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-- Brad Delong

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Thursday, December 9, 2010

More Thoughts on the Tax Compromise

Looks like Obama's tax capitulation compromise is DOA in the House.

According to an email I just received, these are the news reports.

From CNN only hours ago:
Defying President Obama, House Democrats voted Thursday not to bring up the tax package that he negotiated with Republicans in its current form.

"This message today is very simple: That in the form that it was negotiated, it is not acceptable to the House Democratic caucus. It's as simple as that," said Democratic Congressman Chris Van Hollen.

Following the non-binding vote of the Democratic Caucus, Reuters newswire just reported this breaking news:
U.S. House of Representatives Speaker Nancy Pelosi will not bring President Barack Obama's current proposed tax plan up for a vote in her chamber, an aide said on Thursday.

The aide said Pelosi would require changes be made to the measure that most of her fellow House Democrats formally opposed by approving a resolution of opposition to it. The aide said: "She (Pelosi) will honor the resolution."

So, we will have to see where this all leads.  Last night, Lawrence O'Donnell had a tantrum while arguing with lame duck Rep. Alan Grayson about what will happen if the Bush tax cuts expire.   O'Donnell emphasized that a marginal tax increase from 10% to 15% will hit the lowest income group the hardest.  This struck me as being wrong, since the effective rate of the median household is far lower than O'Donnell suggests.  As Reaganite Bruce Bartlett pointed out earlier this year:

According to calculations by the Joint Committee on Taxation, a congressional committee, tax filers with adjusted gross incomes between $40,000 and $50,000 have an average federal income tax burden of just 1.7%. Those with adjusted gross incomes between $50,000 and $75,000 have an average burden of 4.2%.

O'Donnell is making the very basic mistake of confusing the marginal rate with the effective rate, and compounding the error by not considering other elements of tax policy, like the earned income credit.

Here's the reality of effective tax rates for years 2000, and 2006, from the Tax Policy Center for the five income quintiles Things haven't changed much since '06, so we can use those numbers comfortably.

Year   Bottom     Second     Third     Fourth     Top
2000       -4.6         1.5          5.0          8.1      17.5
2006       -6.6        -0.8         3.0          6.0       14.1

The numbers don't quite match Bartlett's, but they're close.  There are probably different assumptions about specific exemptions and deductions.  Also, since these are quintile averages, there's a bit of wiggle room, but not much.   At the low income end, the numbers are stacked pretty tightly.  The bottom line on Bush cut expiration for someone grossing about $20,000 per year is a tax credit decrease of about $8 per week.  This means something if your having trouble making ends meet.  So this data suggests targets for improvement in the next tax bill.

I like O'Donnell, but when you're wrong, you're wrong.  And he was terribly wrong on this.

Obama gave in to Rethug filibuster threats. It's time for him to pay hard ball and promise to veto any legislation that does not include a tax rate increase for upper earners only. 


nanute said...

Finally, a show of some "stones." Better late than never. I'd rater see my taxes go up, if the "compromise" is the alternative. Just curious: Are you confusing the catfood commission's Alan Simpson with Alan Grayson?
If changes are made to the "agreement", how about the following:
Scrap the 2% fica reduction and replace it with a reduction in the federal portion of the payroll tax.
Eliminate the extension for incomes above 250,000. If necessary, agree to a higher threshold, say 500K in exchange for a permanent extension of unemployment benefits of 52 weeks until unemployment reaches the feds full employment target rate.
Otherwise, let em' all expire.

Jazzbumpa said...

No, it was Grayson, arguing against the deal, O'Donnell arguing for it.

Scrap the 2% fica reduction and replace it with a reduction in the federal portion of the payroll tax.

Sorry, you lost me here.

I don't see why there is any ceiling on FICA.

Yes, let them expire, good damned riddance - and veto anything that includes a tax break for the wealthy - define that any way you like.

I believe Unemployment benefits and food stamps have the highest multipliers of anything.


name said...

Your story quotes O'Donnell arguing with Alan Simpson, not Grayson.
I'm saying that instead of a 2% reduction in the FICA portion of payroll taxes, shift the deduction to the federal income tax portion of payroll taxes. Leave FICA out of the equation. I'm not sure on raising the cap on FICA. It sure would help in closing the gap expected around 2035.

Pagan Sphinx said...
This comment has been removed by the author.
Jazzbumpa said...

I totally missed the Simpson gaffe -- DOH!

Payroll tax is FICA - SS plus Medicare. Do you mean shift it to Fed income tax? I'm still confused/

Has horrible insomnia last night and am running on empty.

I'm enormously busy from now through the week-end, at least, so might not posting again for a few days.


nanute said...

Yes. Shift to Federal income tax. Sorry for the lack of clarity. Be well, get some rest. I send you an e mail.