Should We Return To Clinton Era Tax Rates? Ctd


A reader writes:

I don’t think that people understand the magnitude of the budget deficit.  Here is one way to look at it:  The total budget deficit is $1.3 trillion this year, and there are around 110 million full-time American workers.  Do the math and you find that the U.S. government is borrowing around $12,000 per worker this year.  It is impossible to eliminate this massive deficit without raising taxes unless you absolutely gut Social Security, Medicare, and the defense budget.  A fellow like Ron Paul is intellectually honest about these things, but most conservatives are not.

Another writes:

"And have unicorns over for tea."  The image of you drinking tea with unicorns made me spit coffee all over my keyboard.  It also prompted a Google image search that led to this photo.


To get real for a moment: who on this planet is going to stop working or work less because the tax rate on their income over $250K has gone up by 4%? 

I get the abstract argument about incentives and yes, at some point, if you raise taxes too much people will have no incentive to work.  The reality though is that people making that much will either not notice the hit because they make so much money or, if they do, will actually have an incentive to work more to make up the short fall.  Nobody is going to stop working or work less.  John Galt isn't going to lead them to some kind of libertarian paradise where there is no government.  They'll simply pay their taxes as they did in the '90s, and our fiscal outlook will be better for it.


Certainly the “high achiever” types - the successful professionals, entrepeneurs and small business owners - are motivated and driven by the desire to “succeed”.  This is only in part about money; it’s also about pride, self-esteem, the desire to achieve stature in the eyes of one’s family and community and sheer competitiveness.  People like that aren’t going to turn away because the tax rate is slightly higher.  More likely, they will bitch and moan, and then work even harder to build wealth.


You wrote, "And there's no one's income left to tax but the successful's - and a gas tax or VAT (the better options) seem totally unacceptable to most Americans."

What about the 50% of Americans who pay no federal income tax or worse, get a refundable credit?  And don't say, "Well, they pay FICA", because most now get all of their Social Security back and then some.  The Republicans are just as easy to blame as Democrats for implementing things as ridiculous as the refundable child tax credit on top of the child tax deduction!

I agree with you on the $2/$1 formula for eliminating the deficit and then paying off the debt which is killing us in interest. Let's hope the vaunted "debt commission" is serious and looks at entitlement reform. Items one and two should be public employee pensions and the abuse of the SSI/disability components of Social Security. 

As far as a VAT, I would LOVE for us to move to a consumption tax.  HOWEVER, only in conjunction with a drastic cutting or elimination of the income tax. As a former resident of Pennsylvania and Massachusetts, states with both an income tax and sales tax, I've seen that the temptation to gradually increase either or both is too great.  Reagan was right about starving the beast. Just look at all the states and local governments who had a party with new programs during the real estate boom and now are stuck with little will to cut.

We also should look at regionally-set personal deductions for living expenses on both income taxes and property taxes. This would be challenging, but the cost of living should be taken into account before the goverment takes its share.


While I agree with your comments on spending cuts vs. tax hikes, you comment that “If we don't do something serious soon, the US will default” is false, and it drives me crazy when I see similar comments in the press (as well as the equivalent, “China will stop buying our debt” or “the bond vigilantes are coming”). The US federal government is the sovereign issuer of its currency, and CANNOT default on its debt.

State and local governments need to finance their spending and can default because they can’t issue more of their own currency (similar to Greece, which doesn’t control Euro issuance). Countries with their own currencies (US, Japan, UK) can fund their deficits indefinitely because any debt that is owed can be “repaid” by transferring funds from Treasuries held at the Fed to reserve accounts at the Fed. As an example, if China runs a trade surplus, they have dollars that are credited to their reserve account at the Fed (similar to putting money in checking account). If they buy Treasuries, that money is transferred from their reserve account to a Treasury account at the Fed (similar to a savings account). When that debt is due, the money is just transferred back to their reserve account (some people would call this money printing, but basically money is being transferred back and forth at the Fed and one account is counted as “national debt” while the other isn’t).

The main concern isn’t default, but that deficits will create a hyperinflationary environment.

However, as Japan (and our current low rate of inflation) has shown us, that may not necessarily happen, despite high levels of debt. The reason this is important is that we are currently in a balance sheet recession (too much debt held at the private level, creating a lack of demand), but instead of addressing this issue, we are keeping banks solvent and interest rates low in the hope that our over-levered population will take out more loans. While this monetary policy is misguided, the constant fear mongering about our debt levels and calls for more fiscal austerity are further dampening demand.

Our main fiscal response, the Stimulus, was not focused enough on productive uses and was largely used to offset local budget cuts (thus creating no new demand). We need to focus on investments in productive assets that will increase demand (i.e. New Jersey’s recently cancelled MTA line), and talk about debt default is counterproductive because it prevents investment and further dampens demand, all while misunderstanding how the US actually funds its debt.

Ah, the deep well of Dishness.