Budget wars: The middle class loses big time

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Reuters
April 8, 2011

Now that federal budget wars are threatening an adult-sized time-out for the principals involved, it's a good time to examine what's at stake for most of America.

Not doing anything to reduce the size of government debt will be catastrophic. Not much quibble there. But acting hastily and cutting the wrong things can be even more costly to social and economic welfare.

Neither the Republican nor the Democrat's budget plans for 2012 will meet the major challenge of sustaining social programs while cutting the most egregious waste.

Since the GOP budget proposal has been published, let's eye that first. The 2012 budget template, released by Paul Ryan, Republican chairman of the House Budget Committee on April 5, cuts $6.2 trillion from government spending over the next decade. Some clarity is needed here in the semantics of this plan. Cutting is not the same thing as "improving" or "reforming."

One of the hallmarks of the Ryan plan -- a GOP campaign document for 2012 -- is cutting top personal income-tax rates from 35 percent to 25 percent. As part of his "path to prosperity" theme, he estimates that along with other cuts and a lower corporate tax, this will create 2.5 million private-sector jobs, lower the unemployment rate to four percent by 2015 and add $1.5 trillion to real Gross Domestic Product over the next decade.

That claim is not only unrealistic, it's never been supported by any sound economic science. During and after the George W. Bush era, when tax rates were cut on income, capital gains and dividends, unemployment rose and GDP eventually fell.

Would cutting taxes again -- actually reducing revenues further and creating a bigger structural deficit -- make a difference his time around? This is not only wrongheaded, it makes no mathematical sense. You can't reduce the deficit by eliminating a key and ready source of revenue.

The trickle-down theory once again rears its ugly head. The GOP plan effectively snuffs progressive taxation on the wealthy. As Joseph Stiglitz, a Nobel Prize-winning economist, says in a recent Vanity Fair piece, "there is ample evidence that something has blocked the vaunted 'trickling down' from the top one percent to everyone else."

The ultra-wealthy used to pay their fair share. From the 1940s to the 1980s, the top tax rate -- even during the Eisenhower Republican-dominated 1950s -- ranged from 70 percent to 91 percent.

I'm not advocating a return to those lofty rates, but right now you're a tax chump if most of your income is from wages.

It pays big time to have inherited wealth and investment income, both of which will be largely spared in the GOP's misguided budget crusade. Stock dividends and capital gains qualify for the 15 percent rate. Additionally, estate taxes went from a $1 million exemption and 55 percent rate in 2000 to 35 percent and a $5 million exemption as of last year.

Since the GOP also wants to privatize Medicare -- reintroducing expensive private insurers to the program -- the middle class will be digging deeper into savings to cover premiums and larger out-of-pocket costs, especially those under 55. It's the equivalent of turning the popular, guaranteed health program into a massive 401(k)-style boondoggle. Only private insurers will benefit. You will be on your own and likely to come up short during the most vulnerable time of your life.

The Ryan document also savages the self-funding health reform law, which attempts to reduce healthcare costs over time by allowing exchanges to introduce real competition to private health insurance.

No fewer than five glaring boxes in the Ryan report call for the repeal of self-funding health reform, suggesting that this will somehow slay the triple-headed fiscal demons of Medicaid, Medicare and job losses.

As much as I abhor the GOP plan, I'm no fan of the Obama budget, either, which leaves in place funding for a bloated military and two and half (I'm not sure what to call Libya) needless wars. Neither party even touched Social Security nor the trillions that corporations either bank off shore or avoid through tax breaks.

What both sides need isn't more patience. They have clearly dug their ideological trenches and will battle it out at our expense. They need to curb their respective dogmas. Real prosperity comes from mutual benefit, sacrifice and universal incentives, not unrelenting giveaways for one percent of society.

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This page contains a single entry by CFED published on April 8, 2011 3:53 PM.

$5 billion separates parties in elusive 2011 budget deal was the previous entry in this blog.

When families build assets, the whole economy gains: David Rothstein and Joel Ratner is the next entry in this blog.

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