Friday, September 16, 2005

A Katrina Tax Surcharge

Discouraging news from the President's remarks today:

WASHINGTON (AP) - President Bush on Friday ruled out raising taxes to pay for Gulf Coast reconstruction, saying other government spending must be cut. "You bet it will cost money, but I'm confident we can handle it," he said.

Bush spoke after his advisers warned that Hurricane Katrina relief and reconstruction costs will swell the national debt by $200 billion or beyond. "It's going to cost whatever it costs," he said. "We're going to be wise about the money we spend."

Bush did not put a price tag on the costs or say what government programs will be cut.

Where to begin?

I'll start by noting for the benefit of the folks working on the President's speeches that the sentence, "It's going to cost whatever it costs," gives the audience no confidence in the next statement, "We're going to be wise about the money we spend."

I was a fan of cutting other government spending before Katrina, and I am a fan of it now. I hope that the President is right that "we can handle it." The President will have to sort that out with the Republican leadership on the Hill, who seem to believe (quite counterfactually) that there is no more fat to trim. Leave that aside for the moment, and let's ask the following question:

If we can handle it now, why weren't we handling it before?

Why does rebuilding New Orleans compete favorably with this unspecified set of least useful programs, but not funding Social Security personal retirement accounts? Or the new Medicare prescription drug benefit? Or simply lowering the debt burden on future generations?

But I digress. If we have decided that rebuilding New Orleans to the tune of $200 billion is a national objective (and I haven't seen nearly enough debate on that subject in the Capitol), then we ought to fund it by reducing our consumption of everything else. The simplest way to do that would be to impose an income tax surcharge that funds the rebuilding over a given period. Over the next three years, for example, individual income tax receipts are projected to average about $1 trillion per year. So everyone has to pay a 6.7% surcharge over those years, maybe a bit more, since Katrina's economic impact should lower the projections for taxable income and the surcharge itself will discourage economic activity. Over a four year horizon, the surcharge would be 5%, before those adjustments. These are percentages of the taxpayers' tax bill, not of their taxable incomes.

Taxes may be bad, but deficits are surely worse. What's the explanation for why future generations should have to pay for this one, too?

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Anonymous said...

Forgive my lack of deep knowledge on this point but I fail to see why deficits are "surely worse" than higher taxes - other than from an ideological viewpoint. While I tend to agree with the concept that debt should be limited (especially in the hands of politicians), I completely disagree with the implied idea that debt is necessarily bad. The money that is borrowed goes to grow the economy, so for each dollar borrowed you get X return on it. The only real issue is whether the economy is 'winning' or 'losing' on that return. Typically this is measured by a 'debt burden' rather than actual debt, or to put it another way, it's the interest payments that have to be made as compared to the extra taxes that will come in from the stimulative spending. It seems to me that we should only be worried about the 'debt burden' rather than actual debt. I have no problem with arguments about how 'efficient' government spending is as opposed to private spending, but things like highways and rebuilding New Orleans do not seem all that inefficient in the grand scheme of things.

Here is a site devoted to this concept:

Anonymous said...

The stock market "gains" today may not have been "real" gains. All the fiscal spending and debt accumulation may lead to inflation.

There is a lot of "ums" and stammering when the President speaks.

On taxes, some sort of compromise with the Clinton era would be nice - put the highest marginal income tax rates at 37%. Put capital gains and dividends back at 20%. peace-

Anonymous said...

On CNBC, both professional investment people (a bull and a bear) did not think taxes should be increased. None of them believed govt borrowing would crowd out investment. None of them thought gigantic deficits were a big deal.

Everyone was young. I get the feeling like they were in grade school or less during the 1970s. I also wonder if any of them have seen real adversity and insecurity.

Anonymous said...

one more:

based on means-testing, raise the amount of social security benefits for retired people subject to fed income tax.

Anonymous said...

$200 billion divided by 270 million people comes out to around $750 per person for Katrina.

Or put another way, U.S. GDP is around 11 or 12 trillion. $200 billion for katrina is around 2% of GDP. This is equivalent to a household with a median income of 44,000 spending around $800 to $900 to fix something that broke in the house. People can shop at Aldis, carpool, buy more efficient cars and televisions, and survive.

The problem is not Katrina. It is a never ending chain of "rare" events all happening in a row (terrorism, ground wars in Afgan and Iraq, weather disasters). These leave little cushion for the future.

Pride goes before a fall is an early recorded observation of regression to a mean.

Tradition not pride. Every time I see people or organizations use the word pride, it makes me cringe.

Robert Schwartz said...

"Taxes may be bad, but deficits are surely worse. What's the explanation for why future generations should have to pay for this one, too?"

Well, some of the expenditure will be in the nature of capital expenses such as levees and bridges.

If, more revenue is needed, and I think that it is, and has been, we should find other sources than the income tax. Given the close connection between our expenses and our consumption of foreign oil, isn't the most logical source of revenue a massive increase in the gasoline tax? $2/gal. increase should yield close to $200 Billion/year and will have the effect of dampening demand for oil.

Lord said...

If we need something to cut then Iraq should be number one on the list.

Anonymous said...

I'm with you. Raising targeted taxes probably isn't a great idea for all spending, but for things that are supposed to be temporary (iraq war, katrina, etc) doing so seems to make sense. it would be interesting to see how much more accountable the spending would be if folks actually saw that they were paying for it every week. as is, nobody seems to care about the graft and waste in gov't spending (think Haliburton no-bid contracts).

there is 1 major problem. The folks in charge care absolutely nothing about what makes sense. The republicans know that if they raise taxes, they lose elections. so they'll simply continue to run up the deficit instead.