The Republican tax plan includes a repeal of the federal income tax deduction for state and local income taxes, and a partial repeal of the deduction for local property taxes. The Economist magazine likes the idea.
“Republicans have since come to view the state and local deduction as something that encourages big government, rather than deterring it. It subsidizes Democratic-leaning states that set their taxes high…States are surely capable of balancing their budgets without receiving a federal subsidy for doing so. There is no real justification for distorting their fiscal decisions one way or the other.”
There is one justification, though no politicians on either side have an incentive to point it out. Thus making the policies that really shift money, and the identify of the beneficiaries, once again the “unsaid.” One reason that high tax states are in fact high tax states is that the federal government drains money out of them. This deduction of state and local taxes from federal personal income taxes is sort of a partial make-good.
New York City was long known as America’s welfare capital, with a large dependent poor population and extensive services for them. But one doesn’t hear much about that anymore. New York State has also had the highest Medicaid spending in the United States, but one doesn’t hear much about that anymore either. The data shows New York still spends more on aid to the needy than most other states, as a share of its residents’ personal income, but the gap between New York and the rest of the country closed between FY 2004 and FY 2014. As the gap closed, aid from the federal government to New York shifted to other places. Today, moreover, most of this “social” spending is on health care, and thus on older people, not on those with lower incomes. A discussion of these trends, with tables and charts, follows.
Let’s start this post the way I ended the one before. Our population is getting older. Labor force participation is down. The average worker is getting poorer. The average adult is getting fatter and sicker. There are fewer intact families, and less family support. Jobs are very temporary, even among those who still have actual jobs. Unions have disappeared except in the public sector, where they have become another part of the ruling class getting richer as the expense of most workers. People are moving around the country, spending their childhood and getting their education in one state, their working and taxpaying years in one or more different states, and their retirement in yet another state. Leaving friends, family, church and community behind – often far behind. More people are dying early, and becoming disabled early. With a cradle to grave welfare system and an otherwise fractured and mobile society, a relationship with the federal government is becoming the only relationship most Americans will have from cradle to grave.
All these factors are likely to turn the federal government, more and more, into just an insurance company that also has an army, a government that is less and less able to accomplish much of anything else. Trying to change this long-term trend, given our economic, demographic and social conditions, would likely cause a social collapse with far more suffering and early death than is taking place already. There is lots of bad news about this, but perhaps a little good news as well. That good news has something to do with the views of Supreme Court Chief Justice John Roberts, and President Franklin Delano Roosevelt’s “Four Freedoms” speech.
Just based on the news, it would be easy to believe that not much had changed for the federal government during the Obama Administration, other than Obamacare. After that program passed, barely, the Republicans took Congress, and there has been a stalemate – with shutdowns, possible defaults, and a sequester that was meant to force compromise by taking both sides hostage, but turned out to be the actual public policy.
Now that I’m looking at the data, however, I see things completely differently. Obamacare is nothing but a blip in the relentless increase of health care as a percent of the federal budget, mirroring its ongoing increase in the economy as a percent of GDP. The sequester actually did shrink federal spending in the limited areas to which it applied, something people don’t realize because the limited federal government operations people actually see have continued to stagger on the for the moment. Meanwhile, demographic and economic changes have completely re-shaped federal expenditures based on programs that were enacted before Obama and the Tea Party were even elected. Notably the increase in the share of the population that is age 65 or over, and the share of the workforce that is working poor rather than lower middle or middle class. The result is a government completely transformed in a way that is in once sense alarming, but in another sense hopeful.
The past 35 years or so have seen a persistent history with regard to federal tax revenues. Republicans, who have dominated the federal government for most of that time, have cut the taxes that fall more heavily on businesses and the wealthy, the personal and corporate income tax. And then following a fiscal disaster and soaring deficits, Democrats increased those same taxes. In the end the personal income tax ended up, as a percent of GDP, about where it was – at 8.1% of GDP in FY 2014 compared with 7.9% of GDP in FY 1978. While the corporate income tax ended up lower, at 1.9% of GDP compared with 2.6%. This is true even though profits account for a higher share of GDP today than they did in 1978, and work earnings at the top account for a much higher share of total earnings, factors that should have increased personal and corporate income tax revenues as a percent of GDP even with the exact same rules.
Payroll taxes, meanwhile, were substantially increased by the Republicans and never reduced, save for a special exemption in the Great Recession. These taxes fall exclusively on work income in the United States, and more heavily on the working and middle classes. The wealthy pay less, as a percent of their income, the retired do not pay at all and, with regard to international trade, work done in the United States is subject to the tax whereas goods imported from abroad are tax-free. The payroll tax burden increased from 5.3% of GDP in FY 1978 to 6.5% in FY 2001. Before falling to 5.9% in FY 2014, after the share of Americans working and average work income plunged in the Great Recession. Other federal revenues, such as excise taxes, estate taxes, and customs duties totaled 1.7% of GDP in FY 1978 and 1.6% of GDP in FY 2014, although the composition of this category has changed. These trends are discussed in more detail below.
It is once again time for a major federal election, and I am once again doing my best to avoid listening to the nonsense being spoken by the Presidential candidates. I have not watched any of the past debates, and based on what I hear don’t want to watch any future debates either. Despite our nation’s challenges, the candidates are promising to hand out more goodies, and promising the people who would benefit would never pay for them. Bernie Sanders claims that everyone can have everything, and the only people to pay would be the rich. Ignoring the fact that the Bush tax cut for the rich has already been repealed, and we are still facing a national fiscal disaster. Republicans are once again promising tax cuts for the rich, and promising that the only people who would face sacrifices would be the poor and those in younger generations. The same people Republicans have made worse off in federal policy for the past 35 years, with no acknowledgment of that fact.
Only Donald Trump speaks as if he realizes how much worse off the younger generations following in the wake of Generation Greed actually are. But he doesn’t really explain it, almost certainly doesn’t understand it, and instead panders by creating scapegoats, blaming the Chinese, Mexicans and Muslims for all of the nation’s problems instead. The way the poor, immigrants and those living in older central cities were blamed 20 years ago. And he promises that all people have to do is elect him, and the unsustainable consumer debt-driven phony economy that floated his casinos, before they went under, will somehow return. None of this has anything to do with anything any of them actually would, or could, do if elected. So rather than listen to what they say, I have once again tabulated some federal budget data to what the federal government has actually done over the past 35 years-plus. To see how the choices of the past have affected our real future.
and I took a look to see how much of our current recovery is just more debt fueled consumption. More selling out our personal and collective futures to maintain our standard of living despite growing inequality, and inadequate savings and investment. More fake prosperity based on paying workers less, yet selling more to them, and importing more than we export, with these imbalances fueling excessive and unearned executive pay.
Everyone knows this has to change sooner or later. The entire house of cards was collapsing in 2008 before the federal government stepped in, at great cost, to keep the game going a while longer. To buy time so Americans, businesses and the financial sector could adjust and the imbalances could be rectified. Has that happened? Is this economic expansion on a firmer foundation than the junk bond bubble, the dot.com bubble, and the housing bubble? Let’s go to the videotape and find out.