The Meltdown Lowdown (No. 2)

1. Confusing Tax Day and April Fools' Day 1: McCain's Tax Breaks

Some politicians have trouble distinguishing between tax day and April Fools' Day. After all, they both come in April -- it's so confusing.

This year, Senator McCain pulled the best prank -- he proposed a huge tax break for Exxon and the other big oil companies. With a straight face he announced that he wanted to eliminate the gas tax during the summer driving season to save drivers money. Comedy gold!

Of course, we know that the price is determined by demand, because supply is constrained by the refinery capacity of Exxon and the other big oil companies.In other words, there is a fixed amount of supply, so the price will go as high as is necessary to eliminate any shortages.

If the price of gas is determined by demand, then what happens to the price when we eliminate the gas tax? That's right, absolutely nothing. The price will stay exactly the same, drivers will pay as much for gas during the summer driving season as they would have paid if the tax was left in place. The difference is that instead of 18.4 cents a gallon going to the government to pay for maintaining roads and bridges, this money will go to Exxon to keep CEO pay high, and make Exxon shareholders happier.

Senator McCain had more too. In addition to extending President Bush's tax cuts, he wants to cut the corporate tax rate from 35 percent to 25 percent, eliminate the alternative minimum tax, double the dependent exemption from $3,500 to $7,000, and give each newborn child a million dollars.

Okay, I made up the last one, but we're trying to get in the April Fools' spirit here along with Senator McCain. These tax cuts will cost in the range of $400 billion to $500 billion a year (13 percent to 16 percent of the budget), and Senator McCain has no way to pay for them, other than a one-year freeze on domestic discretionary spending. That can maybe get you $10 to $15 billion, but where is the rest of the money?

2. Confusing Tax Day and April Fool's Day 2: Lamar Alexander's Flat Tax

Senator Lamar Alexander tried to upstage Senator McCain with his own April Fools' tax prank. He wants to give every taxpayer the option to either pay the tax owed under the current system or to pay a 17 percent flat tax. For most taxpayers this would not be a very good deal. The poorest people who pay Federal income taxes fall into the 10 percent bracket, meaning that their income (above the taxable threshold) is only taxed at a 10 percent rate. Slightly higher income taxpayers will fall into the 15 percent bracket.

A couple with two kids will not reach the 25 percent bracket unless their income is over $80,000. Even then, most of their income will be taxed at the lower 10 percent or 15 percent rate. The 25 percent tax rate only applies to the income that is over the cutoff, not the family's entire income. To have an average tax rate of more than 17 percent a couple with two children would have to earn more than $100,000. Needless to say, Senator Alexander's tax plan is not going to save your typical schoolteacher or firefighter any money.

While Alexander's plan wouldn't save ordinary folks money it would be fantastic for the rich. Imagine that you're one of those investment banker types that lost billions on bad loans and helped to push the economy into recession. Since it's been a bad year, your salary might have been slashed to a paltry $5 million or so. Under the current tax system, you might owe in the neighborhood of $1,500,000 in taxes. But, under Senator Alexander's plan, you could save about $700,000. That's almost enough money to make a difference even to an investment banker.

The idea of giving even more taxpayer dollars to incompetent investment bankers is pretty funny, but that's not even the best part of Senator Alexander's prank, in comedy it's all in the delivery and Alexander excels in that department -- he said that his plan is "designed to be revenue neutral." No one pays more, some rich people pay a lot less, and we end up with just as much money. Now that's funny.,

3. The Washington Post Calls for Unaffordable Housing

Back in the old days we used to think that one of goal of housing policy was to make it possible for young people to buy homes. The Washington Post thinks otherwise. It wants the government to intervene in the housing market, but only if its intervention will ensure that house prices remain unaffordable.

I'm serious; this one is not an April Fool's joke. The Post says that it would support government intervention to help homeowners' facing foreclosure, but only if the proposal will "stem the decline in home prices."

The Post, in keeping with a longstanding tradition, gets the logic 180 degrees backwards. It makes sense for the government to intervene in depressed markets like Detroit and Cleveland, where there is little room for prices to fall. It would make no sense to intervene in bubble-inflated markets like Los Angeles, San Diego, or Boston, where prices are falling rapidly.

Keeping people in over-priced homes would just cause them to pay too much for housing. Suppose the ratio of the house price to the annual rent is 20 to 1, or higher, which is the case in the bubble-inflated markets. If we start with a 7 percent mortgage, add in 1 percent of the sales price for property tax, and another 1 percent for maintenance and insurance, we have owners paying 9 percent of the house price in markets where renters would pay less than 5 percent. In other words, they would be paying 80 percent more for housing than is necessary.

Furthermore, they would never accumulate any equity since the prices will be dropping as the bubble continues to deflate. . In these markets, the government would have to make good on the mortgage guarantees that are central to the plan, potentially costing the taxpayers tens of billions of dollars.

4. The High Dollar: Wasn't Bernanke Trying to Stimulate the Economy?

Last weekend, Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Henry Paulson said they would take steps to prevent the dollar from falling further. This is strange, because the dynamic duo had previously indicated that they wanted to stimulate the economy with policies like interest rate cuts and the tax rebate plan.

There is probably no more effective mechanism for stimulating the economy at this point than a decline in the value of the dollar. This will make imports more expensive, causing people to buy more domestically produced goods. It will also make our exports cheaper for people living in other countries which will naturally cause them to buy more American goods. The effect is a reduction in our trade deficit which is an essential part of any recovery plan.

The effect of changes in the value of the dollar depends on what class you belong to. A high dollar disproportionately hurts workers who are subjected to international competition (manufacturing workers for example). Think of it like NAFTA, but the impact is orders of magnitude greater. Meanwhile, a high dollar makes those European vacations and French wines much more affordable for the well-off. Bernanke and Paulson's support for a high dollar is really support for slowing the recovery and impovrishing the working class. Now that's a good day's work.

5. Economic Villains Sneak Through Town

Last weekend the G-7 finance ministers gathered in Washington, meeting just before the annual IMF and World Bank meetings. The media did their best to ignore the failings of these bodies. The Washington Post, for example, headlined its article on the meeting "A Weekend to Start Fixing the World."

The media apparently thought it would be too rude to point out that these were the people who designed the policies that wrecked the world's financial markets. In today's globalized economy, it is only dishwashers and school teachers who are expected to be accountable for their performance.

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