As attention focuses intently on the negotiations to
raise the debt ceiling, House Republicans have made a great show of drawing a
line in the fiscal sand. They claim that they will not vote for any deal that
includes tax increases to narrow the budget deficit. But we all know how the
game works in Washington. With the 2012 elections looming the Republican
bluster is merely a bargaining chip that they will quickly toss into the pot
when they sense a political victory. In fact there are signs that such a
compromise is already underway.
House Republicans already have the power to avoid tax
hikes and force significant spending cuts. All they have to do is refuse to
raise the debt ceiling under any circumstances. That's it. At that point the
only discussion would be where to find spending to cut.
But Republicans want to raise the debt ceiling just as
much as Democrats, they just want to gain political advantage in the process.
They have widely accepted the Democrat stalking horse that a failure to raise
the ceiling will lead directly to economic Armageddon. No party wants to be
held responsible for such an outcome. Even if the expected Armageddon does
not come, the Republicans will be blamed for any problems that follow a no
vote on the increase, regardless of the true cause. As a deal is in
everyone's political interest, I am convinced it will happen.
When it comes, it will be structured in a way that
allows both sides to claim victory.
Each side will praise the other for putting politics
aside and having the courage to work together for the American people. They
will announce some kind of ten-year deficit reduction plan, with a seemingly
large multi-trillion dollar headline number.
However, you can be sure that no real spending cuts
will take effect in the early years of the plan. All the real action will be
scheduled for the later years of the current decade and beyond.
But as in all such plans, actions slotted for distant
time horizons have minimal likelihoods of occurring. Unexpected developments
(and in Washington all developments are unexpected) always reshuffle
priorities. The plan will surely rely on rosy economic assumptions that
exaggerate growth forecasts and understate the growth of government
expenditures. When reality intervenes, and the assumed deficit reductions
never materialize, and the economy continues to stagnate, look for Congress
to pass emergency legislation that cancels all bets.
The compromise handed down in a few weeks will also
likely include the elimination of tax provisions that the left have described
as giveaways to businesses. For instance, Democrats will likely get their way
about eliminating the "tax breaks" used by corporate jet owners.
Expect the depreciation schedule for these aircraft to be lengthened from the
current five years to the seven years that is mandated for planes owned by
commercial airlines. While the revenue raised by such a move will be trivial,
the rhetoric is far more important. And in this case the rhetoric is dead
wrong.
There are no subsidies for corporate jet owners. The
fact that corporations are forced to depreciate jets over a period of five
years, rather than being able to fully deduct the expenditure immediately, is
not a subsidy but a penalty. Just because commercial airlines are penalized
more does not mean other corporations are getting a subsidy.
Republicans are also likely to cave on higher taxes on
the rich. Some of these increases will be disguised as merely closing
loopholes and others will just impose income caps on deductions. But do not
be fooled. Some of these moves will bite deeply on the engines of our economy
and make it even more difficult to run a profitable business in this country.
The new political spin echoed in Democrat talking
points in coast to coast is that the rich are paying the lowest taxes since
1950. The bogus statistic results from the meaningless fact that federal tax
revenues currently "only" constitute 16% of GDP. However this
figure is rendered meaningless when considering the inflated nature of
today's GDP figures, and the exclusion of rising state and local taxes. When
it comes to tax burdens, GDP means nothing. What counts is what percentage of
income taxpayers actually fork over. Those numbers tell a different tale.
Today a married couple with a combined income of
$250,000 (assuming each spouse earns 125,000) will pay about 40% of their
combined incomes in Social Security, Medicare, and federal taxes, if they
take the standard deduction. (I have included as part of their incomes and
taxes the Social Security and Medicare taxes paid on their behalf by their
employers - which in reality are borne by the employee anyway.
I then added that figure to their incomes, and divided
the total tax paid by that higher income. I did not factor in this year's one
time 2% payroll tax holiday.)
Compare that to a household in 1950 that earned $25,000
per year (the approximate equivalent to $250,000 today). Assuming all the
income was earned by the husband, which was the norm at the time, the total
tax take using the standard deduction and including both the employee and
employer social security taxes, would have been just below 22%. In other
words, despite claims that taxes are at their lowest levels in 50 years,
today's high earning couple pays over 80% more in federal taxes than their
1950 counterpart!
My guess however is that the
real difference is even greater. In both instances I used the standard
deductions to arrive at taxable income. But the 1950 code was far more
generous than the current code in its allowances for tax shelters. As a
result, my guess is that the typical couple making itemized deductions in
1950 paid less than half the amount of their modern equivalent. Of course
back then there were also far fewer states imposing their own income taxes,
and those that did generally had much lower rates than what prevails today.
Local sales and property taxes were also lower.
It is interesting to note that about 45% of the total
federal tax paid by this modern couple went to Social Security and Medicare.
In 1950, Social Security represented less than 1.5% of their total federal
tax (Medicare did not yet exist). If you just compare income taxes alone, the
modern couple pays 24% in tax and the 1950s couple paid about 21.5%. It is no
accident that advocates for higher taxes fail to mention this issue.
The debt problem does not stem from low taxes, but from
high spending. I do not expect a deal to lift the debt limit will make any
meaningful impact on either.
Unfortunately both taxes and spending are likely to
head higher in the years ahead.
Americans should prepare for the sad reality.
Subscribe to Euro Pacific's Weekly Digest: Receive all
commentaries by Peter Schiff, John Browne, and
Michael Pento delivered to your inbox every
Monday.
Click here for free access to
Euro Pacific's latest special report: What's Ahead
for Canadian Energy Trusts?
For a great primer on
economics, be sure to pick up a copy of Peter Schiff's hit economic
parable, How an Economy Grows and Why It
Crashes.
Peter Schiff
|