Tax cuts and deficit commissions

by Linda Beale

Tax cuts and deficit commissions
crossposted with Ataxingmatter

The game continues, as Republicans hold out for tax cuts for the wealthy (who are garnering increasing amounts of the total income) and various “deficit commissions” put out austerity plans that all call for cutting Social Security benefits and Medicare benefits.

Alice Rivlin, who spoke here at my campus some time ago, seemed clearly to have cutting Social Security and Medicare in mind even then.  See Alice Rivlin on Financial Reform and Deficits, ataxingmatter.  She is now “trying to stir a debate” about a national sales tax, according to Bloomberg.  Przybyla, Rivlin Proposes 6.5% National Sales Tax as Part of Deficit-Reduction Plan, Nov. 17, 2010.  See also Jackie Calmes, New Deficit Reduction Plan from Bipartisan Group, NY Times, Nov. 17, 2010.

Now Rivlin is one of those Clintonites who is a right-center Democrat and, like so many of the Clinton and Obama advisers, close to the banking elite as a former Federal Reserve vice chairperson.  She claims her plan would be good for the country, but it isn’t so clear to me.  Growth for growth’s sake, we learn, doesn’t work very well.  Tax cuts for businesses don’t necessarily translate into US economic growth–they may just lead to higher executive compensation and bigger buybacks of shares for shareholders.  Tax cuts for the wealthy don’t lead to more jobs:  the claim that “small businesses” are helped when their owners aren’t forced to pay the piddling (for them) additional taxes that would be due if the Bush cuts for the wealthiest were not renewed is a farce–there are very few businesses that even fall into the wealthy owner category, and those businesses aren’t likely to invest a penny more in jobs just because their owners get even wealthier with bigger tax cuts.

The Rivlin plan is a combination of significant tax cuts (lowering corporate rates, even though corporations’ effective tax rates are already at the international norm and perhaps lower if all is taken into account), freezing domestic spending (even though the unemployed, underemployed and vulnerable elderly and poor will need more support, not less, and even though infrastructure projects require additional funding and everything from education to food and drug inspection to disease control are already short-staffed); limit federal spending on health care for the elderly while raising Medicare premiums, eliminate most deductions and credits, cut the Social Security benefits (changing the cost-of-living adjustments and reducing growth in benefits for the top 25% of beneficiaries), give a one-year Social Security payroll tax holiday (aimed, I wager, to make Social Security look like it is insolvent and therefore in need of cuts and privatization), and add a national sales tax of 6.5% (terribly regressive).

The claim is that this combination of tax and spending cuts with the sales tax will increase economic growth and therefore create jobs.  I’m not convinced.

Even Bloomberg’s reporter recognizes that the real purpose of these sorts of trial balloons is to “paint[] an even starker picture of the measures needed to tame the debt” and thereby “sell unpopular remedies”.    Aha.  The real purpose for Rivlin’s new visibility is as the “bad cop” of the bad cop-good cop act that has as its goal to sell Americans on the need to end Social Security as we know it, to cut back on our societal commitment to provide decent medical care to the aged, and to carry out even more tax cuts for the benefit of our growing oligarchic class.  Yet the Social Security funds–paid in by workers and their employers–have been used to reduce the federal operating deficit for years, a process that was carred to extremes under Bush to fund the Bush tax cuts and the Iraq and Afghanistan wars.

Federal deficit and Soc Sec Surpluses.OMB. 2010-11-09-Screenshot20101109at5_12_30PM
Source: OMB via Huffington Post

Why doesn’t Rivlin just support changing the current funding mechanism for Social Security so that it will be a tax on 100% of wages and on capital gains, as is Medicare?  Why not support nonrenewal of the tax cuts for the wealthiest Americans?  Why not support continued tightening of the corporate tax code, including restrictions on tax-free reorganizations that permit US multinationals to grow bigger and richer and more powerful (and too big to fail)?  Why not recognize that the deficit isn’t nearly as bad a problem as the increase in inequality in our country and the potential for an oligarchic takeover of our society?

Aren’t jobs the real need, whether or not we do something now or later to limit the deficit?  Shouldn’t we spend money to create jobs, if we have to?  Infrastructure and education are two public goods that the government can fund while at the same time creating jobs.  We can worry about the deficit later.  Or we can just decide not to renew any of the Bush tax cuts.  Nobody was clamoring for tax cuts when the Republicans pushed the first through in 2001, so let them go and we’ll all be back more or less where we were then.  We’ll manage.   If you don’t think so, look at this Tax Policy Center (Urban Institute/Brookings Institution) analysis of the impact of the expiration of the 2001-2003 Tax Cuts.  Extending the cuts would result in an average effective tax rate reduction for all taxpayers of 2.7 percentage points (“current policy”) compared with letting them expire (“current law”).  Renewing the cuts gives the biggest cuts, both in dollar and percentage points, to the highest income taxpayers.

Tax Policy Center Bush Cuts by Quintile

Tax policy center bush cuts by quintile top 20

If raising taxes on the rich is not possible politically now and raising taxes on the middle class possibly hard on the recovery, then at least do nothing other than extend them for a year or two while the country gets back on its feet.  And then let them go, along with a repeal of the preferential rate for capital gains and the extension of Social Security to full income.  Problem solved, and people put back to work.

Meanwhile, the Republicans are intent on letting the deficit go wherever so long as they can get the tax cuts they want most–for the wealthiest taxpayers amongst us. See, e.g., MichaelTomasky’s Blog, Tax Battle Lines Drawn (Nov. 17, 2010).   Camp, Republican from Michigan, says the GOP would be “foolish” to go along with any idea to renew tax cuts for 80% of Americans without giving a tax break to the wealthy at the same time.  Everybody knows that the GOP wants to make those Bush tax cuts that were designed to expire into permanent reductions in tax revenues.  See e.g. (but note my “caution” below),  Will Obama Extend the Bush Tax Cuts?, Human Events (Nov. 16, 2010) (indicating that “Republicans said they are still determined to make all of the Bush tax cuts permanent, rejecting White House overtures to decouple the top rates for a shorter extension”).  And the biggest beneficiaries are the GOP’s primary backers–the wealthy and big business–not the jobless.  See, e.g., “GOP to Jobless: Drop Dead“, Washington Post (Nov. 16, 2010).

(CAUTION–the “human events” blog just cited is a right-wing propaganda sheet scattered with contextually faulty or otherwise typically misleading statements , such as claiming that the scheduled expiration of the Bush cuts “could plunge the economy into another recession” or quoting Michael Steele in saying that the Republicans are fighting to “permanently stop the Democrats’ tax hikes” –even though, of course, the scheduled expiration of the Bush tax cuts was designed by the Republicans as a way to fool the people about the actual multi-trillion-dollar cost and if the expiration of the Bush cuts according to schedule is a tax hike (which I’d dispute), it is a Republican one and not a Democratic one).

Polls fairly consistently show that Americans think at least the cuts for the wealthy should expire and possibly the cuts for all of us.   A recent poll shows that about a third of Americans think we shouldn’t renew any of the tax cuts, and another third think that at least we shouldn’t renew the tax cuts on the wealthy–that means that there’s a 2-1 vote against renewing the tax cuts for the wealthy.   See Steinhauser, Do Americans Want to Extend Tax Cuts for the Wealthy?, CNN Politics, Sept. 14, 2010.  As noted in that article, another poll  (Gallup/USA Today)showed 44% want to roll back the cuts for wealthy Americans and 15% want the cuts to expire for everybody (including wealthy Americans), so also a 2-1 vote against renewing tax cuts for the wealthy.

And rightly so.  Because there is no way that renewing the tax cuts will be a significant stimulus to the economy nor any way that failure to renew them will hurt “small businesses”.  See, e.g., Fisher, The Economics of Extending Bush’s Tax Cuts.  On the other hand, not renewing the cuts for the wealthy would do wonders for the economy–it would give us about $800 billion over ten years, “enough to pay for all veterans’ hospitals, doctors, and the rest of the Veterans Affairs health system, plus the United States Coast Guard, plus the Food and Drug Administration, plus the operation and maintenance of every single national park for the entire 10-year period–with more than $100 billion left over.” Id (quoting Michael linden at the Center for American Progress).