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April 27, 2008
Let's Think Long and Hard about Extending Those Bush Tax Cuts

There was a time one could plausibly argue that importing lots of goods and services, and borrowing a lot from abroad (financing the budget deficits that we've incurred since 2001) was a great idea. But at the time, about two and a half years ago, I made the following warning in a Council of Foreign Relations report [pdf]:

The United States faces a wide variety of possible outcomes, with the most dire having a significant likelihood. One real possibility entails the satiation of global investors’ appetite for U.S. Treasury securities, combined with an endless vista of government budget deficits. After several years of large losses on dollar assets due to depreciation, they then demand a substantial premium for holding dollar-denominated assets; either the dollar must weaken so as to make Treasury securities cheap, or yields must rise relative to those on other assets.

Here's what the dollar has done over the past ten years.

(go to the blog for images and links - phi)
Figure 1: Log Real Value of the US Dollar, normalized to 0 at peak in 2002M02. NBER-defined recessions shaded gray. Source: Federal Reserve Board, NBER, and author's calculations.

Now, after contemplating that time series, consider this item from Bloomberg:

Dollar Slide Drives U.S. Budget as Japanese Desert Treasuries

By Wes Goodman

April 28 (Bloomberg) -- Add another ailment to the U.S. misery index of soaring gasoline and wheat costs and falling home values: a federal deficit that is burgeoning as foreign investors led by the Japanese recoil from the slumping dollar.

The Japanese, who own $586.6 billion, or 12 percent of U.S. government debt, had their worst quarter in Treasuries this decade, losing 7 percent in the first three months of the year as the dollar fell to the lowest since 1995 versus the yen, Merrill Lynch & Co. indexes show. Dai-ichi Mutual Life Insurance Co., Meiji Yasuda Life Insurance Co. and Sumitomo Life Insurance Co., three of the nation's four-biggest insurers, would rather accept the world's lowest bond yields in Japan than buy U.S. debt.

``It's too early to say the dollar will stop falling,'' said Masataka Horii, head of the investment team in Tokyo for the $53.1 billion Kokusai Global Sovereign Open, Asia's biggest bond fund. ``The U.S. economy will be slow for a while.''

Japan owns more Treasuries than any other nation. After raising their holdings by $9.2 billion to $620.6 billion between March and July 2007, Japanese investors trimmed that stake by $34 billion through February, the Treasury said April 15.

America relies on foreign investors, who own more than half the U.S. government debt outstanding, to finance a deficit that New York-based Goldman Sachs Group Inc. predicts will expand to a record $500 billion for the year ending Sept. 30, after a $163 billion gap last year. Without their support, long-term interest rates would be 0.9 percentage point higher, a 2006 Federal Reserve study found.

Diminishing Returns

The yield on the benchmark 3 1/2 percent Treasury due February 2018 rose 16 basis points last week to 3.87 percent, according to bond broker BGCantor Market Data. The yield is up from 3.28 percent on March 17, the lowest since June 2003. The note's price declined 1 9/32, or $12.81 per $1,000 face amount, to $97.

Ten-year Treasury yields fell to within 2.03 percentage points of similar-maturity Japanese government bonds on March 17, the narrowest margin in more than a decade. Japan's 1.65 percent 10-year yield is the lowest of 31 bond markets tracked by Bloomberg and compares with 4.18 percent for German bunds.

A survey of Japanese funds investing overseas found 58 percent favor euro-denominated bonds, up from 20 percent a year ago, Barclays Capital Japan Ltd., a unit of the world's fifth- biggest currency trader, said in an April 24 report. Kokusai cut its U.S. fixed income holdings to a record-low 20 percent in March, from 32 percent two years ago.

``European debt is more attractive than Treasuries,'' said Nobuto Yamazaki, executive fund manager at Diam Asset Management in Tokyo, which runs an $8.55 billion bond fund that is Japan's third-biggest. The euro, which gained 14.5 percent in the past year against the dollar, ``will continue to be strong,'' he said.

Of course, this is not the only hazard to the dollar's value. Interest rate differentials, accelerating inflation in the US vis a vis other countries, the possibility of dollar depegging are also important [1], [2], [3]. Which one will prove the most important is hard to say, which is why Justin Fox quotes me as "confused" about the likely path of the dollar. Downward, sure; but how far, and how long, are the questions that remain. But my guess is dumping a lot more US Government debt on the market over the next few years by making the Bush structural budget deficit permanent is not the way to stem the dollar's slide.

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Phred said:

I'm missing the point of this.

Are you saying Congress should raise taxes when the Bush tax cuts expire?



Phred

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the tax cuts bush passed only benefit the richest people in the country. john mccain acknowledged this back when it was proposed (2001?)

roughly 60% of large corporations paid NO TAXES last year

the taxes have to come from somewhere. where do they come from you ask? thats right.. the middle class. the same people who this country is seemingly trying to bankrupt.

meanwhile, the elite in the country keep getting richer, and keep getting tax breaks.

investment banks are taking bold risks and getting bailed out with OUR TAX DOLLARS- but we will never see a penny of that money back, much less a return on our investment.

the bush tax cuts are valid for 2 more years. if mccain gets elected, he has vowed to make them permanent.

sounds like fun.

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the taxes have to come from somewhere. where do they come from you ask? thats right.. the middle class.

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Phred said:

I'm missing the point of this.

Are you saying Congress should raise taxes when the Bush tax cuts expire?



Phred

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Im middle class, and I dont pay taxes. I have only paid federal taxes one year in 9 years of employment.

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Yes, we should raise taxes when the Bush tax cuts expire.

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"I certainly would not claim that tax cuts pay for themselves," Edward P. Lazear, chairman of the president's Council of Economic Advisers, testified last year. He's not alone. In the 2003 Economic Report of the President, the council concluded that "although the economy grows in response to tax reductions (because of the higher consumption in the short run and improved incentives in the long run) it is unlikely to grow so much that lost revenue is completely recovered by the higher level of economic activity."

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Rich people pay the majority of taxes because they have the majority of the money.

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Im middle class, and I dont pay taxes. I have only paid federal taxes one year in 9 years of employment.

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How do you manage that?

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The federal government simply doesnt charge me any.    I astonished every year it happens.  The tax code is extremely progressive.




As far as tax cuts go, I am for them philosophically.  But with such huge debt, it may not be the best time to have them - I dont know.  I do know however, that the debt should be tackled twos way, taxes as you mentioned and cuts in spending.  The number one holder of US debt is promises made to old people who didnt save a dime and spent on luxuries their whole life.  Need to stop that BS right away.

Sounds like you live in a cheap area and are good with money -

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Their tax burden is higher proportionally than their share of the nation's wealth.

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s far as tax cuts go, I am for them philosophically. But with such huge debt, it may not be the best time to have them - I dont know. I do know however, that the debt should be tackled twos way, taxes as you mentioned and cuts in spending.

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phi1618 said:

Rich people pay the majority of taxes because they have the majority of the money.

It's not true that rich people necessarily pay a higher portion of their income as taxes, though only the super-rich really benefit. Hedge fund managers like George Soros (close to $3 billion income last year) and Jim Simmons (a paltry $1.4 billion) pay tax at a 15% marginal rate, vs. 28-35% for more ordinary people.

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Of course, it also depends on how you treat entitlement programs. For example, the marginal income tax rate for someone who makes $100,000 in a year is 28% vs. 25% for someone who makes $50,000, but the total tax for social security and medicare drops from 15.4% to 2.9%, so the total federal tax rate drops from 40.4% to 30.9%

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Tax rates and the social security wage base limit. Social security and Medicare taxes have different rates and only the social security tax has a wage base limit. The wage base limit is the maximum wage that is subject to the tax for the year. Determine the amount of withholding for social security and Medicare taxes by multiplying each payment by the employee tax rate. There are no withholding allowances for social security and Medicare taxes.

The employee tax rate for social security is 6.2% (amount withheld). The employer tax rate for social security is also 6.2% (12.4% total). The 2007 wage base limit was $97,500. For 2008, the wage base limit is $102,000.

The employee tax rate for Medicare is 1.45% (amount withheld). The employer tax rate for Medicare tax is also 1.45% (2.9% total). There is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax.

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(this is hidden from a worker somewhat since part of the tax burden is placed on the employer, but the net effect is the same since it's been this way for a while.)

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1. The share of total federal income taxes paid by the top 1% of tax filers increased to 39.38% in 2005 (most recent year available), while the tax share of the top 5% climbed to 59.67%. The income tax share of the top half rose to 96.93%, according to recent Internal Revenue Service (IRS) data. The tax shares are the highest on record for these groups in comparable IRS data going back to 1986.

2. The share of adjusted gross income generated by the top 1% increased to 21.20% in 2005, relative to a level of 20.81% reached during the height of the stock market bubble in 2000 (when the income tax share of the top 1% was 37.42%). Although the income share of the top 1% is similar in 2000 and 2005, the income tax share was about two percentage points higher in 2005.

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Of course, it also depends on how you treat entitlement programs. For example, the marginal income tax rate for someone who makes $100,000 in a year is 28% vs. 25% for someone who makes $50,000, but the total tax for social security and medicare drops from 15.4% to 2.9%, so the total federal tax rate drops from 40.4% to 30.9%


Nonsense:

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Tax rates and the social security wage base limit. Social security and Medicare taxes have different rates and only the social security tax has a wage base limit. The wage base limit is the maximum wage that is subject to the tax for the year. Determine the amount of withholding for social security and Medicare taxes by multiplying each payment by the employee tax rate. There are no withholding allowances for social security and Medicare taxes.

The employee tax rate for social security is 6.2% (amount withheld). The employer tax rate for social security is also 6.2% (12.4% total). The 2007 wage base limit was $97,500. For 2008, the wage base limit is $102,000.

The employee tax rate for Medicare is 1.45% (amount withheld). The employer tax rate for Medicare tax is also 1.45% (2.9% total). There is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax.



http://www.irs.gov/publications/p15/ar02.html#d0e2130

For somebody making $100,000 in 2007 only $2,500 would be exempt from Soc sec for a whopping total savings (?) of $310. This will be zero for 2008 when the limit goes up. Further, no matter how much you paid into soc sec your monthly benefits are capped. Someone who paid the max his whole life has been well and truly fucked.

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THE CONSTITUTION DOES NOT ALLOW FOR INDIVIDUAL INCOME TAX. do your homework. the government is illegally robbing us of our hard earned dollars to finance shit the government should not even be participating in.

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