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A Washington Post Not-So-Much-Lovefest on the Bush Tax Cuts

July 31st, 2010 . by economistmom

bush-tax-cuts-expire-survey-washpost-marcus-july2010
(Graphic above from Washington Post online:  Should Congress extend the Bush tax cuts?)

It’s a big “rag on the Bush tax cuts” week in the Washington Post–I think because this is one of the biggest looming issues Congress and the Administration will be coming back to after August “recess.”

It began with Ruth Marcus’ column on Wednesday, where she wrote:

…Which takes us back to the matter of whether it would be risky to let any of the Bush tax cuts expire. As a practical matter, Democrats and Republicans agree that the cuts should remain in place, at least temporarily, for families making less than $250,000 a year. That’s a debatable point. Former Federal Reserve Board chairman Alan Greenspan, whose blessing was responsible for propelling the tax cuts forward in the first place, said recently that Congress should let them lapse.

The real disagreement is over extending the high-end tax cuts, and on this even some supposedly fiscally responsible Democrats — I’m talking to you, Kent Conrad — have gone wobbly. The no-new-taxes-now crowd cautions against raising taxes in a recession — a fair point, except that there are more efficient ways to spur the economy than giving more money to those least likely to spend it. Alternatively, they cite — and inflate — the supposed impact on small business of raising the upper-end rates.

This would be more convincing if the Republican line were something other than “no new taxes, ever.” The economic and fiscal circumstances may change, but the prescription remains the same. And the patient is too ill to tolerate another dose of this quack medicine.

And in the Sunday paper (already available online as of Friday), the Bush tax cuts are the focus of the “5 Myths” series as well as “Topic A.”  Bill Gale of the Brookings Institution writes about “5 myths about the Bush tax cuts”.  My favorite myths of the five are #1 (on the tax cuts as “stimulus”) and #5 (on the effect of the tax cuts on the longer-term fiscal outlook)–because Bill argues there’s not much to “love” in either case:

1. Extending the tax cuts would be a good way to stimulate the economy.

As a stimulus measure, a one- or two-year extension has one thing going for it — it would be a big intervention and would provide at least some boost to the economy. But a good stimulus policy can’t just be big; it should also offer a lot of bang for the buck. That is, each dollar of government spending or tax cuts should have the largest possible effect on the economy. According to the Congressional Budget Office and other authorities, extending all of the Bush tax cuts would have a small bang for the buck, the equivalent of a 10- to 40-cent increase in GDP for every dollar spent.

Why? As the CBO notes, most Bush tax cut dollars go to higher-income households, and these top earners don’t spend as much of their income as lower earners. In fact, of 11 potential stimulus policies the CBO recently examined, an extension of all of the Bush tax cuts ties for lowest bang for the buck…The government could more effectively stimulate the economy by letting the high-income tax cuts expire and using the money for aid to the states, extensions of unemployment insurance benefits and tax credits favoring job creation…

5. Continuing the tax cuts won’t doom the long-term fiscal picture; entitlements are the real problem.

One theory holds that the country’s long-term budget shortfall is “just” an entitlements problem, the result of rising costs associated with growing Social Security rolls and increased health-care spending (via Medicare and Medicaid). Republicans like this idea because it plays down tax increases as a potential solution. Democrats like it because it makes the recent health-care package seem like even more of a triumph.

But it just isn’t true. The deficits we face over the next decade reflect a fundamental imbalance between spending and revenue, one that goes beyond entitlements. Based on projections by the CBO, Alan Auerbach of the University of California at Berkeley and myself, among others, even if the economy returns to full employment by 2014 and stays there for the rest of the decade, the continuation of current fiscal policies, including the Bush tax cuts, would lead to a national debt in the range of 90 percent of GDP by 2020. That’s already the highest rate since just after World War II — and Medicare, Medicaid and Social Security aren’t expected to hit their steepest spending increases until after 2020.

According to these same projections, the yearly deficit would rise to 6 to 7 percent of GDP by 2020. The Bush tax cuts would account for a significant chunk of this, considering that in each year they are in effect, the revenue lost because of them amounts to nearly 2 percent of GDP.

Compounding the problem: By increasing the government’s debt, the tax cuts have already led to higher interest payments on that debt. So even if all of the cuts expire on Dec. 31, we will still be paying for them for years to come.

And under this Sunday’s “Topic A,” it seems that no matter where fiscal policy economists fall on the ideological spectrum, it’s hard to find one who thinks permanent extension of all of the Bush tax cuts is a good idea.  My response (just because this is my blog):

DIANE LIM ROGERS

Chief economist at the Concord Coalition and blogger at EconomistMom.com

President Obama will find it very difficult, if not impossible, to simultaneously keep two major policy promises: maintain the generously defined “middle class” portions of the Bush tax cuts and begin to restore fiscal sustainability by reducing the deficit to 3 percent of gross domestic product by 2015.

At the same time, current economic conditions suggest a continued need for deficit spending to assist in the recovery. Even if the Bush tax cuts are far from the most effective form of additional fiscal stimulus we could come up with, it may be all we can get right now, politically.

So one way Obama can avoid simply rubber-stamping the Bush tax cuts — and turning the policy he has labeled “fiscally irresponsible” into his own — while saving face on his promises would be to temporarily extend only those portions of the cuts he has proposed to permanently extend in his past two budgets. A one- or two-year extension would buy time for the economy to further recover, while providing policymakers with a realistic deadline to permanently reform the tax system to raise adequate revenue in a more efficient and equitable manner — in other words, to come up with a tax plan Obama would be proud to put his name on.

And in the informal survey of readers conducted on the page with Ruth’s column, as of Saturday 6 pm, 57 percent of respondents (out of nearly 1000) said we should let all the Bush tax cuts expire as scheduled.  (Snapshot above.)

UPDATE (Saturday night):  Stephen Colbert’s take on the issue.  (Thanks to Len Burman for calling this to my attention via Facebook.)

11 Responses to “A Washington Post Not-So-Much-Lovefest on the Bush Tax Cuts”

  1. comment number 1 by: AMTbuff

    I agree with Diane. Until both spending programs and the tax system are changed to some sustainable form, there’s no point in adjusting anything major.

    I just wish she could see that there was also no point in adding more promises for health care to the ones we cannot keep. That, too, should have awaited the great restructuring. Or should I say the Great Restructuring, to put it on a par with the Great Depression as a change of course for government.

    Perhaps politicians already know that it’s coming, so that whatever they enact today will be very temporary. That would explain the increasingly short-sighted legislation, especially tax law, we have seen recently.

  2. comment number 2 by: VAT Brat

    Back in 2001 with the budget surpluses, how many Democrats were talking about holding spending constant (as a % of GDP) and using “the surplus” to reduce the national debt?

    The Republicans knew that surpluses were going to be used for national healthcare and other Democrat dreams for expansion of the welfare state. That’s why they supported the tax cuts!

    The Republicans were right about the Democrats then, and they are still right today. How do we know this? Well the Democrats passed Obamacare in the face of this nation’s largest budget deficits since WWII. At the margin, with ridiculous budgetary assumptions gaming CBO rules, they claim this won’t “add to the deficit.”

    But if a political party or an economist or public policy commentor’s first priority is reducing deficits and even paying down the national debt to reduce interest expenses, then they would never advocate an expansion of government spending. In fact, they would oppose creating a new long-term spending program before fiscal sanity was restored.

    The Republican strategy is to box in the Democrats and force them to assume responsibility for raising taxes to pay for their spending wish list. Without any kind of a constitutional constraint that assures there is external pressure to utilize incremental tax revenues to reduce deficit spending, the Republicans would be committing political suicide if they signed on for tax increases.

    If the Democrats want to deal, then they’ll have to come forward with cuts to entitlement spending and support some kind of constitutional limits on public debt. Otherwise, there’s nothing in it for the Republicans. Let the Democrats gain the pleasure and pain of running and paying for the welfare state.

    Anyone who bashes the Bush Tax cuts without acknowleging this back drop is just a partisan Liberal Democrat posing as a concerned fiscal policy wonk. They want Republicans to sign on as tax collectors for the Democrat welfare state, and get mad when they refuse.

    Yes, as Bruce Barlett would say, the Republicans (excepting Paul Ryan) are too chicken to go out on the campaign trail to specify the spending cuts that are consistent with their tax policies. But Democrats wil demagouge any Republican who dares speak the truth about this so it’s easier to avoid confronting it.

  3. comment number 3 by: BillSmith

    The WP poll is all but meaningless. This is Washington D.C., I wonder what % of the people that responded live “outside the Beltway”?

  4. comment number 4 by: Arne

    By RICHARD W. STEVENSON
    Published: January 31, 2001
    “Mr. Baucus and Representative Charles B. Rangel of New York, the senior Democrat on the House Ways and Means Committee, said they had told Mr. Bush that the size of the tax cut should be determined by how much money is available after budgeting for other needs, including education, cutting the national debt and putting Social Security and Medicare on sound fiscal footing.”

  5. comment number 5 by: VAT Brat

    Mr. Stevenson:

    I guess Charley Rangel has changed his tune since then. He supported creation of 2 new entitlement programs (Medicare Part D and Obamacare) before Social Security, Medicare and the national debt were put on a sound footing. Also a sound footing doesn’t mean holding spending constant in Charlie Rangel’s world. It means giving him the increases in spending he thinks are necessary.

  6. comment number 6 by: michael

    How about dealing with a real problem; we spend more on defense than all planet earth combined;
    cut the military 70%, close 70% of bases; ADMIT WE ARE BROKE, stop intervening in every other country on the planet.
    With this money we could have universal health care, high speed trains, etc.
    U.S. has hundreds of years of energy, 15 times that of Saudi Arabia, let’s use it
    ADMIT global warming is a scam and even if u believe this dribble there are multiple ways of cooling the earth for 1/100 of 1% of the cost that fools like Al Gore would have us waste.

  7. comment number 7 by: Curly

    The problem is not more taxes. It is too much spending. As long as congress can use our taxes to buy more votes the congress will find ways to spend more money than taxes will bring in. If you look at what the liberal democrats is doing you can see it. They are pushing more government help in all forms to the lower income individuals without requiring anything in return from those who will receive. If given a chance they will force government on us all. They will have unemployment income for those who will not or do not work even if it is for their lifetime. So who do you think the people that is receiving this kind of aid? They will vote for the party that will increase it and not for anybody that will cut it or increase the tax ON THEM.

  8. comment number 8 by: SteveinCH

    Michael,

    Cutting military spending by 70 percent wouldn’t even close the budget gap we have, never mind paying for that list of other things you want.

  9. comment number 9 by: Arne

    In 2001 it was not hard to be for cutting the national debt because they thought they had enough surplus to cover it as well as tax cuts and still have something left to inrease programs.

    Was anyone saying hold spending constant?

  10. comment number 10 by: Anandakos

    I expect that Speaker Pelosi has in her heart of hearts decided to let the reconciliation changes from 2001 lapse. It would be a tremendous strategic victory for Democrats because it would immediately reduce the “Obama deficit” for FY 2011 by $300 to $400 billion dollars, and the ten-year projections by three or four trillion.

    That’s because — as you of course know Diane — the permanent tax rates would become the legally mandated “steady state”. Even if the Republicans win control of both houses of Congress this year — increasingly likely — and then push to re-pass the Bush cuts, it would shift the onus of “deficit spending” to them.

    If they tried to resuscitate the Bush levels for everyone it would be they who would be exposed as the vicious hypocrites they really are.

  11. comment number 11 by: Howard CW

    In California, the state is requiring state workers to take 3 unpayed days off each month, teachers, fire fighters, and police are being layed off. Parks are being closed. I always felt that we were one of the richer states. Nation wide it doesn’t take much to see that more Government resources are needed.