One of my favorite cousins traveled all the way from the hills above San Francisco Bay to attend Jon Stewart’s Rally to Restore Sanity in Washington, D.C. this weekend. Stewart’s assertion is that political discourse in this country has become too angry and that if people are reasonable, common ground can be found. This led me to wonder how much common ground there already might be among Democrats, Republicans, and Tea Partiers.
Could there be values or religious differences among the parties? I would argue that these are of slight importance to most Americans. My evidence for this is that most Americans claim to be Christian yet spend money on a new SUV rather than driving a 5-year-old Honda Accord and giving what would have been the SUV payments to help the poor and suffering. Christian Americans very seldom follow the teachings of the historical Jesus when those teachings conflict with financial goals. A voter might have a personal preference about whether or not evolution should be taught in public schools, but is not likely to sacrifice personal consumption to realize that preference.
That leaves economic policy as the area of real dispute. Yet if you listen to politicians from the three parties, they all seem to want substantially the same things: a lavishly funded military and continued foreign wars, government transfers of money from working to non-working Americans (e.g., Social Security), unlimited government expenditures on medical care for those over 65 and for poor Americans (i.e., Medicare, Medicaid, and Obamacare), government workers enjoying high salaries, early retirement, and a comfortable inflation-adjusted pension.
The only important point of difference seems to be whether or not the above-mentioned “wants” are affordable for American society. For people who believe that America’s future prosperity will be much greater than today’s, the 2009 and 2010 federal budget deficits totaling $2.7 trillion (CBO source) are hardly worth worrying about. That’s about 20 percent of today’s GDP, but it would be only 2 percent of 2020’s GDP if we were to enjoy real GDP growth of 25 percent annually instead of our historical average of 3.3 percent . Similarly the unfunded pension obligations of states and cities, estimated at perhaps $4 trillion (Economist), will be easily affordable by a future generation of very highly paid American taxpayers.
Looking at the U.S. Census Bureau’s historical median income table (follow the P-5 link), Voter A could look at the median male worker’s income rising from $22,648 (2009 dollars) in 1953 and reaching $34,762 in 1973, perhaps because all of the technology innovations of World War II had finally been fully adopted by American industry. If that trend were to start again in 2010, perhaps explained by enthusiasm over the iPad, we could all expect to have 50 percent more income in 2030 than we do today and it would be correspondingly easier to pay off our debts, pension obligations for past and present government workers, and for the world’s most expensive health care. Voter A would presumably think it very reasonable for a politician or party to propose an expansion of government spending, in the same way that a college student might prudently borrow money in the expectation of having a reasonably well-paying job at age 35.
Suppose that Voter B, however, happens to concentrate on a different section of the same table. Voter B notices that median income for a working male American was actually lower in 2009 than in 1973, having slipped during those 36 years to $32,184. Voter B expects the average American to be no better off in 2030 or 2036 than he or she is today. Thus Voter B would think it insane for the government to propose spending a future generation’s money, in the same way that it would be insane for a 55-year-old to borrow money planning to pay it back at the age of 70.
The purported great divide and incivility among Americans in political discourse might be as simple as one group that thinks 2010-2046, economically, will look like two replays of 1953-1973 back to back while the other group thinks it will look like 1973-2009. As nobody has a crystal ball, there is really no way to be sure who is right. So perhaps on this election day we can be mindful that the person voting for the opposing party actually wants all of the things that we do; it is simply that he or she has a different expectation about American wealth circa 2046.
[The posting is not meant to minimize the importance of the choices that voters face. If optimistic Voter As prevail and are wrong about America’s future wages, the country is bankrupt. If pessimistic Voter Bs prevail and are wrong about America’s future wages, we’ll have unnecessarily deferred a lot of things that we desire.]
[You might ask why I considered only male Americans in this discussion. It is because women changed the way that they participated in the workforce over the years in question. It is more sensible to compare a male working in 1953 to a male working in 2009 than to do the same for women, whose educational and professional opportunities have been so greatly expanded.]
One thing that has happened is that politicians have managed to substitute relatively simple to explain and achieve proxies (cutting taxes and spending government money) for the much harder to achieve goals people really care about (reducing the size of government and solving social problems respectively). Common ground tends to be in the underlying goals but discussion stays focussed on the proxies.
The only thing missing from your discussion is that a large number of people on the Voter A group believe that the government spending and high taxes themselves will contribute to the growth in GDP. There is correlative evidence for this, though, as in all things economics, nothing causative.
For example, in the two decades following World War 2, the top tax brackets in the country were between 80 and 95%. They were on much higher income levels, of course, but it is a point of evidence that high tax rates on the rich are not devastating to an economy. Instead, that was a period of remarkable economic growth. The Voter B group will likely point out that, at this time, the rest of the developed world had their productive capacity reduced to near zero by the war.
The way I look at it, progressive income taxation is mostly a good thing. The argument that, if you tax the rich too much, there will be no incentive to become wealthy and generate economic growth in the process, only goes so far. If, for tax reasons or otherwise, if income disparities are excessive, it has the same effect of stifling desire to succeed, since there would be a feeling that there would be no way to achieve the wealth necessary to compete with the old money.
Joshua: Although in theory there might have been one American who sat in place in 1953 and allowed the government to collect 95 percent of his income, the 1953-1973 period is not an example of high government spending and high growth. If you look at http://www.usgovernmentspending.com you’ll see that in most of the years between 1953 and 1973, for example, U.S. government spending (federal, state, local combined) was about 30 percent of GDP. By comparison, during the years with less growth in median income, government spending was generally higher, ranging from 35 percent in 1990 to nearly 45 percent today.
I’ve written about this before, but I think it is insulting to professional politicians to suggest that more taxes could be collected from Americans. If they could get more, they would. Why wouldn’t a 95 percent income tax rate result in higher collections than the current 35 percent top rate? In the jet and Internet age, people would not sit still so that the government could take 95 percent. When the Irish government changed the law so that U2 would have to pay taxes (previously they’d been exempt with no limit because they were musicians), U2 moved all of its assets into an offshore trust (previous posting). Why would the employees of Microsoft and Google, for example, remain in the U.S. to pay their 95 percent when they could negotiate a deal with Vancouver and move up there (top Canadian federal tax bracket is 29 percent (http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html), already lower than ours, and the provincial top tax rate of 14.7 percent is not that different from California’s 10.55 percent (http://www.taxfoundation.org/research/topic/15.html)?
Corporations founded in the U.S. are now getting most of their growth and sometimes most of their profits from operations overseas. There is no reason that they need to stay in the U.S. and indeed many financial industry entities are already incorporated in Bermuda and other tax-free countries.
If plugging a deficit were as easy as “let’s just confiscate all of the private wealth”, politicians would already have done it in the U.S. and in Europe. You can see this here in Massachusetts where the teachers’ union is arguing in favor of higher sales taxes. They aren’t proposing that Massachusetts tax the rich more heavily to keep teacher salaries and pensions at pre-Collapse levels; they are proposing that poor people be taxed with higher sales taxes. The teachers know that rich people can easily move across the border to New Hampshire or down to Florida.
Philip, you forget that US citizens earning top-bracket income abroad remain liable; Internal Revenue defines the entire world as “internal.”
Even renouncing US citizenship or permanent residency is no protection, as you’re now required to give up ~45% of all assets on your way out the door. This includes real estate, art, stocks, etc.
Comparing the light entertainment you mention against what’s happening in France right now should assist anyone still conflating the far-right Democrats with a traditional people’s movement.
John: Thanks. I was familiar with the fact that people who remain U.S. citizens continue to be subject to federal income tax. I wasn’t familiar with the 45 percent exit tax for those who emigrate. http://www.taxmeless.com/USCitizenRenounce.htm seems to indicate that it was passed in 2008 in the “Heroes Earnings Assistance and Relief Tax Act”. I hadn’t expected to see Third World-style currency and capital controls within my lifetime here in the U.S.!
Given this new tax, I suppose it will be easier for our government to confiscate accumulated wealth to pay for Social Security, Medicare, our foreign wars, etc. I am not sure how it helps a state pay off its public employee pension liabilities, though. A wealthy person can escape to a lower tax state or emigrate (I don’t think U.S. citizens or emigrants living abroad have to continue to pay state taxes for the rest of their lives).
As far as new wealth goes, however, so much of it is being created by operations in countries other than the U.S., I don’t see a long-term way for U.S. federal and state governments to collect the lion’s share. When Microsoft makes money by selling software in Brazil or Germany, there is no long-term way of ensuring that they will bring the money back to Redmond to be taxed. The struggle between the government and multinationals is shown in
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aAKluP7yIwJY
and
http://ipsnews.net/news.asp?idnews=36710
The U.S. government can declare victory in the struggle at any time, of course, and take whatever it wants, but, unless the government nationalizes the corporations, the companies will always have the option of suffering a one-time expense and moving to Canada, Switzerland, Mexico, Ireland, Singapore, Thailand, or wherever. Note that the Swiss in particular are willing to negotiate tax rates to whatever figure works to the benefit of both parties (see http://query.nytimes.com/gst/fullpage.html?res=9C03E5D61330F937A25752C0A9619C8B63 (” immigrants make a one-time payment based on the value of their Swiss homes in exchange for immunity from further taxes.”) ).
It’s important to remember that, while top marginal tax rates circa 1950 were exorbitant, effective tax rates were about the same as now, even for high earners. Prior to the Tax Reform Act of 1986, the tax code was replete with deductions, exemptions, and shelters which ensured that nobody paid effective rates that were anything close to the top marginal rates. Of course, coerced allocation of spending and investment can be viewed as an invisible or implied tax.
As I see it, some of the current dissatisfaction over Obama is based upon high effective tax rates for the “low-six-figure” crowd. The tax code treats these people as if they are rich, even though that’s absurd. They earn enough to be bitten hard by federal income tax, but not enough to shift their income into capital gains or tax free munis. Say that a family of four is just getting by in a high cost area on $100,000 per year. Let’s say, furthermore, that Dad is a plumber earning 75k and Mom is a waitress earning 25k. When the family voted for Obama, they hoped that they might be able to afford health insurance. Now they find that the coverage will cost them 18k per year, with no government subsidy because they’re “rich.” The have no opportunity to buy an affordable catastrophic policy, because those have been effectively eliminated. When they bought their house, they were forced into an ARM because easy credit and slack underwriting had inflated the price of the local housing stock. Now their ARM has reset, and they can’t make the house payment anymore. They see Obama throwing billions at the banks, but there’s no relief for them.
Oh, well, I digress. I’ve followed politics for a long time; this just looks like inchoate rage to me.
Thanks for the link to the census P-5 table. I’ve referred to similar tables in the past, but that one goes back further and is easier to read.
Oh, just curious: why does your Voter B stop at 1973? When I look at the table, I go back to 1968 for an even bigger timeframe. (“a US male’s median income is worse now than in 1968”)
John: Why did I use 1953-1973? It was a nice round 20-year block and the earliest data in the table is from 1953. Why did I pick 1973 to the present as the alternative? Because it is “the rest of the data” in the table. There was no special magic to the periods. I only pointed out that a person’s expectations about the future would depend on which part of the table he or she looked at and thought was most likely to be repeated for the next 20-40 years.
Use 1968 if you like. That’s the year that the house I’m living in was built. I have the original paperwork and know that the 4000 square foot structure cost $38,000 to build or 6.3X the median male worker’s income. The insurance company estimated in 2009 that it would cost $800,000 to rebuild the house in the event of a fire. That’s 24.9X the median male worker’s income in 2009 (i.e., it would consume 100 percent of the guy’s income for 25 years to pay for the house, assuming 0 percent interest, whereas previously it had taken just over 6 years). A person who believed that trend was going to continue would not expect the median American worker to be able to pay for anything besides food and shelter.