Tuesday, November 27, 2012

Buffett's 21%


I doctored a graph from John Taylor that shows federal spending as a percent of GDP. Your icon's 21% suggestion is far below anything proposed on paper and since the (extremist) Democrats are dead set against changing one comma of Obamacare, Social Security, Medicare, Medicaid, SNAP, I don't see how you get to 21%. Heck, they won't even admit that in a world of 500 channels we shouldn't be subsidizing Big Bird. Of course the Republicans are only slightly better given their predilections to subsidizing Boeing via the Ex-Im bank and agribusiness with farm price supports.

Most of Buffett's op-ed focused on asserting without evidence marginal tax rates don't matter. But he never addresses the issue. Instead he makes the obvious point that investors invest. Thanks Warren, whoda thunk it? But marginal rates matter. Hell, ask a former heroin addict

I love this idea of going back to the 1950's tax rates, or Bill Clinton's tax rates and assuming if we do that ONE thing then everything else will magically follow. In case your memory needs refreshing Medicare and Medicaid started in 1965. The combined (worker and employer) tax rate on social security was 2.25% from 1951-1953 and ended at 3.75% in 1959. Today it's 12.4%. 

So sure, let's go back to the 1950's. If you eliminated Medicare and Medicaid and cut back Social Security by 80% you can achieve far less than 21% federal spending as a percent of GDP.

Here's one more thing to consider. I know in the fantasy liberal world tax rates and incentives don't matter. In the grittier world of drug users it somehow seems to apply. So let's assume the incentives drug users respond to is indicative of how people respond to marginal tax rates. And lets raise tax rates. On the rich, super-rich, middle class, you choose. What happens to young people's investment decisions? 

Investment decisions you ask? Yes, their investment in human capital, their investment in education. What happens? In the incentive-driven world they invest less. Simply because the after-tax returns have declined. Why would you as a policy maker on the one hand propose a policy that lowers the after-tax returns to education and on the other hand encourage investment in education via subsidies like Pell Grants and direct student loans?


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