Wednesday, June 27, 2012

Mortgage Deduction vs. Capital Gains Tax

I am in favor of passing Bowles-Simpson, and I would defer to them how to revise tthe tax system, but the tax system is badly out of whack and needs revising quickly and thoroughly.  If people don't respect the tax code, if they perceive it as unfair, they won't pay.  Everybody will be a tax cheat, as they are in many southern European countries, like Greece and Italy.  That said, I wonder if it would be better to eliminate the mortgage deduction, which affects a broad portion or the population, or the capital gains tax rate, which lowers taxes mainly for the rich.

In 2006, the mortgage interest deduction cost the US $76 billion.  Although it affects a broad population, most of the benefit went to the moderately or conspicuously rich.  Half of the benefit went to 12% of the taxpayers, those making more than $100,000 per year.  If it was eliminated, house prices would fall probably 10-15%.  This article says it promoted the then-housing bubble.  

Bowles-Simpson proposed replacing the current deduction with a 12% tax credit (so you don't have to itemize to benefit, since usually only the wealthy itemize).  A 15% credit proposed by a GW Bush panel would have produced $388 billion from 2013 to 2019, i.e., about $65 billion/year additional revenue.  

A CBO analysis points out that the capital gains tax includes a tax on any change in value due to inflation, which is not real income, but is similar to any tax on interest which does not account for inflation.  On the other hand, capital gains tax is not imposed until the item is sold, which may delay taxes for years.  Capital gains over time have produced between 4-7% of revenues for individuals, although they were over 10% for the latter half of the 1990s.  Changes in tax rates affect behavior, but usually for a short time, a few years.  If capital gains taxes are going up, people will sell assets sooner to be taxed at the lower rate, but once they are sold, the spike in selling is over.  In general it is hard to predict capital gains revenues.  

The conservative Heritage Foundation position is that raising capital gains will stifle the economy.  It implies that rich entrepreneurs will not work if they have to pay the same taxes as plumbers or engineers.  They just won't get out of bed in the morning.

A Wall Street Journal article has some specific numbers for capital gains tax receipts in fairly recent years.  In 2003, receipts were $51.3 billion.  In 2007 they were $137.1 billion.  A rough estimate is that if these rich people (and they are almost all rich) paid at the regular tax level (35%) rather than the current capital gains level (15%) the receipts would roughly double, i.e., to $100 billion in 2003 and $250 billion in 2007.  This is very rough, because rich people hold some assets for a long time, and only sell them when the capital gains tax is relatively low.  If there were no special capital gains tax, sales of assets would smooth out; with they special, lower tax they tend to bunch up either just before the rate goes up, or just after it comes down.  But it seems like you could estimate that the lower capital gains rate cost the US treasury about $100 billion per year during the first decade of the 2000s, or about $1 trillion over the last 10 years.  

Thursday, June 21, 2012

Means Testing Social Security

I am interested in the extent to which Social Security is reduced by means testing, since I am a retired US government employee who also qualifies for Social Security because of years spent working in the private sector.  Because of my government retirement, my Social Security is severely reduced, by something like 2/3 or 3/4.  I get less than $50 per month, which every month when I get it seems more like a joke or an insult than social "security."  I will have to live a long time just to get back the money I have paid into Social Security, much less any "government money."

So, what about older rich people like Warren Buffett or T. Boone Pickens?  Do they face limits on the Social Security they can collect?  The Arizona Republic says Buffett collects $32,000 per year, or about $2,600 more per month than I do.  I presume the government has determined that he need the "security" more than I do.  Rep. Ron Paul admitted on Morning Joe that he gets Social Security, although he did not say how much he gets; I think he probably gets more than I do.  In 2007 Sen. John McCain reported that he collected $23,160 in Social Security, or about $1,900 per month more than I do.  It is harder to find out what Boone Pickens collects from Social Security, but this article says he and fellow Texan Ross Perot do collect it.

The main means test that rich people face now seems to be that they have to pay income tax on their Social Security.  Payments are also reduced if you continue to work after you start collecting Social Security, but the limits are reduced as you get older.  So, there are probably no limits on Buffett or Pickens, who are both over 80.

One article in the Huffington Post makes the argument that instead of means testing Social Security payments, the government should remove the limit on the amount of income that is subject to the payroll tax for Social Security, currently $110,100.  Since the payroll tax rate is almost as high as the capital gains tax that most rich people pay on their income, eliminating the limit would substantially increase the income of the Social Security trust fund and do a lot to make Social Security self-sustaining.

For me personally, however, the lesson is that as a retired US government employee, I am subject to a much stricted means test than the richest people in America.  Once again the 1% gets welfare paid by the 99%.

Bin Laden and Drones

I am not entirely happy with the way the Obama administration has handled the bin Laden killing and the frequent drone killings.  I think it was okay to kill bin Laden, but it would have been better to capture him and try him, in the US or in some international court.  If he had resisted arrest, the Seals could certainly have killed him.  I think he was killed because the US did not know what to do with him legally.  The cowardly Republicans are scared to death of bringing any terrorists in the continental US, although the chance of their escaping and harming anyone is practically nil.  The only way they could get out is if they were found not guilty of terrorism, and in that case there is no justification for holding them.

I do not like the idea of executing terrorists by drone attack.  I think it should be used very sparingly, only when there is evidence of a genuine, immediate threat to the US, and the US has to act to save lives.  On the other hand, I do not want to risk the lives of American troops unnecessarily.  The drone attacks certainly save the lives of some American troops.  But we are fighting to preserve American values of justice, honor, and the rule of law.  Destroying these values also has a significant cost.  Presumably we would not kill people willy-nilly, just because they looked suspicious.  So, somewhere there is a trade-off between saving the lives of American troops and destroying American values.  I believe Obama has erred on the side of destroying American values in order to save troops lives.

Wednesday, June 20, 2012

Supreme Court Coup

Americans and Egyptians have been upset at what they call a coup by the Egyptian Supreme Court in ruling on presidential candidates, etc.  They forget that we had our own coup in the US by our Supreme Court in deciding Bush v. Gore, and appointing George W. Bush President of the US regardless of what the actual vote was in Florida. The US survived this coup, although poorly, since Bush was one of the worst Presidents in American history.  Egypt may survive its little coup, but it is much more unstable than the US was.  The big issue is Islamic fundamentalism, which has been given a huge boost by America's ill-advised war in Iraq, which hugely strengthened the hand of Islamic fundamentalists in the Middle East.

Fed Still Alone

Today's announcement by the Fed that it will continue the "twist" to lower long term interest rates, since it can't reduce short term interest rates below zero, shows how isolated the Fed is because the Congress can't or won't do anything.  We still have no fiscal policy, only a monetary policy.  Monetary policy can't do everything.  The Republicans complain that the Fed should not have an employment mandate in its duties, but Congress is doing nothing about unemployment.

The Republicans complain that the US looks like Greece in terms of incurring too much debt, and they have a point, but the US also looks like Greece because it has a dysfunctional government, in that our Parliament, Congress, does nothing.

One of the main reasons for a do-nothing Congress has been the introduction of the requirement of a 60% majority to pass any legislation, rather than 51%.  I don't think the founders of the United States anticipated this outcome, although when talking about the Supreme Court, the Republicans always say we should adhere to what the founders were thinking in the 1700s.  Until recently, the 60 vote requirement for cloture was only used for very important legislation where there was an actual filibuster.  The Democrats are partly to blame for not forcing the Republicans to conduct an actual filibuster speaking for hours like Jimmy Steward in "Mr. Smith Goes to Washington," not just saying they are conducting a virtual filibuster.

I don't think the Fed should take actions to prop up the stock market unless there is a crisis.  I guess there could be debate about whether we are currently in a crisis, but I don't think we are.  Bernanke could let the Dow drop at least 1,000 points before acting as if there were a crisis.  There is a crisis in Europe, but to some extent that is a good thing for US markets.  The Fed should work with the IMF and its European counterparts to assure liquidity, minimize bank failures, etc., but that doesn't necessarily include propping up the stock market.

Wednesday, June 13, 2012

Iraq and Iran

Arianna Huffington is right in her blog about the Iraq-Iran partnership made in America. The US war in Iraq vastly strengthened Iran's role in the Middle East.  The strengthened Iran already has consequences in today's Middle East because of its support for Syria's President Assad in addition to other trouble-making groups such as Hezbollah.