Simpson Bowles on Taxes

Any plan that congress agrees on to avert the fiscal cliff must include some sort of tax reform.  There is little way around it.  The politicians tend to skirt the issue, we need to have a grown up conversation about how to improve our tax code.  We can make it simpler, and we can make it fairer.  There won't be any magical plans that promote 10% GDP growth and eliminate all debt by 2015.   It's just not going to happen.  What can happen though, is small steps in the right direction.  The Simpson-Bowles plan makes such a step, pushing the dialogue forward on meaningful tax reform.

Below is a graphic illustrating the Simpson Bowles plan on taxes.

While the above chart might seem complicated, we've set out to describe, in simpler terms, the major elements of the Simpson-Bowles tax proposal.

First off, the Simpson-Bowles plan eliminates the Bush era tax cuts for the wealthiest Americans.  This is done before changes are made to the tax code.  The elimination of these breaks are built into its baseline.

Additionally, there are a lot of tax increases in the Simpson-Bowles plan.  This is necessary to make any large scale dent in the debt.  As a balanced approach, the revenue increases and spending cuts are roughly equal.  The Simpson-Bowles plan also taxes dividends and capital gains as normal income.  This basically results in a huge tax increase for the rich, who hold more of their wealth in stocks and would be taxed more in capital gains and dividends.  Therefore, the Simpson-Bowles plan is able to lower the actual rate while still maintaining equity in taxation.  The Simpson-Bowles plan also significantly cuts deductions for taxes, which allows it to lower some overall rates while still getting revenue increases.  The difference is that people would be paying a higher percentage of their income, because they have less deductions from the baseline rate.

The Simpson-Bowles also recommends raising the gas tax by 15 cents.  While this would undoubtedly hurt some Americans who need gas for travel, work, etc, It could be a much needed revenue booster and a way to get on the right track for green energy.  Americans consume a lot of gasoline, so having a gas tax increase could dramatically increase the revenue into the government's coffers.

We'll have more on tax reform tomorrow.

Simpson Bowles: Defense Cuts and Why We Need Them

The Simpson-Bowles plan, which we mentioned in yesterday's post, calls for deep cuts in defense spending, and for good reason.  Defense spending makes up a significant portion of the nation's overall budget, and that share is even larger when we only look at discretionary spending.  This makes the Department of Defense a prime candidate for budget cuts.

Military spending has also ballooned in recent years because of wars in Iraq and Afghanistan.  Both these conflicts have increased the amount the United States spends on the military and each has had a significant effect of the debt of the nation.  In the figure below, we can see the gradual increase in spending after September 11th, until Obama's military budget freeze.

Spending this much money just doesn't seem like a valid use of resources.  The US military must learn to be more efficient with how it uses its money.  Other countries all around the world, though they do not have the same military capabilities and presence of the United States, spend far less than us on defense.  The United States is far and away the largest military spender in the world.  It's time it took a step back and found more efficient ways to do things.

While military spending certainly helps US businesses grow and make profits, the amount the military spends is showing up less and less in actual changes to our GDP.  Therefore, the value in trimming debt is going to be a far greater positive than the effect of any growth maintaining the spending levels might cause.  

We can afford to make these defense cuts, and we will not be weaker as a nation because of them.  While we might deploy less soldiers and fighter jets around the world, we can still be the most powerful military in the world.  We spend so much, that cutting a bit probably won't make that much of a difference in the grand scheme of things. Also, a ballooning federal debt is also a national security risk, and endangers to solvency of our entire nation.  It is in our country's best interests to find ways to reduce debt, and cutting unnecessary defense spending is one way to do that.  As a part of a balanced approach, reforming the Pentagon budget is necessary in any negotiations regarding the fiscal cliff.

The Fiscal Cliff: Part 3-Simpson Bowles

The Simpson-Bowles Plan is a plan for improving our nation's fiscal situation produced by the National Commission on Fiscal Responsibility and Reform, and named after the commission's co-chairs, former Republican U.S. Senator from Wyoming Alan Simpson and former Clinton Chief of Staff Erskine Bowles, a Democrat.  This commission was created by president Obama in 2010 to identify policies that could be used to solve our budgetary crises.

The Simpson-Bowles Plan goes beyond what many other ideas to reduce deficits entail.  Both Simpson and Bowles bravely recognize the need for increased revenue and reduced spending to get the nation back on the track of financial solvency.  If we want to be serious about reducing our debt, there will be no easy decisions.  Money must come from all places possible, and this includes reforms to the tax code, social security, and the defense budget.

As you can see in the figure above, the Simpson-Bowles proposal (Co-Chair Proposal) goes far beyond what any major party has come up with.  What the plan might lack in depth in any one any it makes up for it in its balanced approach to cutting debt.  Paul Ryan's plan includes more cuts to domestic discretionary spending, but leaves defense spending alone, for the most part.  The Simpson-Bowles approach also increases revenue, partly by eliminating loopholes, partly by raising taxes.  They understand that we cannot have a balanced approach without an increase in revenue.  Until now, we have never fought a war without an accompanying tax increase to pay for it.  Now, with wars in Afghanistan and Iraq, we have had two.  This simply is not sustainable.

We hope that Senators and Congressman, as well as the President, after initially spurning this plan, take a second look at it in the midst of fiscal cliff negotiations.  We need real, concrete plans to cut debt if we are to ensure the financial stability of this nation for years to come.  In coming posts, we will elaborate on details of the plan, and explain why its ideas are important.

The Supreme Court: DOMA and Proposition 8

The Supreme Court recently announced that they would review the Defense of Marriage Act (DOMA) and California's Proposition 8, a constitutional amendment that established marriage as between one man and one woman.  The Defense of Marriage Act, passed in 1996 by large majorities in both houses of Congress, defined for federal purposes marriage as the legal union between one man and one woman.  Under this act, no state is required to recognize any same-sex union performed in another state.

These two cases present a large opportunity for the Supreme Court to change the dynamic of LGBT equality around the country.  Any decision the Supreme Court makes will likely have effects that reach far into the future.

Over recent years, the tide has turned regarding the public opinion on same-sex marriage.  More and more people, polls have found, believe that same-sex couples should be allowed to marry.  

The fact that the Supreme Court has even considered these cases means we have come a long way since initial days of extreme injustice.

Here is a PBS NewsHour report on the big news:

It will certainly be interesting to see how the conservative justices, namely Justice Kennedy and Chief Justice Roberts, react to this case.  

The Fed: Demystifying the Most Powerful Part of Government

As we discuss the debate over the fiscal cliff, it is important to understand what the government can do in order effect change on the economy.  In this post, we'll concentrate on the Federal reserve, a very powerful, if not the most powerful, part of the US Government.  The Federal reserve uses Monetary Policy, or the control of the money supply, in order to establish low unemployment and low inflation.

Above is a graphic showing how the Federal reserve is set up.  There are many organizations involved in the Federal Reserve, and the important thing to take away is that these organizations work together to establish monetary policy for the United States.  The Board of Governors is the national level of the Federal Reserve.  Ben Bernanke is the chairman of this board.  There are also regional Federal Reserve Banks, which have headquarters in specific cities around the country, as you can see below.

The Federal Open Market Committee is a group that does many actual transactions in order to regulate the money supply.  This group is made up of all the national governors and 5 of the 12 regional heads.  The chairman of the Federal reserve Bank of New York is always on this board, in recognition of New York City as the financial capital of the United States.

Now, the Federal Reserve has no power over fiscal policy, which is the manipulation of taxation and expenditure to promote low unemployment and low inflation.  While the desired end  result is the same, the power over Fiscal Policy resides mostly with Congress and the President.  What the federal Reserve   can do is adjust the amount of money in the economy to promote growth (easy money) or low inflation (tight money).

For example, with an easy money policy, the Federal Reserve will allow the interest rates it charges to other banks to lower.  This effectively lowers the cost of money.  Money has a cost? one might ask.  In a practical sense, it does.  The cost of buying money in the form of a loan is the amount you pay in interest.  By lowering interest rates, it is more attractive to buy money.  Accordingly more people will get loans and more people will be spending that money, fueling the economy.  

Tight Money Policy, on the other hand, raises interest rates, causing the price of money to rise and less people to borrow money.  This seems like limiting the economy, and in effect, it is.  In some cases, especially when there is high inflation, it becomes necessary to slow the economy down by making sure there is less money out in the economy.  The Fed does this by employing a tight money policy.  

Now, while the Fed would like to be able to control interest rates to control monetary policy, in practice, most banks do not get their money from the Federal reserve.  It is much easier to get money from fellow banks, and there is a strong stigma behind borrowing from the government.   They can control rates indirectly, but by far the most commonly used tool or tools are Open Market Operations.  Open Market Operations (OMOs) are activities by a central bank (the fed, in this case) to buy or sell government bonds on the open market.  This helps control the supply of base money, the monetary base, or supply, of a nation's money.

As you can see above, in an easy money policy, more money is put into the economy, as the name would suggest.  Here, the Fed spends money to buy bonds and securities held by citizens, providing them with money to increase the money supply.  In tight money policy, the Fed sells these same bonds and securities, which people pay for with cash, taking that money out of the money supply.  These operations are performed and adopted by the aptly named Federal Open Market committee (see above).

Steelers QB: not the real Big Ben

Now, even though the Fed has no power over taxing and spending, they can still regulate the money supply of the entire nation.  This makes the Federal reserve and its head, Ben Bernanke, very powerful.  they are charged with a great responsibility, and it is important that they get their job done right.  Without guidance, the money supply could go up and up and up, leading to hyperinflation like that of Weimar Germany, where people used money, because it was cheaper than kindling and firewood.

Big Ben Bernanke

It is important to understand how the Federal reserve works, especially since we discuss using fiscal policy (taxation and spending) to fix our nation's budget problems.  We must coordinate our economic efforts, using both monetary and fiscal policy together, not against each other, to get our economy back on track. 

Fiscal Cliff: Part 2-Taxes

If Congress does nothing to act on the expiration of the Bush Era tax cuts, many will see a modest rise in the amount of taxes they must pay.  When planning for the future and trying to work a deal, Congress must balance cutting the deficit with economic recovery, as raising taxes would lead to a decrease in consumer spending, the principle part of Gross Domestic Product (GDP).

In order to balance spending cuts, increased revenue must be on the table for a fiscal cliff deal.  In order to get enough revenue, limiting deductions and raising taxes on millionaires is necessary.

In the campaign this year, Mitt Romney championed limiting deductions as a way to make his proposed tax cuts revenue neutral.  If applied to the fiscal cliff, we can use these same limits on deductions to increase the revenue that the government is able to collect.  Capping total deductions at $50,000, according to the Tax Policy Center, would raise around $750 billion over a ten year period.  Deductions would actually hurt the richest Americans the most, leaving middle class America unscathed.  80 percent of additional revenue would come from top earners in the 1%. Some deductions that are on the chopping block specifically appeal to rich Americans, as you can see in the table below of prospective plans.  A tax break for corporate jets is such a deduction.  Working with the deduction system could bring in even more money, though it would hurt more Americans in the process.

Another option is to increase personal income taxes to the pre-Bush tax cut levels.  This would make a modest dent in the deficit, so more revenue is obviously needed.

All in all, we need a balanced approach on revenue increases just like we need a balanced approach on the whole fiscal cliff crisis.  Congress needs to make sure that it is not unduly hurting anyone, especially the middle class and the poor.  We're not out of the woods yet, with our economy in a sluggish recovery.  Prudent fiscal policy is just what we need to continue or recovery and make a dent in our debt for the future.

The Fiscal Cliff Series: Part 1

The term "Fiscal Cliff" is used to describe the problem faced by Congress at present.  A combination of tax cut expiration and automatic cuts will take effect come January 1st if a plan is not produced to avert the situation.  

Because of Congress's failure to come to an agreement in accordance with the Budget Control Act of 2011, which raised the debt ceiling but left open the ways to cut deficit spending.  Since a bargain was not reached, sequestration will occur, which mandates across the board spending cuts.  In addition, the Bush era tax cuts will expire, as will a 2% Social Security Payroll tax cut, and the expiration of federal unemployment benefits.

If Congress doe snot act, as before, the results could be very grim for our country's growth.  It will have a very detrimental effect on an economy that is still shaky.  

The effect of the Fiscal Cliff on GDP

As you can see above, analysts have projected strong negative effects on our nation's GDP if  we run over the Fiscal Cliff.  The Tax Policy Center has stated that middle income families will pay, on average, $2,000 more dollars in taxes in 2013.  The Congressional Budget Office (CBO) also anticipates increased unemployment  where 3.4 million will lose their jobs.

That being said, the country cannot continue on the path it's on with regards to deficit spending.  at least something needs to be done to curb our spending so that we get back on a sustainable debt track as our economy begins to rebound.  Large deficit spending should really only be done it trying economic times, and we should try to steer clear of that now.

The effect of the Fiscal Cliff on Deficit

Now, as we consider the negative effects of the fiscal cliff on growth, we should also note that it would drastically decrease our spending and cause us to run fewer deficits.  The CBO baseline in the figure above shows that effects of the fiscal cliff.  The blue alternative would be the effect of repealing the automatic cuts and extending the Bush Era tax cuts.  Though this also reduces deficits, at least for a while, more would need to be done to put our nation on the track of long term sustainability.  We'll discuss possible solutions to this problem in following posts.

A New Global Policy

A major problem that we face when trying to bring about peace around the globe is education levels in developing and war torn countries.  One way to measure this is by looking at the adult literacy rates, then comparing the rates to other countries.

Literacy Rates by country

The results we see are not promising.  Countries in the Middle East have literacy rates significantly lower than those of developed and even developing nation, especially for women.  This translates into fewer opportunities for members of those societies.  Without strong educational institutions, the youth in Middle Eastern and North African Countries have few opportunities to advance themselves, leading to rampant unemployment.

Without opportunities, often the only choice young people have is to associate with terrorist organizations. These young people have no future and no voice.  These young people need to be given a voice that does not involve setting off bombs.  Perhaps the Arab Spring has allowed the young people to find some way of expressing themselves and helped them vent their anger, but more needs to be done. We need to give them more, the future of a higher education.

So how does this affect our foreign policy?

In order to promote peace throughout the world, we must promote literacy and education.  Young, educated people are forces of change throughout the world.  By providing an education to lower class women, we can empower them more than ever before.  Instead of using bombs, we ought to use books to create a new global policy.  The Middle East has extreme poverty and although we may not think it is our problem, we need to make it our problem.  It is much more effective to bring up a country through education than to use crash and burn tactics of military action.

The United States must work with other countries to promote more NGOs to work inside these countries to promote education reform.  They must work with local governments to provide funding for schools.  Additionally, we must open our own doors to these young people who wish to pursue a higher education within the United States.  Politicians at home may not appreciate this policy, but it is much better in the long run to pursue a strategy of youth empowerment than to simply use military action.  We need to pursue a foreign policy of inclusion if we are to bring about peace in the Middle East, not one of exclusion.

Energy Reform Series: Part 4-The Economics of a Carbon Tax

Considering the rise fossil fuel emissions, especially those of carbon dioxide, something ought to be done in the form of policy change to promote reduction of pollution.  In this post, we will look at one idea, a carbon tax, which would be imposed on industry to promote reduction in fossil fuel use.

Taxes would be levied on carbon use.  Energies such as coal or gasoline would have a much higher rate than solar or wind power.  These clean sources of power would likely not be taxed at all.  Firms have a strong incentive to adopt whatever new technology is necessary to reduce their carbon footprint.

The draw of a carbon tax over Cap and Trade is its simplicity.  Cap and Trade involves the buying and selling of carbon credits with other companies.  The Carbon Tax simply levels a tax on carbon use on all companies.  This would also mean a carbon tax could be implemented much more quickly than a cap and trade system. From a government's perspective, the carbon tax could be more beneficial, as it supplies additional revenue to their coffers.

However, this could also mean higher energy prices for consumers.  The government might have more money, but one way to get around tax for energy companies would be to simply raise rates.  This could be a very negative effect of trying to fix a very important problem.

One way to solve this problem is to change the way the money is allocated once it is collected from the polluters.  Since households would be paying more, it makes sense to alleviate them of a burden that was supposed to be placed on major polluters.

To do this, the government would use the money collected to pay out benefits or provide tax breaks to households that would bear a burden from paying the higher rates.  This makes the whole system revenue neutral.  This would be preferable over simply levying a tax.  This way, consumers can actually make a profit by implementing their own energy saving measures, instead of just holding steady or paying their original bill.

Whether it's the Carbon Tax or Cap and Trade, Congress must act soon on establishing some method of reducing our fossil fuel consumption.  Profit is a huge incentive for businesses, and anything that cuts into that profit is an unwelcome burden on businesses.  We need to use financial incentives for our advantage when it comes to energy policy.  Both Cap And Trade and the Carbon Tax do this: they make it worth a business's while to invest in ways to reduce consumption and increase efficiency. If we do this, we can make sure that our commercial and industrial sector of the economy is clean and efficient, paving the way for energy independence.   

Education Reform

Education is a big area for reform in America.  With the introduction and failure of the No Child Left Behind Act, there is a huge space for new education reform.

                       

While No Child Left Behind highlighted some of the issues in our education system, it did not really fix our problems.

With spending increasing in the education sector of our economy, we have only seen a tiny improvement in scores:
                           

Now, test scores are obviously not everything that matters in education.  The tests that are used no not necessarily measure academic competency.  Even so, with this much money being spent on education, we would expect to see some improvement.  But, in fact, we do not.

Teaching is and will remain some of the most important jobs in America.  The sooner we all realize this, the better we are suited to go about reform.  Teachers instruct and enlighten new generations, driving them towards success.  We need to ensure that those who fill these jobs are both well qualified and well prepared to do this.  One inspiring can make a positive contribution to a students life.  These contributions are often impossible to quantify for wage purposes.  We can, to a certain extent however, pay teachers based on their affect on the students.  Merit based teacher hiring, promotion, and retention will encourage teachers to be the best they can possibly be.
                          

This is not all on the teachers though.  Instructors who teach teachers need to be the best they can be also.  Teachers need to be well prepared so that they can succeed. Ensuring that we have extensive teacher training is essential.  Teachers should be informed on strategies that help motivate students.  They can share their ideas so they all can succeed.  Such collaboration must be encouraged in the education system.

In order to push students to learn more, we must challenge them, but not beyond their limits so that they are overwhelmed.  In our educational system, there are often only two streams: Grade Level and Honors/Advanced Placement.  There is no middle ground.  Often students feel they are unready or unprepared for the most challenging class, but then, devoid of options, are frustrated with the simplicity of the Grade Level Class.

This needs to change.  Teachers in all classes need to asses student skill and willpower to offer or assign tiered assignments varying the challenge that students have.  Some students may not be able to go beyond what Grade Level requires.  Very well.  Others can have a challenge, so that they may still challenge themselves and expand their knowledge without overwhelming themselves.  This would not require any additional "Accelerated" classes from being added to the school course offerings, thus eliminating any additional class/teacher cost.  Though all assignments may not be tiered, as to ensure grade fairness, a significant amount of increased challenged could be added to the courses with this system.  Teachers can assign some tired assignments, and present a choice to the student on others, encouraging students to challenge themselves, but within their limits.  This provides a way for all students, not matter their skill level, to push themselves without increasing their stress level.

We should strive for high standards so America can produce the best and brightest.  It is important for our future as a nation.  We should have more early childhood education opportunities.  Foreign languages should be taught much earlier, such as in elementary school.   Underprivileged children should have the same opportunity to go to and succeed in school as anyone else.  Education is greatly important in our country as we strive for success in the future.  There should be a better system for paying teachers.  Merit pay is one option, but other options could be implicated.  Instead of states “dumbing down” their standards so more kids pass, we should raise standards and make sure we make them.  

More money can be spent in education, but overall, it should be spent more efficiently. We need to evaluate what programs really work in engaging kids, and funding those programs.  With better education, our children will be our future. They will be able to create better renewable energy resources, increase the US front on science and technology, and reach greater achievements on the economy. We must also include a larger range of foreign languages and arts in the studies. This will increase respect for the nation, and our future people will be able to meet with foreign people in an easier fashion. In terms of teachers, they must receive a higher pay. In these times, with huge lay-offs, we must remember, talent not tenure.  

Our education system is broken.  We have students that are struggling and we are locked into a system that rewards teachers for hanging in there the longest, not ones that effectively teach and inspire their students.

W.B. Yeats once said, "Education is not the filling of a bucket, but the lighting of a fire." By challenging our students, we can light student's intellectual fires so they burn bright and powerful into adulthood, catalyzing and illuminating their futures.