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Forex Blog - Straw Man Arguments

Straw Man Arguments

 

I am a day late on this one, maybe two but I have to get this off my chest as the bloviating class launches full force into an attempt to paint Obama administration as overreaching on the economy with tax and regulatory issues before it has had time to even select an economic policy team.

 

Can I just say that this is like FDR in 1944 turning the full attention of the US to fighting communism before vanquishing fascism?  For those who don’t know WW2 history, Stalin’s Russia was a US ally and where the back of the German military was broken.   I am not equating Bush with the latter (fascism) or Obama with the former (communism), just making a point about straw man arguments that completely miscalculate what the main danger is…not with over regulation and crippling tax rates but with a disaster of a financial system from under regulation and a deficit hole that threatens the short-, medium- and long-term viability of the US economy. This is a question of pragmatism over dogmatic ideology.   Fairy dust tax cuts don’t raise tax receipts…supply side economics is as George Herbert Walker Bush argued voodoo economics.  So apart from spending cuts US taxes will have to rise to address the budget deficit well before any major reconfiguration of entitlement programs (means tested, higher retirement age and fewer benefits).  The timing of tax hikes ahead and middle class tax cut will surely be recalibrated in light of the serious economic crisis the US economy finds itself currently (Bush tax cuts are due to expire in 2010 anyway and this looks like a reasonable date for implementing a major tax hike for the upper two income brackets by simply not extending the Bush tax cuts of 2001 and 2003 and middle class tax cut).

 

Income taxes…we heard lots in the presidential campaign about how the top 1% of all income earners pays 60% of all income tax.  I don’t dispute this fact but it is so incomplete in its presentation in that it does not mention why the top 1% pay 40% of all income tax – their income has soared (top 1% earns 21.2% of the nation’s income) and majority of Americans have not seen income grow much (real income down for a large section of workforce).  It is not their tax rates that have soared - these have fallen to 33% from 36% for the lower of the top two tax brackets and to 35% from 39.6% for the highest tax bracket (Obama wants to go back to the old brackets as the 2001 and 2003 tax law prescribed in 2010 and perhaps sooner while Republicans and the White House want to make them permanent).    So from a tax revenue standpoint the way to raise receipts all else being equal is to make lower income earners pay more which raises fairness question as this group has seen declining real income or make wealthiest pay more where income has exploded.  There is another segment of tax payers who have seen tax rates rise despite the Bush tax cuts – those that get caught in the Alternative Minimum Tax net and disallows most itemized deductions.

 

Richest of income earners as victims of progressive taxes is a straw man argument.  First of all Teddy Roosevelt introduced progressive taxes to address the inequity of the tax system.  The idea that the richest of income earners who have seen incomes explode will fold up their entrepreneurial shop because they face paying 39.6% federal income tax rate vs. 35% is disingenuous when income for this bracket has grown to unprecedented proportions of total income.  Now how Obama will use the tax hike is far more genuine debate – cutting taxes on people earning under $250,000 (starts much lower – just $150,000-250,000 won’t see tax increase) may not be the best way to introduce fiscal stimulus as majority of people getting the tax cut (many of whom don’t pay federal tax because they earn too little but do pay payroll tax, sales tax, state tax and local tax) may not be the most optimal use of a tax hike on the rich.  I suspect that Obama will do to the tax hike receipts what Bush admin did to the TARP funds – change horses midstream – from earmarking buying bad assets to infusing banks with capital.  For an Obama admin look for more funds from future tax increases on the wealthiest to be diverted from the middle class to infrastructure investment…I think.

 

And a similar straw man argument is being used about regulation and policy intervention.  I don’t know where to start on this one but it seems to me it was the failure of regulators at every empowered body along with a failure of government (executive and legislative branches) to improve regulation particularly of the shadow banking sector (derivatives) that caused the credit crisis.   To bleat about government overreaching on capital market regulatory reform ahead is completely misstated the risk – form doing very little to over doing it just does not hold water.   Taxpayers for goodness sake now have stakes in the major banks – this alone implies need for far more stringent regulation.  When bankers screw up self-regulatory regime and need massive federal bailouts to avoid systemic failure they have no one to blame but themselves for a future regime of heavy handed regulation. Yes this is not a good prognosis for future earnings in the banking system (buy and sell side).  I wish it were different but it is not and plenty of blame to throw around going back several admins.  But banking business reverting to the mean of returns and risk should remind all in the business that 1995-2007 were extraordinary times for many employed in this sector.  But banking boom bust is not that different than the tech boom bust.  Banking business will take several years and a major business cycle upturn before it can become anything close to the cash cow it was for so many before 2007. 

 

I could go on about other straw man arguments about corporate tax rates being too high (effective rates are quit low) but won’t.  But I will say that with the US and global economy facing two disasters of an order not seen in 75 years, relying on economic religion for policy prescriptions is moronic.  Booms make ideologues and economic dogma common.  Economic and banking system failures make pragmatists of the most diehard eco ideologues – just look at what the Bush admin and Treasury Secretary Paulson have done in the last 13 months.  If the bloviating class that seems to dominate the airwaves has an ounce of humility they should realize straw man arguments have no place in the current policy debate.

 

David Gilmore

 

 

 

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