Paul Krugman:
So, about those tax cuts: back in 2001, the Bush administration bundled huge tax cuts for wealthy Americans with much smaller tax cuts for the middle class, then pretended that it was mainly offering tax breaks to ordinary families. Meanwhile, it circumvented Senate rules intended to prevent irresponsible fiscal actions — rules that would have forced it to find spending cuts to offset its $1.3 trillion tax cut — by putting an expiration date of Dec. 31, 2010, on the whole bill. And the witching hour is now upon us. If Congress doesn’t act, the Bush tax cuts will turn into a pumpkin at the end of this year, with tax rates reverting to Clinton-era levels.
In response, President Obama is proposing legislation that would keep tax rates essentially unchanged for 98 percent of Americans but allow rates on the richest 2 percent to rise. But Republicans are threatening to block that legislation, effectively raising taxes on the middle class, unless they get tax breaks for their wealthy friends.
That’s an extraordinary step. Almost everyone agrees that raising taxes on the middle class in the middle of an economic slump is a bad idea, unless the effects are offset by other job-creation programs — and Republicans are blocking those, too. So the G.O.P. is, in effect, threatening to plunge the U.S. economy back into recession unless Democrats pay up.
Tags: Bush tax cuts
Mark Zandi goes all Newt Gingrichy in an Op-Ed piece in the Sunday New York Times on the issue of what to do about the scheduled expiration of the Bush-era tax cuts.
In light of the fact that Zandi, the chief economist at Moody’s Analytics, has produced a good deal of work that has been very supportive of the economic benefits of fiscal stimulus, including expanded unemployment insurance, it’s a curious piece of writing based on an even more curious perspective.
Zandi begins by reminding us that all the Bush-era tax cuts are set to expire at the beginning of 2011. President Obama wants to let the tax cuts expire for individuals making more than $200,000 and for households making more than $250,000 a year, thus allowing the current 36% rate for those with the highest incomes to return to the pre-2001 rate of 39.6%. And the president wants to extend the current tax cuts for everyone else. Congressional Republicans, on the other hand, say they want to extend all the Bush-era tax cuts, including the tax cuts for those with the highest incomes.
(In what follows, I steal a page, so to speak, from the FJM-style now kept alive by Ed at the blog ginandtacos)
For his part, Zandi says:
The prudent middle ground would be to forestall any tax increases in 2011 and to phase in higher rates on upper-income households in 2012, when the economy will be on firmer ground.
Never mind that there’s nothing inherently prudent about the middle ground, the assumption is that in 2012 “the economy will be on firmer ground.” Really? For who? Without major new public jobs stimulus efforts, there will still be millions upon millions of unemployed workers. I know they say that time heals a broken heart, but time alone does not heal a sick economy.
The president’s plan would be taking an unnecessary gamble with the struggling recovery.
The real unnecessary gamble would be to not implement a new, large-scale jobs program to re-employ millions of Americans, like a 21st-century ‘WPA’. But we digress.
Businesses have only recently begun to add jobs, and they appear to be a long way from hiring fast enough to reduce unemployment. Even under the best of circumstances, the unemployment rate will remain near 10 percent well into next year. The high rate of joblessness has cast a shadow on the collective psyche that will only worsen with higher taxes, raising the already uncomfortably high odds that the economy will suffer a double-dip recession.
Yes, we know that private sector hiring has been anemic, and Zandi himself expects massive unemployment “well into next year” (what happened to that “firmer ground” by 2012 thing?). But the real danger is that the “shadow on the collective psyche” caused by high unemployment “will only worsen” if there are even slightly higher taxes on the rich. Never mind actually addressing the unemployment crisis; if those with plenty of money have to pay a fairer share in taxes, that itself will cause an ever darker and deeper shadow on the collective psyche, which in turn could cause a double-dip recession. Yeah, and don’t forget our precious bodily fluids!
In most times, raising taxes on the wealthy by such a modest amount has had little impact on the economy. But these aren’t most times. The well-to-do appear unusually sensitive to changes in their finances, probably because their nest eggs are significantly smaller with the drop in stock and housing prices. Only the top 3 percent of households would have to pay higher taxes if the president got his way, but this rarefied group currently accounts for a fourth of consumer spending. If they pull back, even a bit, the recovery could be derailed.
Oh my. The well-to-do are “unusually sensitive to changes in their finances.” It would be nice if they were unusually sensitive to the plight of the unemployed, of low-income families and of the struggling working class. But that would be too much to ask, seeing as many of the well-to-do kept their jobs while throwing millions of workers out of theirs. And while the well-to-do would still make out better than everyone else under the President’s tax plan, the additional $40 billion a year in revenues could help pay for major new jobs programs to bring down unemployment.
Successful small-business owners, who power the nation’s job-creation machinery, make up one-third of these high-income taxpayers. They have set up their businesses so that their profits are taxed at personal rates. Raising marginal tax rates, even a little, on those who have suffered during the past several years would be a mistake.
Double oh my. Not only are they unusually sensitive, but oh how they’ve suffered. So much so that they are among the wealthiest 3 percent. And speaking of 3 percent, only 3 percent of all small business owners are in these top income brackets. Many of them have actually set up their businesses so that their profits are not taxed at personal rates, but at the much-lower 15% capital gains rate. But, at any rate, can’t you hear that great job-creation machinery humming right along?
Some people make a more nuanced argument that higher taxes on the wealthy could pay for additional economic stimulus — like a bigger job tax credit or resurrected 1930s-style work programs.
Yes. That’s right. I just did.
This view has theoretical merit — some of my own analysis has been used to support it — but it is asking too much of our political system now to get it just right. I’m skeptical that a politicized Congress would be able to pull it off, and failure to do so would leave us next year with higher taxes and a hobbled recovery.
Heavens no! We can’t possibly ask our political system to do what needs to be done in this historic economic crisis. That’s crazy talk. Especially if it means the rich would pay a fairer share in taxes. I’m just pleased as punch simply knowing that Mark Zandi thinks my view has at least theoretical merit.
On the other hand, the Republican proposal to keep the current tax rates permanently in place even for the wealthy takes an unnecessary gamble with our long-term fiscal outlook. Tax cuts do not pay for themselves. Even when President Ronald Reagan slashed much higher tax rates in half, this argument failed; in the current tax debate, it is unsupportable. By definition, high-income households are where the money is; higher rates would raise substantial revenue for long-term deficit reduction.
Yee-haa! Substantial revenue! Come on, boys, let’s get to it!
What? Not yet?
Once the recovery is off and running, and stock and housing prices are consistently rising, allowing the Bush tax cuts for high-income households to expire — over, say, a three-year period — would not harm the economy. The overwhelming fear among high earners that their lifestyles will be forever diminished should have faded, and the tax increases would be small enough not to materially alter wealthy people’s decisions about spending, working or investing.
Baby steps, people, baby steps. You know how unusually sensitive the rich are. And not just sensitive. Why, they’re virtually traumatized by overwhelming fear. And if we aren’t sensitive enough to be concerned about their overwhelming fear, well they might just turn around and wreck the economy — again.
Keep in mind that the economy performed admirably in the 1990s when high-income households paid the same higher tax rates. And the wealthy would benefit as much as anyone from reducing the federal deficit, because that would keep interest rates low, spurring investment and job creation.
Thank goodness, Mark Zandi reappears, briefly, as Mark Zandi.
Whatever policymakers decide regarding the tax code, they should take action, or agree not to, quickly. Not knowing what tax rates will be just a few months from now is adding to the collective nervousness, already high after the epic policy debates on health care, financial regulation, energy and immigration. All this anxiety is most likely affecting whether businesses hire.
Pay no attention to the previous portions of the Op-Ed, just do something, anything, and get it over with already. All the anxiety, the sensitivity, the collective nervousness, the shadow on the collective psyche, the Jungians coming out of the woodwork…. Stop! It’s killing me!
None of this means the tax code should be off the table when President Obama’s fiscal commission addresses how to fix our long-term problems. Past experience with fiscal austerity at home and overseas strongly suggests that it is best for the economy’s long-run performance to restrain government spending rather than raise taxes, but taxes must also be part of our national debate.
Ah, austerity, how sweet the sound. Like a can of cat food being opened.
In this recession, the government has necessarily made a string of momentous economic policy decisions. Some have worked well; others have been a disaster. We can’t afford any more mistakes.
Specificity be damned! Hit the word count max and ran out of room. Here’s the plan in a nutshell: fear the fears of the fearful rich; enrich them still, or else; and let it all trickle down.
The author is the winner of the 2010 CREDO Mobile/Netroots Nation award for Blog Activist of the Year.
Tags: Bush tax cuts
The 2001 and 2003 Bush tax cuts, which were passed under reconciliation by Republicans so they only needed 51 votes in the Senate, benefited wealthier Americans the most. Those tax cuts for the wealthy had little stimulative effect on the economy, turned federal budget surpluses into deficits and exacerbated the income inequality between the top 2 percent and everybody else.
All the Bush tax cuts are now set to expire next year. While there is widespread support for extending those cuts directed at helping lower-income and middle-class Americans, the debate is on over the tax cuts for those at the top of the income scale.
Now, a leading economist and former Federal Reserve Board vice chairman, Alan S. Blinder, wants to end of the Bush tax cuts for the wealthy and direct the huge budget savings toward programs including extended unemployment insurance, fiscal aid to states and job-creation programs.
Blinder, an economics professor at Princeton, penned a recent Op-Ed on the subject in the Wall Street Journal.
Apparently unbothered by the consistency hobgoblin, some of the Republican deficit hawks also want to make the 2001-2003 Bush tax cuts permanent, rather than letting them expire on schedule at the end of this year. Yet their major argument is classic Keynesian thinking: Letting tax cuts expire is tantamount to raising taxes—which is the opposite of what you want to do when the economy is weak. A few days ago, Sen. Jon Kyl (R., Ariz.) even went so far as to declare it OK to raise the deficit to finance tax cuts, but not to pay unemployment benefits.
Blinder’s preference?
Let the upper-income tax cuts expire on schedule at year end. That would save the government an estimated $75 billion over the next two years. However, it would also diminish aggregate demand a bit. So, instead of using the $75 billion to reduce the deficit, spend it on unemployment benefits, food stamps and the like for two years. That would surely put more spending into the economy than the tax hike takes out, thus creating jobs.
How much more? Getting a numerical estimate requires the use of a quantitative model of the U.S. economy. In recent testimony before the House Budget Committee, Mark Zandi of Moody’s Analytics used his model to estimate that extending unemployment insurance benefits has almost five times as much “bang for the buck” as making the Bush tax cuts permanent.
Based on his estimates, the budgetary trade I just recommended would add almost $100 billion to aggregate demand over the next two years—without adding a dime to the deficit. That translates to about 500,000 more jobs each year.
Blinder reiterated those assessments Wednesday, and indeed went even further, saying he thought at the time that the Bush tax cuts for upper income Americans were like “piling on” — worsening the effects of income inequality. On a conference call with reporters, Blinder said of the tax cuts for the rich “it would have been better if they hadn’t been enacted.”
Letting the top income tax cuts expire, he said, would allow us to use the additional funds for things that would stimulate the economy more directly, such as unemployment insurance, food stamps and jobs programs, while also lowering deficits long-term.
“Not all budgetary dollars are created equal,” Blinder said. “Some have a bigger bang for the buck.” He estimates the stimulative effects on GDP of a dollar used for unemployment benefits or food stamps to be $1.60 to $1.70, while all the Bush tax cuts would account for about half that much — and far less for just the tax cuts for the wealthy.
Blinder and Mark Zandi of Moody Analytics also released a detailed study this week which estimated that without the combination of monetary and fiscal stimulus measures taken since late 2008, job losses would have exceeded 16 million, more than twice the 8 million lost in the recession.
Still, Blinder said the economy is currently weak enough to require additional fiscal and monetary stimulus. That’s the context for him urging the end of the Bush tax cuts for individuals making more than $200,000 and couples making more than $250,000 a year — and directing the first two years of new revenues to programs like unemployment insurance, food stamps and state aid.
I asked Professor Blinder if he thought the private sector needs a public jobs stimulus. “Absolutely,” he replied, saying he favors creating a temporary “WPA-type public jobs program,” one which he said would also “kick start the private sector hiring process.”
Yesterday’s conference call was organized by the Center on Budget and Policy Priorities which has also urged an end to the Bush tax cuts for the wealthy, estimating that would free up nearly $90 billion in the first two years.
Tags: Bush tax cuts, deficit, Jobs, stimulus, unemployment
