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The Fiscal Commision


Greg Mankiw has an interesting post at his blog, about the bipartisan fiscal commission being thought up on Washington.

The answer for liberals is easy: They want to raise taxes to fund the existing, and even an expanded, social safety net, while politically insulating the Democrats as much as possible from the charge of being the “tax and spend” party.  President Obama can then campaign in 2012 that he did not break his no-taxes-on-the-middle-class pledge, but rather a bipartisan group broke it.  That is, the President wants to take credit for fixing the fiscal situation but duck responsibility for having imposed higher taxes.

But what if you are conservative?  This is harder.  You can try to stick to your no-tax-increase position.  The problem is that doing so would require spending cuts larger than are politically realistic.  If I were king, I bet I could find sufficient spending cuts.  But I am not expecting to be anointed any time soon.  If the fiscal commission is going to succeed, tax increases will have to be part of the deal.

I pretty much agree with everything Dr. Mankiw said. Democrats do want to increase taxes, of course they say only on the “rich.” Medicare is broken and underfunded. Social Security is going to be broke by 2017 (CBO estimate) unless something is done soon. The choices are decrease benefits (politically unpopular), increase eligibility age (politically unpopular) or raise taxes (politically unpopular).

It’s a real catch-22. I would like to see the age requirement indexed to life expectancy rates, Mankiw thinks this is a good idea as well.  When SS was the life expectancy for an average male was 56 years old, women were 60 years old. Now in 2009, the average life expectancy is 77 years old for males (Don’t know for females, sorry ladies). Not only that but the standard of health for the elderly is much greater than it was in the 1930s.

Does it really make fiscal (not moral) sense for a person to work ~45 years, retire at 65 and live off the dole for another 12 plus years? I know it sounds heartless but people can work nowadays until they are in their mid 70s, and many already do. Of course we can’t forget opportunity costs, there will be an increase in unemployment as the jobs the older generation keep will not be able to go to the younger generation. And in an appeal to emotion, won’t someone please think about the children! That was meant as a joke in a half hearted way. Yet, there is the simple fact that SS will not be available to the younger generation at all, unless something is done now.

Personally, I like the idea of letting people opt out of SS and Medicare. As it is right now, I’m paying into a SS system and I now I’m never going to see any  bit of that money. Let me at least take a third of what I’m already paying into and let me do with it as I please. Call it pro-choice. =) I’ll gladly stick it into gold stocks, cause you know the dollar is going to tank soon anyway and those SS checks won’t be worth the paper they are printed on when that happens anyway. Of course, a lot of people in Washington, both Democrat and Republican, do not want to see the people have any choice anyway. They’d all rather have your money so that they can spend it rather than you, you really don’t know what’s best for you anyway. /snark

The second part of Mankiw’s post deals with a VAT tax. The VAT stand for value added tax and it’s a consumption tax. You pay a tax on everything component of everything you buy, the taxes of each component add up and are added as a tax at the check out line.  So if you buy the new iPad, which has lets say 10 components, you pay a tax on each component, lets say 10% each. So if the cost to make an iPad adds up to $200, your going to pay $20 in taxes added onto the sales tax of 7.25% (here in Little Rock).

I agree with Mankiw that it is the best of bad ideas, but for different reasons. It’s good only if they repeal the income tax as well. So that the sole tax colected by the Federal government is the VAT. Keep corporate taxes at 20%, to keep companies from off shoring.

The reason I like the VAT rather than a flat tax, which would be 1000 times better than what we have now anyway, is that the VAT will reduce consumption. The opposite of consumption is savings. So for every purchase that the VAT reduces, due to people like me thinking twice if the actual price is on the order of 20% higher than the sticker price, more money goes into the savings account.

That increase amount of savings will increase investment in the Economy and get the economy growing again. Both Keynesians, through the Solow Model, and Austrians know that investment and growth relay on savings. Of course savings is more important to Austrians than Keynesians but that’s for a different post.

As it is now, with our tax system, companies buy failing companies to operate at a lose for the sole purpose of using it as a tax shelter. Resources are wasted on a company that should be bankrupt because of the perverse nature of our tax system. Something has to change either way.

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  1. yttik
    February 19, 2010 at 09:02

    I am opposed to raising the SS age or cutting medicare. We figured it out one day, we will have paid in a few hundred thousand over our lifetimes in medi and ss, with employers matching funds. There’s no reason for either fund to be going broke except government incompetence, mismanagement, and borrowing against the funds. The payoff, what we will get back from the government at retirement, is already so small compared to the mandatory investment we were required to make over our lifetimes, it would be practically criminal to reduce it even more.

    The gov has to cut spending, but not entitlement spending. And they have to cut spending and not raise taxes. If they were to grant a tax holiday and stimulate hiring and growth, government revenues would eventually increase.

    • February 19, 2010 at 14:35

      I agree, that there should have been no way for the money to run dry, but it did. It did because of profligate politicians of both parties spending money like a drunk sailor. They’ve been taping into the SS trust for decades, but the public didn’t care. They didn’t care because they still kept getting theirs. As long as they got theirs, they didn’t care what happened. That’s the entitlement attitude.
      The problem was giving government the responsibility for saving instead of doing it on our own. Of course there would be people that didn’t save, there are now. But on net, the majority of the population would have gotten it far better than the handful of politicians that can’t even balance a damn check book. They can’t balance a budget but somehow we trust them with our retirement and medical care?
      I love ya yttik, but I think this might be a generational thing. I’m 31, and I know that I will not get a damn thing for all the money I’m putting into the system, and I put in my fair share. Just like everyone else, I want my cut. If I’m forced to pay, and I am forced by the barrel of a gun, then I want to see some kind of return at the end.

      I agree growth is the key. They key is to get away from Keynesian economics. Keynesianism is all about the short run, in the long run Keynes famously pointed out “We are all dead.” Meaning, he really didn’t give a flying fuck about the long run and the next generation, it was all about living in the here and now.

      To me Keynesian economics is like winning the lottery, immediately going to Vegas renting the playboy suite at the Palms (High high dollar rate), going and picking up a few hundred hookers, getting 20 keys of coke and party like it’s 1984. Sure a month later you’ll be broke, hungry, and all fucked up, but you sure did have some fun right!.

      Now the problem with getting away from Keynes is that Keynes give politicians an out to spend more and more. All the talk about the stimulus is Keynesian. All it’s used for is to pay off people for votes. That’s all entitlements are, a way to pay people off so that they will vote for you. It worked wonders back in 1936, FDR won by landslide and giving out tons of “free” money.

  2. yttik
    February 19, 2010 at 22:55

    It’s kind of funny, on another blog I am an evil Republican who wants to destroy medicare and SS. Actually no, I just said they were not a bed of roses, full of government waste, costly, and don’t trickle down to the people. People are not well cared for on SS and medi, they have to purchase private insurance and have a back up retirement fund or else they’re living in their car forced to choose between food or medicine. Oh yeah, SS and medi are just great as long as you have….private insurance and a private retirement fund so you can take care of yourself.

    I don’t believe they have to raise taxes to reduce the deficit. I think they need to cut spending and stimulate growth. The problem with raising taxes is that they never go back and reduce them. And the more taxes we pay, the more the government spends.

    • February 21, 2010 at 18:15

      You mean you aren’t an “evil” Republican? Out of my blog!!! lol j/k
      I think the problem is that the mindset is such that any questioning the results, motives, reality, etc…of the Liberal legislation (New Deal, Great Society etc) is interpreted as the “enemy.” The problem with that is obvious, they won’t let anything change even if it’s to save it or to improve it. They are paranoid that “everyone is out to get ’em.” As we’ve seen at LR, that doesn’t do much in the way of problem solving. It creates divisions.
      That’s why I said it’s a generational thing. Not to bash the Baby Boomers, but to my generation, the BBoomers were a big cause of this problem. For one, not voting the politicians out that started taping into the SS trust in the first place. And two, for not pushing the politicians to do anything about it. There is some animosity in the fact that SS will be there for most of the BBoomers but not for us. We pay into it as well. The way the system works now, all the money that the BBoomers paid in to the system is already gone. It’s been gone for decades, why wasn’t something done about it sooner?
      I don’t mean to sound offensive, but it’s those kind of questions that need answering. They need rational debate. What we don’t need is reflexive circle the bandwagon approach that happens when any discussion happens between “Liberals” and their pet legislation. I can understand why they do it, they know that the programs don’t work they way they wanted them to. That the law of unintended consequences smacked them in the face. (Welfare for example)Yet, they still want to pass more legislation (HCR) and know that if the real consequences of past legislation weren’t as promised, that people would question what really would happen if HCR were to pass.
      These are real questions that need to be asked and honestly answered, but they get lost in the partisan bickering. It’s pathetic.
      I think the problem with reducing the deficit is obvious, NIMBY. They all want to cut other people’s programs, not their own. So nothing will get cut, until the dollar collapses. By then, it will be too late and everyone gets to suffer. Except the horde of past politicians that actually caused the problem, they are either dead already or guaranteed themselves a fat inflation adjusted benefits package years ago, while everyone else was too busy dicking around arguing about the definition of “is.”

  3. kenoshamarge
    February 20, 2010 at 09:44

    Raising the retirement age sounds like a good idea unless you are an older person looking for a job. I retired at 62 not because I wanted to but because the work I had always done was no longer available for me. (I have been a Secretary-Receptionist most of my working life.) Most companies want young and perky and even when I was young I didn’t “do” perky. I substituted competent, helpful and friendly which I thought more important.

    Unless you have some very special skills job-hunting for anyone over 55 is an exercise in futility.

    I also “resent” calling living on SS benefits that most of us have been forced to pay into all our working lives living on the dole. If I would have been able to find a position I would have been considerably better off financially that I am now. I have continued to try to find work to combine with my SS benefits so that I do not have to live in poverty but have had no luck. It seems the more grey hair and wrinkles I get the less “employable” I become.

  1. February 21, 2010 at 18:30

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