The Ultimate Flaw in Obamanomics

One thing that bothers me tremendously about Obama's proposal is that he opts for the "easy" solution, that is to make 3% of people pay for the other 97%. Politically, this is feasible so long as people neglect the economics of the situation.

The incentives are all messed up here. For 97% of the population (unless they are very soon to move into that higher income bracket) it makes perfect, rational sense on the ground level to support Obama's plan: someone else is going to pay for a better retirement for you. A more detailed look is less rosy. Sure, the richest will absorb some of the cost, but secondary effects will also end up harming the economy. The richest also tend to be the most mobile, and London looks better every time we raise the taxes. If we raise taxes by 12.4% or whatever the social security contribution is, London will look a whole heck of a lot better. So instead of getting roughly 35% (which would move to 47%), we'd end up with 0%.

I'll admit that it is not likely that many rich adults will immediately leave, but if we're talking about 75 year projects, I'm sure that a lot of young, able college graduates will look at something near a 50% effective tax rate and reconsider international opportunities.

Obama has to realize that the solution to problems is not to further tax the rich. Not all programs are meant to be re-distributive, and indeed some need to be cut to keep our economy competitive.

Matt of CA @ Jun 13, 2008 13:15:44 PM

Daniel David...

Simply because you don't like the diagnosis or analysis does not make it a lie or blowing smoke. The partisan here is you, you who are not arguing on facts, but are arguing on rhetoric and political points. The fact of the matter is, your $2 trillion stolen from Social Security is a false. The government cannot steal what it has already been authorized to take (if you really want to get ideological, the theft occurred when the government required employers to take payroll taxes to pay for Social Security). And if your number is true (which it isn't), then it stands to reason that every administration since the Roosevelt Administration has mishandled and stolen from the Social Security trust fund (according to your logic), but of course your liberal goggles only allow you to blame Republican administration.

I don't know how you can sit here and say that it is a lie that politicians are simply taking away from Social Security and trying to pay it back with interest. It is EXACTLY what they are doing and have been doing since the program's inception. Republicans do have an answer to trying to fix Social Security, but it is Democrats who do not like the answer. We have already tried your way (Greenspan Commission), and it is only delaying the inevitable.

By the way, Daniel, President Bush did not inherit a balanced government or a government surplus. What the President did inherit was a projected surplus. Projected surpluses or deficits are not guarantees, but are governmental accounting fixes. You might be familiar with one that Bush uses all the time: emergency funding to fund the Iraq War. This is off the books, so his deficits look smaller than what they would be if the War was included in regular fund.

The only person blowing smoke here, Daniel, is yourself. So please, spare us your insults.

Chris of AZ @ May 28, 2008 12:03:03 PM

Runaround, as usual

Chris, the $2 trillion number for the stolen Social Security Trust fund is valid and it's still growing. We ARE STILL taking the surplus every year and burying it on income tax cuts at the top end and on the wars.

Passing over your lying gobbledeqook about a "gambler's fallacy", you did not answer a question about how any Republican is going to get any of it back for the purpose intended.

The reason I blame Bush is because he started his presidency with a government budget that was in balance and instead created $4 trillion in new debt during his tenure and this was IN ADDITION to spending the annual surpluses of Social Security.

You're still "blowing smoke".

As for Emmett, he heard a Republican spin and believed it meant somthing. "Federal Revenues went up."

So what, you still got a government going from $5 trillion to $9 trillion in debt in eight short years. And your Social Security Trust Fund was still stolen.

Daniel David of NM @ May 27, 2008 19:15:00 PM

And just one more point, Ralph, about people over 60 breaking down as a fact of nature, well, I have two names that you should consider. John McCain and Roberta McCain. Showing too much sympathy for one group at the expense of another is not fair, either.

Chris of AZ @ May 26, 2008 22:39:29 PM

"Chris above has argued (blown smoke) against Social Security BUT HAS NOT stated how he intends to get back the $2 trillion dollars of your Trust Fund that has been spent on other things."

I sure do have an inkling of trying to get Social Security solvent, but I'm not interested in trying to get back the $2 trillion (if such a number is even valid) that has been spent on other things. This is the gambler's fallacy, thinking that if they just bet one more hand, it will pay back all the money he owes, plus with a little extra. It never happens as the gambler exactly portrays, and in the end the gambler ends up owing even more money in the end than if he would've just stopped and walked away from the table. And will you stop, please STOP, in trying to place blame on the Bush Administration with spending the SS fund. All politicians, Democrats and Republicans, stick their hands into the thing and use the money to spend on all kinds of things (and as I have told you before, this is the problem with government spending and taxation. Once the money is in the coffers, government can spend it on anything.)

" The main part of Obama's plan to raise and even eliminate the cap on payroll taxes is as I claimed simple and elegant because it is both fair to all (especially the majority whose annual pay falls below the cap) and because estimates by Dollars & Sense economists show it will largely resolve the long term solvency of SS."

How is this fair to all? Is it fair that working husbands and wives pay twice as much in payroll taxes? Is it fair that self-employed individuals have to pay twice as much in the tax simply because they wanted to be their own boss? Is it fair that business have to pay twice as much and take away money that could have been used for hiring new workers, researching new products and services, and overall creating value for their shareholders? Yes, the economists you use state that it will bring long-term solvency to SS, but once again, it does not assume how the economy would respond to such a drastic increase in payroll taxes.

Which brings me to my next point. It is not an accusation that dynamic modeling will result in a more accurate picture of the outcome of a certain tax proposal. I won't say it is a fact that dynamic models produce more accurate outcomes, but they are absolutely more reliable than static modeling. That said, your statement that we should consider "capital gains taxes" separate from payroll taxes is ludicrous. A tax is a tax is a tax is a tax. When a person is taxed, whether through payroll or cap gains, he will look for ways to minimize the impact of the tax or try to avoid entirely. Now, trying to avoid paying a cap gains tax is much easier than trying to avoid paying a payroll tax (unless you go underground), so this also drives at your "fairness" argument. How is it fair that you will effectively raise a tax on all working Americans to support a program that is essentially unfair?

Chris of AZ @ May 26, 2008 22:38:07 PM

What if we took a solution . . .

. . . that no one is proposing and then made an attempt to see if we could pin that phony solution on Obama?

You got a column out of this?

Derrick Gibson of FL @ May 26, 2008 17:35:52 PM

Our Economy is not Crippled.

Having studied economics at an Ivy League University under a Nobel Prize winning economist, I would like to make a couple of points. First, the 1950's was not a magical time. There was the Korean war, which was considered an optional war at the time, which when one looks at North and South Korea. I believe Truman did the very Christian thing in protecting the South Koreans, but he was very unpopular for his convictions. More importantly, there were 3 recessions in the 1950s. The economic properity that is usually associate with the 1950s, was really during the early 1960s when JFK cut taxes.

Second, the United States has not had a real recession since the early 1990s. The United States was able to avoid a major recession in 2001 by doing the opposite of Herbert Humphry did in 1931, which was to increase taxes, raise interest rates, and raise tariffs. I lost my job and had to sell my condo during that time, but I bounced back. The government has a great popensity to make a bad situation worse, just as it is currently doing with ethonal, who's only benefit is to provide substities to farms, which is corporate welfare, and raise gas prices, which is lowing demand for gas.

Third, either Social Security is a psydo-retirement savings or it is wellfare for the elderly. If it is a retirement savings, the increase in the wage cap directly increases the benefits paid so no savings. If it is wellfare for the old, then there should be means testing and reduction of benefits as well as an increase in age, since life expectancy has increased.

Fourth, in theory, practice and theory are the same but in practice they are different. In theory, when the government takes money from people to spend it should not effect the overall economy because the government should provide the same quality of goods or services. Unfortunately, in practice this is not the case. Government taxation provides a drag on the economy, due to fact that humans are less consciencious about spending other people's money than their own.

Fifth, I think it is a myth that George Bush's tax cuts only benefited the rich. I received a tax cut, and I until recently was making less money than a public school teacher. Also, the AMT has taken away a lot of the benefits of the tax cut. Probably, one of the reasons that tax revenues have decreased. Lastly, most of the wealthy is supporting Obama. For example, Hollywood, New York, Boston, San Fransico, Bill Gates, Warren Buffet, etc. Why do they vote against their self-interests? Well, it's because they don't. When the highest tax rate was 70%, the rich lobbied congress for all kinds of tax loop-holes. This is probably one of the reasons that the rich are paying a higher percentage of total taxes now then in the 1970s.

Robert Paul of NY @ May 26, 2008 11:54:44 AM

One MASSIVE problem with your Bush demonizing, Daniel David of New Mexico. The Bush tax cuts have caused significant increase, not decrease, in Federal revenue. Is there a problem somewhere in the world? Instead of trying to seriously consider its cause and trying to remedy it, let's just blame George Bush!

Emmett of OH @ May 26, 2008 01:41:17 AM