What difference did the election make?

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Polls told us that 85% of the population thought the country was heading towards Wrong direction. Yet voters turned out and re-elected almost all of the incumbents. Pennsylvania voters even re-elected a state representative who had been dead for almost a month.

So what’s going on?

It may be that very few challengers promised acceptable change.

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On the main issues of voter concern (inflation, crime, border security, impending recession), the Democratic candidates had no solution. Strangely, neither do the Republicans.

Neither side offered a solution to the public

On the Senate side, Republican Minority Leader Mitch McConnell thought Republicans didn’t need an agenda. He told reporters they would have to wait until after the election to see what a Republican Senate would do. In the House of Representatives, Republicans had some semblance of an agenda, but it was weak on credible details.

The main Republican argument was: the other side screwed up and things were so much better when our guy was in the White House. The main Democratic argument was: “democracy is on the ballot”, which is roughly the same as saying that a vote for Republicans is a vote for the return of Donald Trump.

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Both sides were saying: vote for us because we are not them.

Earlier this year, my colleague Lawrence Kotlikoff and I proposed a inflation and employment program which both sides should take heed – especially now that they have to get back to governing.

First on our list was a series of proposals to protect people from the consequences of inflation.

Solve the inflation problem with indexation

The biggest victims of inflation are the elderly living on fixed incomes. Virtually no private pension or private annuity is indexed to inflation. The reason: inflation is mainly caused by the government, and the private sector does not know how to insure against changes in public policy.

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Social security benefits are indexed to inflation, but the tax on these benefits is not. When the Social Security Benefits Tax was first imposed (in 1984), it applied to so few people that there was little resistance. But because the income thresholds for the tax were not indexed, the tax hit more and more retirees over time. Today, more than half of all senior citizens pay a tax that increases every year without any act of Congress.

Unlike social security contributions, the income tax code is indexed to wage inflation. But there is no comparable adjustment for investment income. People who receive interest and dividend income and who realize capital gains pay taxes on the gains produced by inflation, even when there has been no increase in their real standard of living .

Conclusion: Inflation is good for the government and bad for the taxpayer. It’s a way for the government to increase its revenue without Congress ever having to pass a law. It is also easily correctable.

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Ideally, we should index the whole tax code to inflation. This way the government would never get more revenue when it inflates the currency.

If it is too much lift, some partial steps should be considered. The indexation of tax on social security benefits should be a matter of course. It’s not only the right thing to do, it would be popular with voters.

People should also be able to convert their pension and annuity income into inflation-indexed annuities. These would be administered by the private sector, but supported by the government. It’s easier to do than you think. The Treasury already provides inflation protection with TIPS bonds (Treasury Inflation Protected Securities).

Abolition of the penalty on income for seniors

Due to the pandemic, we are also living with the problem of labor shortage. When COVID hit, many older workers became the first Social Security retirees. Yet if they return to work and earn more than $19,660, they will lose 50 cents in benefits for every dollar earned. When this “earnings penalty” is combined with taxes on social security benefits and taxes on income and wages, older workers can face astronomical marginal tax rates – even exceeding 90 percent!

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Abolishing the income penalty would be a win-win for seniors and for the government. When “retirees” return to the workforce, they will pay income taxes and payroll taxes on every dollar they earn.

We should also abolish the payroll tax for workers once they reach the age of 70. After all, they have already “paid” for their Social Security and Medicare benefits. And if they are willing to continue contributing to the economy, we should encourage rather than discourage their participation.

So why haven’t both sides stuck to these and other ideas?

ideas matter

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Turns out some Republicans have. Prior to the election, the House Republican Study Committee released a document which was replete with laudable reforms, including the indexation of capital gains, the removal of the Social Security earnings penalty, and the complete removal of the Social Security benefit tax.

If you haven’t heard of this document, that’s understandable. At 157 pages, with over 450 footnotes, a voter is unlikely to read it. And since no Republican candidate I know of has run on these ideas, the document remains one of Washington DC’s best-kept secrets.

Ideas matter. But not in the last election.

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