Monday, July 28, 2014

Economic pessimism

From page A6 | November 30, 2012 |

So far the coming year is not shaping up well. The economic outlook leaves us pessimistic. President Obama’s economic strategy is to raise the tax on those “millionaires and billionaires” who make more than $250,000 per couple ($200,000 for a single tax filer).

Who are these so-called high income earners? “They are two-earner professional couples living on the East and West coasts, doctors, lawyers, engineers and Wall Street executives,” according to a July Blomberg News article by Richard Rubin. “Few are billionaires or earn more than $1 million a year, and most are not employers.”

Though one has to assume that doctors and lawyers are employers. Engineers are more often than not employees.

“The 2 percent, they’re people who are successful in their professions, but they’re not the absolute rock stars,” Syracuse University economist Leonard Burman told Bloomberg News. “There’s a big difference between the 99th percentile and the 99.9th.”

The fact that these higher paid professional couples live on the two coasts arises in part from the high cost of living in California and on the East Coast. Think about what it costs to live in New York City or San Francisco and then it appears raising the tax on those earning more than $200,000 is really a tax on residents of New York City, San Francisco, Palo Alto, Santa Barbara, Santa Monica and Malibu and residents of Connecticut, New Jersey or Washington, D.C.

There is a reason it is less expensive to live in Nebraska, Kansas, Ohio, Iowa, Missouri, Indiana, Arkansas and other inland states. Houses are way less expensive. Often taxes are lower. Other than Arkansas there are few people moving to the inland states. More likely they are moving to California or Florida for the weather.

President Obama has been using the phrase “fair shot” since he was a community organizer. His tax plan makes no sense other than making some claim to “fairness,” which is just a code word for income redistribution. It makes no economic sense because it would only raise $82.3 billion annually, according to estimates by the non-partisan Congressional Budget Office. As pointed out by congressional Republicans, that is enough to fund the government for eight days.

Rubin’s Bloomberg article provided valuable information about who the top earners are. Williams College economist Jon Bakija in Massachusetts provided a breakdown by using 2005 tax returns.

“Engineers, architects and information technology workers make up 9.6 percent of the top 5 percent of taxpayers and 4.2 percent of the taxpayers,” Bakija said. “The top 5 percent includes managers, financial professionals, lawyers and medical professionals, though all in the lower concentrations than in the top 1 percent.”

“As you go higher up the income scale, you get a larger share of executives and finance people,” Bakija said.

“Of the top 5 percent, 23 percent have spouses who don’t work outside the home, compared with 31.6 percent of the highest 1 percent and 39.3 precent of the top 0.1 percent,” according to Bloomberg News.

Further, Bloomberg noted that a 2011 Treasury Department analysis found that 25 percent of the taxpayers subject to the top two tax rates, 25 percent are small businesses and employers.

A July study for the U.S. Chamber of Commerce prepared by Drs. Robert Carroll and Gerald Prante of Ernst & Young noted that S corporations, partnerships, limited liability companies and sole proprietorships employ 54 percent of the private sector workforce and pay 44 percent of the federal business income taxes. “More than 20 million workers are employed by flow-through businesses with more than 100 employees.”

In the wake of Obama’s reelection he indicated some flexibility and a willingness to consider revenue increases, which are Republican code words for limiting deductions. But now indications are that he and Senate Democrats are becoming inflexible. Instead of negotiating budget cuts and revenue increases, Obama is going out campaigning for his tax on doctors who spent 12 years going to school.

We remain pessimistic that President Obama and Senate Majority Leader Harry Reid don’t have an incentive to avoid the “fiscal cliff” of the expiration of the Bush tax cuts and huge budget cuts to the Defense Department, among others that take effect Jan. 1, 2013. They think they can blame the Republican majority in the House. They are in denial, if they think the president and the Democrats will escape blame too. It leaves us pessimistic about the economic future.



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