Krugman Prognostication

Paul Krugman:

What's going to happen, economically and politically, over the next few years?  Nobody knows, of course. But I have a vision -- what I think is the most likely course of events. It's fairly grim -- but not in the approved way. This vision lies behind a lot of what I've been writing, so it might clarify things for regular readers if I laid it out explicitly.

Start with the short-term economics.  What we're in right now is the aftermath of a giant financial crisis, which typically leads to a prolonged period of economic weakness -- and this time isn't different.  A bolder economic policy earlier this year might have led to a turnaround, but what we actually got was half-measures.  As a result, unemployment is likely to stay near its current level for a year or more.

And politically it’s hard to do anything about that. Those economic half-measures have landed the Obama administration in a trap: much of the political establishment now sees stimulus as having been discredited by events, so that it’s very hard to come back and scale the policy up to where it should have been in the first place. Also, with the apocalypse on hold, the deficit scolds have come back into their own, decrying any policy that actually involves spending money.

The result, then, will be high unemployment leading into the 2010 elections, and corresponding Democratic losses. These losses will be worse because Obama, by pursuing a uniformly pro-banker policy without even a gesture to popular anger over the bailouts, has ceded populist energy to the right and demoralized the movement that brought him to power.

Despite all this, the midterms probably won’t give Republicans the majority in the House. But the losses will be big enough to deny Obama a working majority for any major initiatives in the rest of his first term. (My guess is that he’ll be reelected thanks to the true awfulness of the Republican nominee). Since Republicans are dead set against any of the things I think could help pull the economy out of its rut, this means more economic stagnation.

Along with this will come a process of defining prosperity down. All the wise heads will tell us that 8 or 9 percent unemployment — maybe even 10 percent — is the “new normal”, and that only irresponsible people want to do anything about the situation.

So what I see is years of terrible job markets, combined with political paralysis.

I hope I’m wrong about all this. But my sense is that to have any hope of breaking out of this trap, Obama and company have to take risks — they have to propose new initiatives that might not pass, and be prepared to run against the do-nothing Republicans if the initiatives fail. That’s not happening now; as best as I can tell, the administration strategy is to insist that only a few minor course corrections are needed, and to wait for the jobs to start coming in.

Maybe they’ll get lucky. But hope is not a plan.

What can the rest of us do? Progressives have to keep the pressure on. The time for trusting the administration to do what’s necessary is past — all indications are that it won’t, not on its own. But maybe, just maybe, the president can be brought to see the danger he’s running by playing it safe.

I wouldn't hold my breath.  In order to cater to what is perceived as the center, Democratic leaders have continuously disparaged liberals and progressives - as Atrios calls them, the dirty fucking hippies (DFHs). Obama has fallen in line with this.  For example, a significant plurality of Americas favor single-payer health insurance run by the government, and large majorities favor the creation of a public health insurance option to compete against the insurance companies.  Yet in Washington watering down or eliminating the public option is considered "centrist."  If that is the case here, on such important legislation, how can one hope that the administration will take any strong actions to turn around the economy?

Tax Provisions of the Health Care Bill - Part 1

Over the last few weeks, we have heard a lot about how the health care bill will change the delivery of health services, but there has been very little attention paid to the revenue raising provisions of the bill.  There are a lot of tax provisions designed to enhance the health care purposes of the bill, but there are others that are simply designed to raise revenue.  The next few posts will discuss these new provisions.

The first item I would like to discuss relates to the positions taken on tax returns by large corporations.  To understand this provision, I will provide some background on the incredibly stupid rules dealing with positions taken on tax returns.

Generally, penalties are imposed on any taxpayer who, in the preparation of its tax return, reports a transaction in a manner that is contrary to law.  The size of the penalty depends on the reasonableness of the position taken by the taxpayer in reporting the transaction, and here is where the insanity takes hold.  If the taxpayer reasonably thought that it was more likely than not the transaction was reported correctly, then no penalty is applied.  If the taxpayer was negligent in when it reported the transaction, or reported the transaction intentionally (knowing it was incorrect), then a penalty is imposed.

But between these two situations, there is a middle ground.  If there is "substantial authority" for the manner in which the transaction was reported, then there is no penalty.  It is important to understand what this means.  A taxpayer may think that the position it takes on the return is a loser, but if it can find a statutory provision, or a regulation, or a case that could possible be viewed as supporting that position, then no penalty is applied.

Now there are two really bad consequences to these rules.  First, a taxpayer can report a transaction believing it is reported incorrectly, but there is no penalty for doing so.  This encourages them to take these kinds of positions in the knowledge that if they lose, no penalty is imposed.  In other words, there is no risk to the taxpayer from reporting the transaction incorrectly, so it might as well report the transaction incorrectly in the hopes that the IRS doesn't discover the incorrect position.  Given the limited resources of the IRS to examine returns, there is no doubt a substantial amount of tax goes uncollected because of this position.

Second, there are a number of accounting firms, law firms and others that peddle transactions that are designed to reduce taxes.  The "buyers" of these transactions are generally large corporations and wealthy individuals.  One of the things the sellers of these transactions have to do is to advise the buyer of the probability that the transaction will work to reduce taxes.  Often times, the sellers advise that there is "substantial authority" that the transaction will reduce taxes.  Understand this - the seller of the transaction believes the position is incorrect, and the buyer of the transaction believes it is incorrect, but nevertheless the buyer will pay the seller a fee because the chances are it won't be caught on audit, or if it is no penalty will be imposed.

Thankfully, the health care bill passed by the House (section 563) ends this madness at least where large corporations are concerned.  It essentially provides that a large corporation must report a transaction reasonably believing that the manner in which it is reported is correct.  Otherwise, the penalty for understating income is imposed.

Now I have my doubts that this provision will ultimately survive, assuming the health reform bill is enacted in any event.  It is aimed at those who have the greatest influence on legislation passed by Congress - large publicly-traded corporations.  Nevertheless, it is good to see that there is at least some effort being made to prevent large corporations from reducing their taxes by misreporting their income.

Quote of the Day

"The hardest thing in the world to understand is the income tax."
              - Albert Einstein

Quote of the Day

"In other words, a democratic government is the only one in which those who vote for a tax can escape the obligation to pay it."
          - Alexis de Tocqueville

Our Crazy Tax System - Addendum

One other point I would like to make.  Conservatives generally tout the concept that they are for a free market and that the government should not interfere.  Yet there is no greater interference in the market than the Internal Revenue Code.  There are literally hundreds of provisions that are designed to influence the economic behavior of individuals and corporations.  A true free-marketeer would recognize this and oppose these kinds of tax incentives.  When it comes to economic decisions, the tax consequences of those decisions should have no role in how they are made.

Thus, I believe that those politicians which advocate a so-called "flat tax," are onto something.  My main concern is that all of their proposals focus on taxing consumption rather than income.  This makes no sense to me, since it allows those in the fortunate position of being able to save some of their income the ability to generate wealth - sometimes huge amounts of wealth - without ever paying tax on it.  This is directly contrary to my view of fundamental fairness.  It also strikes me as being another kind of provision whose ultimate impact is to distort economic decisions.

I'm no economist, but it seems to me that eliminating tax incentives that distort economic decisions would ultimately be good for the economy.  It would certainly be good for our democracy.

Our Crazy Tax System

There are a number of aspects of our income tax laws that just drive me nuts.  It is the one thing that I hate about my job, because my job involves helping clients take advantage of that craziness to reduce their tax bills. One thing I intend to do in this blog is to address some aspects of our tax system that make no sense to me.

One of the fundamental aspects of our tax system is that it relies on citizens to voluntarily report their income and their tax liability.*  An incredibly small percentage of tax returns are actually audited by the IRS, so voluntary compliance is crucial.  When voluntary compliance is undermined, our government - and by extension all us - suffer because the government cannot carry on the activities that the people, through their elected representatives, want it to.

There are three fundamental ways that voluntary compliance is undermined. First, if citizens perceive that the system is unfair, they will not comply.  If A and B have the same income, but A pays less tax than B, B will consider himself as being treated unfairly, and may resort to self-help (i.e., cheating) to correct this perceived unfairness.  Second, if the laws are not actually being enforced - if it is easy to get away with cheating - they may take advantage of this.  In essence, this is an issue of fairness as well.  Why should I comply if someone else is cheating and getting away with it?  Of course, the third is just pure greed.  It is ultimately the greedy that undermine the system, because it is their actions that create the unfairness perceived by others.

So for me the fundamental issue is fairness.  All of my criticisms of our tax laws stem from this.  I often hear stories that to me raise this fundamental issue, and when they appear I will probably rant about them on this blog.

Be prepared.

* Of course, even voluntary compliance is a concept that is applied to some but not to others.  People whose income consists primarily of salary or wage income don't get to voluntarily comply - taxes are withheld from that income.

Disappointment

When Obama was elected, I was hoping I wouldn't have to wear this shirt anymore:

Looks like I was mistaken.  

Quote of the Day

My QOTDs do not reflect quotes of people speaking within the last few days.  They are generally historical quotes that reflect my mood on the particular day I am writing here. Here's my first QOTD:

The word 'politics' is derived from the word 'poly', meaning 'many', and the word 'ticks', meaning 'blood sucking parasites'.  

                 - Larry Hardiman

The Herd Mentality of the Press

In response to the Sarah Palin hubbub, Matt Taibbi writes about the way the press treats our political figures:

The political media has always taken it upon itself to make decisions about who is and who is not qualified to be taken seriously as candidates for higher office. . . . It has always been true that the press corps has drawn upon internalized professional biases, high-school-style groupthink and the urging of insider wonks to separate candidates into “serious” and “unserious” groups before the shots even start to be fired.

. . . 

When that does happen, when the press corps decides to abandon all restraint and go for the head shot, it usually tells us a lot more about the reporters’ bosses and what they’re thinking than it does about the reporters themselves. Your average political reporter is a spineless dweeb who went to all the best schools and made it to that privileged seat inside the campaign-trail ropeline by being keenly sensitive to the editorial wishes of his social and professional superiors.

This is a feature of the press in all their political coverage, not just coverage of candidates and political figures.  More on that later. 


Via Atrios.

 

 

More About Me

I live in just about the most conservative town in the most conservative county in the State of New York.  As my wife says, I am a pilgrim in an unholy land.  I also work as a tax attorney in one of the largest public accounting firms in the world.  Even my wife is a Randian conservative.  And I am a liberal.  I am a liberal bordering on socialist. As a result, I find that I often have to bite my tongue in the midst of political discussions with my friends and co-workers, lest I find that my relationships suffer.  I need an outlet, and this blog is it.


Over the years, I have been successful in my career, and as a result our family has been living a comfortable life.  In a desire to give back to our community, my wife and I have become involved in local politics in our town.  My wife has served as a councilwoman on the local town board.  For the past four years I have served as a trustee on our local school board. The politics in our town is cutthroat, bordering on violent.  Luckily for me, the school board has not become politicized in the way that town and county politics have.  Of course, the political battles are Republican versus Republican - the Democrats here are weak and have never been successful.  And they have been moderate, which means that I am really not welcome there.


One of my biggest interests/concerns is the growing power of large corporate interests in our politics, our economics and our media.  It's something that clearly has been developing over the years, but they now have a stranglehold on our system.  This phenomenon has been developing over the years, and has been accelerating.  As a result, our freedom is being more and more restricted, our democracy is declining, our economic system is failing, and our country as a whole is weakening.  And the future, to me, looks bleak.  This trend must be reversed.  Hopefully, I can do my small part here.