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 Constant Percentage of GDP1943 54.6 531.7 30.3%1963 4.8 30.1 .8% 1983 207.8 385.3 6.0%2003 377.6 402.8 3.4%2009 1,412.7 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 “short-

term” 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 2010 - Govt. Debt as a Percent of GDPCanada 84.0%Germany 78.8%Britain 76.5%Netherlands 64.6%U.S. 58.9%Norway 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 - 6Some 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 - 7Don’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 - 8This 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 personpaying 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 - 2In 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 - 3By 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 - 4One 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 - 5Additionally, 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 - 6Let’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 - 7ANSWER: 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 - 8The 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?