Chapter 14 - Domestic and Economic Policy
Part of the public-policy debate in our nation involves domestic problems. Domestic policy can be identified as all laws, government planning, and government actions that concern internal issues of national importance. Consequently, the span of such policies is enormous. Domestic policies range from relatively simple issues, such as what the speed limit should be on interstate highways, to more complex ones, such as how best to protect our environment or how we should manage the nation's money supply. Many of our domestic policies are formulated and implemented by the federal government, but a number of others are the result of the combined efforts of federal, state, and local governments.
We can define several types of domestic policy. Regulatory policy seeks to define what is and is not legal. Setting speed limits is obviously regulatory policy. Redistributive policy transfers income from certain individuals or groups to others, often based on the belief that these transfers enhance fairness. Social Security is an example. Promotional policy seeks to foster or discourage various economic or social activities, typically through subsidies and tax breaks. A tax credit for buying a fuel-efficient car would qualify as promotional. Typically, whenever a policy decision is made, some groups will be better off and some groups will be hurt. All policymaking generally involves such a dilemma.
THE POLICYMAKING PROCESS: HEALTH CARE AS AN EXAMPLE
How does any issue get resolved? First, of course, the issue must be identified as a problem. Often, policymakers have only to open their local newspapers or letters from their constituents to discover that a problem is brewing. On rare occasions, a crisis - such as that brought about by the terrorist attacks of September 11, 2001 - creates the need to formulate policy. Like most Americans, however, policymakers receive much of their information from the national media. Finally, various lobbying groups provide information to members of Congress.
No matter how simple or how complex the problem, those who make policy follow a number of steps. We can divide the process of policymaking into five steps: (1) agenda building, (2) policy formation, (3) policy adoption, (4) policy implementation, and (5) policy evaluation.
The health-care legislation passed in 2010 can be sued to illustrate this process. Regardless of the ultimate fate of the reforms, they are still the most recent large-scale attempt to craft new public policy.
In March 2010, President Barack Obama signed into law the Patient Protection and Affordable Care Act, a massive overhaul of the nation's health-care funding system. A few days later, Obama signed the Health Care and Education Reconciliation Act, a series of adjustments to the main legislative package. These two measures constituted the most important political development in the United States between the 2008 and 2010 elections, and the largest expansion in the welfare state since the presidency of Lyndon B. Johnson (1963-1969). The signing of these bills marked the climax of an approximately nine-month debate in the nation and in Congress over the future of our health-care system.
Health Care: Agenda Building
First of all, an issue must get on the agenda. In other words, Congress must become aware that a problem requires congressional action. Agenda building may occur as the result of a crisis, technological change, or mass media campaign, as well as through the efforts of strong political personalities and effective lobbying groups. To understand how health care came to be an important issue, and how health-care reform became part of the national agenda, we need to examine the background of the issue.
Health Care's Role in the American Economy. As of 2011, health care was estimated to account for 18.2 percent of the total U.S. economy. In 1965, about 6 percent of our national income was spent on health care, but that percentage has been increasing ever since. Per capita spending on health care is greater in the United States than almost anywhere else in the world. Measured by the percentage of the gross domestic product (GDP) devoted to health care, America spends almost twice as much as Britain or Japan.
As of 2010, when none of the health-care reforms had yet been implemented, government spending on health care constituted about 50 percent of total health-care spending. Private insurance accounted for more than 30 percent of payments for health care. The remainder - less than 20 percent - was paid directly by individuals or by charities. The government programs Medicare and Medicaid have been the main source of hospital and other medical benefits for about 100 million Americans - one-third of the nation's population. Many of these people are elderly.
Medicare. The Medicare program, which was created in 1965 under President Lyndon Johnson, pays hospital and physician bills for U.S. residents over the age of sixty-five. Since 2006, Medicare has also paid for at least part of the prescription drug expenses of the elderly. In return for paying a tax on their earnings (currently set at 2.9 percent of wages and salaries) while in the workforce, retirees are assured that the majority of their hospital and physician bills will be paid for with public funds.
Medicare is now the second-largest domestic spending program, after Social Security. Government expenditures on Medicare have routinely exceeded forecasts. The government has responded in part by imposing arbitrary reimbursement caps on specific medical procedures. The government has also cut rates of reimbursement to individual physicians and physician groups, such as health maintenance organizations (HMOs). As a result, some physicians and HMOs have become reluctant to accept Medicare patients.
Medicaid. Within a few short years, the joint federal-state taxpayer-funded Medicaid program for the "working poor" has generated one of the biggest expansions of government entitlements ever. In 1990, total Medicaid spending was around $50 billion. By fiscal year 2013, the total cost of Medicaid and the Children's Health Insurance Program (CHIP) was about $325 billion. At the end of the twentieth century, 34 million people were enrolled in the programs. Today, in the wake of the Great Recession, there are more than 60 million.
In recent years, the federal government has paid about 55 percent of Medicaid's total cost. The states pay the rest. Wealthy states must pick up a greater share of the tab than the poor ones. Medicaid costs have imposed major strains on the budgets of many states. The new health-care reform legislation adopted in 2010 will expand considerably the share of the population that is eligible for Medicaid. Much of the extra expense due to the new enrollees will be picked up by federal taxpayers.
The Problem of the Uninsured. In 2010, about 49 million Americans - more than 16 percent of the population - did not have health insurance. The uninsured population has been relatively young, in part due to Medicare, which covers almost everyone over the age of sixty-five. Also, younger workers are more likely to be employed in entry-level jobs without health-insurance benefits.
The traditional system of health care in the United States was based on the assumption that employers would provide health insurance to working-age persons. Many small businesses, however, simply have not been able to afford to offer their workers health insurance. In 2011, employer-provided health insurance cost an average of $5,429 for single coverage and $15,073 for family coverage, according to the Kaiser Family Foundation.
The Problem of High Costs. High medical costs are a problem not only for individuals with inadequate or nonexistent insurance coverage. They are also a problem for the system as a whole. Over the past four decades, per capita spending on health care in the United States grew at an average of 4.9 percent per year, even when corrected for inflation. A main driver of the growth in health-care spending was new medical technologies and services. The increased number of elderly persons imposed additional costs.
People over the age of sixty-five run up health-care bills that are far larger than those incurred by the rest of the population. As a federal problem, therefore, health-care spending growth has been and will remain chiefly a Medicare issue, even after the passage of the new health-care measures. In 2011, the government's Medicare trustees reported that by 2024 the Medicare trust fund was projected to run out of funds necessary to pay for all of its obligations. Such prospects explain why the issue of health-care cost containment was almost as important as the issue of universal coverage during the 2009 debates.
The International Experience. The Patient Protection and Affordable Care Act of 2010 attempts to provide universal health insurance for American citizens. The concept of universal health insurance is not new. Throughout the twentieth century, most economically advanced nations adopted such systems. By the twenty-first century, the United States was the only advanced industrial country with a large pool of citizens who lacked health insurance. American progressives considered is unacceptable that the United States could not do what these other nations had done - another argument for placing reform on the agenda.
Health Care: Policy Formulation
During the next step in the policymaking process, various policy proposals are discussed among government officials and the public. Such discussions may take place in the printed media, on television, and in the halls of Congress. Congress holds hearings, the president voices the administration's views, and the topic may even become a campaign issue.
Since the time of President Harry Truman (1945-1953), some liberals have sought to establish a national health-insurance system in this country. During his first two years in office, President Bill Clinton (1993-2001) attempted to steer such a proposal through Congress, but his plan failed. In the first decade of the twenty-first century, however, universal health insurance began to reappear as a political issue.
Unlike previous proposals, the new universal health-insurance plans did not provide for a federal monopoly on basic health insurance. Instead, universal coverage would result from a mandate that all citizens must obtain health insurance from some source - an employer, Medicare or Medicaid, or a plan from a private-sector insurance company through a market sponsored by the federal government or a state government. Low-income families would receive a subsidy to help them pay their insurance premiums. Insurers could not reject applicants.
A program of this nature was adopted by the state of Massachusetts in 2006 in response to a proposal by then-Republican governor Mitt Romney. When, in 2008, the Democrats won the presidency and large majorities in both chambers of Congress, such policy proposals were again on the table nationally. Yet several major issues had to be addressed before a policy could be adopted.
Health Care: Policy Adoption
The third step in the policymaking process involves choosing a specific policy from among the proposals that have been discussed.
As president, Barack Obama largely delegated the drafting of a health-care plan to Congress. Obama's willingness to let Congress take the lead was a notable change. Recent presidents, such as George W. Bush and Bill Clinton, had sought to push presidential proposals through the legislative process without significant alteration. Obama's tactics eliminated much of the tug-of-war between Congress and the president that had been commonplace in past decades, but the political cost of letting Congress take the lead was high. Congress took a very long time to pass the necessary legislation, and much of the political maneuvering required for passage was highly unpopular with the public.
The Issue of Mandated Coverage. One issue that needed to be resolved became known as the individual mandate. During the 2008 Democratic presidential primary campaigns, Obama's health-care plan did not require adults to obtain coverage, although coverage was required for children. Obama's plan, in other words, had no mandated coverage. Congressional Democrats, however, quickly adopted the individual mandate in all of their draft proposals. Without the mandate, there was no way the numbers would add up: universal coverage was impossible unless everyone - healthy and sick alike - chipped in. Unfortunately for the Democrats, the individual mandate allowed the Republicans to accuse the Democrats of "forcing" people to do something, never a popular position in America.
New Taxes. Funding the legislation required additional taxes. Democrats in the House called for heavier taxes on the rich, while the Senate proposed taxes on drug and insurance companies. In the end, the two chambers compromised on smaller tax increases on the rich than the House had planned, plus a number of taxes on the health-care corporations.
Public Reaction. Initially, popular support for health-care reform, as reported by opinion polls, was relatively high. Support eroded quickly, however, as Congress took up the actual legislation. Demonstrations against the Democratic proposals began in the late summer of 2009 - many were organized by the new Tea Party movement. The process of moving the reform through congressional channels gave the public a close look at how legislatures operate, and many citizens clearly were not happy with what they saw.
Passage. The House passed its bill in November 2009, and the Senate passed its version in December. Passing the reform legislation became more complicated in January 2010, after Republican Scott Brown won a Massachusetts special election to fill a vacant U.S. Senate seat. The election meant that the Senate Democrats lost their sixtieth vote, which was necessary to end filibusters. If the House and Senate versions of the bill were reconciled in a conference committee - the normal procedure - Senate Democrats would not be able to pass the resulting compromise, and the entire reform effort would collapse.
President Obama and then-House Speaker Nancy Pelosi, however, patiently assembled enough Democratic support in the House to pass the Senate bill unaltered, thus eliminating the need for a conference committee. The House then immediately passed a reconciliation act, which was not subject to Senate filibuster. The Senate accepted it three days later. "Obamacare," as it was nicknamed, was the law of the land. Outraged Republicans accused the Democrats of "ramming" the legislation through Congress. Neither the Senate's bill nor the House's reconciliation measure received the vote of even a single Republican.
Details of the Legislation. Most of the major provisions of the new legislation were not to go into effect until 2014. The long delay was established in part to allow systems such as state insurance pools to be set up more effectively, but the Democrats also wanted to keep costs down during the initial ten-year period. The lengthy implementation, however, presented political problems for the Democrats, who faced two national elections before most of the programs would be in effect. Voters in those elections would receive few of the promised benefits of the programs.
Some provisions took effect quickly, however. Young adults were allowed to stay on their parents' health plans until they turned twenty-six, and insurance companies could not drop people when they became sick.
In 2014, most of the program kicks in, including the following:
A ban on excluding people with preexisting conditions from insurance plans.
A requirement that most people obtain insurance or pay an income tax penalty.
State health-insurance exchanges where individuals and small businesses can buy policies from commercial insurance companies.
Subsidies to help persons with incomes up to four times the federal poverty level purchase coverage on the exchanges.
Medicaid coverage for individuals with incomes up to 133 percent of the poverty level.
Significant taxes to pay for the new benefits were to be phased in from 2011 to 2018.
Health Care: Policy Implementation
The fourth step in the policymaking process involves the implementation of the policy alternative chosen by Congress. Government action must be implemented by bureaucrats, the courts, police, and individual citizens.
In the example of health-care reform, implementation was complicated by conservative resistance to the legislation. A large number of state officials challenged the constitutionality of Obamacare. The Supreme Court in 2012 upheld the individual mandate, but made the expansion of the Medicaid program optional for the states. Many Republican governors announced that they would not expand Medicaid or cooperate with other implementation efforts. In Congress, Republicans called for repeal of the legislation. If that should fail, they threatened to block funding necessary to implement various parts of the program.
Complete repeal of the legislation would require the support of not only the Republican-controlled House but also the Senate. The repeal would also have to survive a presidential veto. Repeal, in other words, is almost impossible before 2013, and unlikely even then. Finally, much of the reform package takes the form of an entitlement program, such as Medicare or Social Security. Funding for entitlement programs continues on a year-to-year basis unless it is explicitly altered or abolished. In other words, entitlements do not depend on annual budget votes in Congress for their continued survival. Therefore, even if Republicans in Congress were able to "defund" certain aspects of the reforms, most of the new policies would survive.
Health Care: Policy Evaluation
After a policy has been implemented, it is evaluated. When a policy has been in place for a given period of time, groups inside and outside the government conduct studies to determine how the program has actually worked. Based on this feedback and the perceived success or failure of the policy, a new round of policymaking initiatives may be undertaken to improve the effort.
As of 2013, the health-care reforms had received very little evaluation. In part, this was because so many of the reforms were yet to be implemented. Also, opponents were more interested in repealing the legislation than improving it. Republicans and Democrats did agree on at least one small fix in 2011, however: they abolished a provision that imposed heavy paperwork requirements on small businesses.
IMMIGRATION
In recent years, immigration rates in the United States have been among the highest since their peak in the early twentieth century. Every year, more than 1 million people immigrate to this country legally, a figure that does not include the large number of unauthorized immigrants. Those born on foreign soil now constitute about 13 percent of the U.S. population - more than twice the percentage of thirty years ago.
Since 1977, four out of five immigrants have come from Latin America or Asia. Hispanics have overtaken African Americans as the nation's largest minority. If current immigration rates continue, by 2050 minority groups collectively will constitute the "majority" of Americans. If such groups were to form coalitions, they could increase their political power dramatically. The "old guard" white majority would no longer dominate American politics.
Some regard the high rate of immigration as a plus for America because it offsets the low birthrate and aging population. Immigrants expand the workplace and help to support, through their taxes, government programs that benefit older Americans, such as Medicare and Social Security. In contrast, nations that do not have high immigration rates, such as Japan, are experiencing serious challenges due to their aging populations.
A significant number of U.S. citizens, however, believe that immigration - both legal and illegal - negatively affects America. They argue, among other things, that the large number of immigrants seeking work results in lower wages for Americans, especially those with few skills. They also worry about the cost of providing immigrants with services such as education and medical care.
The Issue of Unauthorized Immigration
Illegal immigration - or unauthorized immigration, to use the terminology of the Department of Homeland Security - has been a major national issue for many years. Latin Americans, especially those migrating from Mexico, constitute the majority of individuals entering the United States without permission. In addition, many unauthorized immigrants enter the country legally, often as tourists or students, and then fail to return home when their visa status expires. Naturally, the unauthorized population is hard to count, but the total number clearly has increased each year for several decades. The number of illegal immigrants appears to have peaked in 2007, however, on the eve of the Great Recession, when the number reached 11.8 million. By 2011, the total was down to 11.5 million, according to the Department of Homeland Security, and may have fallen since.
Unauthorized immigrants typically come to the United States to work, and until recently their labor has been in high demand. The housing boom, which came to an abrupt end in the fall of 2007, was partially fueled by the steady stream of unauthorized immigrants seeking jobs. Until the Immigration Reform and Control Act of 1986, there was no law against hiring foreign citizens who lacked proper papers.
Until recently, laws penalizing employers were infrequently enforced. The Obama administration, however, has stepped up enforcement of these laws significantly. In addition, several states, notably Alabama and Arizona, have adopted laws that impose severe sanctions on businesses that employ unauthorized workers. As a result, many agricultural businesses in these states have begun to report labor shortages.
Characteristics of the Undocumented Population. Studies of unauthorized immigrants have revealed that a large share of them eventually return to their home countries, where they frequently set up small businesses or retire. Many send remittances back to relatives in their homeland. In 2011, Mexico received $23 billion in such remittances. In these ways, unauthorized immigrants are acting as immigrants to the United States always have. Throughout American history, immigrants frequently returned home or sent funds to relatives in the "old country."
Unauthorized immigrants very often live in mixed households, in which one or more members of a family have lawful resident status, but others do not. A woman from Guatemala with permanent resident status, for example, might be married to a Guatemalan man who is in the country illegally. Often, the parents in a family are unauthorized, whereas the children, who were born in the United States, possess American citizenship. Mixed families mean that deporting the unauthorized immigrant will either break up a family or force one or more American citizens into exile.
Concerns about Unauthorized Immigration. The number-one popular complaint about unauthorized immigrants is that they are breaking the law and "not playing by the rules." U.S. voters have other concerns as well, some of which involve crime. "Coyotes," or smugglers who help such persons across the border, may exploit or abuse their clients. Some people crossing the border have found themselves abandoned by "coyotes" in desert areas without sufficient water and have died of thirst or exposure. Illegal immigration may also contribute to the drug trade along the U.S.-Mexican border.
Immigration Controversies
In polls by Gallup and other organizations, Americans express opinions about illegal immigration (the term used in the questions) that are highly contradictory. A majority of respondents express sympathy toward the immigrants and believe that a way should be found to normalize their status. Less than a fifth favor immediate, permanent deportation. In the very same polls, however, two-thirds agree that states should be able to set their own immigration laws and that police officers should be able to question anyone about their immigration status. Half believe that illegal immigration to seek work should be a crime.
While a majority of Americans believe that the illegal immigration problem is serious, most do not consider it a priority issue for the government. Those who do consider it a priority, however, have very strong feelings on the topic - and in American politics, a minority with strong feelings can often outweigh a largely indifferent majority.
Partisan Differences. The split in the public's attitudes has been reflected in differences among the nation's leaders over how to handle the issue of illegal immigration. Although most Republicans in Congress have favored a harder line toward illegal immigrants than have most Democrats, partisan divisions were blurred by the adherence of President George W. Bush and a number of Republican senators to the pro-immigration side of the debate. By 2010, however, Republican senators such as John McCain (Arizona) who had supported reform in the Bush years had changed their positions due to intense pressure from the political right. The Republican Party was now substantially unified in opposition to immigration reform.
In June 2012, President Obama announced a new policy under which immigration authorities would suspend deportations of unauthorized immigrants who were brought into the country as children and who were not otherwise in trouble with the law.
State Immigration Laws. In April 2010, Arizona's governor signed the nation's toughest-ever bill on illegal immigration. The law criminalized the failure to carry immigration documents, and it required police to stop and question anyone suspected of being in the country illegally. The law also penalized anyone transporting, sheltering, or assisting illegal aliens. Opponents contended that the act would lead to harassment of Latinos regardless of their citizenship status. Arizona had earlier passed the nation's toughest law penalizing employers who hired undocumented workers. Latinos around the country mobilized against the new Arizona law.
In July 2010, the U.S. government sued to overturn the law, claiming that it interfered with federal authority. A U.S. district court judge blocked enforcement of much of the law.
In April 2011, a U.S. appeals court upheld the district court's ban on enforcement. In June 2012, the United States Supreme Court ruled that Arizona could not make an immigrant's failure to register under federal law a state crime, could not make it a felony for illegal immigrants to work, and could not arrest people without warrants if they might be deportable under federal law. The Court did not block police from investigating the immigration status of anyone they stop. It left the door open, however, to future challenges to this law based on equal protection principles.
In 2011, Alabama adopted a new law aimed at illegal immigration that was in many respects even tougher than the Arizona legislation. Much of the law is currently blocked as a result of federal court rulings, however, and several provisions were invalidated by the Supreme Court's Arizona ruling. Since 2010, Georgia, Indiana, South Carolina, and Utah have also passed laws that attempt to reduce illegal immigration.
CRIME IN THE TWENTY-FIRST CENTURY
Almost all polls taken in the United States in the past several decades have shown that crime remains one of the major concerns of the public. A related issue that has been on the domestic policy agenda for decades is the status of the nation's prisons.
Crime in American History
In every period in the history of this nation, people have voiced apprehension about crime. During the Civil War, mob violence and riots erupted in several cities. After the Civil War, people in San Francisco were told that "no decent man is in safety to walk the streets after dark; while at all hours, both night and day, his property is jeopardized by incendiarism [arson] and burglary." In 1886, Leslie's Weekly reported, "Each day we see ghastly records of crime... murder seems to have run riot and each citizen asks... 'who is safe?'"
In fact, studies by historians have shown that preindustrial agricultural communities had very high levels of interpersonal violence, and that crime rates in the United States and other Western countries fell steadily from the second quarter of the nineteenth century into the twentieth century. Some historians suggest that this century-long decline came about because industrialization, urbanization, and the growth of bureaucratic institutions such as factories and schools socialized the lower classes into patterns of conformity and rule observance. It is notable that newly settled communities in the American West, where such socialization was incomplete, had much higher rates of crime - the "Wild West" was not entirely a myth.
The United States then experienced a substantial crime wave in the 1920s and the first half of the 1930s. This was the period of Prohibition, when the production and sale of alcoholic beverages was illegal. Criminals such as the famous Al Capone organized gangs to provide illicit alcohol to the public. After the end of Prohibition, crime rates dropped until after World War II (1939-1945).
Crime rates in Western countries began to rise in the 1950s. The United States, in particular, experienced an explosive growth in violent crime that began in the 1960s. The murder rate per 100,000 people in 1964 was 4.9, whereas in 1994 it was estimated at 9.3, an increase of almost 100 percent. Since 1995, however, violent crime rates have declined. Some argue that this decline was due to the growing economy the United States had generally enjoyed since about 1993. Others claim that the billions in additional funds that the federal and state governments allotted to curbing crime in the past few years has led to less crime. Still others claim that an increase in the number of persons who are jailed or imprisoned is responsible for the reduction. Some have even argued that legalized abortion has reduced the population that is likely to commit crimes. In any event, the violent crime rate appears to be falling.
The Prison Population Bomb
Many Americans believe that the best solution to the nation's crime problem is to impose stiff prison sentences on offenders. Such sentences, in fact, have become national policy. By 2013, U.S. prisons and jails held 2.4 million people. About two-thirds of the incarcerated population were in state or federal prisons, with the remainder held in local jails. About 60 percent of the persons held in local jails were awaiting court action. The other 40 percent were serving sentences.
The number of incarcerated persons has grown rapidly in recent years. In 1990, for example, the total number of persons held in U.S. jails or prisons was still only 1.1 million. From 1995 to 2002, the incarcerated population grew at an average of 3.8 percent annually. The rate of growth has slowed since 2002, however, and appears to have stabilized in 2011 and 2012.
The Incarceration Rate. Some groups of people are much more likely to find themselves behind bars than others. Men are more than ten times more likely to be incarcerated than women. Prisoners are also disproportionately African American. To measure how frequently members of particular groups are imprisoned, the standard statistic is the incarceration rate. This rate is the number of people incarcerated for every 100,000 persons in a particular population group. To put it another way, an incarceration rate of 1,000 means that 1 percent of a particular group is in custody. Using this statistic, we can say that U.S. men have an incarceration rate of 1,398, compared with a rate of 131 for U.S. women.
These figures, close to an all-time high, mean that more than 1 male out of every 100 is in jail or prison in this country. African Americans between the ages of thirty and thirty-four have a very high incarceration rate - at any given time, almost 11 percent of this group is in jail or prison.
Prison Construction and Conditions. To house a growing number of inmates, prison construction and management have become sizable industries in the United States. Ten years ago, prison overcrowding was a major issue. In 1994, for example, state prisons had a rated capacity of about 500,000 inmates but actually held 900,000 people. The prisons therefore were operating at 80 percent above capacity. Today, after a major prison construction program, many state prisons are operating within their capacity, but some state systems are still at 20 percent above capacity or more. The federal prison system is still 37 percent above capacity. Since 1980, Texas has built 120 new prisons, Florida has built 84, and California has built 83. In 1923, there were only 61 prisons in the entire United States.
Effects of Incarceration. When imprisonment keeps truly violent felons behind bars longer, it prevents them from committing additional crimes. The average predatory street criminal commits fifteen or more crimes each year when not behind bars. But most prisoners are in for a relatively short time and are released on parole early, often because of prison overcrowding. Many then find themselves back in prison because they have violated parole, typically by using illegal drugs. Indeed, of the 1.5 million people who are arrested each year, the majority are arrested for drug offenses. Given that from 20 million to 40 million Americans violate one or more drug laws each year, the potential "supply" of prisoners seems almost limitless.
ENERGY AND THE ENVIRONMENT
A major part of President Obama's legislative agenda from 2009 to 2012 was directed at energy and environmental issues. Energy policy addresses two major problems: (1) America's reliance on foreign oil, much of which is produced by unfriendly regimes, and (2) global warming purportedly caused by increased emissions of carbon dioxide (CO2) and other greenhouse gases.
Energy Independence - A Strategic Issue
As of mid-2012, the United States imports about 43 percent of the petroleum it consumes. More than one-third of U.S. imports come from two friendly neighbors, Canada and Mexico, and about one-quarter from Middle Eastern countries, primarily Saudi Arabia. The world's largest oil exporters include a number of nations that are not friends of the United States. Russia is the world's second largest oil exporter, after Saudi Arabia. Other major exporters include Venezuela and Iran. Both are openly hostile to American interests, and Venezuela is a major source of U.S. oil imports.
While the United States is far from attaining the goal of energy independence, the nation has taken significant steps in that direction. American reliance on foreign oil is down dramatically from what it was only a few years ago. In 2006, almost 60 percent of our oil came from abroad, compared to the current 43 percent. What changes were responsible for this turnaround?
High Prices and New Production. If the price of a commodity goes up, producers of that commodity have an incentive to produce more of it. The price of gasoline has certainly risen in recent years. In the summer of 2008, before the full impact of the Great Recession, the price of gasoline exceeded $4 for the first time. The price fell during the recession. By the spring of 2011, despite the slow pace of economic recovery, gasoline once again cost more than $4 in many parts of the country. The price has fluctuated since but remains high. Clearly, petroleum producers had an incentive to extract more crude oil, if possible. The question was, could they?
By 2008, some experts doubted that enough new oil could be extracted to keep prices from rising indefinitely. They underestimated the impact of a new technology - fracking, short for hydraulic fracturing. Fracking involves injecting a high-pressure solution of water and chemicals into hydrocarbon-bearing rocks, releasing oil or natural gas. The high price of oil made fracking profitable, and it made production from oil sands in Alberta, Canada, affordable as well.
Fracking has had an even greater impact on the supply of natural gas. A few years ago, it seemed likely that the United States would need to import natural gas. Imports would be expensive, because gas cannot be transported by ship efficiently unless it is converted to liquefied natural gas (LNG). By 2012, however, so much natural gas was available domestically that the nation had run out of storage space. Plans were under way to export LNG from terminals built to import it. Low natural gas prices plus new air-pollution regulations made coal uncompetitive as a source of electricity. As a result, plans for 168 new coal-based power plants were abandoned, and about 100 existing plants were scheduled for retirement. Despite concerns that fracking might harm drinking-water supplies or otherwise damage the environment, use of the process continues to grow rapidly.
The Politics of Expensive Oil. The high price of gasoline is a political issue, and several presidential candidates claimed that, if elected, they would bring it down. Crude oil prices are set worldwide, however, and the ability of the federal government to affect these prices is very limited. (As noted, natural gas is expensive to transport overseas, so its price has fallen in North America.) Still, the government has taken some steps to encourage increased supplies of gasoline.
President Obama issued higher fuel-efficiency standards for vehicles in 2009 and 2012. By 2016, new cars should average 39 miles per gallon and light trucks should average 30. By 2025, the nation's combined fleet of new cars and light trucks must have an average fuel efficiency of 54.5 miles per gallon.
The federal government also subsidizes the development of alternative fuels. Subsidies to encourage the production of ethanol from corn are controversial. Critics charge that ethanol production is an inefficient method of producing energy. Ethanol also makes food more expensive by driving up the cost of corn. Subsidies for renewable energy sources, such as windmills and solar power panels, have attracted criticisms, too. A problem with wind and especially solar power has been high costs. Prices have fallen rapidly, however, and use of these technologies has risen quickly. Still, they are a small fraction of the nation's power supply.
Disasters in the Energy Industry. For some years, opening new areas for oil and gas drilling has been a major plank in the Republican Party platform. Democrats have been more reluctant, but in March 2010, President Obama announced that major new offshore tracts in the Atlantic would be open to deep-sea drilling. Less than one month later, the BP Deepwater Horizon oil spill disaster in the Gulf of Mexico began. The spill, the largest in American history, resulted in a temporary moratorium on new offshore drilling.
Unlike many Democrats, Obama also favored building new energy plants that would use nuclear power. Electric utilities planned several new nuclear plants, but these plans were shelved almost immediately. The major problem was the nuclear power could not compete on cost with natural gas. A second problem was safety. In March 2011, a giant tsunami struck northeast Japan and severely damaged four nuclear reactors located on the coast. The resulting radiation leaks convinced many people that new nuclear power plants would be dangerous. By 2012, every one of Japan's fifty-four reactors had been shut down at least temporarily.
Global Warming
In the 1990s, many scientists working on climate change began to conclude that average world temperatures would rise significantly during the twenty-first century. Gases released by human activity, principally carbon dioxide (CO2), may be producing a "greenhouse effect," trapping the sun's heat and slowing its release into outer space.
The Global Warming Debate. Most scientists who perform research on the world's climate believe that global warming will be significant, but there is considerable disagreement as to how much warming will actually occur. It is generally accepted that world temperatures have already increased by about 0.74 degrees Celsius over the past century. The United Nations' Intergovernmental Panel on Climate Change predicts increases ranging from 1.1 to 6.4 degrees Celsius by 2100. This range of estimates is rather wide and reflects the uncertainties involved in predicting the world's climate.
Global warming has become a major political football to be kicked back and forth by conservatives and liberals. Former vice president Al Gore's Oscar-winning and widely viewed documentary on global warming, released in 2006, further fueled the debate. (Gore received the Nobel Peace Prize in 2007 for his work.) Titled An Inconvenient Truth, the film stressed that actions to mitigate global warming must be taken now if we are to avert a planet-threatening crisis. Environmental groups and others have been pressing the federal government to do just that.
Their efforts are complicated by the fact that a major share of the American electorate does not believe that global warming is happening or, if it is happening, that it is not caused by human activities. Disbelief in global warming is a partisan phenomenon. According to one poll, skepticism about global warming among Republicans rose by 11 percentage points from 2008 to 2009, and a majority of Republicans now believe that global warming does not exist. The opinions of Democrats have not changed - about four-fifths of them accept that global warming is a problem. If there is no global warming, of course, there would be no reason to limit emissions of CO2 and other greenhouse gases.
Legislative Stalemate. The centerpiece of the Obama administration's legislative program on energy and the environment was a bill designed to limit greenhouse gas emissions. In June 2009, the House passed a 932-page bill replete with concessions to major energy consumers, including utility companies, heavy manufacturers, petroleum refineries, and others. In the Senate, this bill sank without a trace, to the considerable annoyance of House Democratic leaders. Senate attempts to agree on a different bill in 2010 were unsuccessful, and the Republican takeover of the House in the 2010 elections meant that no action on greenhouse gas emissions was likely in the near future.
Despite the lack of government action, CO2 emissions in 2011 in the United States were actually down from 2008. The most important cause was new power plants using natural gas instead of coal. (Gas does release some CO2, but less than half as much as coal.) More fuel-efficient cars also contributed to the reduction.
THE POLITICS OF ECONOMIC DECISION MAKING
Nowhere are the principles of public policymaking more obvious than in the economic decisions made by the federal government. The president and Congress (and to a growing extent, the judiciary) are constantly faced with questions of economic policy. Such issues become specifically important when the nation enters a recession.
Good Times, Bad Times
Like any economy that is fundamentally capitalist, the U.S. economy experiences ups and downs. Good times - booms - are followed by lean years. If a slowdown is severe enough, it is called a recession. Recessions are characterized by increased unemployment, the inability of those who are in the labor force to find a job. The government tries to moderate the effects of such downturns. In contrast, booms are historically associated with another economic problem that the government must address - rising prices, or inflation.
Measuring Unemployment. Estimates of the number of unemployed are prepared by the U.S. Department of Labor. The Bureau of the Census also generates estimates using survey research data. Critics of the published unemployment rate calculated by the federal government believe that it fails to reflect the true numbers of discouraged workers and "hidden unemployed." There is no exact way to measure discouraged workers, however. The Department of Labor defines them as people who have dropped out of the labor force and are no longer looking for a job because they believe that the job market has little to offer them. The number of job losses peaked in January 2009. Throughout the year, the unemployment picture merely got worse ever more slowly.
Not until 2010 did the economy actually begin creating jobs again, and even then progress was slow and subject to reversals.
Inflation. Rising prices, or inflation, can also be a serious economic and political problem. Inflation is a sustained upward movement in the average level of prices. Another way of defining inflation is as a decline in the purchasing power of money over time. The government measures inflation using the consumer price index, or CPI. The Bureau of Labor Statistics identifies a market basket of goods and services purchased by the typical consumer, and regularly checks the price of that basket. Over a period of many years, inflation can add up. For example, today's dollar (2013) is worth (very roughly) about a twentieth of what it was worth a century ago. In effect, today's dollar is a 1913 nickel.
The Business Cycle. Economists refer to the regular succession of economic expansions and contractions as the business cycle. An extremely severe recession is called a depression, as in the example of the Great Depression. By 1933, actual output was 35 percent below the nation's productive capacity. Unemployment reached 25 percent. Compared with this catastrophe, recessions since 1945 have usually been mild. Nevertheless, the United States has experienced recessions with some regularity. Recession years since 1960 have included 1970, 1974, 1980, 1982, 1990, 2001, and 2008.
To try to control the ups and downs of the national economy, the government has several policy options. One is to change the level of taxes or government spending. Another possibility involves influencing interest rates and the money side of the economy. We will examine taxing and spending, or fiscal policy, first.
Fiscal Policy
Fiscal policy is the domain of Congress. A fiscal policy approach to stabilizing the economy is often associated with the twentieth-century British economist John Maynard Keynes. Keynes (1883-1946) originated the school of thought that today is called Keynesian economics, which supports the use of government spending and taxing to help stabilize the economy. (Keynesian is pronounced kayn-zee-un.) Keynes believed that there was a need for government intervention in the economy, in part because after falling into a recession or depression, a modern economy may become trapped in an ongoing state of less than full employment.
Government Spending and Borrowing. Keynes developed his fiscal policy theories during the Great Depression of the 1930s. He believed that the forces of supply and demand operated too slowly on their own in such a serious recession. Unemployment meant that people had less to spend, and because they could not buy things, more businesses failed, creating additional unemployment. It was a vicious cycle. Keynes's idea was simple: in such circumstances, the government should step in and engineer the spending that is needed to return the economy to a more normal state.
The spending promoted by the government could take either of two forms. The government could increase its own spending, or it could cut taxes, allowing the taxpayers to undertake the spending instead. To have the effect Keynes wanted, however, it was essential that the spending be financed by borrowing. In other words, the government should run a budget deficit - it should spend more than it receives.
Discretionary Fiscal Policy. Keynes originally developed his fiscal theories as a way of lifting an economy out of a major disaster such as the Great Depression. Beginning with the presidency of John F. Kennedy (1961-1963), however, policymakers have attempted to use Keynesian methods to "fine-tune" the economy. This is discretionary fiscal policy - discretionary meaning left to the judgment or discretion of a policymaker.
Attempts to fine-tune the economy face a timing problem. It takes a while to collect and assimilate economic data. Therefore, time may go by before an economic problem can be identified. After an economic problem is recognized, a solution must be formulated. There will be an action time lag between the recognition of a problem and the implementation of policy to solve it. Getting Congress to act can easily take a year or two. Finally, after fiscal policy is enacted, it takes time for the policy to act on the economy. Because fiscal policy time lags are long and variable, a policy designated to combat a recession may not produce results until the economy is already out of the recession.
Because of the timing problem, attempts by the government to employ fiscal policy in the past fifty years have typically taken the form of tax cuts or increases. Tax changes can take effect more quickly than government spending. In 2009, therefore, the Obama administration was employing an exceptional approach with its economic stimulus spending.
Criticisms of Keynes. There have always been economic schools of thought that consider Keynesian economics to be fatally flawed. These schools argue that either fiscal policy has no effect or it has negative side effects that outweigh any benefits. Some opponents of fiscal policy believe that the federal government should limit itself to monetary policy. Others believe that it is best for the government to do nothing at all.
It is worth noting that most voters have neither understood nor accepted Keynesian economics. Despite popular attitudes, politicians of both parties accepted Keynesian ideas for many years. Republican president Richard Nixon (1969-1974) is alleged to have said, "We are all Keynesians now." George W. Bush justified many of his policies using Keynesian language. During the first years of Obama's presidency, however, such thinking among Republicans in Congress vanished almost completely. Instead, Republicans rejected countercyclical policies, reflecting the popular belief that during a recession the government should "tighten its belt."
It did not help the Keynesian cause that Obama's economic stimulus package failed to end high rates of unemployment - Keynesian economists argued that the stimulus was less than half of what was needed to accomplish such a goal. When Obama, in his 2010 State of the Union address, employed the belt-tightening metaphor, Keynesians realized that they had lost control of the political discourse.
During 2011, Obama and the Republicans in the House issued competing federal budget plans that included long-term spending cuts. Republicans also called for immediate cuts in federal and state spending. Yet the unemployment rate remained close to 9 percent, a figure that traditionally would have ruled out short-term efforts to reduce the deficit. As the 2012 elections approached, however, Obama moved away from the theme of deficit reduction and toward a campaign based on opposing economic inequality.
Deficit Spending and the Public Debt
The federal government typically borrows by selling U.S. Treasury bills, notes, and bonds, known collectively as Treasury securities and informally as treasuries. The sale of these federal obligations to corporations, private individuals, pension plans, foreign governments, foreign businesses, and foreign individuals adds to this nation's public debt, or national debt. In the past few years, foreign governments, especially those of China and Japan, have come to own about 50 percent of the U.S. public debt. Thirty years ago, the share of the U.S. public debt held by foreigners was only 15 percent.
Deficit Spending. As noted, when the federal government spends more than it receives in revenues, it typically borrows by selling U.S. Treasury securities. Individuals, businesses, and foreigners buy these treasuries. Every time the federal government engages in deficit spending, it increases the size of its total debt.
Can deficit spending go on forever? Certainly, it can go on for quite a long time for the U.S. government. After all, as long as individuals, businesses, and foreigners (especially foreign governments) are willing to purchase Treasury securities, the government can continue to engage in deficit spending. If deficit spending goes on long enough, however, the rest of the world - which owns about 50 percent of all Treasury securities - may lose faith in our government. Consequently, U.S. government borrowing might become more expensive. We, as taxpayers, are responsible for the interest that the federal government pays when it issues treasuries. A vicious cycle might occur - more deficit spending could lead to higher interest rate costs on the U.S. debt, leading in turn to even larger deficits.
So far, however, there has been little sign that such a problem is imminent. On the contrary, following the financial crisis that struck on September 15, 2008, panicked investors piled into treasuries in the belief that these were the safest instruments in existence. The interest that the U.S. government must pay on its borrowing is also very low. In June 2012, the average interest rate on four-week Treasury bills - the shortest-term Treasury obligations - was 0.06 percent - for all practical purposes, an interest rate of zero. Correcting for inflation, anyone buying short-term treasuries was paying the U.S. government for the privilege of making loans to it. After a crisis in which it seemed possible that the government of Greece might default on its debts, investors again began to demand treasuries.
The Public Debt in Perspective. Did you know that the federal government has accumulated trillions of dollars in debt? Does that scare you? It certainly would if you thought that we had to pay it back tomorrow. But we do not.
There are two types of public debt - gross and net. The gross public debt includes all federal government interagency borrowings, which really do not matter. This is similar to your taking an IOU ("I owe you") out of your left pocket and putting it into your right pocket. Today, federal interagency borrowings account for about $4.8 trillion of the gross public debt. What is important is the net public debt - the public debt that does not include interagency borrowing.
Are We Always in Debt? From 1960 until the last few years of the twentieth century, the federal government spent more than it received in all but two years. Some observers considered those ongoing budget deficits to be the negative result of Keynesian policies. Others argued that the deficits actually resulted from the abuse of Keynesianism. Politicians have been more than happy to run budget deficits in recessions, but they have often refused to implement the other side of Keynes's recommendations - to run a budget surplus during boom times.
In 1993, however, President Bill Clinton (1993-2001) obtained a tax increase as the nation emerged from a mild recession. Between the tax increase and the "dot-com boom," the United States had a budget surplus each year from 1998 to 2002. Some commentators predicted that we would be running federal government surpluses for years to come.
Back to Deficit Spending. All of those projections went by the wayside because of several events. One event was the "dot-com bust" followed by the 2001-2002 recession, which lowered the rate of growth of not only the economy but also the federal government's tax receipts. In every recession that we have lived through, tax receipts have always fallen. The "bust" in 2008-2011 was no exception.
A major event took place on September 11, 2001. As a result of the terrorist attacks, the federal government spent much more than it had planned to spend on security against terrorism. Also, the government had to pay for the war in Iraq in 2003 and the occupation of that country thereafter. Finally, Congress authorized major increases in spending on discretionary programs.
The Great Recession dramatically increased the budget deficit and the level of public debt. Tax revenues collapsed, and spending on such items as unemployment compensation rose dramatically. In addition, immediately upon taking office, President Obama obtained legislation from Congress that helped push the public debt to levels not seen since World War II. Such high levels of debt became a major political issue.
Monetary Policy
Controlling the rate of growth of the money supply is called monetary policy. This policy is the domain of the Federal Reserve System, also known simply as the Fed. The Fed is the most important regulatory agency in the U.S. monetary system.
The Fed performs a number of important functions. Perhaps the Fed's most important task is regulating the amount of money in circulation, which can be defined loosely as checking account balances and currency. The Fed also provides a system for transferring checks from one bank to another. In addition, it holds reserves deposited by most of the nation's banks, savings and loan associations, savings banks, and credit unions. Finally, it plays a role in supervising the banking industry.
Organization of the Federal Reserve System. A board of governors manages the Fed. The board consists of seven full-time members appointed by the president with the approval of the Senate. There are twelve Federal Reserve district banks. The most important unit within the Fed is the Federal Open Market Committee. This is the body that actually determines the future growth of the money supply and other important economy-wide financial variables. This committee is composed of the members of the Board of Governors, the president of the New York Federal Reserve Bank, and presidents of four other Federal Reserve banks, rotated periodically.
The Board of Governors of the Federal Reserve System is independent. The president can attempt to influence the board, and Congress can threaten to merge the Fed into the Treasury Department, but as long as the Fed retains its independence, its chairperson and governors can do what they please. Hence, any talk about "the president's monetary policy" or "Congress's monetary policy" is inaccurate. The Fed remains one of the truly independent sources of economic power in the government.
Loose and Tight Monetary Policies. The Federal Reserve System seeks to stabilize nationwide economic activity by controlling the amount of money in circulation. Changing the amount of money in circulation is a major aspect of monetary policy. You may have a read a news report in which a business executive complained that money is "too tight" or run across a story about an economist who warned that money is "too loose." In these instances, the terms tight and loose refer to the monetary policy of the Fed.
Credit, like any good or service, has a cost. The cost of borrowing - the interest rate - is similar to the cost of any other aspect of doing business. When the cost of borrowing falls, businesspersons undertake more investment projects. When it rises, businesspersons undertake fewer projects. Consumers also react to interest rates when deciding whether to borrow funds to buy houses, cars, or other "big ticket" items.
If the Fed implements a loose monetary policy (often called an "expansionary" policy), the supply of credit increases and its cost falls. If the Fed implements a tight monetary policy (often called a "contractionary" policy), the supply of credit falls (or fails to grow) and its cost increases. A loose money policy is often implemented to encourage economic growth. You may be wondering why any nation would want a tight money policy. The answer is to control inflation. If money becomes too plentiful too quickly, prices on average increase, and the purchasing power of the dollar decreases.
Time Lags for Monetary Policy. Sometimes, accurate information about the economy is not available for months. Once the state of the economy is known, time may elapse before any policy can be put into effect. Still, the time lag in implementing monetary policy is usually much shorter than the lag in implementing fiscal policy. The Federal Open Market Committee meets eight times a year and can put a policy into effect relatively quickly. A change in the money supply may not have an effect for several months, however.
Monetary Policy During Recessions. A tight monetary policy is effective as a way of taming inflation. (Some would argue that it is not the only way that inflation can be stopped.) If interest rates go high enough, people will stop borrowing. How effective, though, is a loose monetary policy at ending a recession? Under normal conditions, it is very effective. A loose monetary policy will spur an expansion in economic activity.
To combat the Great Recession, however, the Fed reduced its interest rate effectively to zero. It could not go any lower. Yet when consumers had credit, they were still reluctant to make major purchases. Many businesses found that they had little need to borrow to invest in new activities - and no need to hire new staff. Overall demand for goods and services was so low that companies could produce all they needed with their existing capacity and workforce. Monetary policy had run out of steam - using it was like "pushing on a string." The government has little power to force banks to lend, and it certainly has no power to make people borrow and spend. As a result, the Obama administration placed its bets on fiscal policy.
During 2008 and 2009, the Fed developed a new way to respond to the failure of banks to lend. Relying on its ability to create money, it began to make loans itself, without turning to Congress for appropriations. The Fed bought debt issued by corporations. It bought securities that were based on student loans and credit-card debt. By 2009, the Fed had loaned out close to $2 trillion in fresh credit. In 2010 and 2011, the Fed implemented yet another new policy, called quantitative easing, in an attempt to make monetary policy more effective. Quantitative easing essentially means buying quantities of long-term treasuries.
Regulating Banks. In addition to managing the money supply, the Federal Reserve has a variety of responsibilities in the area of bank regulation. The Fed ensures that banks have a large enough quantity of reserve capital to back up the loans they are making. It also administers various regulations that protect consumers. In the past, not all banks fell under the regulatory oversight of the Fed. For example, the Fed did not supervise investment banks that do not take deposits from customers. This exemption came to an end in 2008 when the collapse of Bear Stearns, an investment bank, threatened to bring down large numbers of other institutions that had financial ties to the ailing firm. The Fed stepped in to extend Bear Stearns an emergency loan and to force it to sell out to JPMorgan Chase, a much stronger institution, for a nominal price. Subsequently, the president and Congress took action to provide $700 billion to "rescue" other financial firms facing collapse.
THE POLITICS OF TAXES
Federal taxes are enacted by members of Congress. Today, the Internal Revenue Code, which is the federal tax code, encompasses thousands of pages, thousands of sections, and thousands of subsections - our tax system is not very simple.
Americans pay a variety of taxes. At the federal level, the income tax is levied on most sources of income. Social Security and Medicare taxes are assessed on wages and salaries. There is an income tax for corporations, which has an indirect effect on many individuals. The estate tax is collected from property left behind by those who have died. State and local governments also assess taxes on income, sales, and land. Altogether, the value of all taxes collected by the federal government and by state and local governments is about 25 percent of GDP. This is a substantial sum, but it is less than what many other countries collect.
Federal Income Tax Rates
Individuals and businesses pay income taxes based on tax rates. Not all of your income is taxed at the same rate. The first few dollars of income that you earn are not taxed at all. The highest rate is imposed on the "last" dollar you make. The highest rate is the marginal tax rate. The higher the tax rate - the action on the part of the government - the greater the public's reaction to that tax rate. If the highest tax rate on the income you make is 15 percent, then any method you can use to reduce your taxable income by one dollar saves you fifteen cents in tax liabilities that you owe to the federal government.
Individuals paying a 15 percent rate have a relatively small incentive to avoid paying taxes, but consider the individuals who faced a marginal tax rate of 94 percent in the 1940s, during and after World War II. They had a tremendous incentive to find legal ways to reduce their taxable incomes. For every dollar of income that was somehow deemed nontaxable, these taxpayers would reduce tax liabilities by ninety-four cents.
Loopholes and Lowered Taxes
Individuals and corporations facing high tax rates will adjust their earning and spending behavior to reduce their taxes. They will also make concerted attempts to get Congress to add loopholes to the tax law that allow them to reduce their taxable incomes. When Congress imposed very high tax rates on high incomes, it also provided for more loopholes than it does today. For example, special provisions enabled investors in oil and gas wells to reduce their taxable incomes.
Progressive and Regressive Taxation. The greater your taxable income, the higher the marginal tax rate. Persons with large incomes pay a larger share of their income in income tax. A tax system in which rates go up with income is called a progressive tax system. The federal income tax is clearly progressive.
The income tax is not the only tax you must pay. For example, the federal Social Security tax is levied on all wage and salary income at a flat rate of 6.2 percent. (Employers pay another 6.2 percent, making the total effective rate 12.4 percent.) In 2012, however, there was no Social Security tax on wages and salaries in excess of $110,100. (This "cap" changes from year to year.) Persons with very high salaries, therefore, pay no Social Security tax on much of their wages. In addition, the tax is not levied on investment income (including capital gains, rents, royalties, interest, dividends, and profits from a business). The wealthy receive a much greater share of their income from these sources than others do. As a result, the wealthy pay a much smaller portion of their income in Social Security taxes than do the working poor. The Social Security tax is therefore a regressive tax. Note that three-quarters of all taxpayers owe more in payroll taxes, such as Social Security and Medicare taxes, than they do in income taxes.
The Temporary Payroll Tax Cut. In 2011 and 2012, the portion of the Social Security payroll tax paid by employees was temporarily reduced from 6.2 percent to 4.2 percent. This rate cut was an economic stimulus measure agreed to by President Obama and the Republicans in Congress. While the cut was in line with Keynesian economics, it also appealed to Republican antitax philosophy. The reduction was scheduled to end on the last day of 2012, and its repeal was part of the "taxmageddon" crisis that Congress was forced to address in December 2012.
Health-Care Taxes. One aspect of the Patient Protection and Affordable Care Act (Obamacare) is that it raises taxes on upper income persons to offset the act's cost. Beginning in 2013, single taxpayers with more than $200,000 in earned income pay an additional 0.9 percent Medicare tax on all of their income above $200,000. For married taxpayers filing jointly, the tax starts at income above $250,000. Also, single taxpayers with an adjusted gross income of more than $200,000 will pay a new 3.8 percent Medicare tax on "unearned" income. Such income includes interest, dividends, rents, royalties, and a variety of other payments. Again, for married taxpayers filing jointly, the tax starts at income above $250,000. Of course, if the Republicans were to succeed in repealing the legislation, these taxes would not go into effect.
Who Pays? The question of whether the tax system should be progressive - and if so, to what degree - is subject to vigorous political debate. Democrats in general and liberals in particular favor a tax system that is significantly progressive. Republicans and conservatives are more likely to prefer a tax system that is proportional or even regressive.
Overall, what kind of tax system do we have? The various taxes Americans pay pull in different directions. The federal estate tax is extremely progressive, because it is not imposed at all on smaller estates. Sales taxes are regressive because the wealthy spend a relatively smaller portion of their income on items subject to the sales tax. Before 2013, the 1.45 percent Medicare payroll tax was entirely flat - that is, neither progressive nor regressive. Because it was not levied on investment income, however, it was regressive overall. The Affordable Care Act, however, turned the tax into a progressive one beginning in 2013. Add everything up, and the tax system as a whole is slightly progressive.
DID YOU KNOW?
~From 2007 through 2009, the U.S. government mailed out $180 million in benefit checks to twenty thousand Americans - who were dead.
~The odds are one in twenty that an American born today will wind up in jail or prison at some point during his or her lifetime.
~It costs the U.S. Mint 2.41 cents to make a penny and 11.18 cents to make a nickel.