A Response to Buffett’s Op-Ed

Here’s a link to a WJS article that comments on the Buffet piece.

http://blogs.wsj.com/wealth/2011/08/15/would-taxing-the-super-rich-raise-much-revenue/

I think it is interesting to think about this question in the light of historical attitudes toward tithing.  The Old Testament (largely endorsed by the Church) prescribed 10% across the board, I believe, without reference to how much the person made or how much effort went into making it.  Such a universal obligation in one sense creates a greater sense of solidarity than a progressive tax rate.  If everyone is giving to the venture, everyone takes a greater interest in its success.  It seems logical to me that the more lopsided the tax base becomes, the narrower the portion of the population who keenly consider their civic duties.

Obviously, Old Testament laws cannot necessarily be analogized to present circumstances.  Still I think it’s worth a thought.

I am glad the Warren Buffet feels such a responsibility to give back.  I wish more wealthy American’s took his lead.

Kicking Off the Discussion

This is the text of the email Tommy sent that started this discussion:

Friends,

On the occasion of S& P’s downgrade of the U.S creditworthiness, I thought it appropriate to reflect on where we are as a nation. Obviously, the downgrade itself represents not the reality of American fiscal health, but only one perception of it. Still, it’s a singular event in our history and worthy of attention.

Opinions nationally are mixed on how we can put our fiscal house in order. Some argue that it is time to scale back the federal regulatory burden that handcuffs entrepreneurs and private enterprise, the drivers of economic growth. Others say we must reform entitlement spending, which threatens to balloon in the coming years even beyond its current girth. Others say that, yes, cuts in government spending are necessary, but they should come primarily from other places, the defense department and corporate welfare, to name a few. Still another group prefers increased tax revenue to cuts in spending. This group argues that taxes can and should be raised on those American’s who can best afford to pay them, lest we balance the budget on the backs of the middle class. Yet another group argues that tax cuts, especially in the capital gains and corporate rates, are essential for catalyzing the boom in GDP necessary to outgrow our legislatively entrenched deficits. Paul Krugman thinks we need another massive stimulus, a single payer health system, and more quantitative easing of the dollar. Of course a combination of these approaches is also possible. But virtually no one claims no fiscal correction is needed, a fact that itself represents a watershed in American politics.

The outcome of next year’s presidential primaries and national election will largely hinge on which of the above approaches Americans believe will solve our fiscal problems. It is an existential question the answer to which will determine what kind of America we can expect our children to inherit.

The debate over the sustainability of the American system cannot be had without reference to the specific actions outcomes we have observed in recent history. But I hope the discussion does not devolve into an “Obama: For or Against” paradigm, at least not until the Republican primaries are finished. Let us look not at what has been said and promised but what has and can be done.

I volunteer to get the debate going:
1) Spending on social welfare (entitlements) must be cut on the federal level. Medicare and Social Security in particular must be addressed. First, our spending is unsustainable at current levels. Second, it crowds out private, parochial, and municipal charity that should be favored according to the Catholic principle of subsidiarity. Third, the creation of a dependent class through social welfare programming skews the priorities or voters and undermines the democratic process. Fourth, it is an invitation to class warfare demagoguery by politicians. Fifth, social welfare that increases national indebtedness represent merely the redistribution of wealth from future Americans to current Americans. In that sense, in is inherently anti-democratic.

 
2) The federal regulatory regime must be scaled way back. The EPA, the NLRB, and the Affordable Care Act are all part of the problem. First, the sheer cost of compliance makes starting a business and expanding a workforce impracticable. Second, the unpredictability of future regulation by unaccountable administrators makes business expansion inherently riskier. Third, regulation at the federal level is by nature poorly fitted to the diversity of businesses it impacts, which results in unintended consequences and inefficiencies. Fourth, it violate the principal of subsidiarity by neutering state and local oversight. Fifth, it encourages a culture of lobbying and crony capitalism in which the most well connected businesses flourish regardless of whether they are competitive and viable in the market.

I just threw a few email addresses in the box to get things going. If you would like to add others to the conversation, please don’t be shy.

Let me know what you think.

Tommy

Where the Tax Dollars Go

I am thankful that Tommy initiated this conversation. I think it is an important one that merits the consideration of thoughtful citizens throughout the country. The S&P downgrade, in some sense, only ratified what many of us already know: that our nation’s fiscal house is in disarray.

I agree in principle with some of the comments Tommy made in his inital post. That said, my initial reaction was that some of the premises to the first point assumed more than they ought and that  I was completely ignorant about the assertions in the second point.

But I was unsure whether my initial reaction was or was not justified.

To that end, I thought it helpful to begin looking at data. Although there is a largely normative dimension to this debate (ie, what our fiscal priorities ought to be and why), I think it necessary (in the case where systems already exist) to establish what is the case before we can establish what ought to be the case with any real credibility. Or, at least, that’s my bent.

In an effort to start moving down this path, I want to present a few pieces of information. I’ll embellish upon my perceptions with respect to some of this data in the coming days; this is only intended to start uncovering some basic information from which the conversation can grow in a constructive, evidential fashion. I found that as I learned more about the drivers of the federal deficit, the implications of the debt, and the composition of federal revenue, I found my some of my ideas and assumptions being challenged, while others of those ideas were reinforced. At a minimum, I felt increasing appreciation both for the simplicity and complexity of the problem(s).

To start, I want to share a brief graphic from the CBO that illustrates where our federal dollars went last year. for those unaware of the role the CBO plays; they are essentially the non-partisan fiscal compilers and analyzers of federal budgetary (among other) data. They are also tasked with providing Congress the information they need to make decisions (given their constitutional ‘power of the purse’).

Each month, the CBO compiles a review of the federal budget (riveting reading, I assure you) that details revenues, expenses, and the cumulative deficit (among other things). Because the federal fiscal year ends in September, the October review contains an initial analysis of what the previous fiscal year looked like. I’ve included a link to the October 2010 review to the right of this page.

Last year, the United States GDP (ie, total economic output, roughly) was approximately $14.7 Trillion.Federal spending amounted to approximately $3.5 Trillion dollars (24% of GDP). The deficit (ie, difference between what we spent – $3.5T – and what we raised in taxes – $2.1T) was approximately $1.4T (9% of GDP).

These amounts are staggering, but more on that later. The first question: where did the money go? Enter the infographic.

According to this graphic, over half of our federal spending went to “entitlements,” principally Medicare, Medicaid, and Social Security. Of these programs, approximately $696 Billion (4.7% of GDP) went to Social Security, $450 Billion (3.0% of GDP) went to Medicare, and $273 Billion (1.9% of GDP) went to Medicaid. In the case of Medicare and Medicaid, these amounts represented year-over-year increases of 4.9% and 8.7%, respectively. Social Security expenses increased roughly 5.4% between FY 2009 and 2010.

These amounts are staggering to think about, but they represent real payments to real people. It follows, then, that we should want to know to whom these payments are being given, how much their being given, and under what circumstances. Tommy’s point about redistributing wealth is a good one; these payments are indeed a transfer of wealth from some taxpayers to other citizens (taxpayers?).

In future posts, I think it will be helpful to further unpack the various blocks on this graphic, as well as the rate of change (historical and projected) of those various graphics. Additionally, like any other budget, expenses have to be matched to revenues and so the question of tax policy should also be considered. “Fixing” the deficit and “solving” the debt problem are, in many ways, a simple math problem: there are sums on one side of a spreadsheet that need to equal the sums on another side of the spreadsheet. The difficulty will arise in determining whose interests are affected on which side of the spreadsheet so that balance can be be obtained.