Dealing with the Sunset of the Bush Tax Cuts (Part II in a series)
by Linda Beale
crossposted with Ataxingmatter
Dealing with the Sunset of the Bush Tax Cuts (Part II in a series)
The Congressional Budget Office has published a report with its views on the economic impact of enacting legislation to extent some of the Bush tax cuts. The full report and summary are available here.
The report provides 10-year projections–all with the caveat that forecasting economics is “subject to considerable uncertainty.” It projects a relatively slow recovery from the recession, as is typical with financial crises, with unemployment staying relatively high until about 2014. The slow growth means lower revenues, though the CBO expects revenues to begin to recover in 2010–with a total of $2.1 trillion or 14.6% of GDP. But spending will be about $3.5 trillion (24% of GDP). That means a projected deficit for 2010 of $1.3 trillion, second only to 2009’s deficit as a percentage of GDP (9.1% compared to 2009’s 9.9%). That’s using as a benchmark the tax laws as written–i.e., no additional “patch” for the alternative minimum tax (AMT) and no changes to the Bush tax cut sunset provisions, so that the Bush cuts expire as slated at the end of 2010. If those policies were not continued (i.e., if a further tax cut similar to the Bush cuts were enactetd and an AMT patch were put in place, and the discretionary budget remained about the same as in past years as a proportion of overall spending, the deficit in 2020 would be about 8% of GDP and the public debt about 100% of GDP.
That’s a significant cost to enact tax cuts. Should we do so? Wouldn’t the economy get more of a boost if we allowed the cuts to expire as slated and used the additional revenues in programs that are likely to build jobs?
There is certainly an argument for increasing economic stimulus now, if possible. That might spur some further job creation and permit more of those on the brink of economic disaster to retain their homes. While tax cuts are likely not the best means of providing a stimulus, it might be more possible to attain a Congressional vote compared to direct government programs, such as infrastructure spending.
But the utility of tax cuts as a stimulus likely wanes fairly rapidly as income levels increase. A person with 30 thousand of income will find ready spending needs for a few hundred dollars of tax savings. A person with 30 million of income would not need the extra tax savings and might simply purchase more financial assets with any extra cash. The purchase might add liquidity to the US markets–or it might be equities in China or India and have no useful impact in the US. Purchases in the secondary market, at any rate, will not put new funding in the hands of corporate businesses. So the argument in favor of a new tax cut does not well support an across-the-board cut. Cut taxes for those at the lower income levels, but retain rates for those at the top. Obama’s line-drawing is nothing magical, but increasing taxes for individuals making more than $200,000 shouldn’t be a big problem.
you may have these numbers at your fingertips. i have been too busy to look them up, but I think that the Bush tax cuts… rescinded… are exactly the amount it would take to pay off the Social Security Trust Fund as it comes due. about 3% increase in the tax rate on incomes over 100k. There are lots of reasons why this would be “just” as well as “fiscally responsible.”
Maybe you can confirm the numbers, or point me to an easy source so I can confirm them myself.
Meanwhile i, a poor person, am profoundly suspicious of arguments that would increase taxes on “those making over 200k.” I simply don’t like “tax the other guy” arguments or attitudes. We are all in this together. The rich can afford to pay more, sure, and should, but letting ourselves conveniently off the hook while taking from the rich, strikes me as exactly the same kind of thinking as when the rich tell us that taxing them will destroy the economy.
Colberly, I know your position on “tax the other guy”, but at what point of the reduction in tax rates to the rich do you want to start this argument? The 90% rate or the 35% rate?
The progressivity of taxation is majorly out of balance historically. Protesting the tax increase above $200K based on it being “tax the other guy” is not addressing the historical imbalance in either power, or benefits received.
My issue related to Linda’s post and I don’t mean this as picking on her, but… I think it is time for those in finance and econ who are arguing for changing tracks to stop hedging their talking with statements like: “While tax cuts are likely not the best”, “likely wanes”, “might”, etc. I know in science everything is in play. But in daily life, for society people generally are not living by hedgeing everything they decide.
We are not going to change the school of economics by always hedging the dicussion.
As to the tax cut, governement stimulus it’s all means to get money into the hands of the many. We’re talking velocity here. Only, the solutions we’re proposing are all top down perspective that argued it was increasing the bottom up flow. It is a delussional proposition and perspective. The problem is a lack of real bottom up activity. That is, 1.4 trillion dollars per year of income no longer in the hands of the many but in the hands of those earning $30 million per year. So what, do you really think that they “might” only purchase more financial assets with that?
got to be a little careful here. i am not saying “don’t tax the rich.” I am saying to come out and argue for tax increases on the rich that just conveniently miss raising taxes on yourself. If raising taxes on the rich by 3% will… as i think they will… solve a serious problem (paying back the money they borrowed in the form of tax cuts from Social Security), then it is better politically as well as for your own mental hygiene, to ask for those tax increases in the context of a general, progressive to be sure, increase in taxes that includes, say, a 1% increase on those at the median income, as well as a 3% increase on those above 106,800 (just a number that occurs to me), and a tenth of a percent increase in the payroll tax, the “only tax poor people pay” that will, just magically, if repeated from time to time, pay for the retirement needs of those same poor people.
that said, in general i think you are right that the rich use their excess money these days not in productive investments, but in destructive gambling schemes, and i am completely unimpressed by their argument that if you raise their taxes, they will sulk in their tents and the economy will collapse.
and i agree that the “economists” are so brainwashed by their own magical theories that they can’t think straight about this. they can’t even imagine that a tax increase could help, not hurt, the economy.
to answer specifically your first question… i do’nt want to see ANY reduction in tax rates at this time. i want to see a phased i 3% increase in the marginal rate over 100k. a 1% general increase on taxes above the poverty line. and a tenth of a percent increase in the payroll tax this year, and again in about 2026 and each year after that for about ten years…. up to an increase in the payroll tax of a total of one percent.
after that, depending on what happens, and what congress does with its borrowing and spending, it should be possible to reduce the tax rates on the high earners, and may or may not be necessary to increase the payroll tax another tenth of a percent from time to time, up to about 2% total, that should stabilize the program for as far as the eye can see. at a price that is both fair and easily affordable by the people who will get the benefits themselves.
if we had a war, and taxes of 90% were needed to pay for that war, we should raise the tax rate to 90% if we could, rather than pass on the cost to the next generation… who might have their own “war” to pay for. clearly i would be willing to modify this on the grounds that the next generation is better off if we win this war, and if we don’t impoverish ourselves doing so… but that is a slippery slope and should be recognized as such.
“The rich can afford to pay more, sure, and should, but letting ourselves conveniently off the hook while taking from the rich, strikes me as exactly the same kind of thinking as when the rich tell us that taxing them will destroy the economy.” Coberl
I think that you’re exaggerating the point being made, that the rich have got to pay their fair share and that that fair share should be based upon the economic value realized by the rich in our country. The argument generally given by the rich and those that represent the interests of the rich is that the economy benefits from the activities of the wealthiest people. They’ve got it ass backwards. The economy is a reflection of the activities of all its citizens. The rich simply beneift more from that activity. They are a proportionately greater drain on the assets of the economy and hence the rest of the participants in that economy take less value from said economy. The wealthiest citizens in any economy owe more back to the government that regulates the eocnomy not simply because they can better afford to pay more, but becasue they take more value out of the economy. The government that regulates the economy does so in greater service to those very individuals who get so much more value out of the economy.
To those who so vociferously complain about paying their taxes I can only say stop complaining and pay those taxes. It’s patriotic to support the govcernment that structures and regulates an economy that so generously beneifts all of you. If that government at the same time squanders so much of your tax dollars on wasteful wars of adventure then tell it to stop doing that. If you’re not complaining about the greatest wastes of our country’s assets then you’ve got your arguments ass backwards. Who do you expect to pay the costs of war? Who do you exxpect to pay the cost of corporate welfare? You can’t have it both ways.
Teddy Roosevelt on Inheritance Taxes:
“A heavy progressive tax upon a very large fortune is in no way such a tax upon thrift or industry as a like would be on a small fortune. No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax; and as an incident to its function of revenue raising, such a tax would help to preserve a measurable equality of opportunity for the people of the generations growing to manhood.
“We have not the slightest sympathy with that socialistic idea which would try to put laziness, thriftlessness and inefficiency on a par with industry, thrift and efficiency; which would strive to break up not merely private property, but what is far more important, the home, the chief prop upon which our whole civilization stands. Such a theory, if ever adopted, would mean the ruin of the entire country–a ruin which would bear heaviest upon the weakest, upon those least able to shift for themselves.
Read more: http://blog.beliefnet.com/stevenwaldman/2008/10/teddy-roosevelt-socialist-advo.html#ixzz0xSa79bOj
Roosevelt later also endorsed a progressive income tax:
“At many stages in the advance of humanity, this conflict between the men who possess more than they have earned and the men who have earned more than they possess is the central condition of progress. In our day it appears as the struggle of freemen to gain and hold the right of self-government as against the special interests, who twist the methods of free government into machinery for defeating the popular will. At every stage, and under all circumstances, the essence of the struggle is to equalize opportunity, destroy privilege, and give to the life and citizenship of every individual the highest possible value both to himself and to the commonwealth……
“No man should receive a dollar unless that dollar has been fairly earned. Every dollar received should represent a dollar?s worth of service rendered?not gambling in stocks, but service rendered. The really big fortune, the swollen fortune, by the mere fact of its size, acquires qualities which differentiate it in kind as well as in degree from what is possessed by men of relatively small means. Therefore, I believe in a graduated income tax on big fortunes, and in another tax which is far more easily collected and far more effective, a graduated inheritance tax on big fortunes, properly safeguarded against evasion, and increasing rapidly in amount with the size of the estate.”
“The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living, and the get-rich-quick theory of life.”
Read more: http://blog.beliefnet.com/stevenwaldman/2008/10/teddy-roosevelt-socialist-advo.html#ixzz0xSamGSTB
If raising taxes on the rich by 3% will solve a serious problem (paying back the money they borrowed in the form of the tax cuts from Social Security).
What did the Bush tax cuts have to do with Social Security?
And, as you know Social Security itself benefits the low income worker on a greater percentage than the high income worker (which I think is proper).
In addition, it was Bush’s administration that helped pass Medicare Part D, probably the most expensive entitlement, per dollar, we have!
I agree with you. but i still think it’s not clever to just say “tax the other guy.”
here we go again.
what the Bush tax cuts did to affect Social Security was to raise the deficit to such a point that paying back the money the government borrowed from Social Security will present difficulties…. not real difficulties but political difficulties.
SS benefits low income workers as it is supposed to do. that’s why low income workers pay for it. as they should.
medicare part D, in my opinion, was designed in a way intended to break Medicare.
probably my sentence in what don quoted from me is hard to read: the 3% tax increase on incomes over 100k will pay back the money the people paying that tax effectively borrowed when they got the Bush tax cuts. much of that money was borrowed from Social Security. much of the tax raise i am proposing would go to pay off the Trust Fund… that is pay back the money borrowed from Social Security.
hope that makes more sense.
I agree with everrything youi said. There are many Treasury and other papers that confirm your views as well (except for the military portion).
I can provide the links, if desired.
Everything in moderation is one generalization that seems to be true, with no exceptions (except to not be moderate in moderation, perhaps)?
The reason there are no recent US papers on harm to the economy from militarism is the congress is on the take. There is some work on waste and inepttiude by GAO on the weapons systems’ development and acquisition. It is good stuff and hits the mark, but is not widely reported.
Which would be better: $25B for the first boat of a new class of aircraft carrier or $25B for transportation and energy infrastructure?
What about spending for killing and breaking things using some 19th century war techniques is as good as building productive resources in the heartland?
Unless you want US aircraft carriers to keep your factories in China open, then forget the heartland.
Foreign entanglements and such………………