service shows that only 3 percent of small business owners would be subject to the higher tax, and studies of past tax increases suggest that letting the Bush tax for the wealthy would have little  impact on hiring.

On the other hand the Senate this week approved the Administration’s multi-billion dollar package of tax breaks and government-backed loans for small businesses.

Where are the deficit Hawks, now?: Ironically, many members of Congress who want the rich to keep their reduced taxes are deficit hawks who routinely vote against extending  unemployment benefits to those in need but who favor an extension of tax benefits to the wealthy — benefits that will add some $700 billion to the federal deficit over the next decade. (According to the nonpartisan congressional Joint Committee on Taxation).

Do Republican tax policies work? The following graph (CNN) also suggests that Bush era economic and tax policies don’t work so well for the middle class. Note the the sharp rise in percentage poverty rates during the Bush era which provided a bonanza to those with the highest incomes. The enormous tax cuts and war funding during the Bush Administrations helped to turn a $230 billion federal surplus into a 1.3 trillion deficit — the inheritance that the Obama Administration assumed.

Why it matters: According to the latest U.S. Census Bureau data (2009), some 43.6 million Americans (one in seven) are below the poverty line — less than some $10,000 for a single person, $22,000 for a family of four. The number is growing rapidly, up by 4 million more people from the year before. (The third consecutive annual increase). And if you’re struggling to support your family on $22,000 you’re already hurting badly and probably slipping with every rent and utility bill.

The ranks of the working-age poor reached the highest levels since the 1960s. In addition, the number without health insurance topped 50 million, as people lost jobs and the employer-funded medical coverage.  All of these problems create a downward spiral. People who can hardly pay the rent don’t spend, fewer products are sold, businesses layoff workers and so forth. And Home mortgage foreclosures  just hit their highest level since the housing meltdown began. There were 95,000 homes repossessed last month.

Squeezing out the Middle Class: We fear that these statistics are not merely a byproduct of the 2008 collapse of the financial markets, but a much broader structural crisis facing the nature. The some total of policy decisions (from financial deregulation, to subsidies to corporations, to tax policies) have led to a growing inequality in both income and wealth in the U.S.  The following graph shows the worrisome trend. (Click graph to enlarge)
The graph above clearly indicates a transfer of income has occurred at the expense of most American families. The graph below, based on data from the Federal Reserve Board shows just how much wealth is held by the top 1 percent of families. (Click graph to enlarge)
In closing we pose the following questions to readers:

1. What impact does the growing wealth gap have on the quality of our quality of life?
2. What impact does it have on vibrancy of our democracy?
3. Some argue that Congress should retain the Bush tax cuts in order to spur investments. Do you believe that investing in financial markets actually creates jobs in the U.S.?
We invite your comments.

7 Comments leave one →
  1. September 26, 2010 2:32 pm

    Great writeup. I agree with your position, in fact recently posted “Tax Cuts are the Leeches of Voodoo economics” which goes on to suggest how to get us out of the more strategic problem which is: economics today is where medicine was in George Washinton’s time; he was bled to death by his well intentioned but medically ignorant doctors. Economics is not yet a science; until it has a scientific foundation (and that is doable but not in the works as yet), we will be whipsawed by the harebrained theories of the right and left.

    I’d appreciate your reaction to the proposal suggested in the last paragraphs…. I’m doing more than just writing that proposal.

    • Henry S. Cole, Ph.D. permalink*
      September 26, 2010 11:03 pm

      Ed, I agree and will elaborate: For one thing economics is stuck on an equilibrium model that has little bearing on the real world. Complex self organized systems are generally far from equilibrium, meaning you have to deal with non-linearities, interlinked feedback cycles, instabilities and the like. This is why I believe that we should be looking at ecosystems as models for economic resilience. Resilience meaning the ability of a system to absorb and recover from shocks while retaining functionality. Resilient systems are flexible rather than fragile. Among the characteristics of resilient ecosystems:

      1. Diversity (diversity of species and diversity within species)

      2. Based on renewable, non-depletive, non-extractive energy

      3. High levels of resource efficiency with high recycling rates of natural capital

      4. Localism: close location between production and consumption; resources are found close to home and recycled. Example, leaves fall, are broken down by bugs, fungi, bacteria, nutrients retained in soil can be reused by plants.

      4b. Localism-b: communities appropriate to environment; you don’t find orchids on the tundra (contributes to efficiency and resilience).

      5. Non-extractive, non-depleting globalism (hydrological, geochemical, atmospheric cycling. The concept of scales needs to be added here.

      6. Growth has an important, distinct and limited role in systemic health. Example: rapid colonization after a forest fire.

      7. Continual restoration and maintenance of infrastructure. Examples: forest root system prevents soil erosion; carbonate deposits build coral reefs, etc.

      8. Dynamic yin and yang: example the interplay of competition and cooperation — both are critical, these are not opposites but support one another (example: best competitors know how to form joint ventures – reinforced via co-evolution).

      9. No bailouts. Example, tree falls — not a disaster due to diversity; colonizers take advantage of newly created opportunity (more light, water, nutrients, space).

      10. Ecosystems — no government, but many regulatory systems (e.g. homeostasis); example the yin and yang between producers, consumers, predators, prey; too many herbivores will boost the predator population — thus there is fluctuation around some sustainable level in a resilient system.

      11. Natural capital (biomass) is highly concentrated at the bottom of the food web (pyramid); I would hypothesize that such arrangements exist because they go with the flow of entropy. Concentration of wealth (inverted pyramid) is inherently unstable because it requires enormous amounts of energy to keep the pyramid from collapsing. In the end it’s self-defeating because its too inefficient and costly. Any ecosystem with an inverted pyramid would have disappeared long ago. Who knows may be this had something to do with the extinction of the big dinosaurs some 65 million years ago.

      How did such great resilient natural economies become that way? They have had lots of time for evolution and co-evolution to sift and winnow. Ecosystems evolve to be resource efficient and well matched to the environment persist; those that don’t lose ground (no pun intended).

      Notice that I use efficiency in a systemic sense. When businesses seek efficiency they do so from the standpoint of corporate rather than system-wide efficiency. I believe that diversity and competition plays an important role in promoting systemic efficiency that leads to resilience and sustainability. Of course with consolidation (e.g. banking, agribusiness) the diversity is eliminated (along with localism) and the powerful few become extractive of the whole. The extreme example are the big hedge fund operators who bet against an entire system to build their own wealth.

      You can read more at the following posts:

  2. Imani Kazana permalink
    September 25, 2010 9:29 am

    Well written & presented. Great graphics/charts. Excellent work.

    Let’s hope that the public responds.

  3. September 20, 2010 12:20 am

    Your article on eliminating the Bush tax cuts on individuals earning more than $200,000 per year and families earning more than $250,000 per year is very much to the point. I wonder whether, after all the tax shelters available to the rich, their real tax rate is really higher than that of the average American.

    I find your discussion invaluable, in that it puts all the relevant statistics in one place! This will be very useful to those of us who are called to dispute the argument that taxes on the rich will reduce valuable investment in this country.

    • Henry S. Cole, Ph.D. permalink*
      September 20, 2010 10:31 am

      Yeah, many of those guys say they want a flat tax. The dollars and not the percentages are what’s important. And there are so many hidden subsidies that benefit the corporate wealthy.

      Thanks for your comment, Mike.


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