These tax credits will do little or nothing to promote economic growth because they do not reduce marginal tax rates -- the rate on the next dollar of income -- to provide powerful, meaningful incentives for productive activities such as investment, entrepreneurship and work. A tax credit is effectively a cash grant that can only affect incentives up to the amount of the grant. Indeed, such tax credits would likely reduce economic growth because the credits are phased out as income rises, and so effectively impose higher marginal tax rates over those income levels.
For a real middle-class tax cut, we should cut the 25% income tax rate that now applies to single workers earning $32,550 to $78,850, and married couples earning $65,100 to $131,450. We should reduce that rate down to the 15% rate paid by workers below these income levels. That would, in effect, establish a flat-rate tax of 15% for close to 90% of American workers.
Given the data presented here, I think this is a cautionary tale for the President-elect. This does not mean, of course, that he must govern like a Republican from Kentucky. Far from it! It just means he should be aware that there are factions in the country that strongly opposed him, and he should be careful with how he manages these groups. He does not have to do what they want him to do, but he should not overly antagonize them.
The political consequences of that could be harmful. For instance, in the states shaded red in the 2008 picture, there are about 20 white Democratic Representatives and 7 Senators who will stand for reelection at least once in the next eight years. President-elect Obama has to be mindful of them - otherwise, they could go the the way that the New England Republicans have gone in the Bush years.
All sorts of promises are proposed to bail out mortgage holders who have defaulted or owe more than their homes are worth. Apparently, no debtor is really culpable. And apparently, no one took out second or third mortgages for optional consumer purchases, or bought homes too large for their incomes.
What is the lesson here for other pinched families who will not default and will somehow meet their mortgage obligations, even on homes with negative equity? Is it that those who pay what they owe are punished while those who fail to are excused?
President-elect Barack Obama promised over $1 trillion in new entitlements at a time when the Bush administration may well run a $500 billion annual deficit, only adding to a $10 trillion national debt. We also have $50 trillion in federal unfunded liabilities, ranging from long-term promises to Medicare and Social Security to payouts for government bonds and guaranteed loans.
Such massive borrowing and guarantees all offer cover for insolvent or poorly run programs (that face no worry of running out of money -- and thus have no incentive to change). Corporate farmers just learned that the current $288 billion farm bill will once again provide government subsidies to ensure that it won't matter much whether they plant the wrong crop at the wrong time.
Universities raise tuition rates that exceed the rate of inflation. But in our brave, new no-failure world, why worry when more promised federal-guaranteed student loans and credits will ensure steady paying enrollment? With guaranteed federal money, why be concerned that colleges and universities are overstaffed with administrators, replete with centers and programs that have nothing to do with undergraduate education, and erecting Las Vegas-like student unions and colossal recreation centers?
Americans are creating a therapeutic society in which none of us need fail. No one loses in T-ball anymore. Schools honor a dozen valedictorians. In universities, a "C"
passing grade is now the understood kinder and gentler version of the old and
Our culture forgot that there was once a utility in failure. Failing reminded us of what works and what doesn't -- and how we must learn to avoid the latter. Instead, in our new economic purgatory, no firm, company, state, city or individual ever quite goes to financial heaven or hell. A Bear Stearns or Chrysler neither succeeds nor fails but just sort of endlessly exists.
In response to: Abbreviated Pundit Round-Up