More on the White House "deal" on tax cuts
by Linda Beale
More on the White House “deal” on tax cuts
crossposted with Ataxingmatter
Dan Shaviro, a colleague at NYU, ends up being hopeful about the Obama-GOP deal. See “The deal on extending the tax cuts“, Start Making Sense, Dec. 6, 2010 and “The tax cut deal: too soon to tell who really won?“, Dec. 7, 2010. I think that is because Dan tends to credit Economics 101 with considerably more wisdom than I do (and place “efficiency”, as defined by the free marketers, higher on the wish list for tax policy than I), so he thinks Social Security isn’t on a sound footing and that benefits will need to be cut; thinks expensing for corporations is a reasonable way to spur growth; thinks there is some possibility that the 2012 replay of “Bush tax cuts, take 2” might play out in favor of Obama if he is “very clear that he planned to veto any extensions and let all the tax cuts expire UNLESS the Republicans made the deal he requires”. I’ll intersperse my comments with Dan’s below.
1) extending all the expiring individual rate cuts for 2 years:
Dan says “we knew this was going to happen” so the only problem is that it comes up again in 2012 when Obama will “might face extra credibility problems”.
I think we only knew this was going to happen because Obama didn’t fight on this at all. Obama signalled at the beginning that he would cave, and he did not take to the bully pulpit at all. He conferenced with Republicans and cut out the Democratic leadership in reaching his “deal”–which is a Republican policy in everything but name.
2) extending unemployment insurance through 2011:
Dan says it is an important stimulus and “wasn’t going to happen otherwise.”
I agree on the stimulus. But the Dems should have brought unemployment extension up on a daily basis and forced the Republicans to vote against it. So the “wasn’t going to happen otherwise” is part of the give-up before you start negotiating that got us into this mess.
3) reduce the Social Security payroll tax by 2% for one year:
Dan says “good stimulus” though “targeting could have been a lot better” and admits my point (made when payroll holidays were first brought up) that the payroll holiday feeds into the drive to decimate Social Security by hitting the Trust Fund. But Dan thinks the “concern” about long-term fiscal problems is real, and so is comfortable with addressing it “sooner” anyway.
I disagree. The concern about Social Security is being hyped in order to destroy Social Security as we know it. It is in line with the enmity towards unions, towards single payer health care, towards re-regulation of the banks, towards breaking apart big banks, and towards any other policy that would restore a vibrant middle class. By allowing a payroll holiday for everyone, the majority of the benefit goes to people who don’t really need it, and too little benefit goes to those who do. Targeting is better than a tax cut purely for the rich, but that isn’t saying much. Doing some stimulus in a means that pushes the GOP agenda to eviscerate Social Security forward is like tying one hand behind your back–a rather unwise way to enter a long-term battle for the economic future. Will we have the brutal mix of casino and winner-take-all capitalism that has driven most of this country’s policies from Reagan on or will we have a tempered capitalism that ensures a broad-based growth and creates an economic system that works for everyone? The Republican’s aims to let states go into bankruptcy and use that mechanism to destroy public employee unions says they are in this battle to destroy the New Deal if they can. We need to fight just as hard on the side of the middle class.
4) Estate tax cut by increasing the exemption from the 2001 level to $5 million (basically 500% of the 2001 amount) and lowering the top rate to a mere 35%.
Dan thinks this might actually be preferable “in efficiency terms” to the current law, which would have restored 2001 rates in 2011, if done in a “distribution and revenue neutral framework”. And even though this isn’t that, he doesn’t think a more progressive estate tax “is long-term feasible anyway.” So this is not “a terrible outcome in a realistic overall sense.”
Here we part ways 100%. There is no such thing as a distribution and revenue neutral framework–that is a fiction of economics 101 that permits what we have seen, which is four decades of redistribution upwards. Further, distribution neutral is not desirable in an economy where the winners already take all–if we don’t reverse the direction of distribution in this economy, we will end up in oligarchy (if we aren’t there already). In that context, this was the single most viable opportunity for reinstating an appropriate estate tax, either by letting the Republican-passed law take hold (return to 2001 exemption and rates) or by passing a slightly modified but ideally more progressive version (higher exemption but progressively higher rates beginning at 45%). This is indeed “a terrible outcome in a realistic overall sense.”
5) extensions of the EITC, tuition tax credit and expensing (as well as the R&D credit, not mentioned by Dan
Dan says that the EITC and tuition tax credit are okay because they may add progressivity and the expensing provision is okay as a short-term stimulus.
The EITC is okay. Tuition tax credits just subsidize the things colleges spend money on that they don’t want students to have to feel they are paying for–like too high administrative salaries (across-the board, at private and public universities). We ought to fund higher education at public institutions, but with conditions, such as limiting the percentage of total budget spent on administration or on the revenue sports, etc. As for expensing, it is unclear how it can be stimulative in this context, when the reason companies aren’t expanding is because they don’t see a demand for the business. Most companies have the cash on hand and can borrow at a funding cost that is extraordinarily low. That isn’t what is holding back investment. Odds are, the savings from expensing will just go to another round of higher manager salaries and big payouts to shareholders (who will also continue to benefit from an extraordinarily low dividend and capital gains rate under the deal).
Dan seems to think that Obama will be able to argue credibly that “this time I mean it” when it comes to the 2012 election and the Bush tax cuts are ready to expire once again. Fat chance. There’s nothing so far to convince anyone–Obama caved before fighting on the public option and on taxes for the rich and on the estate tax and on capital gains and on carried interest and on and on. Obama in fact is now pushing his Democratic colleagues to support an agenda that will easily get 100% Republican support and maybe enough reluctant Democratic support to pass, rather than rallying them to fight so that he can veto, if need be, wrong-headed legislation. So he has proven that the Dems lose in the minority and they don’t bother to fight when they are in the majority. No way his base will trust him to do it better next time around.
Meanwhile, the GOP is already blaring that there is no way that they’ll give an inch on anything. They won’t support the Build America Bond program, because they want states to declare bankruptcy as a means to destroy public employee unions. And they don’t seem to care that they are destroying the American social contract between the wealthy and the rest of us at the same time–we are what we are because we have recognized the importance of a strong middle class that acts as a check on oligarchy. Yet the Republican party–and now too many Dems–are willing to throw it all away just to get elected one more time (maybe) in the future.
In my view, the American people are the losers here. The AMT patch primarily helps those with high incomes. Most of those who pay the AMT because of bracket creep are in the 250-500,000 income range–certainly not middle class. Only a few are in the 75-100,000 range. The extension of extremely favorable taxation of secondary market capital gains and dividend income is of benefit to the wealthy who own most of the financial assets. The extension of the tax rate cuts even below 250,000 already aids the wealthy–adding the tax rate cut at the top means that most of the rate cut goes to the very well off. This is a very good deal with corporate managers and owners, and rotten for ordinary Americans. It’s the upside down world of George W. “the have-mores are my base” Bush.
linda
yep.
Obama is a Republican, isn’t he?
I heard a little of Randi Rhodes’s show while driving home this evening. She disagrees with angry liberals. I didn’t catch the beginning, so I don’t know what her reasoning is, but I did hear her say there was something in this compromise that will boost the economy and add jobs.
I don’t know what that is. The 2% payroll tax cut is the only thing I can think of that comes close. But it seems to me to not be very close. For the median family grossing $50,000 per year, that’s $1000 – about $80 a month, or $20 a week. That’s one trip to McDonald’s, if you don’t have more than 2 kids. What the hell is that going to accomplish when the output gap is $1.2 trillion?
I’d like to be optimistic here, but I don’t see any reason to. Have I missed something important?
JzB
JzB said: “Have I missed something important? ” Couple things actually. Yes the 2% will have some minor to modest impact, but the other item is the business write off rule. Remember there is $3T sitting in the side lines in those business accounts.
Couple those items with some of the pressure and uncertainty has been removed from businesses so that they can begin investing those trillions.
So, if I am correct, this messed up political bill might actually be the economic tipping point. Up or down? It will be interesting to watch.
CoRev –
I just heard a spirited debate about the business write off on Lawrence O’Donnell’s show. It’s an opportunity to basically expense capital investment in the first (or second – I’m not clear on the details) year, rather than over whatever the normal depreciation schedule would be. Essentially, this is another tax break for corporations.
I have really big doubts about this spurring any serious spending. Tax write offs don’t have a lot of value as an incentive unless tax rates are high.
Well, I hope it works. I’d be delighted to be wrong on this. I don’t think we’re at a tipping point, though. I think we are just continuing a slide into deflation, and this is more of the same kind of policy that has been ineffective for 30 years.
Good luck to us all,
JzB
I dislike the bill, for at least a couple of the reasons you do – would prefer simply a negative income tax of say $250 per head, both to protect the SS trust sanctity, and to target it better. And the estate tax being included in an emergency stimulus bill in any way is just a matter of politics, and I’d certainly expect one being passed by an outgoing democratic congress to do better than this.
There has to be, though, an analysis of what happens after December 31st politically. WOuld the next congress pass a more conservative bill and send it to the White House? Will they pass the same bill perhaps stripping out a couple bones thrown toward the House? Democrats in the Senate could certainly filibuster, but filibuster a bill which the Democratic President has asserted he wants?
The real issue here is that Obama, rather than passing a real tax bill two years ago, settled for a very minimal one pushing the problem out past his honeymoon period. Bush put the tax bill first in his agenda. We did get Obamacare, but gosh, shouldn’t Democrats have been able to come up with a better plan after thinking about health care for 50 years?
Sheesh, on health care, I just looked back wistfully at my health care bills from the pre-Clinton period, when there was a real groundswell for action on containing rising costs and getting the same bang for the buck as other nations. Bills now are 4x as high, but with no focused indignation to bring the ever rising costs under control.
Linda Beale really doesn’t get it. And she is not alone.
Beale skips right over the most important issue related to the tax package bill, if one is passed. Apparently, she has no clue.
Larry Summers gets it:
“If they don’t pass this bill in the next couple of weeks,” said White House economic adviser Larry Summers, “it would materially increase the risk the economy would stall out and we would have a double dip.”
Did Summers really mean what he just said, asked reporters?
“It would significantly increase the risk,” Summers repeated.
No one here has bothered to say a word about that issue. Not a single word.
Linda Beale really doesn’t get it. And she is not alone.
Beale skips right over the most important issue related to the tax package bill, if one is passed. Apparently, she has no clue in spite of the latest economic news.
Larry Summers gets it:
“If they don’t pass this bill in the next couple of weeks,” said White House economic adviser Larry Summers, “it would materially increase the risk the economy would stall out and we would have a double dip.”
Did Summers really mean what he just said, asked reporters?
“It would significantly increase the risk,” Summers repeated.
No one on this thread has bothered to say a word about that issue. Not a single word.
I am in favor of eliminating all of the Bush II era tax cuts, but after reviewing the economic data this week for the U.S. and Europe I know that Larry Summers is correct. I can wait two years to voice my opposition to extending the tax cuts beyond 2012. The U.S. can’t afford a double dip recession. Nor can Europe.
Linda Beale really doesn’t get it. And she is not alone.
Beale skips right over the most important issue related to the tax package bill, if one is passed. Apparently, she has no clue in spite of the latest economic news.
Larry Summers gets it:
“If they don’t pass this bill in the next couple of weeks,” said White House economic adviser Larry Summers, “it would materially increase the risk the economy would stall out and we would have a double dip.”
Did Summers really mean what he just said, asked reporters?
“It would significantly increase the risk,” Summers repeated.
No one on this thread has bothered to say a word about that issue. Not a single word.
I am in favor of eliminating all of the Bush II era tax cuts, but after reviewing the economic data this week for the U.S. and Europe I know that Larry Summers is correct. I can wait two years to voice my opposition to extending the tax cuts beyond 2012. The U.S. can’t afford a double dip recession. Nor can Europe.
Linda Beale really doesn’t get it. And she is not alone.
Beale skips right over the most important issue related to the tax package bill, if one is passed. Apparently, she has no clue in spite of the latest economic news.
Larry Summers gets it:
“If they don’t pass this bill in the next couple of weeks,” said White House economic adviser Larry Summers, “it would materially increase the risk the economy would stall out and we would have a double dip.”
Did Summers really mean what he just said, asked reporters?
“It would significantly increase the risk,” Summers repeated.
No one on this thread has bothered to say a word about that issue. Not a single word.
I am in favor of eliminating all of the Bush II era tax cuts, but after reviewing the economic data this week for the U.S. and Europe I know that Larry Summers is correct. I can wait two years to voice my opposition to extending the tax cuts beyond 2012. The U.S. can’t afford a double dip recession. Nor can Europe.
I think a fight now on this — with uncertainty and collateral damage to the most vulnerable — is a real mixed bag.
Democrats might retain what honor they have, but if it results in setting us back then it would be a hollow victory, assuming the Republicans would cave and not the Dems.
The next election is a long time away. The people made their choice last month and we’ve got let their government give what they wanted to them, good and hard.
If they still want more Republicanism in 2012, so be it. It’s their funeral. Me, I’ll be back in Japan by then, where I first skedaddled back in ’92 when things first started going to hell.
Who is Larry Summers and why not just give the link and let us find the errant sentence?
Summers is selling this rotten piece of republican kissing legislation, Summers the guy who hired the crooks to make huge money aiding Russia’s evolution to capitalism, see the history from David Warsh.
Why do you think that Larry Summers thinks this bill is critical to stopping the impending double dip?
Is significant increase in risk real? Is it from a 99% chance to 99.2% chance? Or what do you think this bill does?
What do you describe as significant,?
I think the risk of a double dip is independenet of this flawed and regpessive bill.
This bill at best talks tens of billions of stimulus.
And the 2% “reduction” of payroll tax likely will go to consumer deleveraging and if the citizen is rational into an IRA/401k.
The risks of the double dip were far more entrenched when the republicans gutted the first stimulus.
And pillaging the country for wars is noihelp.
MG –
Please, no adressing a poster or commenter in 3rd person. Mind your manners.
Mext, read what CoRev and I had to say. We are discussing the risk -or lack thereof – to the economy.
Summers is being a salesman. Accelerated deprecation is basically a cash-flow/time value of money ploy. But money has very little time value at the 0-interst bound, and businesses are still not going to invest – no matter what the tax situation – unless they see a sales return for the investment.
The alledged stimulus effect looks like a lot of smoke and mirrors to me.
Cheers (or something)!
JzB
Troy –
Yeah – the timing is a big problem. You’re making a good argument for the Dems to have taken action on this two years ago.
Do you think forcing the Rethugs to repeatedly and visibly filibuster highly popular initiatives all through ’09 and ’10, and then using the presidential bully pulpit to call them out on the unpopular programs they support might have moved the knob on this last election?
Focusing on the events of this week is really missing the point of the B. Hoover Obama presidency. It’s pretty damned telling that he fawns over the Rethugs, and is pissed at people like me.
http://economistsview.typepad.com/economistsview/2010/12/the-sorrow-and-the-self-pity.html
Blech!
JzB
JzB, think of the write off rules in this light. Those firms which have cash and/or excellent credit will look at any deferred and planned investment as being reduced in price by their tax rate.
That will front load the invesments to 2011. That can be a huge stimulus for next year. My concern is that it is too short. Adding another couple of years or even a gradual phase out would extend the build out planning, extending the stimulus impacts. This is one category of dollar multipliers that I believe proves out in reality.
Well, it’s there for deferred, planned, or new investrment. OK.
But why would anyone invest if there is not a growing market for their product?
Like I said, I hope you’re the one who’s right here. Let’s follow employment growth, corporate investment and GDP over the next 12 months.
cheers!
JzB
You know the bottom line for me is that it is just plain bad economics. I could care less if the GOP won if it meant that the economy would improve, but not only is the bill unlikely to have any more effect on the economy then the rules have had for the last decade, but it undermines our future by increasing the deficits and undermining social security. We have had Dumbya’s tax rates for 10 frickin years and we are nowhere in those 10 years. We have had 99 weeks of unemployment insurance the last 2 years and unemployment continues to inch up despite substantial deleveraging and an adequate but neverthless large stimulus package. As to accelerated depreciation the points have been made–why invest if there is no demand? The final piece the payroll tax holiday will do absolutely nothing to spur the economy.If you wanted to do something then give the employer a break on the first 20 K of wages paid and pay for it by removing the cap on employer pay in. While at the higher end, the employer’s share would likely go to the wage earner, that is not true at the lower end-minimum wage type jobs , particularly with 10% unemployment. A potential employer who is on the fence about adding a worker could be tipped into hiring that worker if the employer could hire without a FICA contribution. Putting people to work even at $20K a year is going to stimulate the economy a lot more than giving existing workers a few $100 extra take home a year.
CoRev –
Narrative style is a technique for writing fiction or non-fiction prose. It is not a method of discourse.
If we are in a room with a few other people, and I walk up to Mike, frex., and start talking about you, withing your hearing, as if you weren’t there, that would be rude. Same here in the blog.
If you want to comment on what I or anyone else is saying, adress that person directly.
That to do otherwise is rude is my value judgement, sure – but it strikes me as being a breach of appropriate courtesy, and I stsand by that judgment.
Cheers!
JzB
JzB, on this like so many others we still disagree. Too often the original author is quoted or referenced from their original source. Often they do not take part in any discussion here, so I do not agree with your example.
Furthermore, when these articles are copied, referenced or quoted here, the author is not the original. In those instances it is appropriate to reference the AB provider. It is the ABer that is making a point and not the original author. You have also used this comment in those situations where the AB provider is referenced. I disagree with you in that example also.
A neo liberal, which is right of center republican.
CoRev,
Julius Caesar wrote his ‘commentaries,’ during his conquest of Gaul in the third person.
You know where he ended up. Caeasar that is………….
JzB also said: “But why would anyone invest if there is not a growing market for their product? ” But there is a growing market, just not a fast growing market. This stimulus will result in a positive rate change. My concern is a one year tax write off credit long enough to sustain that increased rate?
Larry Summers is probably right that getting a budget deal passsed might help avert a double dip.
Ceaser was trying to overthrow the republic. He deserved to die in a pool of his blood.
Sic semper Tyrannis.
Jazzbumpa,
Linda Beale doesn’t participate in the comment threads at this blog. I will continue to address her in just that way.
US has no Caesar today, it has more like Crassus, and Afghanistan/Iraq is US’ long drawn out Carrhae.
Go off to war for the war profiteers and get sent away with our economy on a silver tray.
CoRev –
That’s fine. I have no problem with disagreement.
For a writer in absentia, I concede your point. For a blog participant, I’ll stay with my original assesment.
cheers!
JzB
Terry said: “As to accelerated depreciation the points have been made–why invest if there is no demand?” Where do you come up with this? 2010 Q3 GDP real groth was 2.5%. It probably will be adjusted somewhat, but it is still rising. So there clearly is rising demand.
The kinds of products that businesses usually invest in these short write off periods are machinery, vehicles, and services. These pruchases are delayed because of the uncertainty, but quick write offs cut the prices in the short term, and that’s where demand expands.
9% of the country says O is not liberal enough.
38% thinks he’s too liberal.
O should win the liberal states in 2012. He’s got to win the swing states — FL, NC, OH, IN, VA again to retain what power he has.
jazz
someting important: yes
the payroll tax cut is inteded to weaken social security for the final kill later. if it was a question of putting money in the hands of the working class they would have had an income tax holiday, or a negative income tax. instead they want to hurt SS finances and at best put it on the dole.
they are taking away your retiremetn savings and giving it to you to spend at wal mart. then, maybe, they will tax the rich man to make up the difference to SS. destroying the link between worker pays and worker benefits.
CoRev
thanks for the splainin’. trouble is i have never been a big booster of “green energy.” lotsa boondoggle there and more enthusiasm than sense. i just wanna see you driving an electric car in town, and taking a train for the longer trips. i know that’s not what you want to do, or even I, but I think we do need to do it anyway.
but as for “world experience,” the world is just like me. they want to go zoom. and they are too dumb to know that if they go zoom zoom zoom now they won’t ever ever be able to go zoom at all ever again.
Cursed
and look where that led.
CoRev
more writing tax laws so people game the system instead of basing their decisions on economic fundamentals. that is exactly what we have had too much of.
Linda:
Interesting, one of the men who helped cause the 2008 collapse on Wall Street is now advising the Pres on the economy and the extension of tax breaks. Summers needs to go.
HM,
I wouldn’t count on Obama surviving the Democratic primary right now. Some of the Demo heavies are already stacking wood against him. If he wins, he’ll be further weakened if a protracted fight occurs, and then he will be unlikely to recapture the bulk of the Independent voters which he must have to win the national election.
The split Democratic Party is a track wreck. It may get much worse before 2012.
How does GDP grow with 9.8% unemployment?
terry
the economy, like the tide, is going to come back. when it does, this deal will be given the credit for it.
ilsm
i think it’s been doing it. has something to do with counting money as “produce” though if i remember, that’s not supposed to happen. maybe its just all them yacht sales.
Summers
is a moral disaster. tells you something about Obama’s judgement.