A Principled Approach to the Budget - Rationale

Over the next several posts (hopefully over the next week or so), I'm going to take on the budget from scratch with a very different orientation than in the norm.  My posts are, except for comparative purposes, going to ignore all of the various baselines and all of the plans that have been advanced.  The reason for this is simple.  I've concluded that there is no possible solution to our budgetary issues until such time as we move to a principled discussion about taxes and spending.  So today's post will be a bit of description of where I'm going, the second post will cover spending, the third will cover taxes, and the fourth will put numbers to the principles, starting with today's budget and make the case for a radical but maybe possible solution.

What would a principled discussion look like?

It would start with stating the rules that one thinks should govern the budget.  Not the actual expenses by category but the rules that would determine those expenses.  It would also not make reference to any spending beyond today's spending.  Today's spending is certain.  Forecast spending is anything but.  Forecast taxes are similar.  It would then do a similar thing on taxes and lead to a solution where the actual rules are an outcome of the application of the principles.  A discussion that starts with the outcome simply put masks any principles that might be behind the outcome, as the various parties angle to explain why their solution is the only solution without ever explaining why the solution works.

Why is a principled discussion necessary?


I've referenced this a bit above but a principled discussion is necessary because it's the only way out of the current nondiscussion we are having about the budget and about taxes.  One cannot possible enter into the discussion without a lot of knowledge and research.  By contrast, a principled discussion is something that anyone can engage in.

Second, a principled discussion takes us out of the debate about winners and losers, at least for the moment.  We can discuss the principles without knowing how they will affect results.  Indeed, as of this moment, I'm not sure what numbers are going to result from what I am proposing.  I have some gut instincts since I know what the principles are but I actually haven't done the math yet.

Finally, a principled discussion more clearly helps us see the areas of disagreement than a discussion around the numbers.  It is probably possible to start from the current budget and tax structure to infer principles but, particularly on taxes, it would be difficult to clearly define them.  When we disagree on the principles, we open ourselves up to a discussion of why we disagree.  When we argue the numbers, there tend not to be good "why's"

So where do we go from here?


Let me be clear.  My intent in doing this really is to propose a budget and a tax structure.  The end game is to get us there but also to be totally transparent on how I got there.  I'll also point out that when I get to the numbers, it will be done at a fairly high level since I don't have the time to do it at a more detailed level.  That said, a more detailed approach would be both feasible and beneficial.  As a minimum, I'll find out a lot more about what I think.  At a maximum, maybe it will create a blueprint for a new way for us to both talk about and to set the budget and the tax code.

Now the New York Times is Doing it too

Further to my recent post on the Buffett rule, here's the New York Times on the Buffett rule.

Unfairness in the tax burden is one important example and driver of that divide. The White House released tax data showing that the average federal tax rate of the wealthiest 0.1 percent of Americans has fallen from 51 percent to 26 percent over the last 50 years. At the same time, the middle-class tax burden was basically unchanged or slightly higher, with those taxpayers paying 16 percent of their income in federal taxes in 2010, versus 14 percent 50 years ago.

But of course, the "tax data" that the White House released isn't tax data at all.  It's invented data invented by the Council of Economic Advisors to make the political point that the President wants to make.  They are not referencing historical data but a modeled exercise, a modeled exercise that does not comport to the actual historical data.

No doubt there's a reasonable argument for the data released as being a good way to assess changes in taxes but to argue (as the WH does) or infer (as the Times does) that this is somehow historical data is simply false.

Making Stuff Up About the Buffett Rule?

On the White House website, as of 7PM Eastern on April 10, you can find the following graph






Now if you read to the bottom, you'll see the source as "CBO."  I found this pretty interesting because, to my knowledge, the CBO has never published effective tax rates back to 1960.  I know because I've spent a lot of time looking for them.

They have published effective tax rates back to 1979 and you can find those here.  Let's do a quick comparison.  The WH chart shows the effective tax rates of the top 0.1% as below those of the top 1% from 2003 on and says the source is the CBO.  Meanwhile the CBO data (which only goes through 2005) shows no such thing.  The WH chart also appears to show (based on interpreting the axes) far higher tax rates than were actually in place according to the CBO report in 1980.  But since they haven't published the data or linked to the CBO, it's a bit hard to know.

But it's this chart that allows the WH to argue that tax rates have declined by more than 50 percent for "the wealthy."  Meanwhile the CBO data for the top 0.01% shows a decline of about 30 percent from 1979 to 2005, pretty much the same decline in percentage terms as most income groups although less than those in the bottom quintile.

So I'm left with 2 questions:  Did the WH misquote the CBO?  If they did, where did the data come from?  If they didn't, can they show us the CBO data?

Update:  The White House shows in a different report the same data but in this report, they clearly source the data as not coming from the CBO and not even being actual data but rather data created by the CEA.  The specific quote is: "Average Federal tax rates for a sample of 2005 taxpayers after adjusting for growth in the national wage index" and the source is basically CEA analysis.  CEA/CBO what's the difference?