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A Modest Debt Ceiling Proposal

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My resolution to the debt ceiling debate states that we need a balanced budget amendment and a constitutional limit on spending at no more than 19 percent. And actually that’s a higher spending percent than I’d consider ideal, because since 1971-2010 the US has only taken in an average of 18.47 percent of GDP in tax revenues (despite the varying tax rates in that period). From 1950 to 2000 federal spending as a percent of GDP averaged 19.8 percent. Under George W Bush (2001-2008), despite his overseeing of large deficits, spending was actually lower than the 50 year average at 19.6 percent. By comparison, under President Obama, federal government spending as a percentage of GDP was 25 percent in 2009 and 23.8 percent in 2010. 

As part of the debt ceiling compromise, Democrats want to increase taxes (which is typically their solution to every problem) and combine that with spending cuts (which they will rabidly fight against). The Republicans’ typical position is to refuse any plan that raises taxes, however they are even more emboldened in this case because our economy is already in such bad shape.

Obama went on the attack during his June 29, 2011 press conference, accusing Republicans of favoring corporate CEOs over middle class Americans. One may be inclined to ask, “How does not wanting to raise taxes on anyone, including the people who want to hire middle and lower class people, the same thing as opposing the middle class?” To borrow a line from Ayn Rand’s classic Atlas Shrugged, “Why ask useless questions? How deep is the ocean? How high is the sky? Who is John Galt?”, the answer is nobody knows; just don’t question it.

Despite his 2009 stimulus package giving tax incentives for corporate jets, Obama attacked corporate jets six times in his speech. For the record, eliminating the tax incentives for corporate jets would generate roughly .1 percent of the revenue he wants to take in as part of the Democrat debt reduction strategy. As you may have been able to tell by the measly increase in tax revenue generated by an elimination of corporate jet tax incentive, his focus on corporate jets and CEOs and such isn’t really about debt reduction. His focus on the issue is a tactic in class warfare, which has long been a Democrat strategy to gain popular support for tax increases on the wealthy and corporations; as well as painting Republicans as corporate shills.

Interestingly, on The O’Reilly Factor airing 6/28/11, liberal radio host Alan Colmes said the Democrats don’t want to raise taxes, they just want to eliminate tax loopholes and deductions. For the record, I think that Alan Colmes is qualified to have a show called “Alan Colmes says the darndest things”, as he has a history of saying the most absurdly false things that come to his mind. Democrats have been clamoring for higher taxes for as long as I can remember. But it does appear as though he may have forecasted a strategy change, as lately President Obama has been echoing the same thing.

A true supporter of free markets understands that means not incentivizing or disincentivizing the purchasing of certain goods. For example, politicians levying high taxes on cigarettes to discourage smoking creates a disincentive and thus isn’t a free market action. The Democrats subsidizing and giving tax breaks to green energy companies and offering tax breaks to people who buy their products creates incentives for sellers and buyers of the products, and also isn’t a free market action.

Therefore I propose this idea: for every specific tax deduction that Democrats want to eliminate, we lower the corporate and individual tax rate by .015 percent. So if the Democrats want to eliminate 200 deductions from the tax code, that is great so long as the overall rates are lowered by 3 percent. According to the Cato Institute, the income tax code in the US had 54,846 pages in 2003, and it has grown by thousands of pages since. There are probably thousands of deductions, promoting activities/behavior at the expense of other competing industries and other taxpayers who have to pay more to make up the revenue surrendered by the deductions. My proposal will get us closer to a freer market and will lower the already too high taxes. It should also be stated that this isn’t a radical proposal, as Obama’s own debt reduction committee recommended an idea very similar, but their idea was ignored by the Obama administration. I should also mention that lowering taxes as a whole under Ronald Reagan, increased revenues to the government. Combining the revenue generated by the elimination of numerous tax deductions and economic growth through people being able to keep and spend a little more of their money could perhaps generate much more revenue than anticipated.

Lowering the corporate income tax is just as important as lowering the personal income tax rate, because the United States has the highest corporate income tax rate in the world. This causes American companies to move operations overseas and for US money to stay in offshore bank accounts; when it could be in our banks for them to lend it out as loanable funds to Americans. Also problematic is that the corporate income tax is in many ways a double tax. As businesses typically have a set profit margin, they pass on the cost of their taxes on to consumers. As a result, companies must sell their items for much higher prices to pay for the taxes levied on them. People may argue that removing the corporate income tax after its been in effect, won’t cause companies to lower their costs, as they’ll just pocket the money. Businesses could do that, but for them to stay in operation, they’d either have to lower their prices or resort to praying that their competition isn’t interested in expanding market share by lowering prices. However, even in that unfortunate scenario, the companies would then have the revenue to increase hiring, give their current employees raises, and put tons of money in R&D to make better products. Or perhaps the companies would drop the prices by half of the tax decreases and keep the other half, either way it’s a win-win for the economy.

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About Nick Croucher

  • Glenn Contrarian

    What an interesting piece full of inaccurate – and outright false – Republican talking points!

    1 – The author claims that raising taxes and opposing spending cuts is what Dems always do. What the author doesn’t realize is that the total tax burden on Americans RIGHT NOW under the Obama administration is LOWER than it has been for fifty years, including under Eisenhower, Reagan, Nixon, Bush 41, and Bush 43. The claim by the Republican elite that we’re already paying too much in taxes is an outright lie – because we haven’t paid so little in taxes in half a century!

    2 – American has the second highest (not the highest, as the author claims) NOMINAL corporate tax rate among developed nations. BUT after all the loopholes, tax breaks, and deductions are taken into account, the exact opposite is true – America has the second-lowest EFFECTIVE corporate tax rate in the developed world. Republicans never, ever mention that last part. They only see the nominal rate and pay no attention whatsoever to the much more important effective corporate tax rate.

    3 – Corporate taxes are NOT merely ‘passed on to the consumers’ as the author of this article (like the vast majority of conservatives) argues. Why? Because such a claim evinces a lack of understanding – repeat, a lack of understanding – of economics. Why? Because businesses that stay IN business always, always, always charge one price and ONLY one price for every product and service they sell: whatever it is that the market will bear. If the market will bear higher prices, the prices WILL be raised without regard to corporate taxes paid or not paid. Conversely, if the market will NOT bear higher prices, the prices will NOT be raised (but might be lowered) without regard to corporate taxes paid or not paid. The ONLY difference the corporate tax makes is in how much profit is taken.

    4 – The current deficit-to-GDP is lower RIGHT NOW than it was for four years under Reagan! Its high point was in the last year for which Bush 43 submitted a budget – 2009 – and was slightly lower in 2010, and is now projected to be lower than it was during half of Reagan’s administration.

    5 – Reagan DID slash taxes…but what most Republicans have forgotten is that he RAISED taxes eleven times after he found out the hard way that the American government needed more revenue. To wit:

    “Ronald Reagan was never afraid to raise taxes,” historian Douglas Brinkley, who edited Reagan’s diaries, told NPR. “He knew that it was necessary at times. And so there’s a false mythology out there about Reagan as this conservative president who came in and just cut taxes and trimmed federal spending in a dramatic way. It didn’t happen that way. It’s false.”

    It’s important to note that Reagan’s tax increases did not wipe out the effects of that initial tax cut. But they did eat up about half of it. And as Peter Beinart points out, the 1983 payroll tax hike went to pay for Social Security and Medicare…Reagan also raised the gas tax and signed the largest corporate tax increase in history, an act Joshua Green writes would be “utterly unimaginable for any conservative to support today.”

    Didja read that, TPANick? Reagan passed the LARGEST corporate tax increase in American history! How many of your Republican friends know that? Probably ZERO.

    I pointed out much of this in my recent article, The Republican Big Lies About Taxes and Government Spending. Not a single BC conservative could argue against the facts laid out therein. If your article is any indication, neither can you.

  • Instead of criticizing Alan Colmes for saying the craziest things ever uttered, I wish I had used you as my example.

    Reagan’s problem, just like George HW Bush’s problem was that he trusted democrats, which is a classic mistake. Actually thats just pure stupidity. Democrats told Reagan that for every $1 in tax increases Democrats would cut $2 in spending.

    Trusting democrats to cut government spending would be like trusting a crack addict to guard a stash of crack, without using any or stealing it.

    As a lib, you must be conflicted about corporate tax loopholes. You are bred to hate corporations, but you also taught that GE is going to help save the planet with its green energy products and its liberal news networks so them not paying any taxes is acceptable.

    The US had the 2nd highest corporate tax until Japan lowered their’s.

    Lastly, I noticed your comment came at 2:15am. I work full time (a concept foreign to the democrat voting base) and I don’t have time to monitor comments. So, farewell. I appreciate the input despite your falsehoods and bitter tone.

  • Glenn Contrarian

    I see your reply contains little when it comes to hard facts, but is simply a collections of assumptions and accusations. For instance, you’re repeating the “highest corporate tax” claim, apparently without ever having checked my reference showing that we’re second-highest on NOMINAL rate, and second-LOWEST on effective rate…but perhaps you haven’t heard that many corporations (like GE) paid NO tax at all.

    How, exactly, can our EFFECTIVE corporate tax rate (not nominal, but EFFECTIVE) be second-HIGHEST when many of our corporations pay little or no tax? Answer that!

    And as for your ASSUMPTION as to why I’m up at 2:15 AM, we had a saying in the Navy about making assumptions: when you assume, you make an ‘ass’ of ‘u’ and ‘me’ – meaning in so many words that one must not make assumptions. Assumptions KILL people in the industrial workplace, and someone who assumes is going to wind up ruining peoples’ lives and careers.

    FYI, I’m retired Navy, and I’m presently a Foster dad of medically-fragile children – I take care of the most medically-challenging kids that the state will allow to stay in a home. And, Mr. TPANick, this is NOT a nine-to-five job. Ever been in a hospital? Sure you have. Are the nurses by the patients 100% of the time? Of course not – they’re most often at the nurse’s station between rounds waiting for the next problem to crop up. That is my life here at home – and again, it’s NOT a nine-to-five job. It’s twenty-four/seven, because it includes not only the physical and medical care we provide, but also the responsibility to these kids that we carry, all day, every day. There’s VERY few people that are able to do what we do day in, day out – and that’s why we’re among the most valued Foster parents in the entire statewide system.

    Okay, Mr. Democrats-don’t-know-how-to-work? LEARN how not to ASSUME, and you’ll be a better man for it.

  • Baronius

    Really solid article, Nick. Welcome aboard.

    As a practical matter, though, it takes years to get a Constitutional amendment passed. If I were in Congress, I wouldn’t trust a deal based on a promise of support down the road. There are too many ways to wiggle out of a deal. So how do they resolve the impasse in Congress? (I realize that most of your article is about a tax deal, but that first part caught my eye.)

  • Glenn Contrarian

    Baronius –

    Did you question any of his claims? Did you check to see if his claims were factual? Feel free to check my claims as well.

  • Glenn Contrarian

    TPANick –

    Look through my rebuttal of your claims and present any evidence you can that my claims are false:

    1 – The total tax burden under Obama is lower than at any other time in the past fifty years.

    2 – America has the second-highest NOMINAL corporate tax rate…but has the second-lowest EFFECTIVE corporate tax rate. If you still want to claim we have the highest nominal rate, go ahead – but I want to see you disprove that we have the second-lowest EFFECTIVE corporate tax rate.

    3 – Successful businesses do not pass on corporate taxes to the consumer because successful businesses price their goods/services at no more and no less than what the market will bear.

    4 – The deficit-to-GDP ratio is lower NOW than it was for half of Reagan’s presidency.

    5 – Reagan raised taxes eleven times and passed the largest corporate tax increase in America’s history.

    I really want to see you refute these – and please use reputable links, or at least links that use credible and verifiable data.

    BTW, TPANick, for the first fourteen years of my adult life I was a Republican. I was like you, heaping scorn and ridicule on Carter and Mondale and Dukakis. But what you see above is one of the reasons I left the Republican party in the early 90’s, because I started seeing through the outright lies they were telling. You haven’t seen through the lies yet.

    All I’m asking is that you verify the credibility of the talking points you presented as compared to the credibility of the data I’m showing you, that shows your talking points to be nearly completely false.

  • Clavos

    Why? Because such a claim evinces a lack of understanding – repeat, a lack of understanding – of economics. Why? Because businesses that stay IN business always, always, always charge one price and ONLY one price for every product and service they sell: whatever it is that the market will bear. If the market will bear higher prices, the prices WILL be raised without regard to corporate taxes paid or not paid. Conversely, if the market will NOT bear higher prices, the prices will NOT be raised (but might be lowered) without regard to corporate taxes paid or not paid. The ONLY difference the corporate tax makes is in how much profit is taken.

    This “analysis” ignores the basic fact that when taxes are raised for a given class of taxpayer they are raised for all taxpayers in the class, thereby raising that particular cost of doing business for all of them equally.

  • Clavos

    Successful businesses do not pass on corporate taxes to the consumer because successful businesses price their goods/services at no more and no less than what the market will bear.

    Assumes an inelastic market, which is almost nonexistent in the real world, unless regulated as such by — you guessed it, a meddling government.

  • I sincerely hope this is my last time commenting on my own post. I don’t comment on yahoo or newspaper articles online to argue with libs, because its a waste of time. And I love debating, but online its a waste of time. Google images the phrase “arguing on the internet”

    1) Overall Tax Burden. Reading the article you linked, didn’t make your case. The article, written in May of 2010 says that in 2009 (2 years ago) the tax burden was as low as its been since Truman, which is interesting considering taxes were very high under Truman. What made the tax burden low in 2009? “Individual tax rates vary widely based on how much a taxpayer earns, where the person lives and other factors. On average, though, the tax rate paid by all Americans ?” rich and poor, combined ?” has fallen 26% since the recession began in 2007.” So, the tax burden is lower because we are in an economic recession, not because tax rates are particularly low. Using this logic 100% of the population is unemployed and tax rates are 99.9% the tax burden would be as low as it possibly could be. Further evidence that the recession is the reason the tax burden (taxes paid) is low? “Stimulus law. One-third of last year’s $862 billion economic stimulus went for tax cuts. Biggest reduction: The Making Work Pay tax credit reduced income taxes $800 for married couples earning up to $150,000.” So a stimulus which is running out is another temporary reason the tax burden is low, granted we’ll have to pay all that money back… so… And lastly from the article “Sales tax. Consumers cut spending sharply in this downturn, thereby paying less in sales taxes.” Yes, people are unemployed and have less money, thats not the same as a change in overall tax rates. This isn’t good evidence to make your case.

    2)I think my favorite link was this “effective corporate tax rate” argument. Now, unlike #1, this one could help make your case about too many loopholes and such, and GE’s not paying any taxes last year makes it even further. However, it can just as easily make my argument, that higher tax rates doesn’t always create higher tax revenue. In fact, the article you linked even says that other nations increased their tax revenue by lowering their corporate tax rates and eliminating loopholes. Which strangely sounds like an article that I may have just written yesterday.

    3) If you have a corporate tax rate of 20%, the goods you buy from that corporation will likely cost roughly 20% more than they would otherwise. But it evens out, because every corporation deals with it, unless they have really good tax lawyers.

    4) Reuters and US Government Spending (the bottom of the page contains the data included in the graph)

    5) Reagan netted tax increases at the end of his administration. I know that. When I talked about his tax cuts creating more revenue, I was talking about the years immediately after he did the income tax cut.

    Your links do nothing to refute mine. Now, lets change topics here briefly. You lectured me on “assuming” citing an old navy saying.

    The whole assume = ass out of you and me phrase isn’t navy specific its a common cliche I’ve heard my whole life. Secondly, you assumed I was a republican and that my “republican friends” had no idea Reagan raised taxes. I’m a libertarian, not a republican, and I was well aware. And my friends don’t follow politics, they are useless 20 somethings who vote democrat every election without being able to explain why. I don’t talk politics with them because they base any argument on emotion or just get frustrated and become mean.

    I appreciate your service to our country and I’m sorry to hear about the special needs of your child. Once again, this is the internet so you could be making that up the same way a kid says “my mom died” if you tell a “your momma” joke. But I’ll take your word for it.

    I treat people the way they treat me, I’d prefer we agree to disagree and we go our separate ways or we can keep wasting time, your call. Once again, I love debating, it is perhaps even my favorite thing to do, but internet debates are a waste of time.

    I assume by your persistence and your decision to post on my article initially that we are similar in that we have an ego. This ego wants to get the last word and wants to get the other party to agree with him in the end. Its just not going to happen.

    I’d love for this to be the last comment, however I have a feeling your going to post again and this discussion will perpetuate based on our personalities.

    Hopefully I’ll have the will to keep my mouth shut. Regardless, take care.

  • Baronius

    Nick – Struggling against quicksand only makes you sink faster! BC’s threads will eat up as much time as you let them.

  • Glenn Contrarian

    Nick –

    I do appreciate you going to the effort to try to use logic and fact to refute what I said, for such is much more reliable than making sweeping assumptions.

    As for my livelihood, my children are not special-needs – it’s my Foster children, and as I said, we’re among the very few in the state who can care and have cared for medically-fragile children for over a decade.

    As you point out, there’s no way to verify anything I say, and that maybe I’m making all this up. So I encourage you to look up my BC writings. You’ll find no personal insults (except to politicians and celebrities – they’re fair game), sincere public apologies for the times I’ve been wrong (which is not something you see often at all on debate threads), and a tone that is always, always sincere.

    That’s what anonymity allows me to do, to write without personal insult (thereby taking the high road), to publicly apologize even when it makes me look bad, and to be sincere even when my positions aren’t popular among those who normally agree with me.

  • The debt ceiling is not about future spending. It is about paying the bills for spending that has already occurred.

    If you can possibly wrap your mind around this simple fact, a lot of the nonsense being spouted off on the subject [including this article] falls away.

    Have a spirited debate about future budgets, spending and taxes — fine, no problem. But tying it to the debt ceiling [raised 74 times in the last 50 years, referred to in 2002 by then-White House budget director Mitch Daniels as ‘just housekeeping’] is ideological pigheadedness.

    Anyhow, most Washington observers seem to think Obama is winning this argument. That would be good news, but I’ll believe it when I see it.

  • Baronius

    Handy, my credit card balance is about my previous spending, but I’d be a fool not to consider my balance when planning future spending. When I’m spending 10% of my paycheck on the minimum monthly payment, I shouldn’t be applying for new cards.

  • Yes, the debt is an issue in making decisions on future budgets. But whether to raise the debt ceiling is not.

    The appropriate time to have this intense discussion about spending and taxes is the FY12 [and beyond] budget process.

    Risking our international credit [and risking an immediate skyrocketing of bond interest rates] is flirting with disaster. It is not only not necessary, it’s utterly foolhardy.

    And raising the debt ceiling is decidedly NOT the same as “applying for new credit cards.” It is ONLY about current debt, and if you reach the limit, something won’t be paid for. Even McConnell and Boehner concede this. And you yourself know better than your facile credit card comparison would indicate.

  • Baronius

    – It’s increasing the total debt you’re allowed to carry. It’s exactly like applying for new credit cards.

    – Why shouldn’t Congress hold this discussion right now?

    – There’s no reason the US would have to default on its debt if the debt ceiling isn’t raised.

  • #15: You are factually wrong. Take time to inform yourself on the subject before writing something that foolish.

    The credit card analogy is faulty. As Bernanke said today, a more accurate analogy is going on a credit card spending spree, then refusing to make the minimum monthly payment, damaging your credit rating — but on a massive scale.

    Here’s a good explanation from CNN Money:

    What happens if Congress blows the debt ceiling?

    Treasury would not have authority to borrow any more money. And that can be a problem since the government borrows to make up the difference between what it spends and what it takes in. It uses that borrowed money to help fund operations and pay creditors.

    Geithner’s critics say he could prevent default by simply paying the interest due to bondholders.

    But since average spending — minus interest — outpaces revenue by about $118 billion a month, Geithner won’t be able to pay all the country’s bills.

    That means he will have to pick and choose who to pay and who to put off every day. And there’s no guarantee that paying interest while shirking other legal obligations will protect the country from the perception of default.

    Geithner said it would be akin to a homeowner who pays his mortgage but puts off his car loan, credit cards, insurance premiums and utilities. The mortgage is taken care of, but the homeowner’s credit could still be damaged.

    And this is quite apart from the perception of global investors and the huge market for US treasury securities. If that interest rate jumps up, then the debt gets massively larger, instantly.

  • Of course, Congress can talk about whatever it wants. But linking the debt ceiling to future budgets is pure political opportunism, taking advantage of the limited knowledge of the public about this subject. A limited knowledge that Baronius apparently shares, or pretends to for rhetorical purposes.

    The overused maxim, “You’re entitled to your own opinion, but not your own facts,” certainly applies here.

  • Baronius

    Bernanke’s analogy applies to defaulting. My analogy applies to increasing the debt limit.

    I’m saying that we’ve gone on a spending spree and have hit the limit of our current cards (which fits both analogies fine). We can either increase our debt limit (my analogy) or stop paying the minimum (Bernanke’s analogy). Of course, they’re both analogies in that the US sets our own debt limit.

  • You are just being stubborn and putting your fingers in your ears.

    When we surpass the debt ceiling, the treasury secretary can no longer do business as usual, which is to borrow to make up the difference between incoming and outgoing funds. Not new spending, but the previously authorized spending.

    If he can’t make up that difference, then he or someone has to decide what to pay and what not to pay. [In a side note, do you really want to hand that authority to the executive branch?]

    You choose to ignore the very real threat of how the world perceives our credit. Considering how much we currently borrow at luxuriously low interest rates, we do need to be concerned about those perceptions.

    By the way, we already hit the ceiling of $14.294 trillion on May 16. Geithner temporarily suspended investments in federal retirement funds to buy us 10-11 more weeks.

    If the ceiling is hit for real, and the stock and bond markets do crash as predicted, how will you feel about making your cast-in-cement ideological “argument”? Do you remember that 700-point drop in the Dow as the House GOP initially rejected TARP?

  • Baronius

    I think that everything in your last post is factually correct. But again, there’s a difference between the debt ceiling being hit and a default on debt. In fact, as you point out, we’ve already hit the debt limit, and the Treasury Secretary is already prioritizing the money that’s coming in. I have no doubt that that’ll get tougher as the weeks go by. But I’m guessing that you’d rather see a good deal tomorrow than a bad deal today; so would I. We just define “good deal” differently.

  • From the AP, within the last half hour:

    Moody’s Investors Service is threatening to lower the United States’ credit rating, saying there is a small but rising risk that the government will default on its debt.

    The credit rating agency says it will review the federal government’s triple-A bond rating because the White House and Congress are running out of time to raise the nation’s $14.3 trillion borrowing limit and avoid a default.

    The government reached its borrowing limit in May. Treasury says the government will default on its debt if the limit is not raised by Aug. 2.

    A downgrade would raise interest rates on U.S. treasury bonds, increasing the interest paid by U.S. taxpayers. It would also push up rates for mortgages, car loans and other debts, which are linked to Treasury rates.

  • “Asking what the U.S. economy might look like after a possible U.S. Treasury default is akin to asking ‘what will you do after you commit suicide.’ “

    — Steven Wieting, Managing Director in the Economic and Market Analysis team of Citigroup, in a July 11, 2011 report

  • Baronius

    That’d be huge.

  • “It’s the end of the world.”

    A line by a character played by Eli Wallach in Wall Street, Money Never Sleeps.

  • Like TARP, a debt ceiling increase will eventually pass, and, as with TARP, the skeptics will continue to claim that it was all scare-tactic hype.

    But why risk it? We can still argue about taxes and spending in the FY12 and FY13 budgets and during and after the presidential election.

    Taking immediate drastic action right now [i.e. hundreds of billions in spending cuts] could have drastic consequences. Worth the risk? I say no way.

  • rob grant

    Like it or not, corporate tax, excluding retained earnings, amounts to double taxation. Whatever flows through the corporation to be taxed shouldn’t be taxed to the corporation. Again, retained earnings should be taxed the full shot, since retained earnings in the form of bank accounts and shares of stock in other companies actually stifle economic activity. Personally, I think our politicians should put a kicker in that some how stimulates job growth in exchange for 0% corporation tax on any money not in the form of retained earnings or which has a flow-though to CEO and other officers. This would also be good for Wall street.

  • Igor

    Everything is double taxed.