Monday, August 6, 2012

Is the President Negatively Impacting U.S. Employment in His Effort to be Re-elected?

The Jobs Cliff presents an interesting dilemma regarding President Obama's obvious campaign strategy of pitting 99% of the voters, aka the weirdly and presidentially designated "middle class he says he's desperately trying so hard to save," against the 1% of the greedy, evil and fattest of the fat cats among us, who he merely wants to pay their "fair share" in taxes.

In other words, the vast majority of the voters will be asked to pay no more in taxes while the evil greedy 1% will be required to do the right thing and pay their fair share since "they didn't build that" anyway.

First, we'll consider what the referenced article says about the potential effect of (1) the President's campaign strategy on U.S. employment and then we'll move on to some facts about his (2) "fair share" of taxes argument.

1 ..."The President's election strategy isn't helping employment.

There's a lot of tragedy in Friday's employment report that showed another listless month for job creation, but also an irony. Even as President Obama's political prospects depend on boosting the economy's red blood cell count, his own re-election strategy may be driving it down. To wit, his insistence on threatening the economy with a huge tax increase in January is inhibiting the jobs improvement he needs.

The economy created 163,000 net new jobs in July . . . . The monthly average for 2012 so far is about 151,000, and 153,000 for 2011, which is subpar for any normal recovery and reflects perilously slow growth. The unemployment rate edged up to 8.3%, and the labor force participation rate slipped again to 63.7%; as recently as 2007, it was 66.4%.

The statis carried over into payrolls, where average hourly earnings increased by all of two cents to $23.52. Average hourly earnings have grown by 1.7% over the last year, almost perfectly tracking inflation. In a word, Americans overall haven't had a raise.

Taken together, the report shows that businesses are stuck in a defensive crouch, waiting to hire and invest until the tax, regulatory and election turmoil is sorted out. Mr. Obama's ultimatum that he will allow the country to go over the tax cliff and let all rates to rise in 2013 unless Congress raises taxes on "the rich" only—well, it isn't helping.

Such desperate measures would be reckless even in less desperate times, and they are particularly intimidating to the smaller but entrepreneurial and fast-growing businesses that ought to be picking up more workers. It is even more intimidating to the "pass through" businesses that report income on individual tax returns and are typically bulwarks of job creation.

Mr. Obama's political advisers, and the President himself, must believe that this strategy is the only way he can win re-election. But the gambit is imposing a high cost on the American workers and businesses that have to wait to see how bad the policy damage will be in 2013."

2 ... Class Warfare and Fair Shares

Now let's move on to the "rich need to pay their fair share" argument put forth by the President. As in the case of Fox News, let us now "report" the facts; you can "decide" for yourself what's "fair."

The Numbers Inside a Hot-Button Issue concludes thusly:

"So where does that leave the question of "fairness?" "It's not resolvable scientifically," says Mr. Thorndike, the historian. "It's only resolvable by a show of hands."

Overview Discussion of the General Concept of What Constitutes "Fairness"

And so it is with all things normative. Fairness is in the eye of the beholder. It's not determinable objectively. What's fair to me may be viewed as unfair by you. What's enough for me may not be enough for you.

In a "progressive" as opposed to a proportional tax system (our American system is a "progressive" one), the question of what's fair or progressive enough is simply unanswerable. There's no correct response. That's why politicians can debate it forever and never come to an answer.

For illustrative purposes only, if the first $20,000 of income is taxed at 10%, what should the marginal rate, aka the next increment, be for earnings over $20,000 and less than $75,000? 20% or something else? And for earnings greater than $75,000 but less than $250,000, should the rate be 30% or something else? And for earnings over $250,000, should the rate be 35%, 40%, 50%, 75% or something else?  What's fair in a progressive system is simply in the eye of the taxer from time to time.

But here's the real math. It's voter math. 1% is less than 99%, so the idea behind the President's raising taxes on the rich is based on that simple reality. Even though the economy sucks and will continue to suck, Mr. Obama and his political team obviously believe that vilifying the evil, fat cat, greedy rich folks will win him enough votes to be re-elected as many of the 99% will opt for not taxing themselves and taxing the filthy few. Class warfare in action, even though it won't make a dent in, let alone solve, our nation's economic, employment or fiscal problems.

But who cares about that?  It's election season. First things first means getting re-elected before doing anything about the real problems of the American people.

So what are the straightforward facts about who pays what in taxes? Here's what the fact based above referenced article has to say:

"President Barack Obama says someone has to pay more taxes if the U.S. is to tame its budget deficit and provide the government he thinks the nation needs. He proposes that the best-off Americans pay more. It's only fair, he says.

"There are a lot of wealthy, successful Americans who agree with me because they want to give something back," he said in a speech in Roanoke, Va., that set off dueling campaign ads. "Look, if you've been successful, you didn't get there on your own."

His Republican opponent, Mitt Romney, counters that the deficit can be reduced without raising taxes if Washington is tough on spending. He thinks raising taxes on the best-off would be unwise and unfair. "President Obama attacks success, and therefore under President Obama we have less success," he said.

The contrasting comments underscore philosophical differences over the roles of the individual and society. But the most tangible disagreement is on taxing the rich.

"Who's right: Obama or Romney? Both. Or neither," says Joseph Thorndike, a tax historian. "When it comes to taxing the rich, there is no single, objectively correct answer. You can talk all you want about asking rich people to pay 'their fair' share,' but don't kid yourself. You're just trying to turn private opinions into public policy."The contrasting comments underscore philosophical differences over the roles of the individual and society. But the most tangible disagreement is on taxing the rich.

"I'm struck" he adds, "how the facts can be used selectively by either side."

Academic tomes have been written about revamping the tax code so it finances the government while doing less damage to economic growth. But, countless congressional hearings later, the U.S. is no closer to a consensus on "fair share" than when the income tax was born 100 years ago.

The top marginal income-tax rate, the most visible metric, has gone from 7% in 1913 to 92% in the 1950s to 28% with the Tax Reform Act of 1986 to 39.6% in the Clinton years to today's 35%. Mr. Obama wants to raise that; Mr. Romney wants to cut it while eliminating loopholes and deductions to make up the lost revenue.

Over the past three decades, Americans—including most of the rich—have paid less of their incomes to Washington. Top earners have received more of the income and paid more of the taxes; a growing number at the bottom have paid less or, in some cases, nothing.

Whether that is fair is a question of politics and values. Facts can inform the debate. Here are a few salient ones:
The top 5%, top 1% and top 0.1% of Americans have been getting a bigger slice of all the income and paying a growing share of federal taxes.

To measure the tax burden over time, Congressional Budget Office economists look beyond income-tax returns. They add federal income, payroll, excise and corporate taxes and calculate them as a percentage of income, broadly defined to include wages plus the value of government- and employer-provided benefits.
From Ronald Reagan to Barack Obama, the tax code has been tweaked and the economy has had its ups and downs, and the share of federal taxes paid by the top 5% and the top 1% has risen faster than their share of income:

In the 1980s, the top 5% averaged 22.6% of income and paid 28.5% of taxes.

In the 1990s, the top 5% averaged 25.3% of income and paid 34.3% of taxes

In the 2000s, the top 5% averaged 28.4% of the income and paid 40.3% of the taxes.

That doesn't mean that the best-off are living on less. The top 1% averaged income of $1,530,773 this year (up $174,083 from 2004, when the data series begins) and paid federal taxes of all sorts of $422,915 (up $20,704 from 2004), according to estimates by the Tax Policy Center, a number-crunching joint venture of the Brookings Institution and Urban Institute.
Average tax rates have come down for everyone. On average, the tax bite on the rich is bigger—except for those whose income mainly comes from capital gains and dividends.

Across the earnings spectrum, Americans' share of income that went to taxes fell in the 1980s, rose in the 1990s and fell again in the 2000s. This year, taxes and other receipts will cover only two-thirds of federal spending; the government will borrow the rest.

For those in the top 1%, whose incomes are more volatile than others, the average tax bite in 2007 was 28.9%, below the 1995 Clinton-era peak (35.3%) but higher than the 1986 Reagan-era trough (24.6%.)

Most Americans, though, have seen the share of their income that goes to taxes fall steadily. For earners in the middle, the tax bite eased from 18.9% in 1979 to 16.6% in 1999 to 14% in 2007 even before the recession and recession-fighting tax cuts.


{Taxing Terms  

Average tax rate: Percentage of the income of an individual or group that is paid in taxes  

Capital gains: Profits from the sale of stock or other assets  

Marginal tax rate: Tax on each additional dollar of income  

Payroll tax: The 15.3% tax on wages, split between employer and employee, that helps finance Social Security and Medicare}

The rich do, on average, pay more of their income in taxes than the middle class....
The share of taxes paid by the bottom 40% of the population has been shrinking along with their share of income.

In 2007, the bottom 40% received 14.9% of the income (including the value of government benefits) and paid 5.9% of all federal taxes. In 1979, they had a bigger share (17.4%) of the income and paid more (9.5%) of the taxes.

A growing number of Americans don't pay any income tax. They don't make enough or live on Social Security or are getting tax breaks targeted at low-wage workers.

In 2011, according to the Tax Policy Center, about 46% of households didn't pay any U.S. income taxes, a proportion swollen because so many have seen paychecks shrink or evaporate. But even in the better years of the mid-2000s, roughly 40% of households didn't pay any federal income tax.

Many did get hit by the payroll tax, which helps finance Social Security and Medicare. But about one-fifth of households didn't pay either federal income or payroll taxes; many did pay state and local taxes.
The tax system narrows the gap between economic winners and losers, but not enough to stop the gap from widening.

Because the tax code takes more from the top than from the bottom ("progressive," in tax jargon), it significantly reduces inequality.

Comparing income before and after taxes, CBO says the tax system cut the share of income going to the top 20% by about seven percentage points in 2007, most of that coming from the top 1%.

Everyone else's share of income increased. But the market and social forces widening the inequality gap have been so strong, though, that after-tax inequality by CBO's measure still is higher than at any time in the past 30 years.

Over the past 30 years, the weight of federal taxes has shifted from the income tax to the payroll tax, which is less progressive. As a result, CBO says, "the extent to which taxes lessened the dispersion of household income" has been reduced. Academic analyses that zero in on the growing share of income going to the top 0.1% reinforce that.

And that brings us full circle with respect to paying our fair share of taxes. We'll end the referenced article with the quote where we began.

So where does that leave the question of "fairness?" "It's not resolvable scientifically," says Mr. Thorndike, the historian. "It's only resolvable by a show of hands."

Summing Up

We reported the facts; now you can decide the fairness.

As you may know, my take is that politics sucks. And that politicians suck, too.

Politicians don't mean what they say and don't say what they mean.That's politics.

We the People need to wise up and work hard to help inform our neighbors and friends of the facts.

Then we can all decide for ourselves what's fair and unfair about all this silly campaign rhetoric. And what, if anything, we intend to try to do about it.

Like matching government revenues with expenditures, for instance. And acting to limit the government's expenditures severely.

Thanks. Bob.

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