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Well now we know more about those proposed tax law changes. For those of you who are already depressed about losing some, if not all your mortgage interest rate deduction, how about this one: no more deducting State or Local taxes! Now I wonder which parts of the country this would hurt the most? Ah! Those nasty blue states, the ones with services for their populations! If this gets approved the average tax bills in the Northeast and on the West coast will sky rocket and those regions will end up subsidizing the South and Mid-West even more. Just in case you forgot the so-called red states are those who routinely vote for less government and then rely on the Federal government for hand-outs and welfare. While the blue states are the ones who don’t mind government programs and send more monmey to Washington than they receive. How long would that arrangement last if Federal taxes rose radically, let’s say, in New York? Does the adminsitration really think that New York [or any of the other high property tax states] really wants to sink in service levels to, say, Alabama? Forget globalization as a source of diminished living standards, how about this administration?

The Congressional Budget Office has recently reported that the Federal deficit for the fiscal year 2005 will be $317 billion, which is much lower than in 2004 [when the deficit was $413 billion]. The administration was quick to argue that the improvement is vindication for the President’s fiscal policy, especially the tax cuts. This is nonsense. The numbers remain grim and the President has made things worse, not better. Federal revenue [i.e. the total of all taxes etc the Federal government collects] is still very low by historical standards at around 17.1% of GDP. In other words the supposed stimulus of the tax cuts has not boosted revenue at all. In fact revenue under George Bush has been lower than at any time since World War 2. So much for stimulus! On the contrary: much of the revenue increase stems for the cessation of a business tax cut which meant that corporate taxes rose $51 billion from 2004. Nor are Federal revenues confounding forecasters at all: they are pretty much what the CBO projected for the year, so there is no sudden improvement. No one expects the deficit to be eliminated any time soon, so all the crowing in Washington is just an attempt to divert our attention away from the failed fiscal policies the Republican shave foisted on us for the last few years. Remember that when Bush came power the budget was running a surplus. Where did that surplus go? Into the Republican tax cuts. Finally don’t forget that the deficit includes a surplus on Social Security of $175 billion, which means the deficit on everything else [like Defense etc] was really $492 billion. That’s no triumph, that’s a disaster. When will we wake up to this rotten policy and the selling out of our future?

The latest inflation numbers are out [for September, you can read about it here] and they make for grim reading: the highest increase for 25 years. The problem stems from energy which saw price rises of 12%. So why isn’t there panic on Wall St.? Because they focus on what they call ‘core inflation’ which handily for them excludes energy. So unlike you and me who will feel the pinch from energy price increases stock pundits and their like applaud the fact that ‘core inflation’ was tame [it increased 0.1% for the fifth straight month]. My question is: who pays ‘core inflation’ prices? Not consumers who bear the brunt of all prices; not corporations whose costs will rise; not anyone at all. So why get giddy over ‘core inflation’? It’s a statistical device to smooth out volatile things like energy costs. The problem is that it the proper technique for doing that is to look at three or six month moving averages of the entire index, not by the elimination of volatile components. So we should all ignore the market’s calm and begin to worry what this all might mean. One thing we know for sure is that Fed will have to keep raising interest rates. Another is that we will have less cash in our pockets come this buying season. How can stocks not suffer sometime? The market is betting that energy costs have suffered a one time spike: do we believe that? I don’t for one.

Well the President’s panel on tax reform [find it here] has finally shown its hand. The news is not so good for those among us who own homes. At long last someone in Washington has taken aim at one of the countries biggest tax giveaways: mortgage interest relief a.k.a. middle class welfare. The U.S. is one of the few remaining countries where the interest incurred by on a mortgage is tax deductible. I have been advocating reducing and then eliminating this welfare program for years. By allowing the deduction the tax code has distorted the economy: it has made home ownership cheaper than the ‘free market’ would have otherwise and has consequently diverted resources away from other, better, investment opportunities. As a result of this welfare program many more people own homes than would have been the case in a free market. At the same time this over-investment in housing has produced the kind of demand that contributed to the current housing price bubble [this does not exonerate the equally distorting effects of the excessively lax monetary policy of the Federal Reserve Board]. So while we have had a distorting tax incentive for people to buy houses that they would not otherwise be able to afford, we have simultaneously driven prices up artificially which, paradoxically, prices other people out of the market. Such is the convoluted, and inevitable, result of tinkering with the economy via the tax code. This is not to say that home ownership is bad: democracies tend to be more stable when people own their own homes. It’s just that by hiding the subsidy of home ownership we have allowed ourselves to pretend that this program is not welfare, when it patently is exactly that. How many people, I wonder, consider mortgage interest rate relief as a welfare program? The impact on the Federal budget is hidden as ‘Tax Expenditure’ and thus remains hidden in the back pages of the budget document. Other welfare programs appear up front and thus attract much more attention from the anti-social spending crowd: they are more easily identified as potential sacrificial cows in these days of right wing attacks on social spending. So the Tax Reform Panel deserves credit for ‘outing’ home ownership subsidy. Let’s see if anything comes of it.