Uncle Vinny, Uncle Sam, and the proverbial rock/hard place

When people with responsibility and power make stupid public statements on film the press usually goes wild sort of like a swarm of bees after you just bumped into their nest.  Remember when Dan Quayle misspelled potato and when candidate Romney said something about the lower 47%. But when a prominent US Senator, Tammy Baldwin, explained in front of rolling cameras why Social Security could not be part of the coming budget negotiations because it was separate and fully funded until 2037, no one said a peep. The press looked like Marcel Marcaeu as Bip the Clown.

So pardon old Lar if he takes a big swig of JD and takes his chance to spout off a bit. Remember when our leading intellectual Al Gore mentioned the nation’s lock box a few years back? It is the same kind of disinformation. Is it stupidity or a clear attempt to mislead the public? Guys – there is a lock box. But unlike a real lock box that keeps the family treasures and a few naughty photos of grandma when she was 16, the USA lock box is full of a bunch of IOUs from the Federal government. Let’s suppose the Davidson family has a lock box with an IOU for a million dollars from Cousin Vinny. Vinny is in prison serving 90-100 years for financial fraud. Cousin Vinny owes a lot of people a lot of money.  What is that IOU worth to the Davidsons? Right! Zero, Nada, Zilch, Yung.  

It is the same thing with the US lock box. But in this case Uncle Vinny has been replaced with Uncle Sam. For years and years the Social Security system received more in revenues from tax payers than it paid out to prune-eating elderly. Did  Social Security invest those surplus dollar in GE stocks? In a portfolio of stocks? In anything that might come close to looking like an investment? Of course not.  Every year since I can remember SS lent the money to Uncle Vinny – er I mean Uncle Sam. Why? Because the US government has gone more than a half century spending more than it earned in the non-SS part of the government budget. That part of the budget is called "on-budget." That terminology makes no intuitive sense because all government spending, including SS, is included in the budget. 

For example, in 2012 the so-called on-budget part of the US budget had a deficit of approximately $1.4 trillion dollars. In that year the Off-Budget (mostly SS) had a surplus of $67 billion. So in 2012 SS loaned approximately $67 billion to the US government for its on-budget deficit. In return the SS system got another IOU to add to approximately a half a century of similar IOU’s. Those IOUs were stacking up like hotcakes at Denny’s on Sunday morning. Now please tell me what the probability is of the US government paying SS back so it will be solvent through 2037? Can you say zero?

As the surplus in SS soon diminishes – it is expected to be down to $22 billion by 2017, the government will begin paying from the on-budget part of the budget money to cover the deficits in social security.  This is like Uncle Sam getting a loan from Greece.   Since the on-budget will be in deficit too – that just means that we borrow more money from the public.

So when anyone tells you that SS is solvent and does not need to be part of the government fiscal cliff deliberations, please grab your wallet and whatever other valuables you might have with you and run for the hills. These people are either ignorant or the evil man Mini-Me. Either way, get out of town fast.

I feel better now. But I still have another page to ruin so why stop now when we are having so much fun? Let’s talk next about the President’s insistence that marginal tax rates be increased for the millionaires or those in the top 2 percent of the income distribution. First, the overwhelming majority of those in the top 2% are not millionaires – so quit saying that. It is just plain wrong and totally misleading. STOP IT. Aim I yelling?

Second, the top 2% account for approximately (I had to extrapolate from the top 1% and top 5% data) 18% of all income earned in the USA and pay 47% of all income taxes. Okay – so these folks make about a fifth of the income and pay almost HALF of the taxes. So quit saying that don’t pay their fair share. This is bullcrap. Just say they should pay more. If you think they should pay more – just say it that way. Don’t disparage the people who pay for nearly half of all income taxes collected? Don’t bite the hand that feeds you. Just explain why you want them to pay more. Is that so much to ask?

Finally, if some folks are willing to sock it to the upper 2% then why won’t you come off your high horse and work with them? To most of us the difference between a marginal tax rate and an average tax break is the like the difference between nuclear fusion and nuclear fission.  Most of us don’t have a clue about the difference without a quick trip to Wikipedia. To a nuclear physicist about to build a bomb, the difference is pretty critical. To an economist about to promote a policy to strengthen economic growth the difference between marginal and average tax breaks is also very important. So let’s work on this a minute.

One party says they want the rich to pay more. So let’s suppose we agree that the rich paying even more than 50% of all taxes is okay.  Let’s assume the other party says they are ready to sock it to the upper 2% by increasing the average tax rate paid by rich people. The rich will pay more dollars AND the rich will pay more dollars as a percent of their incomes. You would think the first party would be elated. But NOOOOO, that  party sticks up its nose and calls the other party a bunch of stupid poopie-heads.

Why isn’t that party willing to accept an increase in average income tax rates paid by the upper 2%? Why is the ONLY WAY they want to impact the rich through raising the marginal tax rates or brackets of the upper 2%? There is no economic answer. You can sock it to the rich equally with average or marginal approaches yet the President and some in his party insist that it has to be one way and not the other.  I heard Charles Krauthammer the other night explain on television while visibly gritting his teeth the reason for his focus on marginal rates is that President Obama wants to cripple the Republican Party. He thinks by sticking with the very intuitive marginal tax bracket approach that he fulfills his election mandate and sticks up for the average American by raising marginal rates.

I don’t know if Krauthammer is right or wrong. But I do think the President is being disingenuous – and that is a hard word to type if you don’t actually know how to type according to the correct method. On one hand Obama says it is all about math – that you cannot raise enough money from the rich by changing their deductions and thus raising their average tax rates. But that is highly debatable. Furthermore he recently did a complete flip-flop and now says that changing deductions will hurt charities too much. He said exactly the opposite a few years ago. Aside from the flip flop this signals the real reason he doesn’t want to go in the average tax rate direction – he has finally admitted that tax loop holes exist for a purpose. Each loophole was legislated for an important purpose. If you close loopholes then someone gets hurt. He says one day that the tax code and the entitlement system must be restructured. But he is not being honest. Every so-called restructuring will hurt one group or another. Obama does not want to get into all that. It is much easier and politically more fun to go after the rich and rich only via marginal tax rates.

But of course it is a big lie. If he raises his $1.6 trillion mostly from the rich do you really believe that won’t create another economic tailspin? Do you really believe that the 2013 recession will be short and modest? Do you really believe this won’t affect the average person greatly? No way Jose. One way or another – the US has to fix a half-century mess of living like Uncle Vinnie. This is the proverbial rock and a hard place. There are no easy solutions. To me we are better off starting down the path in the right direction with average tax rates. Marginal tax rates on the rich is a path to nowhere.