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Dear Mr. President: It’s Tax Day. Do You Know Where Your Tax Policy Is?

April 15th, 2010 . by economistmom

April 15, 2010

Dear Mr. President:

With all due respect, I write this open letter to you as an economist and as a mom.  Just like parents ought to know where their children are at 10 pm, I think you, Mr. President, ought to know where your tax policy is–emphasis on your–on April 15th.  It’s your “baby” now, this complicated thing called the U.S. federal tax system.

For all the complaining you have done on your Senate campaign trail, and then your presidential campaign trail, and now even as President about how unaffordable and unfair and in general not very smart the Bush tax cuts were, why is it that the centerpiece of your–emphasis on your–tax policy thus far is the deficit-financed extension of the vast majority of these very same (not very smart) tax cuts?

Why do you spend over $2 trillion in your budget–the most you spend on any single policy item–on your predecessor’s tax policy, which you repeatedly explain is to blame for the deterioration and unsustainability of our nation’s fiscal outlook?  Meanwhile, you took back your own ideas for new tax policy–such as the permanent extension of the Making Work Pay tax credit–because you decided to put higher standards on your own tax cuts and actually pay for them (offset their cost with offsetting revenue increases such as climate change revenues), and Congress (even your own Congress) therefore balked.

I have news for you:  you’re in charge now!  You aren’t stuck with the (not very smart) Bush tax cuts–not any part of them!  You are the one who will have to sign an entirely new piece of legislation in order to keep any part of the Bush tax cuts after this year.  You hold the reins.  You don’t have to stay on the Bush path.  You don’t even have to stay on the Bush tax policy horse.  You can switch horses altogether and go down a better path on your better horse.

You have the human capital to take these reins and do much better.  Your economic team is comprised of some of the world’s foremost experts on tax policy–such as your NEC chair Larry Summers and your CEA member Austan Goolsbee and your OMB director Peter Orszag.  If any of them were made fiscal policy “kings of the day,” would they decide that deficit-financed extension of the Bush tax cuts (even if “only” for 95 percent of households) is the best tax policy they could come up with?  I suspect not, but just ask them.  It is a fun thing to talk around the water cooler about on Tax Day.

I know you made an unfortunate campaign promise on tax policy that you feel bound to–to not raise taxes on any households with income under $250,000.  But isn’t it more important to keep your greater (at least implicit) promise to the American people on keeping our economy strong, putting us on a better path (”changing” course), and leaving the nation in decent shape for our kids?  You can’t keep both promises, and to me as an economist and as a mom–and I hope to you as our leader and a dad–it’s obvious which one you should abandon.

Happy Tax Day!

Respectfully,

EconomistMom

20 Responses to “Dear Mr. President: It’s Tax Day. Do You Know Where Your Tax Policy Is?”

  1. comment number 1 by: VAT Brat

    Let’s think about this problem like an economist instead of like a preacher. Why are people who propose irresponsible fiscal policies more popular and successful at elections than responsible persons? Contrast that question with the following: How many restauranteurs who promise quality steak dinners for $3 still in business?

    The difference between federal politicians and someone operating a business is that they face binding constraints where they must reconcile their expenditures with revenues. So what is an elegant constraint that we can impose Congress and the President to force them to behave more like restaraunteurs, or even State Legislatures for that matter?

    The answer is a Debt Limit Referendum (see http://www.thepeoplesdebt.com ) . This would force Congress to submit any proposal to raise the amount of debt held by the public to a referendum for approval by the voters. If the voters truly care about the problem of deficit spending, then they will put the brakes on raising the debt ceiling (excluding intragovernmental trust fund debts). Then Congress will have no choice except to propose budgets that are balanced. Programs will have to be cut, retirement age increased, Medicare eligibility age increased, tax rates increased, itemized deductions eliminated, etc., etc. The solution will lie somewhere between Rep. Paul Ryan’s Roadmap and whatever Rep. Steny Hoyer is thinking about but hasn’t said yet.

    All these conferences and videos and scary panel discussions are moot until there is a constitutional amendment that changes the incentives for politicians to behave as fiscal idiots. If someone has a better idea, I haven’t heard it, but I’ve got an open mind.

  2. comment number 2 by: Brooks

    Well said, Diane.

    My only nit and suggestions is that I wouldn’t refer to tax rate cuts as “spending”. While I realize that a dollar less in revenue and a dollar more in spending add equally to the deficit (other than differences in dynamic effects, which also matter), I think lumping them together as “spending” loses an important, substantive conceptual distinction and will also (from a persuasion standpoint) lose a lot of people in the center and right of center (or at least detract from the persuasiveness of whatever arguments you have for letting more of the Bush tax cuts expire) because it triggers the perception of someone with a vastly different philosophical/ideological perspective — a lefty who either doesn’t have much appreciation for the difference between higher taxation and lower spending or who is trying to use semantics to equate the two and/or sneakily promote a solution that is as skewed to the tax (increase)-side as possible.

  3. comment number 3 by: Greg Ransom

    Send “mom” back to kindergarten for using the word “spend” here …

    “Why do you spend over $2 trillion in your budget–the most you spend on any single policy item–on your predecessor’s tax policy”

  4. comment number 4 by: Greg Ransom

    Using the word “spend” here is the language of left of center public policy hacks, not the language of, well, actual moms …

    “Why do you spend over $2 trillion in your budget–the most you spend on any single policy item–on your predecessor’s tax policy”

  5. comment number 5 by: Brooks

    Diane,

    I don’t know if Greg Ransom read my comment or not before he commented*, but you can see what I mean via his example.

    * Greg, if I may ask, had you read my comment prior to your comment? Even if you had, were you already planning to make your criticism even before reading my comment?

  6. comment number 6 by: Andy Harless

    In what sense is it true that President Obama is “in charge now”? I don’t think the US Constitution gives the President responsibility for tax policy. He can veto an extension of the Bush tax cuts, but with short-term interest rates near zero and the economy likely to be running below potential for the foreseeable future, I doubt that vetoing tax cuts is a good idea. Beyond that, it’s a question of putting together a better tax policy that can make it through Congress. That might be possible, but it would be politically difficult to say the least. It would have to be done by reconciliation, because such a policy would not survive a cloture vote in the Senate, and it would have to be done this year, while the Democrats still have substantial majorities in both houses. Can it be done? Maybe. Would the attempt be the best use of the President’s resources? Maybe, but I’m not going to second guess President Obama and his political advisors on that point.

  7. comment number 7 by: SteveinCH

    Then Andy, I assume you’re for trillion dollar deficits in perpetuity?

  8. comment number 8 by: Diana

    Hmm, yes, instead of “spend,” I would say “squander,” “waste,” or “fritter away.”

  9. comment number 9 by: SteveinCH

    Diana,

    Can you “squander”, “waste”, or “fritter away” something that doesn’t belong to you in the first place?

  10. comment number 10 by: Andy Harless

    If nominal GDP grows at 4%/year, a trillion dollar deficit will be about 1.5% of GDP in 2050, which seems reasonable to me. So, yes, Steve, I am for trillion dollar deficits in perpetuity.

    Unfortunately, unless we manage to fix Medicare, deficits could get much larger than a trillion dollars 40 years from now. But for the next decade or so, the problem is more likely to be deficits that are too small to compensate for weak autonomous demand, rather than too large to be sustainable.

  11. comment number 11 by: SteveinCH

    Wow.

    Simply wow. I really don’t know what to say. I guess a debt to GDP ratio of 100 or 125% doesn’t really bother you because that’s what we’re likely to have.

    So the government should be in the business of stimulating the economy for a decade or more?

    We’ll be long since bankrupt before 2050 gets here.

  12. comment number 12 by: SteveinCH

    Sorry we’re going to have that ratio of 100 to 125 percent by the end of the decade. CBO forecasts 90 but to get there, they assume inflation of 2% for a decade. That’s never happened for any 10 year period in the 20th or 21st century. Once inflation is up, the deficit explodes since so much of spending is linked to inflation.

  13. comment number 13 by: Andy Harless

    Just like Japan went bankrupt years ago, eh?

  14. comment number 14 by: Andy Harless

    BTW tax receipts rise with inflation too, so the argument that inflation will explode the deficit makes no sense (unless you’re referring just to the nominal value of the deficit, but in that case, who cares?). At worst, inflation might not help reduce the debt to GDP ratio as much as it did in the 1970’s, since more things are indexed now. Unfortunately, though, we aren’t going to have that inflation, since it requires an excess demand for goods and services, which is not in the cards any time soon.

  15. comment number 15 by: SteveinCH

    If you want to be Japan, go for it. Doesn’t sound fun to me.

    Inflation only helps if real interest rates stay the same. I wouldn’t bet on that since inflation will be driven by dollar printing which, if you’re an investor, is sure to increase the risk premium.

  16. comment number 16 by: Brooks

    Obama rhetorically exploits the widespread complete misunderstanding of tax expenditures, claiming to be a tax-cutter when what he did was spend more (on subsidies) in the disguise of tax cuts.

    Mr. Obama admitted to his supporters that the anti-tax rallies “amused” him.

    The president went over the laundry list of tax cuts instituted in Washington over the past year.

    “In all, we passed 25 different tax cuts last year. And one thing we haven’t done is raise income taxes on families making less than $250,000 a year — another promise that we kept,” he told supporters at the Arsht Center for the Performing Arts. “So I’ve been a little amused over the last couple of days where people have been having these rallies about taxes. You would think they would be saying thank you.” http://www.cbsnews.com/8301-503544_162-20002677-503544.html

    Although I don’t have a dollar breakout, it seems that most of those “tax cuts” were not really tax cuts — i.e., tax rate cuts — but just spending subsidies provided through the tax code to fool people (very successfully, as is generally the case with tax expenditure subsidies). Let’s take a look:

    One third of the Recovery Act was made up of tax credits, the White House emphasizes.

    “No one I’ve met is looking for a handout,” Mr. Obama said in his address Saturday. “And that’s not what these tax cuts are. Instead, they’re targeted relief to help middle class families weather the storm, to jumpstart our economy, and to bring the fundamentals of the American Dream — making an honest living, earning an education, owning a home, and raising a family — back within reach for millions of Americans.”

    The credits included:

    * An increase in the Earned Income Tax Credit
    * An expansion of the Child Tax Credit
    * For those who work, the Making Work Pay tax credit offered $400 per individual and $800 per couple
    * For those who lost their job, there was a 65 percent tax credit to help cover the cost of health care. The first $2,400 in unemployment benefits went tax-free
    * Up to $2,500 under the American Opportunity Credit for students and parents paying for college tuition
    * $8,000 for first-time home buyers
    * A deduction of state and local taxes paid on a new car
    * Up to $1,500 for home improvements to increase energy efficiency http://www.cbsnews.com/8301-503544_162-20002548-503544.html?tag=contentMain;contentBody

    And if it had been a voucher or straight rebate for healthcare or for home improvements or for a new car or for tuition, etc., even if the offer, the dynamics, the cash flow, etc., were all substantively exactly the same for everyone and every entity involved, it would be labeled “spending” and seen entirely differently by confused people (who in this case seem to be almost everyone), even though they would be substantively the same exact thing. Yet, just because Obama provided these subsidies through the tax code instead, he is able to exploit this confusion to add all that spending while convincing most people that he has “cut taxes”. Yeesh. Just awful.

  17. comment number 17 by: Matt

    Brooks,
    Your correct/observant point: “… and seen entirely differently by confused people (who in this case seem to be almost everyone), …”

    The confusion stems from the publics near universal, uneducated belief that the US govt is the same as a household. Please get them to read Prof Wrays note here.

    Resp,

  18. comment number 18 by: Matt

    Sorry link here!

  19. comment number 19 by: Brooks

    Matt,

    Please don’t associate yourself with my comments as if your “reason” why some belief is valid or invalid is the same as my reason. You probably don’t even understand the point I made. You just want to trot out your same, silly point (well, insofar as one can discern what your bottom line point is). You are a one-trick pony, and a lame one at that*.

    * with apologies to ponies everywhere.

  20. comment number 20 by: Lev Lafayette

    Stop taxing goods, services, and transactions.

    Tax resource usage instead.

    Think through what would happen.

    And for goodness sake America.. Reread Henry George. He’s one of yours!