Pesky Uncles, Brothers-in-Law, Etc…Thanksgiving 2012 Edition

November 21st, 2012 at 9:10 pm

Ahh, Thanksgiving…the turkey, the trimmings, the pies, the family…including those brothers-in-law, uncles, and other friendly antagonists who sputter out worn out arguments along with bits of corn-bread stuffing.

So, in the holiday spirit, let us pray prep for the expected onslaught.

[Updates: Since we’re-in-this-together, I’ve pasted in some tasty side dishes from comments about shenanigans at their tables and what to do about them.]

Even my 13 year-old just asked me about the fiscal cliff, so let’s start there.  Like I’ve said before, expect to get a big dose of “Sure, you won.  Now here are my demands!”

“OK, somehow your guy won.   But how could he possibly want to raise taxes!  That’s just going to tank the economy and kill small businesses.”

You’ll want to start out with some context here: “Hold on, bro—remember we’re only talking about the top two percent of taxpayers and top three percent of small businesses.  And re the latter, we’re definitely not talking about the corner shop—we’re talkin’ the corner office in the hedge funds, law firms, high-end medical practices–folks that have been makin’ a killing lately (knowing glance as heads nod around the table).”

Quickly now, before he can come back at you: “But you’ve got a point, dude.  We all know this economy ain’t exactly great yet, so you’re right to wonder if this is a good time for any tax increase at all.  And here I can assure you: don’t worry.”

You veer from instructive to annoying in these settings if you start citing CBO, but you should know there’s authoritative research to substantiate this point.  Still, it’s probably just as effective to remind folks that we’re just talking about the upper income tax rate structure that prevailed in the Bill Clinton years—can’t lose when you invoke the big dog (well, maybe prudish old Aunt Glady’s might wince at the name)—the last time we had a truly strong economy that lifted low and middle incomes and moved the federal budget into surplus.

Finish up by reminding the rest of the folks around the table—likely to be sympathetic to this point—that really, with so much of the economy’s growth accruing to the folks at the very top of the income scale, along with the clear need to start to get our budget back in line, it makes sense to ask the “folks on the hill” to kick in a bit more.

“We can’t just keep giving poor people more and more stuff.  At some point, we’ll all just be working to support welfare and food stamps.”

I recommend putting down that drumstick and employing the old “stroke and kick” here.

“I know it seems that way, what with all the unemployment benefits and food stamps.  There’s no question a lot folks have been facing hard times (not subtle shift towards agreeing with Uncle Righty but introducing concept of safety net).  But that kind of stuff always goes up in recessions.  I mean, you can’t blame people for working when there’s not enough work.”

[If he spouts “there’s tons of jobs out there if only people would take ‘em” then you need to point out that the unemployment rate has been highly elevated since 2008.]

So the question is has there been an increase in spending on low-income programs over time.

And the answer is that, excepting health spending—Medicaid—and recessions, spending on low-income programs has been about 1.5% of GDP forever (see figure here).  And the increase in health care spending is a) an economy-wide problem, not unique to low-income programs, b) actually happening less quickly in the public sector programs (Medicare, Medicaid) than in the private sector, and c) not exactly “welfare” implying layabouts on the dole.  In fact, over time programs for the poor have solidly shifted towards a work orientation, like the Earned Income Credit, a wage subsidy for low-wage workers and Ronnie Reagan’s favorite anti-poverty program!  (Be careful he doesn’t choke on a giblet when you hit with this last bit.)

“Don’t you get it!?  Our debts are in the trillions!  What kind of family could run their affairs like that?  Certainly not this one or any other responsible family I know of.”

Oooh…careful here.  She’s comin’ right attcha with the homespun aphorism about government needing to tighten its belt just like everyone else—this framing is likely to get a lot of heads nodding around the table.  It sounds right…but it’s way wrong.  So you’d better start by getting on their page.

“That makes a lot of sense, Auntie Teabag, and I’m with you 100% that when the economy is back on track and people’s paychecks are rising again, the government needs to tighten its belt, just like you said, and start getting rid of those deficits.  But the problem is this: if everyone’s tightening their belt at the same time, the economy will do much worse, people will be stuck without jobs and with no help at all.”

In fact, it’s really the opposite of where Auntie is: when families tighten, the government needs to expand.  And if that means a larger budget deficit that’s okay, as long—and folks might like this point—as it’s temporary.  I can’t stress this last point enough.  (It doesn’t help you here that politicians of all stripes, including the President, recite this damaging mantra.)

“You know what really hurts our deficits, Auntie?  Not stuff like the Recovery Act—an $800 billion belt loosener by the feds.  That’s over now—after adding millions of jobs and helping a lot of families do a little better over the downturn—and its and contributing absolutely nothing to the increase in the debt.  It’s the stuff that keeps going but isn’t paid for, like those Bush tax cuts!”

You win this argument not by denying the government ever needs to tighten its belt but by stressing the dynamics that have been understood by economists since Keynes (though many are trying hard to forget them today): fiscal policy loosens when the private economy is slack and tightens when it’s strong.

 

OTEers: feel free to submit others and I’ll see if I can get to them between courses!

From comments:

1) “You should be prepared for the “I can’t earn more or I will jump into a higher bracket” issue. If the 39.6% rate is restored, it will only apply to the amount of any taxable income IN EXCESS of $250,000. A common belief seems to be that once someone’s taxable income gets to $250,000.01, the higher rate would apply to ALL of their taxable income down to the first dollar. That fallacy seems to be the only explanation for the zany statements attributed to the Vienna, VA. chiropractor in the Nov 19 NYT.”

[JB: great point that’s often misunderstood.  One interesting wrinkle here though.  Suppose we went with Gov Romney’s idea of capping deductions at a fixed amount, like $25K, instead of raising rates.   Well, there you really would have a problem as a family with AGI of $249K could deduct as much as they do now while a family at $251K could take a big hit.  So you’d have to phase it in which means you’d be short the revenue you’d get from the upper-income rate expirations.]

2) “It’s interesting how easy it is to get confused between “revenues” and “profits.” My cousin, who is a moderate and pretty smart, was convinced that $250,000 wasn’t much for a small business. He didn’t know that revenue that pays for expenses is not taxed, and that it’s actually profits/income that are taxed. I wouldn’t be surprised if this unclear distinction b/w revenues and profits is the source of the “high tax rates hit small businesses” trope.”

 

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17 comments in reply to "Pesky Uncles, Brothers-in-Law, Etc…Thanksgiving 2012 Edition"

  1. Mike says:

    Not a question, but I also think it’s interesting how easy it is to get confused between “revenues” and “profits.” My cousin, who is a moderate and pretty smart, was convinced that $250,000 wasn’t much for a small business. He didn’t know that revenue that pays for expenses is not taxed, and that it’s actually profits that are taxed (I hope I’m getting this right). I wouldn’t be surprised if this unclear distinction b/w revenues and profits is the source of the “high tax rates hit small businesses” trope.

    Anyway, this is a great service that you are providing, Jared! I’ll be all ready for Thanksgiving dinner…


    • Jared Bernstein says:

      Exactly–I get this all the time…expenses, including labor costs and investments, are deductions (actually worth more when taxes go up!)–they’re not income, which of course is sales-revs.


  2. Andi says:

    [If he spouts “there’s tons of jobs out there if only people would take ‘em” then you need to point out that the unemployment rate has been highly elevated since 2008.]

    There are 12m unemployed. There are 3.5m job openings. Math.


  3. ChacoKevy says:

    Better Fillmore album:
    Allmans – Fillmore East
    or
    King Curtis – Fillmore West

    That’s what our family will be debating this Thanksgiving! Have a Happy Holiday!


    • Jared Bernstein says:

      Close, but I’d have to say Allman’s…just based on the opening few bars of Statesboro Blues–contest is pretty much over right there for my money.


      • ChacoKevy says:

        I dig that. When I put on my critic’s hat, I do think that Allman’s album is the better, more ambitious and historically relevant.

        Fortunately, I’m not a critic, but rather a slave to genius. And if you’ve got a powerful and soulful horn section, I will pretty much do your bidding…


    • Peter says:

      Be a nonconformist and say Miles Davis at Fillmore West was best!


  4. wkj says:

    Also, you should be prepared for the “I can’t earn more or I will jump into a higher bracket” issue. If the 39.6% rate is restored, it will only apply to the amount of any taxable income IN EXCESS of $250,000. A common belief seems to be that once someone’s taxable income gets to $250,000.01, the higher rate would apply to ALL of their taxable income down to the first dollar. That fallacy seems to be the only explanation for the zany statements attributed to the Vienna, VA. chiropractor in the Nov 19 NYT.

    http://www.nytimes.com/2012/11/19/business/investors-rush-to-beat-threat-of-higher-taxes.html?adxnnl=1&hpw=&adxnnlx=1353514784-JTGgQXXE7olmxtWQk5I0aA&_r=0


    • pjr says:

      It might be worth noting that the capital gains and dividends tax rates also rise ONLY for money that is above the $250,000 line. This not so straightforward and easy to grasp, but the IRS seems to have followed their orders rather well.


  5. Tom Cantlon says:

    Thanks for providing these kinds of tips. It’s in those many one-on-one conversations that a big part of any change happens.


  6. Nhon Tran says:

    Thank you. Enjoy your Thanksgiving holiday with family. Same to all American OTEers.

    RE: paragrapth beginning with: “You know what really hurts our deficits, Auntie?” Sure, the Bush tax cuts, but also the mandated entitlements. But what really hurts the federal budget going forward is the diminishing capacity of the economy to generate sufficient revenue to meet Americans’ (unrealistic?) expectations of, and demand for, government services. See the latest CBO report about the declining potential growth of the economy (thank you Jared for an excellent blog on that report).
    Regards.


  7. Peter says:

    When people compare the federal budget to a household budget and say that when families are in debt they reduce their spending, just retort that they also try to increase their household income! Especially when voluntarily reducing it caused the debt in the first place!


  8. Allen says:

    Great job Jared — this gets better every year! I’m sure I’ll find it useful! :)


  9. Tom M says:

    Please also note that you will NEVER hear a Republican explain why the NYT chiropractor was all wrong … their strategy is based on FEAR of what tax increases may do. I am not a fan of trying to assign multipliers to various kinds of tax and spending policy changes (sorry Jared) simply because it seems obvious they are not constant over time. BUT, it seems pretty clear that wealthier people have a BALANCE SHEET to cushion the impact of short term changes in their income and expenses. UNLIKE lower income people (many of whom may live hand-to-mouth) whose spending will vary directly (and quickly) with changes in income, the wealthier folk are less likely to adjust as quickly.

    Then–and I do not hear this from anyone–you need to consider how the wealthy are investing the asset side of their balance sheet. If the Fed’s numbers are correct, there is an incredible amount of liquidity (i.e. short term deposits) on their balance sheets. If they fund the increase in their taxes from their short term deposits (that is logical after all) then they will be LENDING less in money markets. BUT … AHA … the TREASURY will be BORROWING less by selling up to $600B fewer treasury bills/notes/bonds than they did in 2012 ….

    On a micro basis there will be victims of the cliff, but on a MACRO basis it pretty much is a wash … government borrows less, and lightly taxed individuals and (hopefully) corporations lend less. WHY? Because any logical player who has been taxed as lightly as they have would have built up a liquidity RESERVE against the day when their taxes finally rise!


    • Jared Bernstein says:

      I agree re non-constancy of multipliers–in fact, that’s something I think most economists agree on. They’re going to be smaller the closer we are to full employment–unfortunately, no worries about that in the near term.


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