Greece: Austerity as Athens Burns

There was another round of Greek protests as the government met to pass an austerity bill:

Greece definitely needs to make progress in reducing their debt and getting their budget in order. The economy is suffering and people are going nuts over it. There's been an immense brain drain because of this. The whole country is unhappy:

Although the demonstration was organized by leading labor unions, everyone from trash collectors, teachers, retired army officers, lawyers and even judges walked off the job to protest the government-imposed wage cuts and tax increases that they say are squeezing the debt-ridden country into penury.

“There’s no precedent for this,” said Anastasia Dotsi, 70, a retired bank worker who said anger had driven her out to protest. After two years of austerity measures, “we have been crushed as a people,” she said.

The bill is harsh in that it will include wage cuts and job cuts, but it might be a necessary measure:

The controversial bill includes cuts in wages and pensions as well as thousands of layoffs in the public sector — once a political third rail in Greece’s welfare state. It also changes collective bargaining rules to make it easier to hire and fire workers, a highly unpopular action that economists say is crucial to liberalizing Greece’s economy but that has little popular support.

Some of this is a necessary for Greece's EU position:

“The vote will boost our negotiating position; it will give us strength for the E.U. summit,” Mr. Papandreou said this week. The main goal for Greece, he added, is “to stay in the euro zone.”

The situation is bad. There's no other way to describe it. Any decision that the government makes seems like a poison pill. I have no idea how Greece is going to get through this in the short term, but in the long term, moving towards a strengthen private sector makes sense. The government is stuck between a rock and a hard place though.

Greek Protests

With the Greek debt crisis, the Greek government has been under pressure to make cuts so that the road to recovery is a much more attainable path. They've already been bailed out a couple times by the European Central Bank and cannot afford to be bailed out again. The path that the Greek government has chosen is to make job cuts, and the people have protested:

Flights were grounded, schools shut and government offices closed in Greece's first nationwide walkout in months. Labour leaders call it the start of a campaign to derail emergency austerity steps launched last month by a government that has already imposed two years of tax hikes and wage cuts.

These people have already made sacrifices, but there is definitely a priority of austerity. The Greek government needs to start moving jobs back to the private sector. By employing so many people, they put a heavy burden on their tax base. Now, the people it promised to help are suffering as a result. Yes, it appears the next few years will be lean for Greece, but it will be better for the long run. However, this seems to be heading towards anarchy:

"We want this government out. They deceived us. They promised to tax the rich and help the poor, but they didn't," said Sotiris Pelekanos, 39, an engineer and one of the striking workers gathered in central Athens. "I don't care if we go bankrupt. We are already bankrupt."

The government really has no idea what it's doing:

"The government is panicking and has no strategy," said Thessaloniki port unionist Fani Gourgouri. "These measures are only extending poverty. We'd be willing to shoulder the cost and say 'yes' to austerity if they proceeded with reforms that would create jobs instead of cutting them."

The problem is that Greece has goals it needs to achieve:

The government will aim to achieve a 2012 deficit of 14.65 billion euro ($19.51 billion) or 6.8% of GDP, by combining 2011 and 2012 goals. Finance Minister Evangelos Venizelos believes this will give Greece a primary surplus next year of 3.2 billion euros ($4.2 billion).

If Greece makes cuts but continues with its over-reliance on government for jobs and other provisions, it will have the same problems in the future. The only way to ensure the future is to make a solid investment in growing the private sector. I don't think they can just make the switch overnight. They can't alienate the people either. The government needs to maintain its credibility, something that's already running thin. Greece has some tough choices to make. The people hare clearly making their voices heard.

Tackling Taxes

With the pending debt crisis, the issue of taxes has become a much discussed issue. The biggest backlash in the debate seems to have been spurred by Warren Buffet, who says the ultra-rich should be paying more. A New York Post op-ed says that this is misguided:

Left unsaid is that much of that is taxed at 35 percent (via the corporate income tax) before he even gets his hands on it. So in effect, he’s paying taxes twice (that is, when his companies actually pay, anyway).

Counting both taxes, his effective rate would really be well north of 40 percent for a big chunk of his income.

In addition, Obama has propagated rhetoric against Corporate Jet Owners:
This, according to Republicans, has spurred a class warfare about who pays what taxes. The Daily Show pretty much explains it best:

The Daily Show - World of Class Warfare - The Poor's Free Ride Is Over
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

This dialogue of shifting the burden of taxes from the rich to the poor has been a common thread from the Republican candidates. Fact of the matter is that the people who aren't paying taxes are amongst the poorest in our country. They live from pay check to pay check and can't afford to pay taxes without threatening their already low standard of living. Quite simply, it's a type of tactical rhetoric to enrage the contingency they're appealing to who tend to hate taxes and hate paying them. To these people, everyone should share the burden if there is a burden at all. Here's what Michelle Bachmann had to say:

"Part of the problem is today, only 53 percent pay any federal income tax at all; 47 percent pay nothing," said Bachmann. "We need to broaden the base so that everybody pays something, even if it's a dollar. Everyone should pay something, because we all benefit."

It's not just her saying this. Jon Huntsman is also in the we need more people paying taxes boat (8:11). I agree with Huntsman as saying we need people to have a stake in our spending. If you aren't paying taxes, what do you care how the government is spending those funds?

The problem though is that people are looking at it from a budgetary stand point. Taxing the poor shouldn't be seen as the way to increase tax revenues. It should be used more to make sure people have a shake in the government's spending. It should be to keep the government accountable.

But as I said before, these are the poorest of the poor:

Consider: Of those households that do not owe income taxes, about a third earn $10,000 a year and a slightly smaller share earn between $10,000 and $20,000. More than three-fourths earn $30,000 or less.

In addition, the notion that these households pay no taxes is flat-out wrong. They pay — leaving aside state and local sales, income and property taxes — federal gasoline and other excise taxes and, most significantly, payroll taxes on every dollar they earn. These taxes are regressive. Everyone pays the same share, regardless of income, so they hit the poor hardest, and they counterbalance the progressivity of the income tax code.

Let's not worry about taxes from a who pays stand point then. Let's worry about taxes from the stand point of the budget. Raising tax revenues is necessary in times where the budget is a concern. Deciding the budget isn't as simple as cutting spending and increasing taxes though. It is important to also consider the effect that these changes will have on the economy.

The economy is struggling.

We need policies that encourage economic growth. Let's start with Obama's plan to raise taxes and see if it would positively affect the economy. We'll look at the UK for evidence. The UK raised the top tax bracket to 50% for the wealthiest:

The new rate will affect the 300,000 highest earners in the UK, out of the 29 million people who pay income tax.
It will be levied on taxable incomes greater than £150,000 a year and aims to raise an extra £2.4bn by next year.

This is, in effect, similar to what Obama wants to do in taxing those making $250,000 or more. So did it work?

The most likely explanation is that higher income tax receipts partially represent the new 50p rate kicking in and rasing revenue. How else to explain the figures? Receipts are up way in advance of earnings or employment growth.

So it has worked in raising revenues. The big question then becomes has it helped the economy? It seems not:

"We always said that recovering from the deepest recession that we've had for many decades, with the largest budget deficit that we've seen for a very long time was going to be choppy and I think probably the waters have been choppier than anyone expected. We've seen big headwinds in the global economy, rising oil prices, rising commodity prices. All those things have an impact on the British economy."

Those same variables would seemingly have the same effect on the US economy. Raising revenues won't be worth it if you have events like this going on:

A solution that also addresses the economy would be the best case scenario. So what other options are there? Michelle Bachmann has proposed that we cut taxes:

Representative Michele Bachmann promised Saturday that as president she would turn things around within one economic quarter, in part by cutting corporate taxes and eliminating capital gains and inheritance taxes. Painting President Obama as doggedly antibusiness, Mrs. Bachmann asked, “Why in the world wouldn’t we do what we know works to create jobs in this country?”

Why would we want to cut taxes when we need to raise revenues? This doesn't seem intuitive does it? Well, a lot of companies have a lot of cash on their balance sheets, but they aren't using it:

Tax policy is driving much of this trend. For multinational corporations, cash earned abroad cannot easily be remitted to the United States. If it is paid back to the United States, it is subject to a dividend tax that can rise to as much as 35 percent. Companies are loath to pay this tax because while they can offset it with taxes paid abroad, the companies still end up paying a relatively high tax rate.

However, lower taxes won't solve the problem completely:

Five companies alone — Pfizer, Merck, Hewlett-Packard, Johnson & Johnson and I.B.M. — repatriated $88 billion, But the repatriation did not result in increased investment. Instead, companies largely repatriated the money and used their current United States holdings to pay out dividends or engage in share repurchases. This was contrary to what Congress had intended.

While the cash was not used for investment, this does not mean it did not have an overall positive effect on the American economy: shareholders went on to spend this cash. The study’s authors acknowledged this, stating that “presumably these shareholders either reinvested these funds or used them for consumption, thereby having indirect effects on firm investment, employment or spending.”

How can this be fixed?

A permanent tax reduction would not only cut taxes but actually raise revenue, allowing for Republicans to vote for it. And it should be a holiday without restrictions — trying to force companies to invest the money rather than pay dividends is a useless exercise that will create only more bureaucracy.

Even if the money were largely spent on buybacks and dividends and a large portion were kept abroad, it would still be reasonable to expect $300 billion to $600 billion to be repatriated. This money would flow into the economy, making the dividend tax cut a stimulus package that Democrats could support.

Lowering taxes isn't the complete solution, but there are ways to combat corporate loopholes and encourage the return of that money into the United States. Tax-friendly areas have been known to do well, as was chronicled in the WSJ documenting the success of the Swiss region Zug:

Developed nations from Japan to America are desperate for growth, but this tiny lake-filled Swiss canton is wrestling with a different problem: too much of it.

Zug's history of rock-bottom tax rates, for individuals and corporations alike, has brought it an A-list of multinational businesses. Luxury shops abound, government coffers are flush, and there are so many jobs that employers sometimes have a hard time finding people to fill them.

Zug provides an example where lower taxes has helped grow the economy and grow tax revenues. This is because as the economy has grown, there's been more wealth to kick back to the government. The government are getting lower percentages of incomes, but those incomes are growing because of the burgeoning economy.

We've actually seen this work in the United States before, when Reagan cut outrageous taxes leftover from the Carter administration. While this didn't rejuvenate the economy immediately, it helped the economy regain momentum through the 1990s, while the Clinton administration operated at a budget surplus.

Government officials need to take a hard look at this. The debt crisis is clearly an important issue. The solution, however, must make long-term sense. To me, this means that the government should encourage economic growth to raise in the future tax revenues. The shortfall from lowering taxes can be done by cutting spending.

The answer to our problems is addition by subtraction. The economy needs a boost. This is the way to do it.

The Other Side

Quite recently, in the eye of this debt deal, President Obama has been lambasting oil companies and other corporations for avoiding taxes through loop holes:

He also goes after corporate jet owners. It's been going on like a broken record. I get why he wants them to be burdened with more taxes, considering they can probably afford it, but I don't know if it's "fair" or "equitable."

Nobody wants to pay taxes because they have no say into what the way that government is going to spend it. Government is inefficient both with layers of bureaucracy and wasteful programs such as Medicare, Welfare, and now ObamaCare. I'm not saying these programs aren't necessary, but rather that these programs aren't efficient.

On the other end of the spectrum, you have Republicans like Paul Ryan, who have consistently criticized the Democrats' irresponsible spending habits. Ryan was extremely pleased with the spending caps put on by the new debt deal:

But that did not stop him from writing a scathing op-ed in the WSJ regarding Obama's budget inadequacies:

Since then he has offered a lot of rhetoric but no real plan to avoid a spending-driven debt crisis. His speeches and press conferences are no substitutes for actual budgets with specific numbers and independently verified projections of future deficits and debt. Meanwhile, it has been over two years since the Democrat-controlled Senate passed any budget at all. This is a historic failure to fulfill one of the most basic responsibilities of governing.

The necessity of controlling federal spending is better illustrated by these graphs:

Needless to say, this problem isn't going to go away. In fact, it's only going to get worse unless we find a solution to this problem. ObamaCare was unnecessary bloated program that compounds the already horrible spending practices of our government.

When you have government handouts with lax rules, people are going to take them. Why wouldn't you want free money? If you can get it, why not? It's costing governments millions of dollars as a result.

To illustrate this problem, I'll use the Michigan Bridge Card program as an example. This program had very lax rules, so many people, in particular, students took advantage of this program. Although their parents were paying for their school and housing, they used the fact that they had zero income to get these cards and to get free groceries. As a result, the state had to make tighter regulations (From MLive):

"We're ready to extend a helping hand to any citizen who is truly in need — including college students who care for young children and are taking the right steps toward becoming self-sufficient," said Maura D. Corrigan, Michigan Department of Human Services director. "Those who don't meet federal guidelines won't be able to take advantage of what is meant to be a temporary safety net program."

It turns out that certain government programs have the same type of loopholes as the corporate tax loopholes that Obama has so vehemently argued to close. The whole system is creating a sort of reverse incentivization to work less and get more for the government. That's not a driver for growth, that's not a driver for productivity, that's not a driver for innovation. You have to wonder whether part of the reason the unemployment rate is so high is because the benefits of being on unemployment is so good. Now Obama wants to lengthen unemployment benefits again:

A top goal for Obama and congressional Democrats is to extend both unemployment insurance and a payroll tax break. These measures were enacted at the beginning of the year. Obama could not achieve those extensions in the budget deal with Congress.

I understand why we have unemployment insurance, but at what point are we going to cut this off? If we keep extending these benefits, why should anyone try to get employment? Where is the incentive to work?

Right now, we have more benefits offered to people than ever before, yet we sit at 9.2% unemployment. It's hard to say the economy is struggling when companies' earnings are generally beating estimates. Part of this might be from job cuts, but even with these stronger earnings, companies like Cisco and Merck are still cutting jobs.

Closing corporate loopholes are just going to cut into these companies' profits. The time honored solution to increasing costs is job cuts. This will only serve to exacerbate the problem. I'm not saying that these loop holes should not be closed, but closing them now might not be the best solution.

The first response for these companies will be to protect their profits and margins in their shareholders' best interests. You have a difference between what Obama thinks sounds reasonable and what will actually happen. We are already in risk of another economic recession. It is important to wait until the economy shows real signs of health before taking constrictive measures like increased taxes.

In the meantime, you should incentivize people to get back in the work force. The extension of unemployment allows people to take their time getting back into the field and pick and choose jobs. Jobs should not be something that people should be picky about right now. The government is shouldering a burden of costs that it needs to pass on to the private sector. As a result, they need to push people to get jobs and remove the uncertainty of future taxes.

In doing so, the government will alleviate the pressure of future costs on companies, while providing a sense of urgency at the bottom of the work force to be more aggressive in the labor markets.

Whereas the threat of taxes casts uncertainties over the overall economy, incentivizing the job market has the opposite effect. With more people employed and less people claiming benefits, you're automatically going to see a shift in revenues and costs. If you tighten up the loopholes or the ease with which people can get other government benefits in order to reduce unnecessary government handouts, you will see savings there too.

The best way to economic recovery and solving this debt crisis is not through taxes, but the other side. We are spending way too much on all of these programs. We need tighten up the restrictions of these programs and provide incentives for growth. The government isn't going to spend its way out of this recession, but rather, they are going to stunt a potential recovery with these backwards measures.

I would urge President Obama to take measures that actually work rather than to get into the weary debate on revenues versus spending cuts. His best path to reelection in 2012 is not by playing party lines, but rather by making a strong effort to right this country's economy and to make positive strides on the issue of debt.