Thursday, December 18, 2008

Protecting Which Taxpayers?

Members of Congress, the White House, and the Treasury have been repeating the mantra of “protecting taxpayers” in the use of “bailout” funds, the $700 billion TARP (Troubled Assets Relief Program) enacted by Congress. The phrase implies that the government wants this money to be repaid to the Treasury, thereby preventing taxpayers from having to make up any losses.

First things first. Excluding TARP and Obama’s projected fiscal stimulus, the federal government’s budget deficit was estimated in the neighborhood of $500 billion for fiscal year 2009 (October 1, 2008-September 30, 2009). TARP is being financed by federal borrowing, not increased taxes. Obama’s stimulus plan could add another $800 billion or so to federal spending over the next two years, which will also be financed by borrowing.

Assume some or all of the bailout funds are recovered by the Treasury. Any such funds are likely to be appropriated by Congress to spend on government programs rather than redeem the borrowed funds and reduce public debt.

As to “protecting taxpayers,” who is at risk?

If it becomes necessary to raise taxes, Congress could raise income tax rates across-the-board or only on upper-income households. The distribution of income taxes in 2006, the latest year for which data are available, is as follows: the top 1% of households ranked by adjusted gross income paid 40% of total income taxes in fiscal year 2006, the top 5% paid 60%, the top 10% paid 71%, the top 25% paid 86%, and the top 50% paid 97%. Whichever approach is taken, higher-income households will pay the bulk of the increase. But this is the group on which Obama and the Democrat Congress want to increase tax rates. For these households, “protecting taxpayers” is empty rhetoric.

Ironically, the true losers could be lower- and lower-middle income households. The Treasury, the Fed, and Congress are trying to head off the potentially harmful effects of deflation and return the economy to growth. However, the creation and circulation of so much new money could fuel inflation in the next few years, which generally hurts lower-income households more than the wealthy. Should this occur, Obama will have a hard time explaining himself to the electorate in the 2010 Congressional and 2012 general elections.

1 comment :

Bryan said...

Right, Alvin.

The species "taxpayer Americanus" is getting rhetorical homage, but little else. I don't really expect reimbursement of any form, but I recognize that the collectivists just don't care about it, because they live under the LBJ myth of unlimited abundance, and think the top 1% are somehow unjustifiably hogging the largesse.

Reading the same 2006 tax data, I've concluded that to "achieve" 23% effective tax rates, the top echelon must be getting about 60% of their income from capital gains, and projecting such numbers forward to 2008, I expect that since few portfolios will have any capital gains by year's end, the treasury will find that most of the quarterly gains thay already have accreted will turn out to be the entire remittances from the top 1%, or, an unscheduled $160B haircut on expected receipts, in addition to the other $500B shortfall you cited.

Reinhart and Rogoff's recent NBER paper "Banking Crises: An Equal Opportunity Menace" suggests the current crisis will run about 3 years and increase government debt by 86%, based on historical studies. Viewing their data as a ballpark-correct estimate, they suggest that most capital-rich "taxpayers" will spend several years not recognizing significant capital gains, and the trends in financial planning should evolve well enough that the gains will not be easy targets for the IRS, or the FTB.

You are correct in identifying the lower and middle stratum of households as the main losers: labor dynamics data suggest that even pre-meltdown job destruction/creation rates are extraordinarily fluid, ~29M gone, 31M created in 2007. Most of these jobs came from small Joe-the-plumber-scale shops, precisely the ones whose owners are the targets of Obama-Biden "fairness". The NVCA longitudinal data suggest it takes an entrenreneur ~$35K to create a job in our economy, and with the rhetoric of "fairness" confusing the populace, this creates obstacles to entrepreneurs raising such capital, and larger disincentives against working for a long-term payday. Fewer jobs will mean an ongoing malaise, but this is the will of the people, as expressed by the ideological faction that they have elected.

Sadly, explaining such concepts to people determined to hold the majority/PC view is a fruitless undertaking, like casting pearls before swine. Let us tend our own gardens.