A Conversation With My Senator

I received an email from one of my US Senators today, Bill Nelson, D, in which he posts his “Common Sense” ideas on how to get out of our financial mess as published in Politico.  For a member in good standing of what many refer to as the Evil party, not what we call the Stupid party, he sure dispenses plenty of stupid.  As anything I say would never be read by the Gentleman from Florida (as they say up there),  I thought I'd fisk this here for tonight's amusement.  I will leave his pearls of wisdom in black text, and add my comments in blue. 

Close the tax loopholes
By: Sen. Bill Nelson,

"There’s no mystery about what we have to do. It’s just common sense. In addition to the spending cuts Congress just made, we need tax reform. And by tax reform, I mean closing loopholes, special interest tax breaks and corporate subsidies. It’s just plain wrong to be protecting tax breaks for oil companies and to be rewarding businesses that ship jobs overseas." - Sen. Bill Nelson

After watching Standard & Poor’s performance in the Enron and housing debacles, it’s hard to stomach their decision to downgrade America’s credit.

Meh.  Complaining about S&P's performance is like TV producers complaining about Neilsen ratings.  You may complain all you like, but it's what the industry uses.  In truth, we've been degraded by other agencies, almost a year ago by the Chinese equivalent of S&P, and nobody over here said a word.  Frankly, I think S&P was right. 

But even coming from S&P, there is a message we should hear: The finger pointing and hyper-partisanship has to stop. If it doesn’t, we really will be on the road to ruin.

Democrats need to see tea partiers as something other than debt-limit hostage-taking Republicans. And Republicans need to see President Barack Obama and Democrats as something other than big-spending socialists.

We’ve got to stop this attack madness. We have to bring civility back to the public square. We have to put the country back on the path to fiscal sanity.

To do that, we need to cut some $4 trillion to $5 trillion. We made a down payment on this with the $2 trillion dollars we cut just last week. Now we need to go further.

I believe you're suffering from what the doctors call “premature congratulations”.  Your vaunted plan will not affect the big picture because that $2 trillion is in a 10 year plan and doesn't start for another three years (2014).  We need to cut much more than that. Here's a before/after graph with and without your cuts:

To understand what we have to do, though, we first need to look at how we got here.

We went from a $236 billion budget surplus in 2000 to a $1.3 trillion deficit last year — and a record $14 trillion debt. A huge chunk of the debt comes from the wars in Iraq and Afghanistan. We’re bringing the troops home.

It's been reported that the total cost of those wars is about $1 Trillion.  Too low?  Let's triple that and say we spent $3T.  3/14, or 21%, is not a “huge chunk” in my book; huge starts at around 2/3 or 3/4.  “It's the spending, stupid”, and stupid spending at that.  But I tell you what: if you went back to the spending levels of 2000 the problem would go away!  Don't want to do that?  Didn't think so. 

The implication here is the old “it's all Bush's fault”, which is a fantasy.  Bush was no fiscal conservative, and had many bad policies (which, strangely, have all been retained by Mr. Obama) but the deficit for this February was more than the entire year of 2007!  There is simply no equal in history for the deficit spending of this administration. 

Another significant piece stems from the Bush-era tax cuts. Warren Buffett, chairman and chief executive officer of Berkshire Hathaway, says the tax cuts for the wealthy should be left to expire. They’re set to do so at the end of next year. We should let that happen.

First off, I hate to break your bubble, but Buffett is a has-been. I have done quite well with my meager 401k by doing the opposite of whatever he suggests. 

There is a persistent confusion of tax revenues with tax rates, which you seem to fall into, Mr. Nelson. The two are not directly related in the mathematical sense. If you raise rates, people can be relied upon to change their behaviors and revenues can fall – or, at a minimum, don't go up as much as you expect.

The historical limit on tax revenues as a percent of GDP is around 18-19%, regardless of tax rates.  Revenues are currently lower than that for a simple reason: the economic downturn is reducing the national income just as it has reduced the income of so many citizens. The emphasis should be on trying to create conditions that lead to job creation to push that revenue up, and raising taxes just isn't one of those. Never has been, never will be. 

See Hauser's Law in your favorite economics textbook.

(Hauser's Law from the Peter G Peterson Foundation)

Or, as a converse, when rates are low, the “rich” can pay more revenue, as in the fact that currently, the top 1% pays more than the bottom 95% combined.  Which leads to the very simple question: since the top 1% of incomes pays more than the bottom 95% of incomes, what is their “fair share”? You don't have much to choose from. 96%? 97%? Should the top 1% pay for everything? If so, I don't want to live in your world.

Agree or not, don’t you think most Americans were better off before the tax cuts than they are now?

Nope.  They were better off before the housing bubble burst, blown quite deliberately by the Federal Reserve, aided and abetted by the Congress. 

Much of the rest of the debt comes from the economic downturn since 2008. That brings us to today. And there’s no mystery about what we have to do. It’s just common sense. In addition to the spending cuts Congress just made, we need tax reform. And by tax reform, I mean closing loopholes, special interest tax breaks and corporate subsidies. It’s just plain wrong to be protecting tax breaks for oil companies and to be rewarding businesses that ship jobs overseas.

The other word for “loophole” is “law”; a loophole is a law that someone whom you don't like is obeying.  You guys write the laws, so those “loopholes” wouldn't be there if you hadn't put them there.  Oil companies get fewer tax breaks than any other industry and are being punished as it is. And the reason companies move jobs overseas is that our tax system is the worst in the world. Maybe if congress grew up and realized that businesses don't pay tax, they simply collect it from their customers (that is, from you and me), and drastically reduced our corporate tax structure, you'd attract companies here from all over the world. 

As chairman of the Senate Finance Committee’s Fiscal Responsibility and Economic Growth Subcommittee, I’ve scheduled a hearing for early September to investigate closing many of these loopholes. Doing so will likely generate $2 trillion over the next decade. Add that to the $2 trillion in spending cuts we’ve made — and we’re in the $4 trillion range that we need to hit. It’s time to stop the shouting and bickering and political attacks. It’s time to show the world that America can take care of business.

Here's a few ideas for your consideration: we've deficit spent over 2.2 Trillion in failed stimulus, TARP and other ineffective programs. What if we said there was to be no income tax at all next year? The cost would be about the same as what we've spent.  We'd borrow 100% of spending instead of 43% of it, but with some discipline, perhaps we could just get it down to doubling what we now borrow. 

Do you think that would stimulate things, if everyone kept their taxes and spent it on whatever they want? Or do you think people would rebel when they had to pay taxes the following year? 

No good? How about if we eliminated corporate taxes, since they don't pay tax anyway. If that's too radical, how about if instead of having the highest corporate taxes in the world, we had the lowest? Do you think that might give some foreign companies a desire to move here? Do you think some American companies might want to “in-source” more into our country? 

It's a law of economics that if you want less of something, you tax it, and if you want more of it, you reduce taxes (or give other incentives). If we want more jobs, we should cut corporate fees, and taxes. 

And if you really want to increase tax revenues (not rates!), have you looked at the Fair Tax people? Of course, you and I both know, that the purpose of the tax code isn't to raise revenue.  One purpose is to punish behavior you don't approve of and reward behavior you do approve of. Social engineering. The other purpose is to reward the people you like with loopholes that they can use.  The tax code hasn't been about revenue in a long time - if ever.

Cordially,

SiliconGraybeard