3 more gloomy bargains: How much the debt deal will cost you

July 22, 2011

No matter what plan Washington concocts to reduce the deficit, it’s going to cost you something. “Shared sacrifice” is in vogue, but your pain will be bigger if you’re unfortunate enough to earn wages or need social benefits.

Most conservative deficit-reduction plans shred the social safety net and cherished personal write-offs in unprecedented ways. The core elements of each proposal will pare middle-class tax breaks, Medicare and Social Security.

As Yogi Berra once said, “it’s déjà vu all over again.” The $3.7 trillion Senate “Gang of Six” plan and related iterations bear a striking resemblance to a “Moment of Truth” deficit commission report issued, and mostly ignored, late last year and pieces of a Heritage Foundation plan ironically entitled “Saving the American Dream.”

No plan will preserve or protect the American Dream as we’ve come to know it. And the powers that be don’t seem to be rattled by the potential chaos if an agreement on raising the federal debt ceiling by Aug. 2 doesn’t happen. Markets may collapse, benefits will be delayed and salaries won’t get paid if the U.S. can’t issue more debt, but the Beltway bickering goes on.

Instead, we have this power play in the form of Byzantine musical chairs. One sure loser is already ordained, though: Middle America. Let’s look at where the deficit commission, Senate and Heritage plans intersect:

“Broaden the tax base”
This is one of the most Orwellian prevarications since the coining of the “death tax.” (Have you ever met a dead person who paid a tax?) When conservative policymakers say this, they don’t mean raising taxes, they mean lowering tax rates and eliminating “tax expenditures,” like deductions for individuals.

The Senate “Gang” plan proposes three tax brackets ranging from eight to 29 percent. Currently the highest personal tax rate is 35 percent. The Senate plan would also cut the hated $1.7 trillion alternative minimum tax. At first blush, both moves will reduce revenue flowing into the Treasury and balloon the deficit. How would the Senate make up the shortfall, considering that it also cuts corporate tax rates from 35 percent to as low as 23 percent? They say: “Reform, not eliminate, tax expenditures for health, charitable giving and homeownership.” Bottom line: Your after-tax cost for healthcare and mortgages may be higher. Although limiting the mortgage interest deduction to one home and capping it isn’t a bad idea, this is not a “broadening” of the tax base. Middle class workers will pay more — unless the cost of healthcare and homeownership mysteriously drop.

“Enacting a $500 billion down payment … ”
One of the key elements of this Senate concept carves up Social Security. Instead of the current formula for cost-of-living adjustments, the Senate (and deficit commission) would substitute a “chained” Consumer Price Index. Through economic legerdemain, this new index would shave an estimated 0.25 percent annually from the current cost-of-living payments. That means a lower Social Security payment!

What about bringing more government workers into the system, immigration reform or simply raising the cap on earnings subject to Social Security and Medicare taxes? None of this is mentioned. After all, to “broaden” the tax base — at least in this perverse definition — “reformers” will reduce benefits. Note: There was no COLA paid in January due to low inflation, even though for millions of retired folks the cost of medicine, food and energy rose. The takeaway here is that “entitlement reform” means cutting benefits and raising your out-of-pocket costs for Medicare and Social Security.

“Repeal the CLASS Act”
The Senate document doesn’t even bother to explain what this is, but I will. The CLASS Act was one of the better ideas to emerge from Washington in recent years. It would have given workers the option to buy lower-cost long-term care insurance through their workplace. If you’ve seen a nursing home bill lately, you know that decent care costs more than $70,000 a year. It’s estimated that 70 percent of Americans over 65 will need long-term care at some point. Right now, either families or the Medicaid program absorbs these exorbitant costs — and Medicaid funding has one of the biggest bulls eyes on it. So middle-class and lower-class families will pay more.

There is some good news in all of this. If you’re a hedge fund, private equity manager, bank, corporate treasurer or securities investor, you’ll be just fine. No one has suggested raising taxes on capital gains, trading profits, derivatives, dividends or “carried interest.” Apparently not everyone will be asked to sacrifice when the tax base is broadened.

16 comments

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There is pain no matter what one does. The next generation will pay for these one way or another.

Cuts in todays programs will affect those who will enter the economy a generation later, scholarships, education loans, home loans, social security whatever… The families will have to institute their own cuts or smartly said, the disposable incomes will drop. This will slow down the economy and lead to more people ask, “Why college?” There will not be enough trained people for the coming waves of jobs. Countries that will invest in education will reap the benefits (read China, possibly India).

The other option is raising taxes gradually and pay the debt down over a generation or two. This is like taking a mortgage and paying interest for 30 years.

Good luck all!

Posted by juggernaut | Report as abusive

The takeaway here is that “entitlement reform” means Any compromise in Washington will inevitably mean cutting benefits and raising your out-of-pocket costs for Medicare and Social Security.The Republicans and Tea party guys have good news in all of this. If you’re a hedge fund, private equity manager, bank, corporate treasurer or securities investor, you’ll be just fine. It would be criminal to suggest raising taxes on capital gains, trading profits, derivatives, dividends or “carried interest.” Apparently not everyone will be asked to sacrifice when the tax base is broadened.
We have a compassionately conservative Republican majority in Congress!!

Posted by loiters21 | Report as abusive

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Posted by Debt solution: Trade US seniors for Mexico’s workers – The Free Lance-Star « Ramona Pacific Plumbing | Report as abusive

I’m a wage earner, so I guess I shouldn’t bother reading Reuters anymore. Seems more like Conde Nast these days. Probably be a lot more wage-earners surfing the net in the next few months/years, so good luck with the elite angle.

Posted by moneywon | Report as abusive

Well, it’s not surprising. It’s been a long time coming but we knew we’d have to make drastic changes sooner or later. In the grand American style, we’ve waited until the very last moment and now it’s far more chaotic and painful than need be.

I suppose that a lot of Americans are wondering why their corporate shills – er, legislators – in Washington aren’t looking out for their best interests. They don’t understand that a prostitute has to service the customer that pays the most.

Posted by Old49Tom | Report as abusive

Compromise is NOT a good thing when your counterparty is bound and determined to raise taxes and expand entitlements that are already unaffordable.

Posted by mheld45 | Report as abusive

This isn’t a deal WITH the Republicans, it’s a “shakedown” of this country BY them — the facts are the same, only the name of the thugs have changed.

Posted by Gordon2352 | Report as abusive

It’s wrong to let this debt addiction to continue – just default and face the consequences – it will be lot less impact locally and more at global level where the jobs migrated to and to the corporations that are in need of some healthy correction.

Posted by Mott | Report as abusive

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Posted by 3 more gloomy bargains: How much the debt deal will cost you | Reuters Money | PolicyABC's "POLICY THINK SHOP" | Report as abusive

The whole debt question is a red herring, a pretext, this is about hacking up the New Deal support of the middle class. A Big Lie. If the TP Republicans were really concerned about the size of the debt they would be open to new taxes, not trying to lower them and not fastidiously avoiding taxing even the wealthiest taxpayers. Their only agenda is to hobble government and get rid of Obama, and these extremists don’t care about injuring the US to do it. We are in the hands of ideologues.

Posted by empower28 | Report as abusive

All these discussions about the federal tax code fail to consider the rising burden of local taxes, which mostly target the middle class: sales tax, real estate tax, and high excise taxes on gas, tobacco and liquor.

I live in NYC and make a low six digit income. I have detailed for the past 3 years every tax I pay. My effective tax rate on my gross income is 56%!! Yes. 56%!!

And that 56% doesn’t include the costs of my healthcare insurance and co-pay (about $5000/yr). It also wouldn’t include education costs if I was sending children to private school and/or university. These additional costs are really tax as well since in other developed countries (Germany, France, Japan) healthcare and education are not an individual’s burden.

In the meantime, John Paulson of hedge fund fame made $3billion in 2009 and paid an avg. Fed tax rate of 15%. Options and futures traders can see tax rates as low as 10%. Real Estate investors can defer cap gains tax indefinitely. The list goes on.

More and more I see a parallel between Bourbon France of the 18th Century and 21st Century USA. Let the aristocracy rule and pay no taxes while the masses subsist. The big difference is that in the 18th Century you didn’t have mass media controlled by the oligarchy as in the USA today.

Posted by Acetracy | Report as abusive

Muddy waters! If we individuals have to ask our credit card company to raise our limit to enable us to pay our mortgage, we do and then we break out the scissors! Raise the limit (only), pay the bills.

Next, how’d we get here? The folks we elected to manage the business of this country FAILED us. “Elected”, ultimately makes that OUR responsibility! We need to fire the management firm (congress), hire a new one with an open view as to how to break out the scissors, live within our means and invest to INCREASE our means.

“Before” you can clear up the water you have to get the pigs out of the creek.

Posted by sfrmyk | Report as abusive

The errant thinking going on in the minds of those dominating the world economy is the notion that they need to give a superior position to any country, or substantive resource provider, to have everyone functioning the healthiest ways possible and so driving a healthy economy. There is nothing like an honest relationship with reality’s ways to let a people decide what is the best way to procede with their lifes for the sake of their posterity’s fullest possible health.

Presently, foreign wages are very low and some factories are polluters according to the standards we require for their operation. There is no way we can compete against this situation. [To assume that foreign entities are not using equipment to make their laborers’ time more valuable is not a valid assumption. They run all kinds of equipment making all sorts of items that go into final products, is what I hear is going on.]

The simplest way to address these two factors in our foreign ‘free trade’ relations is to set up a tariff on products made unders such ‘sub-standard’ conditions and try to return the funds in a way that will address those disparities in a charitable way as possible to those ‘impacted’. If a factory will not upgrade then the funds may get diverted to addressing the enviromental impacts. Admittedly this will pinch the profits of those using the disparity to their advantage for making big bucks on the markups presently possible. Yet in the long run they will actually be more enriched by the communities and environments the oversee and can base an sound economy on.

In order to address the resource limitations in an area, the funds should not be used to buy resources that are not readily available, at least generally in the world. Instead, they could be used to address matters like education, medicine, and conflict resolution and prevention. One of the most basic pieces of information a people need to make wise decisions is the material resources available per person and their sustaining environment and how that defines the limits on their living standards. The next most important bit of information in my view is the skill levels required to live at a desired standard of living.
One might note that resources by themselves are just solids, liquids, gases and energy, usually all mixed up in an unusable form. It is the skills that man has that is the ENABLER for refining these basic materials and to generate items we value (and this can including the refinement of our own human nature’s way of relating to an environemnt, or each other). A strong economy is based more on skills than the raw materials available. Yet material resources do define, very rigidly at times, the precise forms we can expressed ourselves where we are against hard matters generated by nature, or man; so a relative abundance through wise re-use and a balance with natures limits are very important for giving our posterity more sucurity, and freedoms.

Posted by gdmellott | Report as abusive

I just talked with a trader who can’t believe this is actually happening. Push is coming to shove and the markets will speak soon enough. It won’t be pretty.

Posted by johnwasik | Report as abusive

[No one has suggested raising taxes on capital gains, trading profits, derivatives, dividends or “carried interest.” Apparently not everyone will be asked to sacrifice when the tax base is broadened.] ======================================== ====

That’s why the current income tax system needs to be “deep sixed” PDQ. A straight sales tax on every exchange of goods/services, including imported goods/services, would be simpler to administer (i.e., less IRS personnel needed) & more “fair”.

Posted by Observero0 | Report as abusive

[No one has suggested raising taxes on capital gains, trading profits, derivatives, dividends or “carried interest.” Apparently not everyone will be asked to sacrifice when the tax base is broadened.] ======================================== ====

That’s why the current income tax system needs to be “deep sixed” PDQ. A straight sales tax on every exchange of goods/services, including imported goods/services, would be simpler to administer (i.e., less IRS personnel needed) & more “fair”.

Posted by Observero0 | Report as abusive

As a non American, I have always been amazed about the fact that in the US, one can deduct mortgage interests.
The richer you are, the bigger your house(s) and your mortgage interests, the bigger you tax deduction?

With such a provision, there is little incentive to quickly pay off your mortgage: all Americans, including those who can’t afford a house, pay for a part of your home(s).
I do not know since when this provision exists, but this was certainly influenced by the banks, those who really are the deciders in the US.

Why can’t those who can’t afford to buy and must rent a place to live in deduct their rent or part of it from their income tax?

And why not the interests on your car, and why not the interests on your credit card?

And then every body criticises Obama for debts that were created while he was *not* in office.
And and 2 years, he should have settled 8 years of crazy deficits increases and debt rising!
I do not consider Obama’s health care law as a debt creating law, but as an investment that will benefit ALL Americans.
This law is way less “leftish” as in most developed countries who have universal health care.
But in those countries, this is the last thing that the people would want to see disappear from the budgets.

So I would like to have compared numbers: how much “revenue increase” would represent if the mortgages interests deduction was suppressed, and what percentage of it would help to pay for the health of all Americans.
Buying a house is a choice, getting terribly sick is not.
You can plan your own budget and decide if you can afford a house or not, you cannot plan when you or one of your kids will be sick.

Every new or existing house that is sold means less income for the budget.
Is this fair?
From outside, it seems to me that home ownership is (or was) part of the “American dream”, and this has become the whole world nightmare.

Posted by garilou | Report as abusive

Simple sales tax (vs. income tax) can let money leave the country untaxed rather easily.

Posted by gdmellott | Report as abusive