by Eric Martin
This post from Economist Mom about the current dominance of pro-tax cut ideology raises several important points about the dearth of sensible tax policy debate in Washington, not the least of which has to do with the collective inability to grasp the nuances of marginal tax rates.
In particular, she points out that while the Bush tax cuts for the upper brackets only benefit those in the upper brackets (since you have to make above a certain threshold - say, $250K - to have those above-the-threshold dollars taxed at a lower rate), the middle-class portion of the Bush tax cuts still results in most cuts going to the upper bracket taxpayers because a full $250K of their income is taxed at the lower rate, while those in the lower brackets only have an amount up to but less than $250K taxed at the lower rates.
Which says nothing about how much such tax cuts add to the deficit that the supposed deficit hawks supposedly care so much about.
Let’s remember that the permanent extension of “just” the “middle-class” Bush tax cuts, as President Obama has proposed, would add about $2.2 trillion to the debt over the next ten years–without interest costs and without the associated extension of Alternative Minimum Tax relief. Such extension would preserve the full value of Bush tax cuts for 97-98 percent of households while [giving] the largest dollar value of tax cuts to those above the $250,000 threshold.
However, when the fate of the Bush tax cuts is discussed, the debate is framed around the notion that not passing a new round of upper-bracket-only cuts after the same Bush cuts expire on schedule would result in "raising taxes" on the wealthy. While certain individuals and couples making a significant amount above the upper threshold might ultimately pay more if a new round of upper-bracket-only cuts is not passed, those individuals/couples would still be getting a big tax cut on amounts earned up to the $250K. And their tax burden overall would be lower than during the 1990s.
See, for example, the chart at this Kevin Drum post. As Drum says:
That's what we're fighting over: a broad tax cut with something for everybody, or a broad tax cut plus an extra bonus for the upper middle class and an extra super duper bonus for the millionaire class. That's what the Republican Party has unanimously staked its future to.
Matt Yglesias adds:
In other words, there’s no debate in Washington about whether rich people should get a permanent tax cut. Nor is there any debate in Washington about whether rich people’s tax cut should be financed by long-term borrowing. Nor is there any debate about whether rich people should get a bigger tax cut than middle class people. But we “can’t afford” unemployment insurance, we “can’t afford” to pay bank regulators competitive salaries.
It bears emphasizing that the Bush tax cut regime should not be treated as the obvious baseline and starting point. Those tax cuts were enormously expensive, added trillions to the deficit and were so fiscally irresponsible that in order to mask the long term costs, a sunset provision was built in. But now that the sun is setting, the Washington consensus is that, despite the dire need for more revenue, the Bush rates are the new normal. Come on. Returning to 1990s level tax rates, even if across the board, would not be a radical shift to some uncharted, European-style tax system.
That point of view needs to be represented. Not that I'm holding my breath. But at least we can push for some modicum of sanity, as the Economist Mom urges:
I am no longer going to “let the perfect be the enemy of the good.” I am no longer going to try to talk people into seeing that the “right” thing to do with the Bush tax cuts would be to let them all expire. (The even “righter” thing would have been to never have enacted them in the first place.) I am just going to urge the policymakers to avoid doing something with the Bush tax cuts that seems totally contradictory to the fiscal policy goals–both shorter-term and longer-term–that they claim to have. In other words, let’s try to avoid doing something with the Bush tax cuts that seems totally crazy given what we say our fiscal policy goals are for both adequately supporting the (still fragile) short-term economy and better encouraging economic growth by reducing the deficit over the longer term.
Sadly, crazy is how we roll these days.
" I am no longer going to try to talk people into seeing that the “right” thing to do with the Bush tax cuts would be to let them all expire."
This is the right thing to do that neither side has the political will to even discuss.
Posted by: Marty | December 02, 2010 at 01:46 PM
This is the right thing to do that neither side has the political will to even discuss.
Ain't that America.
Posted by: Eric Martin | December 02, 2010 at 01:58 PM
The right thing to do is let them all expire and spend the four trillion dollars they would cost on a five year stimulus plan including the retirement and replacement of all American coal power plants, high speed rail systems and transit, R&D for electric/hybrid vehicles and roll-out consumer subsidies for same, replacement of obsolete government buildings, and an economy-wide energy-efficiency program in which we replace and rebuild every energy-sucking device, building, and vehicle in the country.
I'd also like a pony.
Posted by: Jacob Davies | December 02, 2010 at 02:31 PM
Jeez Jacob, you're gonna get shot talkin that crazy talk
Posted by: Eric Martin | December 02, 2010 at 02:34 PM
I have one little tactics question. Is there some reason that Democrats don't realize they are in the driver seat on this issue? If they do nothing, the tax cuts expire. Can't they use that as a threat to make Republicans do one or two things they want?
Isn't that obvious?
Am I crazier than usual on this?
Posted by: Sebastian | December 02, 2010 at 02:37 PM
Sebastian, I'd say probably because there's a significant number of Democrats, who are conservative enough so that 20-30 years ago they would have been Republicans, who are going to vote for the tax cuts unless the cuts are manipulated so they never come up for a vote.
In short, there are enough Democrats who are going to vote "Aye" that Obama's just got to see what little he can get.
Posted by: DecidedFenceSitter | December 02, 2010 at 02:43 PM
Because the Blue Dogs and half a dozen Senate Democrats are chickens?
Posted by: Nate | December 02, 2010 at 02:55 PM
Can't they use that as a threat to make Republicans do one or two things they want?
i think the GOP trumped that yesterday when they threatened to blow up the Senate if they didn't get everything they wanted.
Posted by: cleek | December 02, 2010 at 03:06 PM
Still, Seb's right in the general sense: the Democratic Party could and "should" seize thhis issue. But the Democratic Party is not exactly a progressive entity, while some members are scared of their own shadows on all matters tax-related.
Posted by: Eric Martin | December 02, 2010 at 03:08 PM
The Democrats can't, they promised the extension to everyone. They have to extend the tax cuts. It is better for them to break the promise on not extending cuts to the wealthiest than to break the promise of extending them to the middle class.
Paint meet corner. Republicans can just wait for the Dems to cave because their BANF is they are reducing the deficit. Win or win.
Posted by: Marty | December 02, 2010 at 05:04 PM
The Democrats can't, they promised the extension to everyone.
They did? When? Where? Who?
Posted by: Eric Martin | December 02, 2010 at 05:17 PM
Sorry Eric, more specific:
The Democrats can't, they promised the extension to everyone under 250k. They have to extend the tax cuts. It is better for them to break the promise on not extending cuts to the wealthiest than to break the promise of extending them to the middle class.
Paint meet corner. Republicans can just wait for the Dems to cave because their BANF is they are reducing the deficit. Win or win.
Posted by: Marty | December 02, 2010 at 05:20 PM
Well, that still leaves room for option c:
Extend for under 250K, and not for over. No promises broken. More popular position in the polls, better policy than extend for all.
All around win.
Posted by: Eric Martin | December 02, 2010 at 05:29 PM
Never mind.
Posted by: Marty | December 02, 2010 at 05:32 PM
and apparently that's what they're trying. but, of course, the Grand Obstructionist Party ain't gonna let it happen.
Posted by: cleek | December 02, 2010 at 05:48 PM
Marty, I get what you're saying, but they need to push the issue. They made a promise, but they can make it so the GOP breaks it.
Put the GOP on the spot, in the corner.
Posted by: Eric Martin | December 02, 2010 at 05:57 PM
No they can't. What are they going to force the Republicans to do? No extension at all is the worst case for Democrats, not too bad for Republicans worried about the deficit. Extending all for some period of time may be the best case (although I think if 250k goes to a million the Republicans might go for a permanent extension at those levels).
BTW, Jacobs spending plan is why no one wants any of them to expire. Because we believe that is exactly where the money would go, same deficit 4 trillion later.
Posted by: Marty | December 02, 2010 at 06:03 PM
No extension at all is the worst case for Democrats, not too bad for Republicans worried about the deficit.
Actually, I think no extension for anyone would hit both parties equally hard. Maybe harder for the R's, actually.
Rank and file folks who voted for R's *did not* do so expecting their taxes to go up.
same deficit 4 trillion later.
Same deficit with all of the infrastructure Jacob describes above looks like a win to me.
A chacun son gout.
Posted by: russell | December 02, 2010 at 06:08 PM
The wonder, for me, is that the Democrats (apparently) don't have a long-standing plan in place to deal with this. Did they not read the sunset provision in the original bill, andnotice when it was scheduled? Did they think, even for an instant, that the Republicans in Congress had any intention of letting the sun actually set on the new tax rates, at least without a major, knock-down-drag-out fight?
Posted by: wj | December 02, 2010 at 06:08 PM
"Actually, I think no extension for anyone would hit both parties equally hard. Maybe harder for the R's, actually."
Anecdotally russell I would say I have been surprised at the number of Rep friends I have that have taken the deficit commissions warnings very seriously. More than one has said they would rather have all of the tax cuts expire if all of the money went to deficit reduction.
These are rank and file Reps who have mixed feelings based on your view of spending and their view of taxes. Many would be ok if the spending cuts came with the revenue increase.
Posted by: Marty | December 02, 2010 at 06:22 PM
It's time for the Democrats to take the lead on tax cuts: propose cutting every tax rate, on every tax bracket, in half, and damn the fiscal consequences.
Crazy, you say? Think about it: what would the GOP response be?
I suppose one response could be a sudden outbreak of bipartisanship. The GOP loves tax cuts; the GOP lives in terror of the (T)axed (E)nough (A)lready party; the GOP's entire economic philosophy is that "jobs" come from tax cuts. And the Dems finally agree! Whoopeee!!
Alternatively, the GOP can go ahead and explain to the Teabaggers and the Villagers and the "independents" that there's no way to "pay for" the Dems' tax cut. I'd pay good money to hear them making that argument.
For that matter, I'd happily listen to the conservative commenters around here make that argument.
--TP
Posted by: Tony P. | December 02, 2010 at 06:23 PM
"permanent extension at those levels"
Permanent?
So if the newly installed Congress of say, 2102, wishes to raise or lower taxes or otherwise adjust Federal revenues, they would be prohibited?
Also, good point, wj.
Posted by: Countme--In | December 02, 2010 at 06:27 PM
Permanent as opposed to a defined length of time until they are supposed to expire again, but then you knew that.
Posted by: Marty | December 02, 2010 at 06:32 PM
Anecdotally russell I would say I have been surprised at the number of Rep friends I have that have taken the deficit commissions warnings very seriously.
That's cool.
Personally, I would be OK with all of the cuts expiring, or only the high bracket cuts expiring.
I would be OK with putting all of the revenue to infrastructure, or all of the revenue to deficit reduction, or any combination of the above.
The only alternative that I see as being really and truly boneheaded is to extend all of the cuts, either permanently or not.
Folks making more than $250K are not going to turn that money into jobs. Not in the numbers we need.
We need the revenue.
Posted by: russell | December 02, 2010 at 07:12 PM
We need the revenue.
There you go again, Russell, talking as if the government is us.
I mean, I like to think so myself, but I wonder whether Marty's "Rep friends" would agree.
--TP
Posted by: Tony P. | December 02, 2010 at 07:28 PM
I entirely agree that the cuts should be allowed to expire (I'll gladly pay the extra $90 a month, and I make around the median income). I'd rather a bunch of the extra revenue went to a massive stimulus, but I'd be fine with it going to reduce the deficit instead.
There are two reason that letting the tax cuts expire would be a political hit for the Dems rather than the Repubs:
1) The Dems currently control the House, The Presidency and the Senate, and few people understand the filibuster, so everything that happens currently happens on the Democrat's watch and is their responsibility in the public imagination.
2a) The reason the tax cuts are designed to expire was so the Repubs could pass them using reconciliation back in 2001, because they didn't have Dem support. So the reason they expire now is because the Dems voted against them then. The Repubs would have supported permanent tax cuts then if the Dems hadn't tried to block them. So the expiration of the tax cuts is something the Dems are responsible for.
2b) This is much like how the fact that congress hasn't passed ENDA is the fault of the senators who oppose ENDA, not the fault of the senators who refuse to support ENDA that doesn't include gender identity. If you reject a bill because it is too weak, generally the supporters of a strong bill won't fault you for it. So if Repubs vote against a tax cut because they are demanding a bigger tax cut, people who support tax cuts will not be angry with the Repubs. Even if this means no tax cut, people (and particularly conservatives) generally support standing up for what you believe in, even if it doesn't succeed, so it is better to demand tax cuts for the rich and not get tax cuts for anyone than it is to give in on tax cuts for the rich.
2c) If the tax cuts expire now, the House Republicans will bring giant tax cuts to a vote next year, allowing the Repubs to vote for giant tax cuts, and forcing Dems to vote against giant tax cuts. This will erase the image of Repubs blocking tax cuts right now.
Posted by: Charles S | December 02, 2010 at 09:34 PM
Obviously, the Democratic members of Congress need a counterattack....is there a reason they cannot shamelessly use reconciliation just like the Goppers did in 2001?
Or maybe they should out tax cut the Goppers: Introduce gigantic tax cuts for everybody, hell, repeal them all. Attach a rider to the bill allowing the government to not have to "fund" its spending with treasuries, thus eliminating the charade of "raising the debt ceiling" all the time. And have the Treasury stop selling treasuries.
Sit back and see what happens.
Right now, they are in a political bind...of their own making.
Posted by: bobbyp | December 02, 2010 at 10:35 PM
Isn't that obvious?
Nope. I mean, they are politicians, just like the republicans. I'm sure if they really were in the driver seat as you imagine they are, they would take the wheel. Of course, you may feel that all those democratic pols are just plain stupider than republicans, but all evidence points to the actual reverse case.
The real problem is this: A lot of those allegedly "socialist" democrats actually believe the fiscal nonsense spouted by the republicans (Evan Bayh, which see), and their political savvy is not enough to overcome their economic ignorance.
So you have a situation where a lot of Democrats share the economic lunacy of the Goppers, but cannot find a way to turn this to their political advantage.
Whudda' surprise.
Posted by: bobbyp | December 02, 2010 at 10:48 PM
Even if it is tongue-in-cheek, proposing hyper tax cuts to expose GOP lunacy would not work because a significant number of GOPsters openly wants the federal income tax and all corporate taxes abolished (the latter currently approaching status of official GOP policy).
What about poisoning the Bush-extension bill instead with DADT repeal, Card check for unionization and some other assorted goodies? ;-)
Posted by: Hartmut | December 03, 2010 at 05:04 AM
We should have been hearing this argument since last January !
That we haven't is another sigh of the Demos incompetence in propaganda.
Posted by: M. Carey | December 03, 2010 at 10:55 AM
What about poisoning the Bush-extension bill instead with DADT repeal, Card check for unionization and some other assorted goodies? ;-)
Fine by me. Now find a majority of dems who would take such a stand, esp. wrt card check--which, if you have not noticed, has apparently sunk to the bottom of the priorities list.
;-)(ha, ha?)
Posted by: bobbyp | December 03, 2010 at 10:19 PM
From Steve Benen, regarding the expiration date on the Bush budget demolishing tax cuts.
Like the Taliban and al Qaeda, Republicans planted gigantic IEDs all over the place.
Democrats and President Obama, the idiots, need a surge, which should include tactical nukes.
Assange is more American than Republican politicians. The wrong guy is about to be arrested.
"But the policy apparently isn't going anywhere. The Bush White House included an expiration date on its own plan, which helped obscure the policy's cost, but under the assumption that by 2010, policymakers would just keep their policy going. Howard Kurtz noted yesterday that Bushies feel as if they set a "trap" that worked.
"We knew that, politically, once you get it into law, it becomes almost impossible to remove it," says Dan Bartlett, Bush's former communications director. "That's not a bad legacy. The fact that we were able to lay the trap does feel pretty good, to tell you the truth."
This attitude is apparently not uncommon. Former White House Chief of Staff Andy Card made comments similar to Bartlett's, and Karl Rove boasted that "we've known this was going to be happening for a decade."
Kurtz sees this as a well-executed plan. The "sunset" provision that would cause the rates to expire served as "a political time bomb: At some point in the way distant future, Democrats could be accused of raising taxes if they tried to undo the Bush breaks and return to Clinton-era levels of taxation."
Posted by: Countme--In | December 04, 2010 at 10:58 AM