The 6-6-6 plan

Inspired by Michelle Bachmann, I’ve been thinking about what a 6-6-6 response to Herman Cain might look like. Being multiply disqualified from seeking election to the US Presidency, I decided to put in as much work as Cain and his team appear to have done, but no more. Hopefully, the magic of crowdsourcing will turn this into a comprehensive blueprint. So, here are the basic goals, and over the page, some of those devilish details.

The aim of the plan would be
(a) Reverse pro-rich and anti-worker policy changes of the past three decades to reduce, by 6 percentage points, the share of market income going to the top 1 per cent.
(b) Increase, by 6 percentage points of national income, the personal income tax revenue raised from the top 20 per cent of the income distribution
(c) Reallocate, or use more efficiently, current public expenditure equal to 6 per cent of national income

The aim would be to raise post-tax incomes for those in the bottom 80 per cent of the income distribution by around 20 per cent, while making around 10 per cent of national income available for new or better public expenditure.

For reference, US national income is currently around $13 trillion, so 1 per cent is $130 billion.

Part (a) is the hardest as far as attaching specific numbers is concerned, but the number of policy options is huge. First, there are the many anti-union laws and policies implemented beginning with Reagan (and before him, for that matter) – increasing the bargaining power of workers is clearly central to a more equitable distribution of market income. Second, there are a wide variety of corporate tax breaks that could be removed.. Third, but perhaps most important is the need for a smaller, and less highly rewarded financial sector. The Tobin tax would be my first step in this direction, but there are many more.

For part (b), the main component is obviously a more progressive income tax scale. But a substantial amount could be generated by ending the concessional treatment of capital gains, treating inheritances as income, and removing concessions that primarily benefit the top quintile. My back of the envelope estimate (to be corrected later) is that a 5 per cent increase in the marginal rate above 100k and a 10 per cent increase above 250k (relative to the Bush scales) would be sufficient

For part (c), lower defense spending could yield savings of 2-3 per cent of national income while still leaving the US by far the world’s greatest military power. Improvements in health spending (for example, a redesign of Bush’s prescription health benefit) could yield 1-2 per cent. Scrapping the mortgage interest deduction (in combination with a once-off reset of current mortgage debts as part of the expenditure package) would save about 1 per cent. After that, there is the long list of pork-barrel items like the Farm Bill, bridges to nowhere and so on.

What to do with the 12 per cent of national income generated in parts (b) and (c)? I’ve assumed that a couple of percentage points would go to reduce state and local taxes paid by those in the bottom 80 per cent of households, leaving 10 per cent of national income for new or better programs. Although that seems like a huge amount, it’s not so much when you look at the big areas of need. Among them

* Poverty, which is at record levels relative to the poverty standard first set out in 1962, and updated only for inflation since then[1]. I’d favor some form of guaranteed minimum income, but even a patchup of the existing safety net would be expensive
* Health care. The US government spends a lot in this area, but relatively ineffectively. A single-payer health insurance system is the obvious way to go, but even a public option would be a big improvement
* Education.  I know more about post-secondary education, where the US used to be the world leader, but has ceased to be so, than about school education, so I’ll focus on the former. The biggest area of need is probably for an upgrading of standards in the community college sector. Success in that sector would imply more articulation into the four-year sector, which would therefore also need funding for more places and lower tuition charges.  Then there is the huge problem of reforming the student loan system.
* Infrastructure. Another area where the US once led the world, and is now lagging badly in many respects.
* Debt and mortgages: Most of this plan is set out for the long term, but some action to deal with the burden of household debt, particularly mortgage debt is urgently needed. As I mentioned, this could be offset in the long run by removal of the mortgage interest deduction, which serves to inflate housing bubbles
* Overseas Development Aid: Most Americans falsely believe that the US spends much of its budget on foreign aid, and that it is still, as it was during the Marshall Plan era, the most generous nation in the world in this respect. Raising ODA from its current level, about 0.15 per cent of national income to 1 per cent would make the second of these claims true, and would be far more cost-effective in all respects than military spending
* Climate/Environment As I’ve argued before, fixing the problems of the global climate will cost much less than many people (on both sides of the debate) imagine, at least if we get started soon. Spending 1 per cent of national income now would save an awful lot in the future.

A few points about the plan. Obviously, it’s way outside the realms of political feasibility, but there’s nothing in it that’s remotely as drastic as the measures in Cain’s plan, or the proposals put forward by Paul Ryan. Many of the measures would simply reverse changes of the past few decades. If implemented in full, it would still leave the US as a relatively low-tax, low-spending government with a highly powerful military, and would only partly reverse recent growth in inequality.

In setting it out, I haven’t made any attempt to give a timescale, or to relate long-run proposals to the short-run need for fiscal and monetary stimulus (except as regards the mortgage debt proposal).

Obviously (I hope) this is just meant as a discussion starter.  Pointers to omissions and errors will be accepted with the good grace usual in such cases, and suggested improvements with even more.

fn1. As will doubtless be pointed out, the CPI probably overstated inflation before the Boskin Commission changes of the 1990s, and there are various other problems with the numbers. Nevertheless, the important point is that this was designed as an absolute poverty standard, taking as its starting point the capacity to have an adequate “economy” diet by the standards of 1962.

37 thoughts on “The 6-6-6 plan

  1. At last we should reflect on measuring poverty vs mindless CPI – talk.

    In the 1930’s you were poor if you could not aford a record player.

    In the 50’s you were poor if you could not afford a mantle radio.

    In the 70’s you were poor if you could not afford in BW TV.

    In the 90’s you were poor if you could not afford a computer.

    In 2010, you are poor if you cannot afford housing.

    In 2030, we will be poor because we will not be able to afford food.

    Thanks capitalists.

  2. @adelady

    My first target would be negatively geared property. It’s a wealth creation scheme for the moderately well-off to use other taxpayers’ funds to convert extremely modest amounts of money used as deposits on property into marginally taxed, but sizeable, capital gains when the rental property is sold.

    I’ve no problem with going after negatively geared property — indeed, I strongly support it. My remark about owner-occupied property merely reflected the fact that theses were more of a tax haven than copmmercial property.

    And the social loss is magnified, because the owners have to make a real loss to get tax deductions but not so much that the bank won’t lend.

    Sorry, but this makes no sense at all. Those with commercial property would happily trade taxation benefits for higher income. What they are after is ROI. If interest rates decline, their negative gearing advantage declines but they get a net benefit. They can use this to support other investment that is also negatively geared and expand their capital-appreciating assets.

  3. @Fran Barlow
    “… happily trade taxation benefits for higher income..” Not quite. Some of them are so barmy about tax that they happily spend more on tax “advice” from lawyers and accountants than they save in tax not paid.

    But this is not really about income. It really is about capitalising profits and socialising losses – in a single step. The income lost annually in a negative gearing arrangement is ameliorated by the tax therefore not paid, and most of that loss is attributable to interest paid on loans. So the tax ‘system’ as a whole is really paying a third or so of the interest expense of acquiring the asset. Regardless of how well one thinks the eventual tax on the capital gain on sale calculation works, the whole process is one of extracting income benefits from the tax system year after year, and converting them to net cash assets at the end.

    The losses were socialised. Any profits is capitalised.

  4. The current returns on domestic property, around 3% with all deductions, are hardly what you would describe as wealth creation. Construction costs are manifold and should returns drop it is likely that the supply of property would decrease making rentals more difficult.

    For many people the greatest investment that they will ever make is in their home and to have that investment devalued by govt policy would be electoral poison, as Frank Walker in NSW found out.

  5. @adelady

    The income lost annually in a negative gearing arrangement is ameliorated by the tax therefore not paid, and most of that loss is attributable to interest paid on loans.

    If so, then the lending body pays tax on that income.

  6. @rog

    I disagree. Obviously you’d need to phase in such a policy — perhaps over 10-15 years so the plateau or decline was very slow, but in the end what you’d achieve is a shift from investment in residential property to more productive sectors of the economy and such investment as was tied up in real property would be very much based on the use value of the property.

    You’d also ensure that there was a more fluid market in property and a better fit between people’s needs and the housing available. You would encourage saving and reduce debt and make arguments over interest rates far less salient to public policy debate.

    You’d probably also have a better trade balance and less purchase of semi-disposable fashionable consumer junk, fewer people working crazy hours to stay ahead of debt and commuting 2 hours each day. In short, almost everyone but the property speculators and the banks wins.

  7. @rog

    This low substainable return is the only reason why Australia’s house prices did not crash during the GFC because it is still affordable for the home buyers. If Australia is too become like US, then there will be a huge boom and drive up all property prices and when it becomes unaffordable; it will collapse and take a few banks with it just like the US.

  8. There are a couple of reason why no housing collapse in Australia during the GFC. They include, first, Australia didn’t suffer the GFC the way others did because of the quick action of the government. Indeed, Australia didn’t even have a technical recession. Second, housing starts have been very poor for the last few years, in good part because those resources have been attracted away to mining and related sectors. As a consequence rental and housing markets were tight. Neither of these suggest that housing will be immune in future. If real incomes tighten, so will Australians tighten their belts, and one item will be their expenditure on housing.

  9. @Freelander

    I do agree on your point, but I was just pointing out that if Australia didn’t have so much tax on properties(i.e. stamp duty and capital gains tax), it will generate a property boom like the US. Property boom is not a good sign for the society as a whole because incomes don’t rise as fast as the increase in property price itself. Eventually it will reach to a stage that people will have to borrow beyond their ability to service the debt. Once this happens, any speculations of a coming recession will crash the housing industry.

  10. The property boom in the US was fuelled by Ninja loans with the financing provided by magically turning junk CDOs into AAA bonds with the application of CDSs. Through in massive dollops of fraud, and you have the catastrophe we had to have. Unless a great number of people in Oz are struck by some type of madness, that type of boom is not going to happen. Ordinary booms, however, remain a possibility, but everyone seems immune to believing straw can be turned into gold at the moment, so we may have to wait some time for the next boom.

    At the moment? We are on a permanently high plateau.

  11. @Freelander

    This boom will not happen as long as there are heavy taxes on property investments such as now, as soon as these taxes are removed; the inflow of foreign investment combined with investment speculation would create that boom as well. Think of the ShenZhen Stock Exchange for example, how long did it take for it to collapse from 19600 points to below 8000 points.

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