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AEI Argues Against Reagan Economic Adviser Bruce Bartlett on Tax Rates

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The American Enterprise Institute’s James Pethokoukis has put forth an article arguing against Bruce Bartlett’s claim that increasing the highest margin tax rate will not harm economic growth. Of course, Bartlett has history on his side, while the GOP and their funded think tanks have dogma. The nexus of the argument surrounds the Clinton era tax rates and the dynamic growth that ensued throughout the ’90s.

Bill ClintonI’m still not sure what caused the “Clinton Boom.” Democrat economist Dean Baker says Clinton got lucky (coincidence) that the internet boom occurred under this administration. However, since VC capital boomed under those years, I wonder if tax policy – slightly higher rates – didn’t drive more capital into VCs to avoid those higher rates on AGI. When I ran a small (very small) business during the Clinton Administration, I looked for ways to decrease my tax bill. The best way, I discovered, was to invest more money into my business. The result of increased capital investments was lowering my AGI and thus my tax bill.

When you own a business, you consider two things: do I have the customers to sustain my business to make it profitable (demand) and will my taxes (AGI) allow me to make a profit on my business. Under Clinton my income rose, regardless of the higher rates, while under Bush my income declined. Under Clinton my retirement accounts grew; under Bush, they declined steadily year over year.

Of course, we’re in a completely different situation now with globalization where multi-nationals can locate anywhere in the world to avoid paying US taxes and obtain the cheapest labor possible. As a result of this dramatic change, I’ve come to agree with Bruce Bartlett on the need to reduce the nation’s fiscal needs on labor taxation towards more to consumption: a Value Added Tax (VAT). If properly designed – and given Congress’s penchant towards rewarding donors and special interests doing so would be extremely difficult without significant campaign finance and redistricting changes – a VAT could be progressive and moral.

The nation, obviously, needs to three things: 1) increased revenues to pay down the debt/deficit which will signal to the markets that the nation the government is serious about its debt problem; 2) a long term plan to control the costs of health care (bend the cost curve which will reduce costs not just to the federal government but to all health care consumers thereby releasing billions for the nation’s other needs; and 3) a major overhaul of the federal government to bring it fully into the realities and needs of the 21st century rather than maintaining a structure more suitable to the 19th or 20th centuries.

One of the mantras in business during the last two decades was “lean and mean.” What that mantra really meant was reorganizing to create efficiency by reducing duplication, collapsing departments to eliminate roadblocks, and streamline processes towards faster approvals as well as lower costs. Government could take a lesson from the private sector here, but will Congress allow such as change when so many Committee heads gain their power from more rather than fewer committees?

The truly wealthy (those in the 1%) will not be harmed by having their tax rates increase by 3.9% to Clinton rates. They’ll still have more money than they need or can use to create demand; however, if the rates increase on income and short term cap gains, those with enormous incomes will find that investments, in VC or longer held investments, are more profitable than cashing out for lower tax rates. Plus, since the tax system is in part used to to encourage behaviors we like and want, such as marriage and having child, and investments we desire, such as technology, research and design, then why not use the tax system to short term investments and lack of investments rather in favor of lower taxes?

Lastly, it is important to note that the GOP notion of extremely low marginal taxes is relatively new. For example, when JFK advocated reducing the top marginal rate from 90% to 65%, Republicans revolted.They said that reducing the rate would increase the deficit…and since they were deficit hawks, anything that would increase the deficit was anathema. Of course, we know now that the enacted decrease, under Johnson, did not harm the deficit nearly as much as those Republicans claimed it might. On the other hand, we know from the eight years’ experience under the Bush Administration, that rates can be too low – as they are now – which most definitely increases the deficit. The extremely low rates did not unleash the animal spirits of capital. Instead they created a bubble just as Treasury Secretary O’Neill said they would when arguing against Cheney’s push for the 2003 tax cuts. Thus, the happy medium may be about 50% as Bartlett mentioned some years ago in an article for Forbes.

When Cheney argued for the ’03 tax cuts, he said we won the election so we can can do what we want (reward ourselves and our friends). Obviously, Cheney did not care about the deficit or long term health of the nation. Whether his acolytes on Capital HIll have taken up his dogma or are simply opposed to doing anything which may help President Obama, as Republican Congressional leaders stated, in that Capital HIll steakhouse, on the night of Obama’s inauguration, is unknown. Perhaps both.

Nevertheless, what we do know from the Clinton era is that raising the highest marginal rate of taxes by a modest amount, such as the 3.9%, does not harm the economy as the GOP and its funded think tanks proclaim. In fact, raising those rates might be beneficial…especially if combined with long term deficit reduction plan, particularly with regards to bending the cost curve of health care spending for the entire economy (i.e, businesses, families, and government) and reorganization of the federal government as Obama advocated in his last State of the Union address. Nevertheless, the entire tax code must be rewritten at some point in the very near future, not only to clean it up, but to insure the revenues needed for the future. As Bartlett has stated a VAT may well be the way to go.

Gingrich’s Lauded Doctor Resigns

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Don Berwick, Center for Medicare and Medicaid Services (CMS) chief, resigned effective Friday, 11/25/2011, as a result of a GOP Senate filibuster that prevents his confirmation. Berwick assumed his position as a result of a recess appointment, but has now decided not to stay on because of the GOP filibuster even though his work in lowering medical costs while improving outcomes has been praised for over a decade by leading Republicans.

For all the partisan hype regarding Berwick’s resignation, remember this man has been praised by leading Republicans, including in 2000 by Gingrich, as one of the country’s foremost experts on controlling rising medical costs while increasing effectiveness.

Now, if you enjoy having medical costs bankrupt you and the nation or have no desire in bending the medical cost curve, then by all means hail his leaving. But for those of us who do want to see medical care costs decrease as a percentage of GDP (currently at 17% and estimated to be 20% by 2020 if costs are not controlled), then his leaving is a step backwards in bringing down excessive medical inflation that’s currently 2 to 3 times more than ordinary inflation.

Health Care Spending

Meanwhile, all OECD countries have medical care costs of no more than 11% of GDP with equal or better outcomes. Imagine how much billions the federal government could save or put into infrastructure improvements or education if just 6% of GDP was not going to medical care. Think about how much higher salaries could be if companies did not have to invest so much of their employee budget in medical care costs and how much lower product costs would be without the high cost of medical care included in their product price…and what that would mean in terms of global competitiveness.

Current Republican presidential frontrunner Newt Gingrich who in 2000 and then again in his 2006 book “Saving Lives & Saving Money” praised Berwick for his passionate belief that quality-care focused systems improve health outcomes and reduce health care spending — and many other conservatives (including former Bush health officials) shared and espoused this vision. From Gingrich’s 2000 editorial:

The Veterans Administration’s Palo Alto Health Care System is creating a computerized patient medical record system. The new Northwestern Memorial Hospital in Chicago was designed from its conception to be a safer, more accurate and more electronic facility. Don Berwick at the Institute for Healthcare Improvement has worked for years to spread the word that the same systematic approach to quality control that has worked so well in manufacturing could create a dramatically safer, less expensive and more effective system of health and health care.

It’s worth keeping in mind what Matt Miller recently wrote in a Washington Post editorial.

The Journal Health Affairs asked former Swiss health minister Thomas Zeltner why his country’s individual mandate was acceptable to a nation known for ardently defending personal freedom. “That’s easy,” Zeltner replied. “We will not let people suffer and die when they need health care. The Swiss believe that in return, individuals owe it to society to provide ahead of time for their health care when they fall seriously ill. At that point, they may not have enough money to pay for it. So we consider the health insurance mandate to be a form of socially responsible civic conduct. In Switzerland, ‘individual freedom’ does not mean that you should be free to live irresponsibly and freeload from others.”

The opposition against Berwick is not about him per se, but rather his approval of a health care system that reduces costs and most importantly the angry, strident opposition of the GOP towards the Democratically enacted ACA and President Obama for no other reason than than he’s a Democrat. If he were a Republican, Berwick would have been confirmed long ago and ACA would have been hailed as a free market triumph that would reduce costs while requiring individual responsibility.

But GOP unreasoned hatred of of all things Democratic will prevent this nation from ceasing to be bankrupted by medical costs. Oh, and the current GOP answer to higher than inflation medical care costs: pick up more of the costs yourselves so you won’t or can’t use so many medical services.

For a middle and working class that has seen their incomes flat line or decrease, those GOP ideas will mean worse outcomes and more economic hardship. This policy argument should not be about political partisanship but about family and business economics.

Good going, GOP.

Written by Valerie Curl

November 28, 2011 at 9:11 AM

Politicians Could Take A Lesson From These Two Opposing Camps

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Post Partisan PowerIn a rare but fruitful collaboration, the American Enterprise Institute and Brooking Institute joined together with Breakthrough Institute to develop a new energy policy recommendation that could lead the country towards a sound, efficient and effective energy policy that could satisfy both Republicans and Democrats.

The Breakthrough Institute was founded in 2003 by Michael Shellenberger and Ted Nordhaus to modernize liberal-progressive-green politics. Pulling together the conservative American Enterprise Institute and the liberal leaning think-tank, The Brookings Institute, the three organizations worked collaboratively to create a white paper, “Post-Partisan Power” – Summary of Recommendations, that lays out an energy policy for a 21st Century United States.

It is time to hit the reset button on energy policy, according to scholars with American Enterprise Institute, Brookings Institution and the Breakthrough Institute, who are today releasing a new report, “Post-Partisan Power,” which calls for revamping America’s energy innovation system with the aim of making clean energy cheap.
Writes David Leonhardt in today’s New York Times, “the death of cap and trade doesn’t have to mean the death of climate policy. The alternative revolves around much more, and much better organized, financing for clean energy research. It’s an idea with a growing list of supporters, a list that even includes conservatives — most of whom opposed cap and trade.”

Mark Muro of Brookings tells Politico the proposal’s four parts “are broadly popular, provide a very broad and appealing American vision of economic transformation and are certainly far more doable than a global pricing system at this point.” Added Steve Hayward of American Enterprise Institute, “The entire climate and energy agenda that we’ve been talking about for several years now has hit a dead end, so it’s time to hit the reset button.”

The energy policy these three think tanks propose focuses on research and development to encourage and create cost effective innovation that the private market can manufacture and deploy here in the U.S. as well as sell abroad.

Taking a market based approach, such as was used by DARPA in the 1960s and ’70s, the recommendations do not rely upon taxes or “cap and trade” to force innovation. Instead the authors recommend using the capacity of the federal government in collaboration with scientists, universities and private industry to spur innovation and develop highly cost effective and efficient market oriented products that can be manufactured in the US and sold worldwide.

As the Politico article states:

The authors blame lawmakers on the left and right for getting wrapped up in the “climate wars” of the last decade while doing little to advance clean energy.

“The choice is not, as liberals often maintain, between global warming apocalypse or mandating the widespread adoption of today’s solar, wind, and electric car technologies,” they write. “Nor is the choice, as conservatives have argued, between an economy wrecked by liberal global warming policies or expanding drilling and nuclear power.”

Instead, they’re proposing a middle ground. And they think the country might have a bigger appetite for compromise after the demise of energy and climate legislation this year.

To read the entire report, download the white paper here.

Written by Valerie Curl

October 13, 2010 at 4:07 PM

In case you missed it….

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So much of the argument on the Health Care legislation no longer focuses on the particulars of the bill, but rather on the process of getting it passed in the face of complete and utter Republican opposition that it seemed worthwhile to post today’s comments by Norm Orenstein. Ornstein, a senior fellow at the American Enterprise Institute (AEI) is a recognized expert on Congress and the history of its workings.

Any veteran observer of Congress is used to the rampant hypocrisy over the use of parliamentary procedures that shifts totally from one side to the other as a majority moves to minority status, and vice versa. But I can’t recall a level of feigned indignation nearly as great as what we are seeing now from congressional Republicans and their acolytes at the Wall Street Journal, and on blogs, talk radio, and cable news. It reached a ridiculous level of misinformation and disinformation over the use of reconciliation, and now threatens to top that level over the projected use of a self-executing rule by House Speaker Nancy Pelosi. In the last Congress that Republicans controlled, from 2005 to 2006, Rules Committee Chairman David Dreier used the self-executing rule more than 35 times, and was no stranger to the concept of “deem and pass.” That strategy, then decried by the House Democrats who are now using it, and now being called unconstitutional by WSJ editorialists, was defended by House Republicans in court (and upheld). Dreier used it for a $40 billion deficit reduction package so that his fellow GOPers could avoid an embarrassing vote on immigration. I don’t like self-executing rules by either party—I prefer the “regular order”—so I am not going to say this is a great idea by the Democrats. But even so—is there no shame anymore?

So, no matter what Republicans and their minions in the media say, the tactics being used by the Democrats is nothing new. Republicans have used it many times before. So, why the hypocrisy, one might ask? Well, as usual with this Administration and Congress, it’s all about partisan politics: winning back the White House and Congress…and truth or the American people be damned. I’m with Mr. Ornstein – even though I’m not a fan of AEI – on this one.

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