This morning the AP released a "news" story about how Republicans want to raise taxes but only on the poor. That is actually the slant that the AP put on the debate about whether or not to cut the social security payroll tax by 2% for 2012. That cut would extend the one-year cut done for 2011 as a pro-growth stimulus. According to the AP, certain evil Republicans are against passing that tax cut, so they want to increase taxes on the poor.
Despite the idiotic position of the AP, there are some real issues that arise with regard to the potential tax cut.
1) The tax in question is the one which funds Social Security. That program is already headed for bankruptcy unless something is done to strengthen it. Cutting $120 billion in revenue from the program in 2012 will only work to weaken the program and hasten the day when it goes bankrupt.
2) The debt ceiling compromise requires Congress to come up with about another 1.5 trillion dollars in additional revenues or spending cuts by Thanksgiving. Adding another 120 billion dollars to the deficit by cutting taxes again will only make that harder.
3) There are much better ways to stimulate the economy than this sort of tax cut. The cut in the payroll tax works to give most American workers a slightly higher take home pay; it comes to like 20 bucks a week on average. This will help people make ends meet, but it will not encourage the increase in consumption or investment that would provide a major push towards higher growth. A cut in taxes on investments that lead to job growth provides a much better incentive to move the economy forward. On the other hand, the payroll tax cut provides more of a stimulus than increased government spending of the sort seen in Obama's stimulus bill.
4) Calling opposition to the cut in the payroll tax support for a tax increase is nonsense and it will lead to much bigger problems the following year. The law already sets a tax level for the payroll tax for 2012. IF nothing is done, the temporary reduction will expire and the level of 2010 will return. There are also temporary reductions in income tax rates, estate tax rates and the alternative minimum tax that will expire at the end of 2012. If those are prevented, then the ten year cost to the Treasury is in the order of five trillion dollars -- twice the amount of the cuts agreed to in the contentious debt ceiling debate.
5) The real truth is that the entire US tax system needs a detailed overhaul. We have corporations like General Electric that can make five billion dollars in a quarter but pay no tax due to the complex loopholes put in the system. We have an underground economy in the area of a trillion dollars a year where no one pays tax. We have folks who have taxes so complex that they do not even understand them, let alone have the capacity to file for themselves. If all deductions were removed and rates lowered, the individual inocme tax would be much fairer. If corporations paid a consumption tax rather than an income tax, all the loopholes would disappear and freeloaders like Obama's cronies at GE would pay their fair share.
The truth is that America needs to not get caught up in stupid and sidhonest political battles about who wants to raise taxes and who to cut them. We should be looking for a better tax system. It is not a difficult search, but it requires courage from the politicians to do what is best for the country rather than for themselves. I doubt anything will be done about it until after the 2012 elections.
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