Why Do I Feel Like I Fell Off a Cliff?

The fiscal cliff deal that passed the Senate last night is appalling.

It raises marginal tax rates at the top (allegedly to “Clinton era levels” but actually higher once you account for the phaseouts of personal exemptions and itemized deductions), but not for anyone else, nibbling away at the rewards for productivity, and placing an ever-greater share of the tax burden on an ever-smaller fraction of the population.



Edited to add: Greg Mankiw has pointed out to me that the phaseouts were present in the Clinton years as well, so my remark about today’s rates being “higher once you account for the phaseouts” is wrong. On the other hand, as Greg also points out, with the increase in Medicare taxes pursuant to Obamacare, total tax rates are in fact higher than they were under Clinton. Greg points to this link for clarification.

Worse yet, it increases the rates on dividends, capital gains and inheritances, encouraging wealthy people to save less, consume more, and demand a greater share of the world’s resources.

The AMT, one of the few bright spots in the tax code, is permanently “fixed”, which is to say that almost nobody will pay it now.

This deal does absolutely nothing to control entitlement spending, which means it’s 100% fiscally irresponsible. Let’s be clear about this. When you’re overspending, the fiscally responsible thing is to spend less, not to cover the difference by visiting the ATM and depleting your assets. Wealthy taxpayers are the government’s ATM; the assets the government takes today won’t be there when they need more tomorrow. Let’s say it one more time: After all the talk about “fiscal responsibility”, there is nothing fiscally responsible about this deal.

Unemployment insurance for the long-term (i.e. greater than 26 weeks) unemployed is extended for another year, once again nibbling away at the income gap between those who produce and those who don’t.

And oh, yes….there’s an extension of tax loopholes for the President’s buddies in the “clean energy” business.

There is, as far as I can see, nothing — let me repeat that, nothing to like about this agreement. As Greg Mankiw points out, it’s a package that rejects entitlement reform, rejects tax reform, and rejects every major recommendation of the bipartisan policy wonks who made up the Simpson-Bowles commission and that most policy intellectuals agree on. I hope it tanks in the House. I’m not optimistic.

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35 Responses to “Why Do I Feel Like I Fell Off a Cliff?”


  1. 1 1 ryan p

    “but actually higher once you account for the phaseouts of personal exemptions and itemized deductions”

    Don’t forget PPACA’s Medicare tax — those are MTR increases too.

  2. 2 2 Alan Gunn

    Demonstrating once again that the branch of economics with the strongest ability to predict things is public choice theory.

  3. 3 3 Doctor Memory

    Ugh. For entirely different reasons, I’m appalled: the consensus on the senate deal is that it trims a mere $6B from the Department of Defense: less than 1%! This was our best chance in recent memory to seriously prune back the Pentagon’s farcical budget, and it looks like we’re simply walking away from it. Shameful.

  4. 4 4 Will A

    Obama’s speech yesterday was designed to upset conservative house Republicans to the point where they would not support the bill.

    It is possible that the point of the deal was to force Boehner to put something on the floor that requires Democratic votes and thus force Boehner to break his “I won’t bring it to the floor unless is can only pass with Republican votes” policy.

    Obama’s new strategy could be to deal with the Senate Republicans who are more worried about be the general election than the primaries given what happened in Indiana, Missouri, North Dakota, etc. Have the senate pass a bill and then pressure the Speaker of the House (whoever it is) to bring up a vote.

  5. 5 5 nobody.really

    …placing an ever-greater share of the tax burden on an ever-smaller fraction of the population.

    I’m thrilled to finally hear Landsburg expressing concern about at least one consequence of the growing income disparity in the US.

  6. 6 6 Tristan

    @nobody.really

    Fully agree!

  7. 7 7 Manfred

    Oh, come on Steve, you are appalled? Why?
    Having in Rochester the Wallis Institute for Political Economy, you fully understand the difference between “economics” and “political economy”.
    I know, I know, it is the job of economists to point out the flaws and the economics of this “deal”, but why are you appalled? These are politicians you are dealing with, these are people whose only interest is their political self-preservation, and not the first best welfare of the economy.

  8. 8 8 Eyore

    Aside from the current broken state that now exists, expectations will also have changed permanently. After the past four years of cliffs and deals, 98% of the society have now been convinced they are not a part of the problem, and also need not be part of the solution — and in fact are owed. Republicans and Democrats will protect them from any revenue demands, and Democrats and Republicans will protect them from any demand to decrease benefits and transfers. And in each party you have the fringes playing the role of arsonists in the magazine around debt ceiling and other manufactured legislative crises. And what spending is in place is inefficient and lobbyist protected (farm bill whose goals are 100% out of line with the medical “health-care”).

    I feel something has really changed the past ten years. From a control system perspective, maybe the feedback gain which now exists as politicians communicate with the public, has become too high for the political system to remain stable or function in any sort of reliable fashion.

  9. 9 9 juandos

    This was our best chance in recent memory to seriously prune back the Pentagon’s farcical budget, and it looks like we’re simply walking away from it. Shameful“…

    Gee doctor memory why didn’t you find it ‘shameful‘ that the biggest expense, the socialist pandering to parasites programs weren’t cut more?

    Just asking…

  10. 10 10 nobody.really

    After the past four years of cliffs and deals, 98% of the society have now been convinced they are not a part of the problem, and also need not be part of the solution — and in fact are owed.

    Whereas prior to that, 100% of society had this conviction. So I see a 2% improvement. And to the extent that we’ve finally broken the back of the No New Taxes pledge, I see room for progress.

    Yeah, a Grand Bargain would have been nice. We tried it; Boehner couldn’t sell it to his own clan. So it’s time for Second Best options.

    [M]aybe the feedback gain which now exists as politicians communicate with the public has become too high for the political system to remain stable or function in any sort of reliable fashion.

    And this is the irony: Arguably, our current problems arise not from the fact that politicians are unresponsive to voters, but from the fact that they are TOO responsive. At least in gerrymandered districts, they know that they dare not exhibit loyalty to the nation, or to the House as an institution. Any deviation from whatever the dominant voting group regards as sacred will result in losing your seat in the next primary. (Similar dynamics arise in the Senate, but are muted because Senate boundaries are not susceptible to gerrymandering.) In the last election the Tea Party got some negative feedback about the consequences of promoting candidates that are so ideologically pure that they can’t get elected (mostly in the Senate). But in many/most? congressional districts, ideological purity has no downside risk.

    Arguably gerrymandering is a big source of our political problems. Yet the Supreme Court has largely thrown up its hands in trying to control this practice. Leaving boundary-drawing to the political process may result in the bastardization of democracy – but what’s the alternative? You can’t beat something with nothing.

    While I have not always been impressed with the political analysis on this blog, the mathematical stuff here far surpasses my capacity to evaluate. So here’s a political/topologic challenge: Devise a formula for drawing House districts “objectively.”

    You start with the map of a state, the location of voters’ residences, and the number of congressional districts within the state. We need an algorithm that, using this information, will generate boundary lines that will put roughly equal numbers of voters into each district, and cause each district to be “compact.”

    Admittedly, solving the math puzzle is not the whole game. With such an algorithm, we’d want to persuade some “good government” jurisdictions to adopt it – maybe places that have adopted rank-choice voting. And then we’d look for test cases — examples of really egregious gerrymandering that effectively disenfranchise 49% of voters, and some election-day fiasco that brings this hardship into stark relief. And then we sue.

    Ideally, we’d have examples of egregious gerrymandering from the left and the right. I haven’t hunted, but I suspect they won’t be hard to find.

    So anyway, I’ll leave Step 1 to you guys. Happy New Year — and happy hunting.

  11. 11 11 nobody.really

    98% of the society have now been convinced they are not a part of the problem, and also need not be part of the solution — and in fact are owed. Republicans and Democrats will protect them from any revenue demands….

    Really? According to Credit Suisse, the Fiscal Cliff deal will require sacrifices from taxpayers in every bracket.

    On average people will see after-tax earnings fall 2.3%. Even those at the bottom of the income scale — < $10K – will experience a fall of 1.3%. And people earning $30K+ will of course experience a larger drop than that, up to the top of the scale — $1 million+ — where people will experience a loss of 7.8%.

    Oh wait, my mistake: People earning $200K-$500K appear to be akin to those earning <$10K; their income will drop only 1.3%, too. You’ll recall that Obama wanted to increase tax rates on those earning $250K, but the Republicans pushed that back to $400K-450K. This is the result.

  12. 12 12 neil wilson

    I hear there are a lot of countries that have far lower tax rates.

    Congo has low taxes and nice tropical weather.

  13. 13 13 Kirk

    My New Years pledge is to repeatedly point out that anyone blaming this crap on the Reps or Dems is THE problem. Both groups f**k us repeatedly for their own benefit and laugh as half of America blames the other group. The only sensible vote is a vote for a third party – it really doesn’t matter which one. As soon as the big 2 parties have to negotiate with a third party to get a majority (this can happen with less than 5% third party in a chamber) things will start to change.

  14. 14 14 Ken

    neil,

    Congo has low taxes

    Do you want to explain what you consider low, what the tax rates are in the Congo, then compare them to the US? Or are you just wallowing in ignorance… again?

  15. 15 15 Harold

    DRC has a progressive income tax from 3% to 50% in 11 bands. Corporate tax is 40%. It does not look particularly low tax from a quick view.

    After the agreement avoided the cliff, share prices increased when trading opened. This suggests that investors believed the deal is good for companies. What are we to make of this? SL has suggested that share price is a good indicator of the value of top execs, presumably it is also a good indicator of the value of the fiscal deal?
    http://www.thebigquestions.com/2010/08/09/hp-falter/

  16. 16 16 Matthew

    Would’ve been better to just go over the cliff in my view.

  17. 17 17 Jeffrey

    “So here’s a political/topologic challenge: Devise a formula for drawing House districts ‘objectively.’”

    Solution: Zodiac districting. Divide the population based on their date of birth. A side benefit is getting to hear on C-Span, “The Libra delegate from Maryland now has the floor.”

  18. 18 18 fenn

    II’d be interested in a list of your favorite books from the last year.

  19. 19 19 Ken B

    @fenn: I know you asked Steve but here are mine

  20. 20 20 Kirk

    Unlearning Liberty: Campus Censorship and the End of American Debate

  21. 21 21 nobody.really

    “So here’s a political/topologic challenge: Devise a formula for drawing House districts ‘objectively.’”

    Solution: Zodiac districting. Divide the population based on their date of birth. A side benefit is getting to hear on C-Span, “The Libra delegate from Maryland now has the floor.”

    You laugh. But one serious proposal for remedying the problem of gerrymandered district boundaries is to eliminate the boundaries: let congressmen run at large throughout their state. If a state has seven congressional seats, then the top seven vote-getters win those seats, and they represent the state at large.

    Yeah, this would solve the problem of gerrymandered districts – and replace it with other problems. For example, we might anticipate that the California congressional delegation would come to be dominated by movie stars. Who else could achieve adequate name recognition throughout that state?

  22. 22 22 Ken B

    Devise a formula for drawing House districts ‘objectively.’

    There are algorithms in computational geometery for partitioning planar regions ‘equably’. Ask for N regions of equal content within a certain fraction, say minimizing perimeter. There may be no perfect objective platonic districting but any scheme like this would be much much less gerrymandered than we have now.

  23. 23 23 Will A

    I think that the founding fathers wanted one house of congress to be the voice of the people and one house of congress to make sure the voice of the people was tempered.

    Before the direct elections of the Senate, the vision was that the House of Representatives would be the voice of the people and that state legislatures would shape congress by determining the composition of the senate.

    We just have the houses switched now. State legislatures control the make up of the house and the Senate is the voice of the people.

    If we want to amend the constitution to have congress be purely the voice of the people, we should disband the senate and institute Ken B’s #21 solution (planar accounting for population though. I.e. New York City would be as large as Virginia on the graph).

  24. 24 24 Will A

    An example of a 3 dimensional map that accounts for population:
    http://www.oobject.com/skyscraper-infographics/relative-population-size-across-the-us/7473/

    For sure I’m not up on cartography, but there must be a way to “flatten” this. Or could calculus be used to break this apart evenly based on volume?

  25. 25 25 nobody.really

    Devise a formula for drawing House districts ‘objectively.’

    There are algorithms in computational geometry for partitioning planar regions ‘equably’. Ask for N regions of equal content within a certain fraction, say minimizing perimeter. There may be no perfect objective platonic districting but any scheme like this would be much much less gerrymandered than we have now.

    Ideally we’d find an algorithm that produced one unique set of boundaries for every set of inputs (state boundaries, location of voters, number of districts); any post-hoc discretion would undermine the claim that the algorithm was “objective.”

    I figured part of the formula would involve minimizing the sum of boundary lengths. And I figured that we’d start with some heuristics involving “corners” – but I’m not sure how to phrase it. Something like this:

    1. Divide total population by number of districts to find population per district.

    2. Find the “sharpest corner” of the state. That is, identify the three points along a state’s boundary – X, Y, and Z – with each point separated by a mile of boundary line from the next point, such that no other collection of three points forms a more acute angle. In the event of a tie, select the corner closest to the Pennsylvania State House in Philadelphia.

    3. Draft the first tentative district to a) include the appropriate population, b) minimize boundary length, and c) include point Y.

    4. Repeat steps 2 and 3 for the next sharpest corner of the state, but minimize boundary length subject to the constraint that the tentative district must not overlap with any prior districts.

    5. When there is no other opportunity to create contiguous districts enveloping a district’s-worth of population, [iterate to a solution having the correct number of districts but minimizing aggregate boundary length].

    Well, it’s a start.

  26. 26 26 Neil S

    re: “Devise a formula for drawing House districts ‘objectively.”

    Ken B is right on target. I’d propose an open competition in which the map with the minimum total perimeter of all districts would be selected.

  27. 27 27 Will A

    @ nobody.really #24

    If you want an objective boundary, then you need to ignore state otherwise you end up with Wyoming having 1 representative for 576,000 people where other districts will 1 representative representing more than 700,000 people.

  28. 28 28 Will A

    An “object” algorithm:

    Decide on 500 congressional seats. Starting at the equator and moving north, find the latitude that includes 10% of the population. From that point move north to find the latitude that includes 20% of the population.

    Continue and you will have separated in the united states population into 10 latitude bands of equal population.

    Then starting at the eastern most point of each band, move west until you have the longitude that has .2% of the population and keep moving west setting the boundary at each .2% of the population.

    You will now have separated each band that has 10% of the population to 50 separate districts for a total of 500 seats in congress.

  29. 29 29 Bob Murphy

    Steve, I think I’m echoing some of the others, but are you just talking about income tax? I.e., with the payroll tax going back to normal, just about everybody is paying more right?

  30. 30 30 Steve Landsburg

    Bob Murphy:

    with the payroll tax going back to normal, just about everybody is paying more right?

    Well, more than last year, but not more than in the quite recent past, so it all depends on where you set your baseline. Of course the Obamacare tax is entirely new, though.

  31. 31 31 Ken B

    @Will A:
    We could just run such an alogoithm per state. The states don’t have equal rep by pop, but the gerrymander is how seats are carved up within a state.

    I agree with you on the founding fathers and how it has flipped. De-gerrymandering would probably help.

    I would also (gulp) double or triple the size of the house (and cut the office staff and expenses to pay for it). That’s a separate argument of course, but would help in several ways I think.

  32. 32 32 iceman

    As long as we don’t lose shoreline

  33. 33 33 Ken B

    Scrooge never goes to the shore. More of it for the rest of us.

  34. 34 34 nobody.really

    I hear there are a lot of countries that have far lower tax rates.

    Congo has low taxes and nice tropical weather.

    I’m often tempted to make a similar argument: I bet we can find lots of places with low taxes – and no government services. Would you really want to trade places?

    Alas, Congo proves to be a particularly bad example to illustrate this point. According to PricewaterhouseCoopers, the Democratic Republic of the Congo is the MOST taxed place in the world, with a prescribed tax rate of roughly 340%. See here , p. 16, bottom table, labeled “Total Tax Rate (% of profit).”

  35. 35 35 John

    Nobody.really,

    That PwC report is impressive and dare I say somewhat interesting. Impressive if you read the entire thing.

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