Economy

American exceptionalism has become a theme of our immigration debate.  From both sides, we hear that America is a uniquely desirable place that, for good or ill, draws an outsized share of the world’s immigrants.  The truth of this matter is that large-scale immigration is a worldwide phenomenon tied to contemporary globalization.  Porous borders and rising education levels have allowed tens of millions of people in developing societies to become more mobile, and new communications and transportation technologies give everyone access to information about other countries and ways to get there.  Perhaps most important, rising global demand has created vast new opportunities for foreign labor – whether it’s to bolster shrinking labor pools across much of Europe, provide services in thinly-populated, oil-rich countries in the Middle East, or cater to wealthy global elites in dozens of tax havens.

So, despite dire warnings that U.S. immigration reform will set off another invasion of America by new immigrants, the data show that many other countries are stronger magnets for foreign workers than the United States.  In fact, when it comes to foreign-born residents, America looks fairly average.

It is true that more foreign-born people live in America today than anywhere else.  But that’s mainly because we are a very large country, with more native-born people as well than anywhere except China and India.  And most of our immigrants came here with our permission: Two-thirds of all foreign-born people living in the United States are naturalized citizens or legal permanent resident aliens, and another 4 percent have legal status as temporary migrants.  That leaves about 30 percent who are undocumented.   

Consider the percentages of foreign-born residents living today in various nations:  America with just under 13 percent of its population foreign-born, according to U.N. data, ranks 40th in the world for immigrants as a share of the population.  By contrast, across the 10 most immigrant-intensive countries, foreign-born people account for between 77 percent and 42 percent of their total populations. 

These unusually high proportions of immigrants appear to be generally linked to global trade and finance.  In the top 10, for example, we first set aside the special cases of Macau and Hong Kong, whose Chinese populations are counted as foreign-born, and Vatican City.  Of the remaining seven nations, four are in the Middle-East – Qatar, the United Arab Emirates, Kuwait, and Bahrain – where tens of thousands of foreign workers are needed to help meet global demand for oil and provide services for native populations grown wealthy off of their oil.  The other three countries in the top 10 are global tax havens and financial centers – Andorra, Monaco, and Singapore -- that draw thousands of global elites followed by foreign workers to provide their services.  

The next 10 most immigrant-heavy countries, where foreign-born persons comprise between 42 percent and 22 percent of their populations, include five more tax havens (Nauru in Micronesia, Luxembourg, Lichtenstein, San Marino, and Switzerland) and three more oil rich, Middle Eastern countries (Saudi Arabia, Oman, and Brunei).  The two others in this group are the special cases of Israel, where Jewish national identity is the draw, and Jordan, home to tens of thousands of people displaced by the Iraqi and Israel-Arab conflicts.

Beyond the top 20 countries for foreign-born residents, numerous other nations that more closely resemble the United States, in economic opportunities and social benefits, also draw immigrants in greater relative numbers than America.  For example, some 19 percent to 20 percent of the populations of Australia and Canada are foreign-born, compared to our 13 percent.  Austria, Ireland, New Zealand and Norway also lead the United States in immigrants as a share of their populations, as do the smaller and less-advanced nations of Estonia, Latvia, Belize, Ukraine, Croatia, and Cyprus.   A similar pattern emerges from OECD data covering 25 industrialized countries from 2001 to 2010.  Over that decade, the share of the American population born somewhere else has averaged 12.1 percent.  By this measure, the United States trails not only such countries as Australia, Austria, Canada, Luxembourg, Switzerland and Israel, as noted above, but also Sweden, Germany, and Belgium. 

This pattern also does not change much when we look at the most recent, annual “net migration rates” of various countries (2012).  That’s a standard demographic measure calculated by taking the number of people coming into a country, less the number of people who leave, and divide by 1,000.   Using that measure, the United States ranked 26th in the world.   At 3.6 net immigrants per-1,000 in 2012, we trail far behind three oil-rich countries averaging 24.1 net immigrants per-1,000 (Qatar, UAE, and Bahrain), 13 tax havens averaging 10.8 per-1,000 (from the British Virgin Islands and the Isle of Man, to the Cayman Islands and Luxembourg), and two countries that have become sanctuaries for refugees (Botswana and Djibouti at 14.9 per 1,000).  In addition, at least four other advanced countries also had much higher net migration rates last year -- Australia, Canada, Spain and Italy, averaging 5.3 net immigrants per-1,000 or a rate nearly 50 percent higher than for the United States.

Given the role of labor demand in migration flows and the particular demand in the United States for skilled workers, it is also unsurprising that, according to the Census Bureau, almost 70 percent of foreign-born people residing here, by age 25 or older, are high school graduates.  In fact, nearly 30 percent hold college degrees, the same share as native-born Americans.  On the less-skilled part of the distribution, of course, we find many undocumented male immigrants.  But as we showed in a 2011 analysis for NDN and the New Politics Institute,  undocumented male immigrants also have the highest labor participation rates in the country:  Among men age 18 to 64 years, 94 percent of undocumented immigrants work or actively seek work, compared to 83 percent of native-born Americans, and 85 percent of immigrants with legal status.

On balance, the data show that the United States is not home to an unusually large share of immigrants, legal and otherwise.  As globalization has increased the demand for labor in dozens of countries while lowering the barriers to people moving to other places for work, America has become fairly average as a worldwide destination.   

This post was originally published in Dr. Shapiro's blog

America’s Gross Domestic Product — GDP — is a very powerful statistic. Markets and politicians zealously track the quarterly numbers looking for a bottom line on how investors and the rest of us feel about our conditions and prospects. Compiled by some 2,000 economists and statisticians at the Bureau of Economic Analysis (BEA), GDP pulls together everything they can measure concerning how much America’s households and various industries earn, consume and invest, and for what purposes. Over the last two weeks, however, two new developments should have reminded us that we know less about GDP than we usually believe.

Early this week, the BEA itself tacitly acknowledged that the GDP measure lags behind the actual economy. The Bureau released a set of changes in how it calculates GDP, designed to take better account of the economic value of ideas and intangible assets. Today, few among us would question the notion that new ideas can have great economic value. But some 15 years ago, long before smart phones, tablets and protein-based medications, the BEA started to study how to revise the GDP measure to take better economic account of innovations. This week, the Bureau announced that when a company undertakes research and development or creates a new book, music, or movie, those costs will be counted as investments that add to GDP, rather than ordinary business expenses, which do not.

In an instant, the official accounting of the economy’s total current product increased some $400 billion. Business profits also have been larger than we thought, because ordinary business expenses reduce reported profits, while investments do not. Most important, the revisions told us that American businesses and government, together, now invest just 2.1 percent of GDP in R&D — less investment than in the 1990s here, especially by businesses, and less than much of Europe.

While this week’s BEA changes bring us closer to an accurate picture of GDP, last week we learned how naïve we can be about blatant misuses and distortions of GDP. This story began four years ago, when two well-respected economists, Carmen Reinhardt and Kenneth Rogoff, published an economic history of financial crises. R&R’s timing (2009) was impeccable, and their book was a bestseller for an academic treatise. More important, it gave its authors wide public credibility when they issued a paper the following year, “Growth in a Time of Debt,” that claimed to have found a deep and strong connection between high levels of government debt and a country’s economic growth. The data, they reported, showed that when a country’s government debt reaches and exceeds the equivalent of 90 percent of GDP, its growth slumps very sharply.

With the big run-up in government debt spurred by the financial crisis and subsequent deep recession, conservatives who had waited a long time for a plausible economic reason to slash government found it in the new R&R analysis. And based on its authors’ newly-elevated reputations, conventional wisdom-mongers from think tanks to editorial boards echoed the new line on austerity. Even the most liberal administration since LBJ couldn’t resist the new meme. Despite a palpably weak economy, the President and congressional Democrats grudgingly accepted large budget cuts, and then pumped the economy’s brakes some more by insisting on higher taxes. And we were not the only ones so economically addled. As government debt in Germany, France, Britain and most other advanced countries rose sharply, conservatives there argued that less government was a necessity for average Europeans as well.

Just last week, we learned that the R&R 2010 analysis was so riddled with technical mistakes that its “findings” about what moves GDP are meaningless. When three young economists from the University of Massachusetts found they couldn’t replicate the results – the standard test for scientific findings — they took R&R’s model apart, piece by piece, to figure out why. It turns out that R&R – or more likely, their graduate assistants – left out several years of data for some countries, miscoded other data, and then applied the wrong statistical technique to aggregate their flawed data. And as bad luck would have it, all of their disparate mistakes biased their results in the same direction, amplifying the errors. In the end, instead of advanced countries experiencing recessionary slumps averaging – 0.1 percent growth once their government debt exceeded 90 percent of their GDP, the correct result was average growth of 2.2 percent carrying that debt burden.

Utterly wrong as R&R’s analysis was, the austerity advocates proceeded to badly misuse it. The authors had merely reported a correlation between high debt and negative growth – or, as we now know, between high debt and moderate growth – without saying what that correlation might mean. Hard line conservatives and their think tank supporters, here and abroad, quickly insisted it could only mean that high debt drives down growth. That can happen, but only rarely — when high inflationary expectations drive up interest rates, which at once slows growth and increases government interest payments. In the much more common case, Keynes still rules: Slow or negative growth leads to higher debt, not the other way around. In those more typical instances, cutting government only depresses growth more, further expanding government debt. Occasionally, the correlation of negative growth and high government debt reflects some independent third cause. The tsunami and nuclear meltdown that struck Japan in 2012, for example, simultaneously drove down growth and drove up government debt. And sometimes, there is no correlation: Britain carried government debt burdens of 100 percent to 250 percent of GDP from the early-to-mid-19th century, while it was giving birth to the Industrial Revolution.

The R&R analysis did not distinguish between these various scenarios. Yet, the conservative interpretation became the received public wisdom. The IMF, the World Bank and most politically-unaffiliated economists insisted that slashing government on top of weak business and household spending would only make matters worse. No matter. The inevitable result was not the stronger growth as promised, but persistently high unemployment and slow growth here, and double-dip recessions for much for Europe and Japan. In the end, R&R deserve less criticism for their mistakes than for their failure to correct the damaging distortions of their deeply flawed work.

This post was originally published in Dr. Shapiro's blog.

The President released his FY 2014 budget today, and right off, it makes more economic sense than most of what passes for serious fiscal discussion in DC.  In particular, it offers up new public investments, uses revenues and entitlement changes to restore long-term fiscal sanity, and phases in those changes down the road when the economy (hopefully) is stronger.  Apart from Fed policy, the budget is government’s most powerful tool for affecting economic growth.  So, the critical economic question is what budget approach would most effectively boost U.S. growth, for both the near-term and longer.  The best answer for now is a plan built around an ambitious public investment agenda, serious measures to broaden the tax base and pare entitlement benefits for well-to-do retirees, and reform that finally resolve the festering issues left over from the 2008-2009 financial meltdown.

To appreciate why continued austerity would be economically reckless, just review the economic data from 2012.  Yes, the United States grew faster than almost any other advanced economy.  But that’s only because the Eurozone has been back in recession, France and Britain treaded water at 0.1 percent and 0.2 percent growth, and Germany grew less than 1 percent.  Even in Northern Europe, Denmark contracted and Sweden expanded just 1.2 percent.  So, the United States looked good with 2.2 percent growth – although only 0.4 percent in the final quarter of 2012 – in-between Canada’s 1.9 percent rate and Australia with 3.3 percent growth.

With such dismal growth, here and across the developed world, the budget’s first mission should be to strengthen it.  There is no economic basis for any short-term spending cuts or tax increases, especially on top of the continuing, mindless sequester.  To be sure, under very special conditions, austerity can stimulate economic activity in a weak economy – namely, when high inflationary expectations drive up interest rates, constraining investment and consumption.  But those conditions have nothing to do with our current economy since interest rates here and across the advanced world are at or near record lows.  The case for austerity, then, is simply politics, and the continuing calls from conservatives to slash federal programs merely mask their fervid preference for a small, weak government. 

Economics matters more in this debate, and progressives should use our slow growth to promote an expanded agenda for public investment.  They could call on Congress to dedicate an additional one percent of GDP to investments that will strengthen the factors that drive growth.  That could mean, for example, more support for reforms to improve secondary education, reduce financial barriers to higher education, and provide retraining for any adult worker who wants it.  It also could mean renewed public support to develop light rail systems across metropolitan areas and improve roads, ports and airports.  This is also the right time economically for Washington to more actively promote the frontiers of technological innovation by expanding support for basic research.  Finally, let’s review federal regulation with the aim of lowering barriers to new business formation.  New and young businesses are reliable sources of new jobs and greater competition.  Those elements, in turn, stimulate higher business investment, particularly in new technologies.

Progressives also would be well advised to accept long-term entitlement reforms that could accompany the new public investments.  Since Social Security provides at least 90 percent of the income of more than one-third of retirees, pension reforms should focus on some form of means-testing.  The best template to contain healthcare spending is more elusive. The Affordable Care Act includes a half-dozen measures calculated to slow rates of health spending.  So, a bipartisan effort to strengthen those measures, perhaps with malpractice reforms to entice conservatives, would be a good place to start. 

These initiatives, by themselves, still won’t be enough.  Economic history teaches us – if only we’d listen – that the recovery that follows a financial crisis is always slow and bumpy, unless policymakers directly resolve the distortions that brought about the crisis.  Many of those distortions in finance and housing linger on.  In finance, the challenge is to get financial institutions to divest themselves of their remaining toxic assets and, equally important, further limit the impulse of these institutions to speculate in exotic financial instruments that remain only lightly unregulated, like a hedge fund.  The political resistance will be daunting, of course.  But the economics is clear: Until such changes occur, Wall Street will not focus sufficient resources towards supporting home-grown business investment.    

The challenge in housing is as difficult politically, though technically less complicated.  Across the nation’s five largest mortgage holders, almost 12 percent of all mortgages were in serious trouble at the close of last year.  Some 6.5 percent of all mortgages were delinquent, another 1.6 percent of them were in bankruptcy proceedings, and 3.6 percent were in foreclosure.  So long as these rates are abnormally high, especially foreclosures, housing values will be weak – and the primary asset of most U.S. households will languish.  Even worse, a weak housing market consigns most homeowners to stagnate economically or even grow steadily poorer; and that means they will consume less and the recovery will continue to be stunted.  One sensible approach would be a new federal program to help people avoid home foreclosures through government bridge loans – like student loans -- made available until the job market recovers. 

This year’s budget debate will probably follow a now-familiar and sterile course, in which the President offers his plan, which is promptly met with partisan invective, followed by personal attacks from all sides.  For average Americans to see their economic prospects really improve, progressives will have to forgo the partisan fights and instead use the Obama proposal to start a new public conversation, one focused on the challenges and changes necessary to get this economy back on track.  

This post was originally published on Dr. Shapiro's blog

Paul Ryan’s new budget blueprint released this week — details to follow, as usual — will only intensify the partisan warfare over the deficit. In truth, the deficit is just a cover story here, since the real debate is over the scope and role of government itself. Ryan at least is more upfront about it than most – he includes large new tax cuts as well as draconian spending reductions in what is ostensibly a plan to “balance the budget.”  In his fervor to miniaturize Washington’s domestic role, however, he cannot provide the resources to maintain the core commitments of Social Security and Medicare.

The ideological core of this debate also explains why most of the proposals and agreements of the past year have paid so little heed to the needs of the economy. There is no doubt that the spending cuts and tax hikes of the last six months have weakened economic growth — and as a result, deficits actually could be larger over the longer-term than they otherwise would have been. The additional spending cuts contemplated for the next six months under the sequester — and under most of the grand bargains being floated to supersede the sequester — would inflict more damage. In this regard, Ryan stands at the extreme with a plan that would drive us back into recession.

Nonetheless, a major deal that includes entitlement reforms and tax-loophole closings remains possible. In the politics that could determine the relative weights of those two factors, Republicans will have less maneuvering room on taxes than Democrats will enjoy on entitlements. That’s because primary challengers from the far right already have taken down a number of conventional Republicans, heightening the GOP’s resistance to more revenues. By contrast, there have been no successful attacks so far on centrist Democrats for supporting the cutbacks in federal programs now in place. This political difference suggests that more of the burden in any grand bargain will likely fall on entitlements than on revenues. The next question is, what entitlement changes could Democrats accept and still preserve the essential missions of those programs.

Let’s consider Social Security and its core guarantee of basic economic security for more than 40 million retirees (plus nearly 9 million people with disabilities). Unfortunately for Ryan and his fellow supporters of austerity for the elderly and disabled, no change that would trim the benefits of all Social Security recipients is compatible with the program’s central mission. To begin, while countries such as Germany, France and Italy provide monthly pension checks equal on average to 75 percent or more of a person’s average monthly wages over a lifetime, this “replacement rate” for Social Security is only about 40 percent. That translates into an average monthly benefit of $1,230, or less than $15,000 per-year. Moreover, these bare benefits comprise at least 90 percent of the total income for more than one-third of all current Social Security recipients.

Let’s do the math. The terms just described translate into an annual income of less than $16,300, which amounts to a very bare minimum. After all, the average cost today of a small apartment (rent and utilities) is over $7,000 per-year. Even if elderly people pay 20 percent less than the average, their rent and utilities still claim an average of $5,600 per-year or nearly 40 percent of all their income. Add to that at least $335 per-month for food at a poverty level ($4,000 annually) and another $310 per-month for Medicare Part B and Part D premiums and other out-of-pocket medical expenses ($3,700 annually). That leaves tens of millions of elderly and disabled Americans with about $130 per-month ($1,600 per-year) to cover all other expenses such as clothes, transportation, recreation, state and local taxes, and any unexpected expenditures.

These data suggest that any across-the-board benefit cut today is incompatible with Social Security’s essential mission. That takes off-the-table changes in the annual inflation adjustment or the retirement age. Given current benefits, the only reforms consistent with the program’s central commitment are ones based on means-testing. For example, Congress could apply a smaller annual cost-of-living adjustment to the benefits of the top tier of retirees. And if Congress is set on guaranteeing the system’s solvency for the next 75 years, in the same spirit they should think about applying the payroll tax to the capital income of the top tier of workers. Not that there is an enormous rush, given the actuaries estimate that the system’s solvency is secure for at least another quarter-century.

Much like George W. Bush’s proposal to privatize part of Social Security, the 2013 Ryan budget is simply uninterested in the missions that animate federal entitlement programs. Democrats would commit a grave mistake, as a matter of both social policy and politics, if they also sacrificed those commitments in search of Republican acquiescence to more revenues.

This week’s bout over federal spending pits Tea Party militants, conservative pundits and most Republican office holders against the President, his congressional allies and most economists who pay attention.  But behind the politics, there is simply no economic basis for the immediate spending cuts that would follow the sequester – or immediate tax increases for that matter.   The economy is still fragile enough that GDP went negative in the last quarter, when inventory purchases and federal spending both slowed more than usual.  And just last weekend, Moody’s credit rating agency stripped the United Kingdom of its AAA rating -- not because UK deficits are too high, but because Britain’s premature austerity policies are leaching away the growth required to make its deficits manageable.  Moody’s decision only echoed recent warnings from the IMF and World Bank against just such precipitous moves to bring down cyclical deficits.

Back home, President Obama’s odds of prevailing on the sequester would be greater, if those who have made careers out of fetishizing a balanced budget were not receiving quiet support from much of Washington’s split-the-difference political pros, including a clutch of Democrats. Looking out a few weeks, a chorus of self-described centrists and a few liberals could nudge the President into accepting a “compromise package” of substantial, immediate spending cuts and what Ronald Reagan used to call “revenue enhancers.”  If it stops there, the economic damage will be contained.  But the scenario could turn worse if, as seems likely, such a compromise also becomes embedded in a Continuing Resolution that will cover the rest of the fiscal year and create a new, lower baseline for 2014.

This premature austerity inescapably will weaken the economy, raising deficits even more down the line.  Worse, such a bipartisan agreement could reinforce both parties’ natural resistance to contain Medicare spending and build up the tax base, especially over the long-term.  And that could finally convince global financial markets that the United States has lost its way economically. The result would be higher interest rates, which in turn would mean even slower growth and higher deficits. What the markets want and have long expected from us is just fiscal common sense.  That means, first, sidestep the sequester trap and instead increase federal investments in infrastructure, basic R&D along our technological frontiers, and access for all adults to upgrade their skills.  Then follow it up with serious steps to contain long-term Medicare spending and expand the national tax base.

A new piece today by Washington Post economic correspondent, Jim Tankersley, discusses the President's economic proposals in the State of the Union and features insight from NDN's Dr. Rob Shapiro. Tankersley gives his take on the President's job proposals in the SOTU, specifically the relationship between growth and jobs - a topic Dr. Shapiro has researched extensively. The correspondent joined Dr. Shapiro for a discussion about growth, jobs, and wages this past Monday. Below is an except from the article:

"'It makes it hard for firms to pass along their increases - for health care, energy, and so on - in higher prices," he [Dr. Shapiro] said. "So instead, they cut other costs, starting with jobs and wages.'" Tankersley then continues to reference Dr. Shapiro, including his recommendations to reduce the payroll tax on the employer side and to be more aggressive in limiting health-care cost increases.

Read more about Dr. Shapiro's recent work, including the graph TIME deemed "The Most Important Chart in American Politics." 

The fiscal cliff is more of a cascade – or a game of dominoes.  First, the President and congressional Republicans have to make a deal on the terms for renewing the Bush tax cuts.  That appears to very possible, since GOP leaders seem to have conceded that additional revenues are inevitable.  So, the most basic deal to be struck is how precisely to raise $800 over 10 years from higher-income households.  John Boehner can probably get his caucus to agree with those revenues, especially since the President has recently talked about raising twice that total, and so long as it does not involve a new, 39 percent tax rate.  The only way to raise $800 billion without hiking the top rate is to increase instead the tax rate on capital gains, dividends and interest.  So, look for a new, 25 percent tax rate on capital income for the top 2 percent – a change that will hit some 25,000 very wealthy households more than some three-to-four million well-paid professionals.

If the two sides can manage to compromise on  the initial high-end tax increase, they get to move on to the next stage:  Some broad understanding about how much can be cut from defense, other domestic programs, and entitlements over the next 10 years – and perhaps, how much additional revenues can be raised from business.  As Republicans will have to concede more substantively on the initial, high-end tax increases, the administration will have to concede more here, especially on entitlements and almost certainly on business tax increases too.  But, any broad agreement on principles should be enough to let them delay the automatic across-the-board cuts in defense and non-defense spending now scheduled for January 1.  

And, if they can manage to compromise on the broad terms of a big budget deal, they get to move to stage three -- actually negotiating what to cut and by how much.  As Republicans are effectively going to dictate the terms of the tax increases on higher-income people which they’ve been fighting – i.e., no new 39 percent rate – the Democrats will get to dictate the terms of the cuts in Medicare and Medicaid which they’ve been resisting.  In the end, all of the changes will probably add up to less than everyone talks about today – perhaps $3 trillion over 10 years rather than $4 trillion, including the $1 trillion in cuts agreed to in the last debt-ceiling fight as well as the initial, $800 billion in  new revenues.  But, it will be enough to get sufficient GOP support to raise the debt ceiling in April, and the economic expansion should be able to continue on its course.

This morning’s employment report makes the President’s case that the economy is not only strengthening, but has been for some months now.  The unemployment rate fell to 7.8 percent; and this time, it was not because more people dropped out of the labor force.  The number of discouraged workers or people “marginally attached” to the labor force actually declined.  Rather, the bullish numbers come not only from creating 114,000 net new jobs in September, but from stronger job creation in July and August than originally reported.  Job creation was revised upward from 141,000 to 181,000 for July and up from 96,000 to 142,000 for August.  In addition, the average hours worked was up, and so was average hourly pay.

The Labor Department actually collects the jobs data in two ways.  The Census Bureau surveys business establishments, which produces the numbers above.  It also surveys households, and the household survey is usually more bullish than the establishment survey.  This month was no exception.  It found that the number of unemployed fell by 456,000 in September and total employment rose by 873,000.  Now, some 600,000 of those newly employed people found only part-time work, so the increase in those employed full-time last month was about 270,000 according to the household survey.    When the establishment and household surveys diverge this much, it usually means that a revision is coming down the line, just as we saw this month for July and August.  It is a good bet that in early December, we will learn that under the establishment data, employment last month rose not by 114,000, but by closer to 140,000 to 160,000. 

The jobs picture is improving, because the elements of a stronger expansion finally are coming together.  Household debt has largely returned to normal levels and housing prices have stabilized, and both are bolstering consumer demand.  Next, we should see business investment strengthen in response to the stronger consumer demand.  In fact, conditions would be even better, but for the rest of the world.  For the first time in years, the biggest drag on the American economy is coming not from the after-shocks of the 2008-2007 financial meltdown, but from a new recession in much of Europe and economic weakening in China. 

The press may not yet realize it, but last night’s debate actually made a little news:  Mitt Romney no longer has a tax plan.  For more than a year, he has promised to cut all tax rates by 20 percent.  When the President noted that the non-partisan Tax Policy Center has calculated that such rate cuts would cost $4.9 trillion over 10 years, Romney responded with a new promise to not let his tax plan increase the deficit.  That means the $4.9 trillion will have to come from closing or reducing deductions, such as mortgage interest and state and local taxes.  The Tax Policy Center study assumed the same, and then calculated that there isn’t enough money in deductions for high-income people to fund their 20 percent rate cut.   That is why the Center concluded that Romney’s plan would result in net tax increases for the middle class. 

To counter those facts, Romney last night said that he wouldn’t reduce the overall income taxes paid by the wealthy.  Since their deductions can’t pay for their rate cuts, that means that their 20 percent rate cut won’t happen either.  Similarly, funding a 20 percent rate cut for middle-class households would require terminating all of their deductions, from home mortgages and child care to college tuition and charitable contributions.  Since Romney would never support ending those deductions for middle-class households -- and even if he did, it would never happen – it means that their 20 percent rate cut also can’t happen.   As the President confronted Romney with basic arithmetic, the basic elements of the Romney tax program unraveled, one by one.

For more see this recent essay by Rob, "Mitt Romney Is Just Not Ready To Be President."

For a candidate running for president on promises to reform taxes and entitlements, Mitt Romney provided evidence this week that he understands little about either taxes or federal transfer programs. Here is what he said: 47 percent of Americans are “dependent” on government transfers. They are the same 47 percent of Americans who pay no income taxes. And nothing he might do or say in his campaign will convince that 47 percent of the country to “take personal responsibility and care for their lives.”

To begin, those who do not pay federal income taxes — 46 percent last year, but in normal economic times, about 40 percent of the country — are not the same people who receive transfer payments. Generally speaking, about one-third of Americans who pay no income tax do not receive any transfer benefits. They are too young to collect Social Security or Medicare, and they are not poor enough to collect Medicaid or welfare. Then there is the flip side: About 40 percent of those who receive transfer payments also pay income taxes. Americans who collect Social Security and Medicare, the vast bulk of federal transfer payments, are distributed across the income distribution. In fact, the average household in the top 1 percent collected $9,000 in those transfer payments in 2009. And incidentally, that $9,000 was only a little less than the average transfer payment collected by those households smack in the middle of the income distribution.

Mr. Romney says these are people who won’t take personal responsibility for their own lives. Among those who receive transfer payments, 70 percent of their payments come from Social Security and Medicare. Those benefits, of course, are available only to working people who paid into the systems from the (via their ?) paychecks. Much of the rest goes to veterans and to students receiving federal loans and grants, also people hardly unwilling to “take personal responsibility and care for their lives.”

If we consider Mr. Romney’s view of personal responsibility from the other direction – those who pay no income taxes – we find that 61 percent of them work for a living, since they pay payroll taxes.  In fact, the payroll tax rate they pay, 15.3 percent, is higher than the 13.6 percent income tax rate that Mr. Romney paid last year on his $21 million income.  Another 22 percent of those who pay no income taxes are elderly people collecting Social Security and Medicare, again after working for it their whole lives.  The remaining 15 percent – equal to 7 percent of the country, not 47 percent — pay neither income nor payroll taxes, because they’re either disabled or desperately poor.

This juxtaposition of payroll and income taxes should alert Mr. Romney that looking at only one form of tax will tell you little about who and how we pay for government. In fact, everyone is a taxpayer when you consider all forms of tax — federal taxes on personal income, corporate income, estate and excise taxes, as well as state and local income, sales, property and excise taxes. Looking at all taxes, the top 1 percent pay out about 29 percent of their total income. That is only a little more than Americans in the very middle of the income distribution, who pay 25 percent of their total incomes in federal, state and local taxes. Even the poorest 20 percent of households pay about 17 percent of their meager incomes in all federal, state and local taxes. These tax burdens hardly describe the free-ride that Mr. Romney attributes to nearly half of Americans.

Although Mr. Romney seems unaware of it, the payroll tax has become the signature tax of American government. Last year, Americans paid about $300 billion more in payroll taxes ($1.4 trillion) than they did in income taxes ($1.1 trillion). In fact, the federal income tax today claims just 11 percent of all personal income. Moreover, among all Americans who work, 86 percent pay more in payroll taxes than in federal income tax. Even among the top 20 percent of households, 54 percent pay more payroll tax than income tax. In fact, 2.3 percent of people in the top 1 percent pay more in payroll taxes than income taxes. That means, of course, that those who pay little or no income tax include some of the country’s wealthiest people.

Most of this week’s commentary on Mr. Romney’s views of taxes, transfer payments and personal responsibility has focused on his political insensitivity. But his views reveal something much more important. He clearly has devoted considerable time and effort to understand how to minimize his own taxes. Yet, through his many years of preparing to run for president, he never bothered to understand the fundamental shape and distribution of American taxes and entitlements, and how they affect everyone’s lives. In a moment of candor that recalls, of all people, Sarah Palin, Mr. Romney has demonstrated he is not yet equipped or ready to be president.