Category Archives: budget

The Buffett Rule and Its Potential Impact On Our Economy


On Wednesday Senate Democrats proposed legislation that would ensure all millionaires pay a minimum federal tax of 30 percent, otherwise known as the Buffett Rule. The people over at Citizens for Tax Justice have come out with a study on the Buffett Rule (full report here) and the kind of impact it would have on our economy. I have broken down some of their findings below. 

Revenue Impact Depends on the Extension or Expiration of the Bush Tax Cuts 

The Buffett Rule would raise about $25 billion annually in years after 2012, while ending tax preferences for investment income would raise around $70 billion annually. These estimates assume the Bush tax cuts expire after 2012 as scheduled. 

In 2012, or in any year in which the Bush tax cuts are in effect, the Buffett Rule would raise around $50 billion while ending tax preference for investment. 

In other words, either of these policy options (the Buffett Rule or ending tax preferences for investment income) would raise more revenue if the Bush tax cuts are extended — but not nearly enough to offset the cost of extending those tax cuts.  

Under the Bush tax cuts, long-term capital gains are taxed at a top rate of just 15 percent while other income is taxed at rates of up to 35 percent, and stock dividends are taxed at a top rate of 15 percent also. The ability of wealthy people with investment income to pay lower effective rates than people with ordinary income is therefore greater in any year in which the Bush tax cuts are in effect. And any policy option to remedy that problem will therefore have a larger revenue impact during any year in which the Bush tax cuts are in effect. 

Of course, the Bush tax cuts include benefits that go far beyond breaks on investment income, and that’s why extending the Bush tax cuts would be extremely costly even if the Buffett Rule was enacted or all tax preferences for investment income were eliminated. 

The Need for the Buffett Rule 

A previous report from Citizens for Tax Justice explained how multi-millionaires like Romney and Buffett who live on investment income can pay a lower effective tax rate than working class people. As the report explains, there are two reasons for this. 

First, the personal income tax has lower rates for two key types of investment income, capital gains and stock dividends, as already explained. 

Second, investment income is exempt from payroll taxes (which will change to a small degree when the health care reform law takes effect). 

The report compares two groups of taxpayers, those with income in the $60,000 to $65,000 range (around what Buffett’s famous secretary makes), and those with income exceeding $10 million. For the first group, about 90 percent have very little investment income (less than a tenth of their income is from investments) and consequently have an average effective tax rate of 21.3 percent. 

For the second group (the Buffett and Romney group) about a third get the majority of their income from investments and consequently have an average effective tax rate of 15.2 percent. This is the problem that the Buffett Rule would solve.

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CBO Debunks GOP’s Economic Plan

GOP has been very persistent in their claims of the way to fix our economy is through austerity — spending cuts to programs such as Medicare, Medicaid, Social Security, Education, Infrastructure, etc. Democrats have countered their plan with a balanced approach of spending cuts but with a focus on spending that would not hurt the most vulnerable in our society and increased revenue through modest tax increases and eliminating tax loop holes and tax subsidies.  

Politico is reporting the Congressional Budge Office came out with a report on Tuesday that shows spending cuts alone will not fix our budget problems. 

Indeed as measured by CBO, 2011 was a year that saw spending trends break heavily in favor of deficit hawks. The combined federal outlays for Medicaid, Medicare and Social Security rose by a little more than 3 percent — less than half of what had been the five-year average. Military spending grew by 1.1 percent, and after a 7.2 percent increase in 2010, other government activities fell by a negative 2.2 percent.   

Yet even in this climate, the deficit in 2011 ended up well north of $1 trillion for the third year in a row, all underscoring the poor economy but also the need for more change on both sides of the ledger. Addressing this gap was the great hope attached to the House-Senate supercommittee created by the August debt-limit agreement, but two weeks before the Nov. 23 deadline, taxes remain such an ideological stumbling block that it puts the whole enterprise in serious jeopardy. 

GOP did come out with a proposal this past week for $300 billion in increased revenue, however, as I wrote earlier this week, it did not appear to be the compromise they wanted everyone to think it was. It was clearly an effort to try to shed that ‘do-nothing Congress’ image.  

On November 2nd Treasury Secretary Timothy Geithner and Senate Minority Leader Mitch McConnell meet to talk about the Super Committee’s deficit plan. 

Geithner had come to the Capitol to meet with the Kentucky Republican prior to leaving for the G-20 summit in France, but McConnell steered the conversation back to the deficit-reduction talks and asked if the White House was hoping the supercommittee would fail. 

This has been a favorite theory of conservatives, who argue that failure serves President Barack Obama’s short-term interests by giving him another example of a “do-nothing” Congress. And it has especially rankled McConnell, who was pivotal to the August agreement and is invested in the 12-member panel.  

Geithner, who also was part of the August debt talks, pushed back, saying no, that Obama wanted a successful outcome and had submitted significant detail in September to help the panel meet its target. McConnell then criticized Democrats for being unrealistic in asking for $1.3 trillion as part of a larger $3 trillion deficit-reduction plan. The secretary answered by walking through the Republican counteroffer and showing that its claim of $640 billion in new government receipts was unrealistic itself, since so little of the total represented real tax revenue.  

McConnell was described as silent, and the meeting ended without any counterproposal to find middle ground.  

Just a few more tidbits of GOP’s proposal for the Super Committee’s deficit plan. They include drilling for oil and cutting the top tax rate to 28%. That’s right….MORE tax cuts for the wealthy.  

The former president of the Club for Growth, Toomey irritated Democrats by including ANWR drilling as one illustration of how government royalty revenue might be increased. And his approach to tax overhaul is to lock in such a low top tax rate in advance—28 percent—that tax experts say it would very difficult, if not impossible, to still have any room left for real deficit reduction.

GOP’s Defunding of Education Having Major Consequences

Since Republicans major wins in 2010 handing them full control in numerous states, they have been slashing education funding at a rapid rate while at the same time cutting corporate tax rates. This is now having very detrimental effects.

In Michigan they have some of the highest class sizes in the country, and they are now in the news for hazards cited by the Detroit Fire Department for overcrowding. However, before I go into the recent news made in Michigan, I want to share with you a few examples of just how drastic these education cuts have been (click on states name for link to full articles).  

North Carolina   

Instead of continuing the temporary, three-quarters-of-a-cent sales tax that Perdue has used to pay teachers’ salaries and support school programs since the state budget deficit emerged, Republicans refused to extend the tax and cut $800 million out of education funding.  

Under the soon-to-be-passed Republican budget, the education system as a whole would lose 13,000 jobs, nearly 70 percent of those from public schools. Other cuts include $13.3 million from dropout prevention programs, $92.2 million from textbooks, $42 million from instructional supplies and even more funding from teacher training, student testing and support programs. 

Indiana  

Many Northwest Indiana schools would receive less state funding over the next two years under a Republican budget plan expected to be approved by a House committee Friday.  

The proposed budget continues Republican Gov. Mitch Daniels’ $300 million annual education funding cut through 2013, eliminates small-school and restoration grants and takes the so-called “deghoster” — three years of additional payments to schools that lose students — out of the school funding formula. 

Gary Community School Corp. is the biggest loser among region schools under the plan. State funding for Gary schools will drop from $94.2 million this year to $79.2 million in 2012 and $74.3 million in 2013. 

Other school corporations facing significant 2012 cuts include Whiting, 5.9 percent; Lake Ridge, 4.3 percent; North Newton, 3.1 percent; South Newton, 3 percent; East Chicago, 2.8 percent; Munster, 2.5 percent; Porter Township, 2.4 percent; Hammond, 2.2 percent; and Boone Township, 2.1 percent. 

Pennsylvania  

State Rep. James Roebuck, D-Phila., Democratic chairman of the House Education Committee, today plans to vote against the House Republican majority’s budget. 

“Like Governor Corbett’s proposed budget, the House Republican budget still cuts funding drastically for K-12 and higher education while failing to use a combined current and projected $1 billion in additional state revenue to lessen deep cuts in education, health care and other vital programs,” Roebuck said. 

Roebuck said the state has received $500 million in additional revenue so far this budget year and that figure can be projected forward into next year’s revenue base, yielding the $1 billion figure. 

“I am deeply concerned about what the Corbett $298 million cut in state funding for Philadelphia public schools would mean for local students and homeowners’ property taxes. The House Republican budget proposal is nearly as bad – it would cut $276 million, or 21.8 percent, from current state funding levels for Philadelphia public schools. That is not a ‘restoration’ – that is still a massive cut,” Roebuck said.  

Roebuck said the House Republican budget cuts $976 million in K-12 education funding, including block grants, education assistance, charter school reimbursement and school improvement grants – not just the one line item labeled basic education funding. 

Wisconsin  

Even though Walker isn’t ordering immediate layoffs, his budget will put tremendous pressure on schools and local governments, which will be asked to shoulder huge cuts without raising property taxes to make up the difference. 

Walker’s budget includes a nearly 9 percent cut in aid to schools, which would amount to a reduction of nearly $900 million. The governor also proposed requiring school districts to reduce their property tax authority by an average of $550 per pupil.   

Michigan’s massive class sizes and overcrowding  

Michigan's Governor Rick Snyder, center, House Speaker Andy Dillon, left, and former Lt. Governor Dick Posthumus as senior adviser to the Governor at University of Michigan's.

James Chambers of The Detroit News reported the Detroit Fire Department has cited schools for over crowding creating a fire hazard.  

Some of the worst victims of the economic crisis have been our nation’s schools. As state coffers emptied, declining revenues forced schools to lay off hundreds of thousands of teachers across the country and pack kids into under-staffed buildings. 

Now, the Detroit Fire Marshall’s Office has issued a citation at the city’s Nolan Elementary School after finding so many children in over-crowded classrooms that it was become a public safety hazard:  Lt. Gerod Funderburg of the Detroit Fire Department said the fire marshal’s office issued a citation at Nolan Elementary School, 1150 Lantz.   

“They went out today and issued a ticket for overcrowding,” Funderburg said. […] The Detroit News reported last week that excessive class sizes at some DPS schools were still a problem six weeks into the school year.   

Specifically, The Detroit News reported that Nolan had 55 kindergarteners in one class, while a DPS high school had 72 students in a science course.  What kind of education do you think you get with 72 students in your class? Remember how everyone makes fun of big lecture hall classes in college? That’s what is happening to our schools.

CBO Findings Show Extent Of Wealth Inequality

I have been reading the non-partison CBO (Congressional Budget Office) study showing the trends in wealth distribution since 1979. After I read it, I thought to myself how could there be any question as to why the protesters of Occupy Wall Street took to the streets.

Since the Reagan Administration implemented the trickle-down-economics policies, giving large tax breaks to the wealthy in the belief that with more money in their pockets it will result in job growth, the income gap has reached a level that rivals 1928, a year before the Wall Street crash that marked the beginning of the Great Depression.

CBO findings  

Sources of Income — For Middle Class is Wages/Salaries. For Wealthy is Capital Gains 

Two factors accounted for the changing distribution of market income. One was an increase in the concentration of each source of market income, which consists of labor income (such as cash wages and salaries and employer-paid health insurance premiums), business income, capital gains, capital income, and other income. All of those sources of market income were less evenly distributed in 2007 than they were in 1979.  

The other factor was a shift in the composition of market income. Labor income has been more evenly distributed than capital and business income, and both capital income and business income have been more evenly distributed than capital gains. Between 1979 and 2007, the share of income coming from capital gains and business income increased, while the share coming from labor income and capital income decreased.  

More concentrated sources of income (such as business income and capital gains) grew faster than less concentrated sources (such as labor income). 

Between 1979 and 2007:  

    • For the 1 percent of the population with the highest income, average real after-tax household income grew by 275 percent.  
    • For others in the 20 percent of the population with the highest income, average real after-tax household income grew by 65 percent. 
    • For the 60 percent of the population in the middle of the income scale, the growth in average real after-tax household income was just under 40 percent. 
    • For the 20 percent of the population with the lowest income, the growth in average real after-tax household income was about 18 percent.  

Growth in Real After-Tax Income from 1979 to 2007

The share of income going to higher-income households rose, while the share going to lower-income households fell. 

The top fifth of the population saw a 10-percentage-point increase in their share of after-tax income.  

Most of that growth went to the top 1 percent of the population.  

All other groups saw their shares decline by 2 to 3 percentage points. 

Shares of Market Income, 1979 and 2007

The Richest Americans and Their Tax Rate

The GOP has been saying in ad nauseam that the way to grow the economy is not by raising taxes on the wealthiest because they are the ones that create jobs, the trickle down economics theory.

Needless to say this has been proven wrong over and over. Just in the past decade, tax rates were decreased to their lowest levels in over 50 years (I have also previously posted an interview with Warren Buffett who acknowledged the inequality in our current tax system stating that his secretary pays more in taxes than he does).   

 The IRS has released data on the tax rates for the 400 richest Americans in 2008. 

The IRS report shows that in 2008 (the latest year for which data are available), the 400 richest income tax filers paid just 18.1 percent of their adjusted gross income (AGI) in federal income taxes. That is down from 22.3 percent in 2000, and is just more than half of the top statutory income tax rate of 35 percent. More than half of the income reported by those 400 taxpayers consisted of capital gains and dividends subject to the preferential rates.

The IRS report, which shows the effective federal income tax rates paid by the 400 highest-income Americans in each year since 1992, offers an important opportunity to understand how the tax system affects the most privileged Americans.

  • Only those with at least $109 million of AGI were members of this group in 2008, and the average AGI for these 400 taxpayers was $270 million. 
  • Each one of these 400 taxpayers enjoyed, on average, more than $155 million of net capital gains and dividend income that was subject to special lower tax rates in 2008.
  • Although 400 returns are less than 1/1000th of a percent of the total individual tax returns filed, these 400 taxpayers collected more than 10 percent of the total preferential-rate capital gains and dividends in the nation in 2008.
  • These 400 taxpayers paid income taxes averaging just under $49 million in 2008. As a share of AGI, their tax bills averaged 18.1 percent. 
  • This decline from 22.3 percent to18.1 percent represented a total tax cut of $4.5 billion in 2008 for this group, or an average tax cut of over $11.3 million each.

“This valuable data confirms what we already knew—that the very richest Americans are paying much less of their income in tax than many would have us believe,” noted Citizens for Tax Justice director Robert S. McIntyre. “These taxpayers are now paying lower effective tax rates than at virtually any time since the IRS began publishing these data in 1992—and the Bush Administration’s capital gains and dividends tax cuts are the main culprit.”

No Jobs For You – Thanks To The Grand Ol’ Party

GOP has successfully filibustered President Obama’s jobs bill. It seems their jobs, jobs, jobs mantra was just talk because since they took over Congress they have yet to pass a bill that would create jobs.

In fact, the most recent budget proposal passed by Republicans, the Paul Ryan Budget, would have had the opposite effect of creating jobs, instead losing 1 million jobs (not to mention turning Medicare into a voucher program). The plan illustrates core party principles.

The Republican budget 

Ends Medicare as we know it, kicking low income and middle class retirees into the Kafkaesque and inefficient private insurance market.  

Tears gaping holes in public investments in education and lifelong learning, efficiency enhancing infrastructure and energy modernization, and science research and technological R&D that create jobs today, “crowd-in” private investment, and provide a foundation for long-run sustained economic growth.  

Offers tax cuts to U.S. billionaires paid for by raising taxes on the middle class and shredding social protections for those hit hardest by the economic downturn, the most efficient policies to boost jobs and economic growth in the short-term.  

All told, the Republican budget would kill an estimated 1 million jobs. The budget, however, wasn’t the only indication of the GOP’s priorities. GOP’s jobs agenda presents a litany of bills that in fact provide explicit subsidies for corporate oil, coal, and gas producers.

President Obama’s Job Plan

The GOP’s budget juxtaposed with Obama’s budget truly show where the loyalties lie in each party. Here is a list of some of the things Republicans decided to vote against (full budget here): 

Build 
As part of a six-year, comprehensive surface transportation bill at $35 billion per year, the Budget creates hundreds of thousands of jobs in the short term with a $50 billion up-front investment; establishes a National Infrastructure Bank to support projects of national importance; and brings access to high-speed rail to 80 percent of Americans within 25 years. 

Consolidates 60 duplicative, often earmarked programs into five. Investment will only be made if bipartisan financing is found to ensure that it does not increase the deficit. 

Builds a next-generation, wireless broadband network to bring high-speed Internet access to 98 percent of Americans, and establish an interoperable network for public safety.  Plan is fully paid for, and the sale of spectrum provides nearly $10 billion for deficit reduction. 

Educate 
Maintains maximum Pell Grant award, helping 9 million students afford college.  Paid for with more than $100 billion in savings, including eliminating year-round Pell and graduate student in-school loan subsidy. 

Reforms K-12 school funding by supporting high standards, encouraging innovation, and rewarding success. 

Consolidates 38 K-12 programs into 11 that emphasize competition and evidence of what works, while also eliminating 13 education programs outright. 

Expands the Race to the Top concept to early childhood education, school districts, university funding, and job training. 

Prepares 100,000 new science, technology, engineering, and math teachers. 

Key Budget Facts 
The Budget includes more than $1 trillion in deficit reduction – two-thirds of it from cuts — and puts the nation on a path toward fiscal sustainability so that by the middle of the decade, the government will be paying for what it spends and debt will no longer be increasing as a share of the economy. 

The President meets his pledge to cut the deficit he inherited in half by the end of his first term. 

Five-year non-security discretionary spending freeze will reduce the deficit by over $400 billion over the next decade and bring this spending to the lowest level since President Eisenhower sat in the Oval Office. 

10-year Deficit Reduction: $1.1 trillion, excluding war savings and not extending 2001 and 2003 tax cuts for high-income earners. Two-thirds are from spending cuts.  2011 Projected Deficit: $1.645 trillion, 10.9 percent of GDP; 2012 Projected Deficit: $1.101 trillion, 7.0 percent of GDP; 2015 Projected Deficit: $607 billion, 3.2 percent of GDP; 2017 Projected Deficit: $627 billion, 3.0 percent of GDP. 

I have said it before and I will say it again, the Republicans want to make the economy worse leading up to the 2012 election (Starve The Beast) to give them the best chance to win back the White House and try to gain control of both Houses. You will recall Senator McConnell telling National Journal’s Major Garrett, “The single most important thing we want to achieve is for President Obama to be a one-term president.” 

This is what is at stake in 2012. What principles do we as Americans stand for? I guess we will find out next year.

Republican Tax-Cutting Track Record

I’m not a fan of taxes like everyone else, but if you like things like roads and bridges, schools and teachers, police and firefighters, etc, then you know they are a necessity. Our country cannot survive without them. We already see the effects of slash and cut politics all over the country at local and state levels. 

In order to grow our economy, everyone needs to pay, and right now not everyone is. The wealthy and corporations are seeing the lowest tax rates in 50 years. GOP’s record on their push for maintaining tax cuts, tax subsidies (corporate welfare), and their triple down economics theory has been proven not to work over and over and over. 

In 1982, conservative Republicans said Reagan’s tax increases would cause a disaster (they didn’t).  

In 1993, conservative Republicans said Clinton’s tax increases would invariably fail (they didn’t). 

In 2009, conservative Republicans said Obama’s stimulus would make the economy worse (it didn’t). 

And in 2001, conservative Republicans said Bush’s tax cuts would cause a remarkable economic boom (they didn’t). 

In 2003, these same conservative Republicans said more Bush tax cuts would do the trick (they didn’t).  

In 2010, these same conservative Republicans said if we could just keep those Bush tax cuts around a little more, we’d be amazed at the economic turnaround in 2011. Here we are. I don’t think anyone’s amazed. 

Ezra Klein wrote the other day “that the Republican approach to tax policy is no longer based on any recognizable economic theory.” America, over the past 2-1/2 years, have been held hostage by radical Republicans at every step of the way.

It is way past time to call their bluff since it is all too apparent they have no intention of doing anything to help out the 99% of us that are not mega-wealthy or a corporation/industry.