The Tax Cut Deal (and a long rant about economic inequality)*

1. Given all the political realities, I think this deal was about the best that we could have hoped for. The economy does need more stimulus, and this deal gives the economy a shot of stimulus in a couple different areas-maintaining the Bush tax cuts (ok, not really stimulus since they’ve already existed for a while, but letting them expire would be contractionary), cutting payroll taxes here (a temporary cut doesn’t do much-it’d be better if this was permanent) and extending unemployment benefits (this makes sense when the job market is this bad-unlikely that they’ll distort the job-seeking market that much).

Yes, this deal greatly inflates the deficit-more tax cuts AND more spending. But we’ll need to cut spending and radically reform the tax code to raise more revenue in two years when this deal expires anyways (more on how to do this later). If the political will doesn’t exist in Congress to cut the deficit then, we’ll be screwed anyways.

2. I think Democrats are wrong to be so upset at the extension of the tax cuts for those making over $250,000. Over two years, keeping the higher income tax cuts in place would only save about $75 billion. That seems like a lot, but really it’s only $15 billion more than Obama saves by freezing cost-of-living-increases for federal workers. And when you’re dealing with a national debt of $70 trillion, $75 billion is merely a rounding error. Sad but true.

So if the Democrats aren’t upset about the extension of the tax cuts for those making over $250,000 because it would seriously increase the deficit, then why are upset? To my mind, there are two reasons.

First, the Democrats think it’s unfair that those making over $250,000 get a tax cut while everyone else is suffering. The Republicans respond that those making over $250,000 aren’t really “rich.”

The Democrats do have a bit of a point here. If you make even $50,000 as an American citizen, you’re (materially speaking) in the luckiest 1% of people ever to walk the face of this earth. Even as a staunch libertarian, I don’t think that people making $250,000 have any moral claim on the rest of us to avoid the rescission of the Bush tax cuts on the grounds that their lifestyle will become more difficult. I don’t have a mortgage, spouse or children, but I somehow manage to live quite comfortably on about $1,100 a month (spending money after taxes/student loan payments). Even if 43% of the income of the 250K plus set is taxed (roughly what the tax rate would be with the rescission of the Bush tax cuts and the addition of Obama’s Medicare tax to fund the health care reform), anyone with a modicum of common sense should be able live on $142,500 a year.

So if we let the $250,000 keep the tax cut, it’s not because rescinding the Bush tax cut would hurt them; it’s because it would hurt the economy to rescind the tax cut now.

Secondly, and related to the first point, the Democrats think that inequality has greatly increased over the last couple decades, so we need to raise taxes on the rich to decrease inequality (even assuming that the funds are not re-distributed to the poor, taxing the rich more heavily decreases inequality).

This argument I really disagree with. As long as everyone’s living standards are improving (whether they are or not is a separate debate), why does it matter if Bill Gates’ living standard is improving several hundred times faster than mine? What possible material difference could it make to my life if someone else is getting richer faster than me? (Of course, this assumes that Gates got his wealth honestly without unfair government intervention-that’s another debate altogether. The short answer is that if the government unfairly favors the rich, then deal with that issue, and don’t worry about the effects of inequality).

I understand the counter-that people are naturally jealous of others similarly situated with higher standards of living. We compare ourselves to those around us. It’s human nature-I do it too. I’m constantly jealous of others (and not just their salaries, although that too-personality characteristics, relationships, physical attractiveness, etc.) Therefore, inequality causes psychic stress by making people feel more jealousy towards others who are materially better off.

I think, however, that this jealousy is wrong (and speaking as a Christian, a moral sin). As noted above, nearly all Americans are among the richest people on earth. While it may be natural to compare yourself to others, you should instead be concerned about reaching your own full potential. If another friend happens to become richer than you, then congratulate them. If another friend happens to find a more desirable spouse then you, then congratulate them. Jealousy will eat you up inside if you let it-there will always be someone better off than you. Feeling superior to those who appear to be worse off than you isn’t any better.

I’m not under any illusion that this is easy moral advice to follow. Indeed, it’s hard even for me to give, much less adhere to myself. But I do honestly think it’s correct, and I’d love to hear any justification for jealousy of others.

Because there’s no moral basis to feel jealous towards others, the government has no duty to alleviate this jealousy. Indeed, even assuming that the government could solve economic inequality, there would still be so many other types of inequality that would spark jealousy. Instead, the government should do its best to increase economic growth and provide a safety net for the poor-after that, let the chips fall where they may.

*yes, I know it’s been forever since I posted. I apologize. I have been (mostly) busy living life.


About irreparabiletempus

God have mercy on me, a sinner.
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3 Responses to The Tax Cut Deal (and a long rant about economic inequality)*

  1. David says:

    Good post, but I think you got the Democratic motivation about income inequality entirely wrong. The Democrats aren’t saying government’s job is to fix income inequality. Their position — for right or wrong — is that income inequality is high enough that increasing the tax rates for the top brackets WON’T be equivalent to social engineering, since the rich will still be more than far enough ahead. When they call for a millionaire’s tax, it’s not because they don’t want people to be millionaires. It’s because increasing some marginal tax rates on the highest brackets won’t have as dramatic an impact — from either a social or personal perspective — on the relative wealth of the rich. It will, however, have a greater value (so the argument goes) on the deficit.

    A core point that’s not accounted for enough is that Democrats only favor raising taxes on the highest brackets. No one says the richest should be taxed at different rates. Everyone gets taxed the same. The higher tax rate only applies to the amount of money you make above certain thresholds. A truly socialist perspective would not accept that, since the first 50k made by a 60k household is worth a lot more to them than the first 50k made by a 400k household, yet under the American system both households get taxed the same for the first 50k.

  2. but if you really want to go after the deficit, there’s no need to get this worked up over the $75 billion in cuts for those making over 250k (for comparison, the Bush “middle class” tax cuts for those making under 250k that nearly all the democrats support cost more than 5 times as much-$385 billion).

    I suppose it all depends on which Democrats you talk to for the income inequality. Larry Summers seems to think it’s a big issue.
    Using the tax code to address income inequality has been a staple of Democratic politics at least since the Clinton presidency, and the idea has been endorsed by some of Obama’s top economic advisers.
    In a 2008 speech just before he was named director of the National Economic Council, Lawrence H. Summers said rising income inequality presented “a critical problem of legitimacy” for U.S. capitalism.
    A year earlier, Summers and Jason Furman, now his deputy, argued in a Hamilton Project paper that raising taxes on the rich – “progressive taxation” – is the “preferred path” to “offset some, but not all, of the increase in inequality.”
    By their calculations, letting George W. Bush’s tax cuts expire for married couples making more than $200,000 a year “would offset roughly one-sixth of the entire increase in inequality since 1979.”

  3. bobozou says:

    summers motives are questionable, at best

    deficit’s don’t matter until they matter… just ask Greece… markets are efficient… efficient is more synonymous with timely than perfect…

    when the bond market turns, it will be very timely… and very unpleasant… just because rates are low now, does not mean that we should be taking out tons of debt…

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