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The basic skills section
How to Think about the Deficit - 1
How would you measure the federal deficit?
How to Think about the Deficit - 2
Should we think about the deficit in “absolute”
or “relative” terms?
For example, would you rather be $5 in debt and
have $10 or be $20 in debt and have $100?
Thus, is the “critical factor” the absolute amount
of the debt or the debt in relation to your
ability to pay it off?
How to Think about the Deficit - 3
The next slide will show you the federal deficit in
current dollars (i.e., not adjusting for
inflation), constant dollars (i.e., adjusting for
inflation) and as a percentage of the economy
(i.e., as a percentage of the Gross Domestic
Product) over time.
How to Think about the Deficit - 4
Year Current
1943
54.6
1963
4.8
1983 207.8
2003 377.6
2009 1,412.7
Constant Percentage of GDP
531.7
30.3%
30.1
.8%
385.3
6.0%
402.8
3.4%
1,279.6
9.9%
So, how large is the federal deficit?
(Dollar amounts are in billions – in 2009 the
deficit is 1.279 trillion dollars)
How to Think about the Deficit - 5
The deficit increases during recessions. Why?
Would you actually want the federal
government to reduce it’s deficit during a
recession?
Should the deficit be considered from a “shortterm” or “long-term” perspective? Thus, if
the cost of reducing the current federal deficit
causes higher unemployment and reduces
future earnings (e.g., through less education)
is short-term deficit reduction advisable?
How to Think about the Federal
Debt
Federal Debt (i.e., total of the annual deficits) as
a percentage of GDP:
1945 – 106.2%
1981 - 25.8%
1987 - 41.0% (no recession but tax cuts)
2000 – 34.7% (Clinton raised taxes)
2006 – 36.5%
2010 - 62.2%
Tax Cuts, Wars and Recessions increase the debt
Government Debt as a Percentage of a
Nation’s Economy
Nation
Canada
Germany
Britain
Netherlands
U.S.
Norway
2010 - Govt. Debt
as a Percent of GDP
84.0%
78.8%
76.5%
64.6%
58.9%
47.7%
How Should We Measure “Well-Being”?
If someone spends $1,000 on diabetes medicine it
counts as part of GDP. However, wouldn’t the
same person have a better life if they didn’t
have diabetes but spent $750 on a computer?
Since $1,000 is greater than $750, in this
example GDP would be higher for diabetes
oriented spending than for buying a computer.
GDP (Gross Domestic Product) only
measures the monetary value of the
economy. It tells nothing about how the
money is used or any non-monetary value
(national health, the functioning of the
political system, job security and measures
of community well-being).
Typically, on such indicators, the United
States ranks lower than the high tax and
strong welfare state countries of Northern
Europe (e.g., Norway, Sweden, Denmark,
Finland, and the Netherlands).
Thinking About Data - 1
Bush: Pollution is lower today than when I
became president.
Kerry: Pollution would have been lower if
President Bush had done nothing instead of
what he did.
Four Options: 1 – Bush right/Kerry wrong; 2 –
Kerry right/Bush wrong; 3 – both right; 4- both
wrong
Thinking About Data - 2
Answer #3 is correct (i.e., they’re both right).
But how can both statements be true?
It is useful to distinguish between a:
TREND
LEVEL
RATE
Thinking About Data - 3
“My job is not to worry about those people, “
Mitt Romney said of the 47% of Americans
who are likely to vote for Barack Obama.
Romney says that “these are people who pay
no income tax,” “who are dependent upon
government, who believe they are victims,
who believe the government has a
responsibility to care for them, who believe
they are entitled to health care, food, to
housing, to you-name-it.”
Thinking About Data - 4
In 2011, of the 47% who paid no income tax 61%
are working and have incomes too low to pay
federal income taxes but do pay federal
payroll taxes (for Social Security and
Medicare) while 21% are elderly (i.e., retired
living on Social Security) while the remaining
18% are largely unemployed. Remember this
is 18% of the 47% who don’t pay federal
income taxes, not 18% of the entire nation.
Thinking About Data - 5
Part of the reason so many Americans don’t pay
federal income taxes is that Republicans have
passed a series of very large tax cuts that
wiped out the income-tax liability for many
Americans. That’s why, when you look at
graphs of the percent of Americans who don’t
pay income taxes, you see huge jumps after
Ronald Reagan’s 1986 tax reform and George
W. Bush’s 2001 and 2003 tax cuts that strongly
favored the wealthy.
Thinking About Data - 6
Some of those tax cuts for the poor were there
to make the tax cuts for the rich more
politically palatable. A top Bush administration
official asked a reporter, “Do you think we
wanted to include a welfare payment to
people who don’t pay taxes and call it a tax
cut?” “No. But that’s what we needed to do to
get it done.” Under Paul Ryan’s and Newt
Gingrich’s Tax Plans Romney would pay no
federal income tax and pay less than 1% of his
income in federal taxes.
Thinking About Data - 7
Don’t confuse dollars with percentages! In
discussing the Bush Tax Cuts, an article in the
Los Angeles Times used the example of a
woman who paid $8 per month in federal
income taxes and, as a result of the Bush Tax
Cuts, would now pay $0. Thus, the Bush Tax
Cuts reduced her federal income taxes by
100%. Contrast this with someone who had
$1,000,000 subject to the highest income tax
rate that was reduced from 39.6% to 35%
under the Bush Tax Cuts.
Thinking About Data - 8
This individual’s federal income taxes were
reduced by only 11.6% (i.e., 39.6 - 35% = 4.6
and 4.6 is 11.6% of 39.6). However, reducing
this millionaires’ federal income tax rate from
39.6% to 35% saves them $46,000 per year
(i.e., $46,000 is 4.6% of $1,000,000). So, while
the poor woman received a 100% reduction in
federal income taxes and the millionaire only
received an 11.6% reduction, the millionaire received
over 99% of the combined benefit these two
individuals received (i.e., $46,000 is approximately
99.75% of $46,096).
Thinking Through Relationships - 1
Statement: “High taxes discourage people from
working and reduce economic growth”
Questions: 1 – Growth for whom? The person
paying the taxes or for the nation as a whole?
2 – Can you think of a way that the opposite
could be true (i.e., higher taxes = higher
growth)?
Thinking Through Relationships - 2
Increasing the taxes on the rich may cause them
to work less hard. However, if this money is
redistributed to poorer people for productive
purposes (e.g., education, training, day care,
etc.) the reduced income of very high income
individuals can be more than offset by the
increased earnings of those whom the
money/services were redistributed to. Thus,
higher taxes can lead to greater growth for the
economy as a whole.
Putting Skills Together - 1
The Estate Tax: As a result of the 2001 Bush Tax
Cuts, by 2009 the value of estates exempt
from taxation had risen to $3.5 million for
individuals and $7.0 million for couples. The
tax rate above this threshold was 45%. Thus,
if an individual inherited $4.0 million dollars
they would pay $225,000 in taxes (i.e., nothing
on the first $3.5 million and 45% of the
remaining $500,000).
Putting Skills Together - 2
In 2009, only the richest ¼ of 1% of estates paid
any estate tax (i.e., 99.75% of estates were too
low to be subject to the tax). Under these
rules only 50 small farms or businesses in the
entire nation were subject to the estate tax.
Virtually all Republican Congressmen and
Senators want estates to be entirely tax free.
They compromised with President Obama and
got the thresholds raised from $3.5 to $5.0
million for individuals and from $7.0 to $10.0
million for couples.
Putting Skills Together - 3
By comparison to the estate tax system in effect
prior to the 2001 Bush Tax Cuts, the current
estate tax system costs approximately $68
billion dollars per year in lost revenue. Think
of what this means in terms of people who
will now lose medical care (i.e., Medicaid some will die as a result), students who will
never go to college, workers who will not be
retrained, working class people who will lose
public transportation services all to pay for
this tax cut for the extremely wealthy.
Putting Skills Together - 4
One of the main purposes of the “skills”
component of this course is to equip you to
think through policies such as the estate tax.
Here are some questions worth considering.
Does reducing, or eliminating, the estate tax
reward merit or luck? Since the estate in
question was typically “built” by someone
other than the person inheriting the money
and the family you are born into is entirely a
matter of luck, it would seem like “luck,” not
“merit” is being rewarded.
Putting Skills Together - 5
Additionally, don’t the program cutbacks
necessitated by the lost revenue from estate
relief reduce the ability of people to “work
their way up” (e.g., reduce government
spending on education, job training, public
transportation to work, etc.)?
If you believe in inheritances, what is your policy
goal? Is it maximizing the number of people
who inherit money or maximizing the amount
of money inherited? These are potentially
conflicting goals.
Putting Skills Together - 6
Let’s reason this out. During the pre-2001
period (i.e., before the Bush Tax Cuts), only
about the richest 2% of estates were subject
to the estate tax. Now, this is less than ¼ of
1% of estates. Even if an estate was subject to
tax, those inheriting would still inherit a very
large sum of money (i.e., the estate tax would
reduce, not eliminate their inheritance).
However, every year many inheritances are
either greatly reduced, or eliminated. If the
estate tax isn’t the reason, what is?
Putting Skills Together - 7
ANSWER: The “end of life” medical expenses of
the person who you would inherit from. For
example, let’s say your father was going to
“leave you” a home valued at $400,000. If he
was diagnosed with Alzheimer’s disease 7
years before death and had to live in a nursing
home, the costs could easily wipe out your
entire $400,000 inheritance. Unlike most all
wealthy democracies, the U.S. government
does NOT provide money for long-term care
beyond about 3 months.
Putting Skills Together - 8
The following is almost certainly “true”: a significantly
GREATER NUMBER of people would inherit money if
we taxed wealthy estates much higher (and had
higher tax rates in general) and if the Medicare
program provided long-term care coverage, than by
having either a small, or no, estate tax but not having
governmentally provided long-term care insurance.
On the other hand, due to the many millions of
dollars inherited by a few individuals the TOTAL
AMOUNT OF MONEY inherited could be greater
under minimal estate taxes.
Putting Skills Together - 9
For example, the total amount of money
inherited would be greater if one person
inherited $100 million dollars than if 1,000
people each inherited $50,000. If you believe
in inheritances, which is your goal: maximizing
the number of inheritances or maximizing the
total amount of money inherited?