Megan McArdle is, unsurprisingly, less enthusiastic about the "Buffett Rule" than I am. But I admit that she brings up a good point: what exactly is the Buffett Rule? Generally speaking, it's the idea that millionaires shouldn't be able to use loopholes and avoidance strategies to end up paying lower tax rates than middle-class families. This suggests something like what the Alternative Minimum Tax used to be: a minimum tax rate that kicks in for high earners if their net tax rate falls below a certain percentage of their gross income.

But that doesn't appear to be what President Obama is proposing. Rather, here's what his economic plan says:

To begin the national conversation about tax reform, the President is offering a detailed set of specific tax loophole closers and measures to broaden the tax base that, together with the expiration of the high-income tax cuts, would be more than sufficient to hit the $1.5 trillion target for tax reform and cut inefficient expenditures as well as move the tax system closer to observing the Buffett Rule. These measures include: cutting tax preferences for high-income households; eliminating special tax breaks for oil and gas companies; closing the carried interest loophole for investment fund managers; and eliminating benefits for those who buy corporate jets.

OK then. The idea isn't to set up some kind of firm tax cutoff, it's to move the tax system "closer" to observing the Buffett Rule. That may be a little less gratifying than a flat number, but it actually makes things easier to judge. In essence, Obama wants to go back to the rules of the pre-Bush era plus two other things: cap itemized deductions at 28% for high earners and abolish the carried interest loophole.

Unfortunately, there's one thing missing here: as part of the rollback of the Bush tax cuts, does Obama also want to roll back the cuts to the capital gains tax rate? The plan doesn't say so, so I assume the answer is no. (There would be no point in eliminating the carried-interest rule, for example, if capital gains rates were the same as rates on ordinary income.)

So I'm not sure what to make of this. These changes would, indeed, move the tax code "closer" to observing the Buffett Rule, but not much closer. It's the low capital gains rate that really makes the difference at high income levels. Obama's plan would reduce the number of high earners who pay very low rates, but it probably wouldn't reduce it very much.

On the other hand, because this isn't some kind of brand new proposal, it is easier to decide if you like it. I've long been in favor of returning to Clinton-era rates on high earners, and I've long been in favor of eliminating the carried interest rule — though I'd probably eliminate it for everyone, not just Wall Street types. The value of capping deductions is a little less clear, but probably OK. (Though I'm open to contrary arguments.) Overall, then, I'm in favor of it.

Anyway, it appears that we're not going to get the Buffett Rule. We're going to get some Buffett-esque Guidelines. Sort of. But at least it's a good start.

Via Brad Plumer, a new OECD report concludes that the rising number of patents over the past decade is a bit of a mirage:

The quality of patent filings has fallen dramatically over the past two decades. The rush to protect even minor improvements in products or services is overburdening patent offices. This slows the time to market for true innovations and reduces the potential for breakthrough inventions, according to a new OECD report....Patents from inventors in the United States, Germany and Japan are the most highly cited, which suggests they are true innovations being used by many firms in their products to generate further innovations.

Brad points out that patent trolling has increased in the United States over the same time period. So we appear to be dominating the world at both ends of the spectrum: we have the best patents and the worst ones. On average, though, even ours have getting noticeably worse over the past decade. I blame it on software patents.

Ezra Klein remarks today on the fact that critics of President Obama's deficit plan claim that much of his savings are "fake." That is, they're savings that were going to happen anyway, so his plan doesn't really change anything:

But that means that more than a trillion dollars of our projected deficit is “fake.” That money can’t be real on one side of the ledger and fake on the other. In general, this mostly speaks to the flaws of talking about deficits in terms of dollar figures rather than debt-to-GDP ratios.

The real question for the president’s plan — or any plan — is whether it stabilizes the debt-to-GDP ratio at an acceptable level. If so, then it’s good enough. If not, then it’s not. That’s what the market cares about, and that’s what we should care about. According to the White House’s projections, their plan will leave debt-to-GDP at slightly above 70 percent in 2012.

Good point. The savings are either real or they're fake, and if they're fake they shouldn't be counted to begin with. Of course, that would mean that our existing deficit situation is less dire than it appears, and that would be inconvenient for the Chicken Littles.

In the end, Ezra is right: who cares? Either the budget gets into primary balance (i.e., not counting interest payments) in a suitable time frame or it doesn't. If it does, everything is fine and it really doesn't matter much which baseline you used to calculate things. And as you can see on the right, the Obama administration projects that their plan will reduce the country's debt-to-GDP ratio consistently from 2014 forward. You may or may not believe that this is actually going to happen, but that's a political judgment. If Congress actually enacts the president's plan, then our debt load will start to go down, and it will go down regardless of whether any of his proposed savings are "fake" or "real."

The New York Times writes today about the education of Jerry Brown:

10 months after his return here, a time when Mr. Brown might have hoped to move beyond struggling with the budget crisis that has dragged down this state, his associates say he appears bewildered and stunned by how much Sacramento has changed since he first served. Mr. Brown has told friends he was unprepared for the extent, in his view, to which Republicans have not made sufficient efforts to accommodate him on critical issues, like putting on the ballot measures to extend taxes to avoid budget cuts.

In one case, Mr. Brown told a friend, he said he felt like “we weren’t even on the same playing field” in negotiating face to face with a Republican lawmaker who would not accept his assertion that most money in the California education budget did not go to administrative costs. Mr. Brown said he finally just stood up and left the meeting.

....“He is aghast,” said Jodie Evans, a longtime associate who had recently had dinner with Mr. Brown in Oakland. “He reports on some of the conversations, like he couldn’t believe the narrowness or lack of comprehending by public officials. He said, ‘Some of my old tools aren’t going to work.’ ”

I confess that I just don't get this. Jerry Brown is a smart guy. He was born and raised in California. He's a professional politician. And yet he didn't truly realize what had happened to the California Republican Party until he took office earlier this year? Seriously? I just don't understand that. How obvious did they have to make it? Smoke signals? Billboards? What?

Martin Wolf writes today about the crisis in the eurozone. I'm not sure he'd put things quite this way, but here's my shortened version:

  1. Greece cannot pay its debts. Period. It has no choice but to default.
  2. Once it defaults, it will be unable to borrow and it will be forced to cut spending even more than it has already. This will damage its economy further, which in turn will reduce tax revenues, which will require further spending cuts, which will damage its economy further, et cetera without end.
  3. This is obviously unacceptable. The only answer for Greece would be to exit the euro and devalue its currency. As painful as this would be, it would almost certainly be regarded as preferable to years or decades of economic collapse.
  4. But Greek exit from the euro would cause staggering damage to the rest of Europe and its banking system — far, far more damage than they'd suffer from merely increasing their bailout of Greece. See Wolf's column for more on this. It must be avoided at all costs.
  5. Thus, the only option left is for Europe to prop up Greece for years. For all practical purposes, this doesn't mean loaning Greece money, it means giving Greece money. Lots of it.

Europe has not yet truly faced up to the fact that #5 is really their only option. It's infuriating, the public hates it, and Europe's political leaders want no part of it. But as Wolf says, "The eurozone then cannot stay where it is, cannot undo what it has done and finds it traumatic to go forward. But the very notion of exit is destabilising. They made it; and they must now make it work." Like Wolf, I don't think they have any choice. The only question is how far past the 11th hour they'll go before finally accepting this.

The Obama administration plans to step up its attacks against the Taliban in Pakistan whether Pakistan likes it or not:

In what amounts to an ultimatum, administration officials have indicated that the United States will act unilaterally if Pakistan does not comply. White House officials and Defense Secretary Leon E. Panetta are said to be adamant in their determination to change the approach, according to officials who spoke on the condition of anonymity about internal administration deliberations.

Although he declined to provide details, Panetta told reporters at the Pentagon on Tuesday that “we are going to take whatever steps are necessary to protect our forces” in Afghanistan from attacks by the Haqqani network, which has had a long relationship with Pakistan’s intelligence service.

In related news, the Obama administration is stepping up its drone attacks in Yemen and Somalia:

One of the installations is being established in Ethi­o­pia, a U.S. ally in the fight against al-Shabab, the Somali militant group that controls much of that country. Another base is in the Seychelles, an archipelago in the Indian Ocean, where a small fleet of “hunter-killer” drones resumed operations this month after an experimental mission demonstrated that the unmanned aircraft could effectively patrol Somalia from there.

The U.S. military also has flown drones over Somalia and Yemen from bases in Djibouti, a tiny African nation at the junction of the Red Sea and the Gulf of Aden. In addition, the CIA is building a secret airstrip in the Arabian Peninsula so it can deploy armed drones over Yemen.

I guess this must be part of Obama's policy of appeasement in Africa and the Middle East that I've heard so much about recently.

We've talked before about the Republican genius for taking advantage of political norms that have traditionally been followed by both parties but have never been actual rules. This has produced a growing list of partisan ambushes like mid-decade redistricting, turning the Senate into a 60-vote body, holding the debt ceiling hostage, etc. So what's the next norm to be flattened by the GOP steamroller in a surprise attack? In what must be a new record, Stan Collender writes today about two norms that Republicans have crushed into dust in a single week.

First up is a letter from the Republican leadership to Ben Bernanke that ominously warns him to "resist further extraordinary intervention in the U.S. economy." This comes on the same day that the IMF slashed its estimate of economic growth for 2011 and 2012 to an almost recession-like 1.5% — precisely the time that the Fed probably should carry out a few extraordinary interventions in the economy.

The Fed, of course, is traditionally supposed to be left free of political influence. But there's an election coming up and, as Stan puts it, the GOP sees economic hardship "as the path to election glory this November":

Why take on the Fed? The Republicans have some direct control over fiscal policy because they can either refuse to consider a proposal in the House where they are in the majority or can filibuster legislation in the Senate where they are in the minority. Because the Fed is an independent agency, the GOP can only do what they did today in the letter by threatening to bring down the wrath of god if it dares take any action to get the economy moving.

....My question: If Rick Perry — one of the wanna-be GOP candidates for president — says that Bernanke's actions to date have been treasonous, what do you call today's Republican demand that the federal agency with the legal responsibility and the potential power to help GDP grow and unemployment to fall not do anything to help the American economy?

What do you call this? Well, as of yesterday, you can call it politics as usual.

Next up is a legislative norm arcane enough that I'd never heard of it. Apparently the Republican leadership is planning to hold off on approving a budget even though the spending levels for FY2012 have already been agreed to. Instead they're going to pass only a short-term continuing resolution. Why? There's really no good reason. They just want another chance to hold the White House hostage:

The commonly assumed but unstated reason for a short-term CR is that the House GOP wants to have increased political leverage on budget and other issues by being able to hold yet another potential government shutdown over the heads of Congressional Democrats and the White House. This time it supposedly will be policy riders — changes in authorizations — rather than spending levels that will be the biggest points of contention.

....This will sound quaint to some and unimaginable to others, but there was a time when doing what the GOP apparently is planning by authorizing on appropriations bills was considered by most Members of Congress to be as much a major legislative sin as usurping another committee’s jurisdiction....In fact, authorizing in an appropriations bill has been considered so taboo on Capitol Hill that Republicans and Democrats on the authorization committee that would be affected by the proposal typically have worked together to prevent it from happening.

Them's the breaks, suckers. It was a nice tradition while it lasted. And keep in mind that the week is young. There's no reason that Boehner and company should be satisfied with exploding only two norms this week. There might be more yet to come.

President Obama has proposed that we enact some version of the "Buffett Rule," which would ensure that millionaires pay at least the same tax rate as middle class workers. But do millionaires really pay lower rates than truck drivers in the first place? The AP fact checks Obama's claim and finds it wanting:

On average, the wealthiest people in America pay a lot more taxes than the middle class or the poor, according to private and government data....This year, households making more than $1 million will pay an average of 29.1 percent of their income in federal taxes....In 2009, taxpayers who made $1 million or more paid on average 24.4 percent of their income in federal income taxes, according to the IRS.

Hmmm. There's an awful lot of averages there. But you need to be pretty careful with that stuff. The average household income in Redmond, Washington, is $66,000, but that doesn't mean Bill Gates is pinching pennies to save up a down payment for his next car.

The whole piece is pretty ridiculous. Obama's point isn't that millionaires pay lower tax rates than truck drivers. It's that some millionaires pay lower tax rates than truck drivers — and as a simple matter of fairness and equity they shouldn't. Take a look at the table below, extracted from the Tax Policy Center. It doesn't just show the tax rates of mere millionaires, it shows the tax rates of the top 400 super-duper millionaires. Back in 1992, only 33 of them paid less than 20% of their income in federal taxes. Today, 289 of them do. That's just not right.

On Fox News, they brush this off with a yawn. "It's because most of their income comes from capital gains," they repeat tirelessly, as if that was sufficient explanation all by itself. But why? Surely even trust fund babies ought to pay some kind of minimum tax rate no matter where their income comes from. Is a 20% tax floor on the income of the rich really so outrageous?

Did Obama Get Rolled?

Was Barack Obama a naive waif who came to Washington untested and unready, and then struggled to control his White House staff? That's the portrait Ron Suskind paints, and to a certain extent I imagine it's true. In fact, I imagine it's true of every president. There's just no training position for the presidency, and no one walks into the job fully prepared.

But that said, how does Obama compare to other presidents? After all, every White House features plenty of chaos, plenty of policy dysfunctionality, and lots of interpersonal feuds (remember all the stories about Condi Rice vs. the alpha male Cheney/Rumsfeld/Libby/Addington pack?). Jonathan Alter suggests that Suskind's portrayal is a wee bit overblown:

I have a whole chapter in my book where I talked to all the former Clinton people who now work for Obama. I asked them all, compare Clinton and Obama....They thought Clinton was more creative and his policymaking, but they prefer to a person Obama in a crisis, which was what they were in. He was decisive and making as many decisions in a week as Bill Clinton made in a year, and making the decisions crisply. The idea that somehow all the former Clinton officials working for Obama were longing for Bill Clinton because they had this inexperienced president who didn't know what he was doing is not what they were saying at the time. I was talking to not just a few, but pretty much all of the former Clinton people in the White House at high and mid-levels. 

I don't doubt for a second that Obama struggled with the demands of managing an enormous crisis from the first day he stepped into the Oval Office. At the same time, I suspect that a lot of what people are interpreting as indecisiveness or inexperience is really something different: it's the fact that Obama agreed with the "wrong" advisors. They're reading about all the internal debates, noting that Obama eventually came down on a side they consider preposterous, and concluding that he got steamrolled. But as Karl Smith says, the more likely explanation is simply that Obama doesn't agree with them:

We observe a President not pushing for more stimulus and not appointing doves to the FOMC. What could be the reason? You could come up with all sort of theories involving intrigue and political strategery. However, here is one you might want to try: the President doesn’t want to do stimulus and is not interested in appointing doves to the FOMC.

Indeed, if I observe a person who cannot communicate — my baby for example — trying to avoid a situation, I am likely to conclude “Charlie does not want to do that.” I think this is generally sound reasoning.

There are, of course, political considerations always at work. On additional stimulus, for example, it's clear that Obama thought it was politically impossible and therefore not really worth debating at length on a policy level. More broadly, though, he just came down more often on the side of Geithner and Orszag than of Romer and Summers. That may have been a mistake, but it doesn't mean he got steamrolled. It just means that he was genuinely persuaded that the deficit is a problem that needs to be seriously addressed.

A loyal reader had the misfortune of hearing Rep. Phil Gingrey (R–Ga.) blather on the radio this morning about the woeful effect that a tax hike on the rich would have on "the small business owners and job creators." He asks, "Can you please do a post providing us with an evidence-based response to this? I have little doubt that most small business owners are pulling in less than 250K and that most people making over 250K aren’t small business owners, but my hunch doesn’t have much credibility."

But his hunch is exactly right! In fact, this is a zombie lie, and as you might expect with a zombie lie, I've written about it before. So here's a reprint of what I wrote 14 months ago, suitably updated with shiny new quotes making the same old complaints:


Back in the day, one of the key Republican arguments against the estate tax was that it forced hardworking, salt-of-the-earth children of small farmers to sell the family plot in order to pay their taxes after dad died. It was a sad story, but with one problem: no one could find even a single small farmer who had been forced to liquidate in order to satisfy Uncle Sam's voracious maw. Even the American Farm Bureau Federation was eventually forced to admit that it couldn't come up with a single example, and a few years later the Congressional Budget Office estimated that under the now-current exemption level, only a tiny handful of small farms were likely to owe any estate tax to begin with — and of those, only about a dozen lacked the assets to pay their taxes. And even those dozen had 14 years to pay the bill as long as the kids kept running the farm. In other words, the story was a fraud from beginning to end.

Good times. Today, though, we're getting a rerun. The subject at hand is President Obama's proposal to tax the rich at slightly higher rates, and the question is who exactly this will hurt. The obvious answer is, "the rich," but it turns out that, just as there are small farmers begging for our sympathy, there are small rich too: namely an alleged army of hardworking, salt-of-the-earth small business owners who would also end up paying higher tax rates. "Don't forget the fact that most small businesses file taxes as individuals," Rep. Paul Ryan declared earnestly on Fox News this weekend. "So when you are raising these top tax rates, you're raising taxes on these job creators."

My correspondent wants an evidence-based response to this, so let's give him one. Step 1: The biggest part of Obama's plan is to let the Bush tax cuts for the rich expire. The Brookings Tax Policy Center took a look at this last year and estimated that only 1.9% of small businesses are in the two top brackets that would be affected by repeal of the Bush tax cuts. That's a little better than the dozen small farms affected by the estate tax, but not by much.

Step 2: About half of that 1.9% aren't really small business owners at all. They're high-income investors who get part of their income from investments in small businesses. So we're down to about 1% of small businesses that would be affected.

Step 3: The top brackets are just that: brackets. When the top rate goes up, it doesn't affect your entire income, just the portion in the top bracket. So if the top rate goes back up from 35% to 39.6%, it only affects the portion of income above approximately $400,000. A small business owner making $500,000 would see an increase of about $5,000. This is a fairly modest amount for someone making a half million dollars, and anything higher than that is hardly a "small" business to begin with. And the marginal effect is even smaller for the second-highest bracket. And the proposed "millionaire's tax" would — of course — affect only people making more than a million dollars.

So that's the case. Raising taxes on the rich at the level Obama is talking about affects only a tiny number of small businesses; it doesn't affect them very much; and it generates revenues of several hundred billion dollars. If the only thing you care about is keeping taxes low for rich people, you won't be convinced. For the rest of us, it's a no-brainer.