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No Jive from Clive on the Then-Bush-Soon-Obama Tax Cuts

August 16th, 2010 . by economistmom

I love the back-to-back columns on the Bush tax cuts and fiscal responsibility that Clive Crook of the Financial Times wrote earlier this month.  He really tells it like it is: we simply can’t afford to permanently extend even the so-called “middle-class” portions of the Bush tax cuts–for several reasons.

His first column (“Obama must break his tax promise”) points out the hypocrisy of the Obama Administration in adopting the Bush tax cuts as the centerpiece of their own tax policy agenda (my emphasis added):

What a commentary on the US approach to tax policy. The tax cuts are due to expire in the first place only because the Bush administration was cooking the books. The idea was to disguise the cuts’ long-term cost, which is colossal. Making them permanent would cost nearly $4,000bn over 10 years. The Republicans always wanted the changes to be permanent. The sunset provision was just a feint to make them look affordable.

Democrats deplored the tax cuts as reckless – which they were – yet want mostly to preserve them. The middle-class part of the tax cuts, which they like, account for roughly three-quarters of the forgone revenue. Talk about having it both ways. Barack Obama organised his election campaign around this position. He complained of fiscal irresponsibility with one breath, then promised even lower taxes for most Americans – households making less than $250,000 a year, some 97 per cent of the total – with the next.

To the Republicans, fiscal responsibility is a fantasy sunset provision. To the Democrats, it is a tax increase confined to a sliver of the undeserving rich.

And he makes it clear that raising revenue to reduce the deficit doesn’t have to involve trading off economic efficiency and growth–but pursuing such fiscally-responsible but economically-wise tax policy does require the President to break his troublesome campaign promise:

So broken is the US tax system – especially the federal income tax – that raising more revenue without increasing rates of tax is technically, though not politically, easy. The income tax base has been whittled away since the last big reform in 1986. Rates are not low by international standards, and their structure is already quite progressive; yet because they are applied to a slender base, the US income tax raises barely 8 per cent of gross domestic product. A broader base with lower, flatter rates could easily raise more revenue.

In addition, new taxes such as a value added tax and/or a carbon tax would be needed to bridge the remaining fiscal gap. These would make sense in their own right as part of the mix, even if there were no revenue shortfall. But the politics is so poisonous that these can barely even be mentioned. Instead, the debate is stuck in the mud of class warfare. All anybody cares about is whether the rich are paying their share. More than their share, say conservatives. Not nearly their share, say liberals. It is like Britain in the 1970s – not a good model.

The leadership that Mr Obama could provide on this is desperately needed. No doubt he understands what ought to be done, but the promise he made in 2008 has tied his hands. He will have to break that promise, and the sooner he does it the better.

And then by the next week, apparently Clive had gotten harassed by readers with arguments that I am well-familiar with (”but why would we raise taxes while the economy’s still weak?”…”but the problem is spending is too high, not taxes are too low”), so that his next column clarified that “Obama has to cut–and raise taxes”:

Last week I argued that sooner or later Barack Obama will have to break his election promise and raise taxes on the US middle class. It would be better not to renege just yet, I said: a double-dip US recession remains a distinct possibility and fiscal policy needs to stay loose for the time being. However, before much longer, restoring fiscal control is going to require higher taxes – and not just for the rich.

Many readers took issue with the article and they often started the same way: “What about public spending? You didn’t say a word about spending.”

No, and I should have. To control borrowing without ever-rising rates of taxation, Congress will have to curb currently projected spending. But that will not be enough by itself. It is delusional to think the US can get from here to a sustainable fiscal balance with spending cuts alone.

The problem with plans to reduce the deficit by spending-side changes alone?  Clive explains there’s just not enough spending to cut unless you really go after the big (dare-I-say) “entitlement” programs of Medicare and Social Security.  The only plan out there that very clearly follows that strategy is Paul Ryan’s “Roadmap” plan.  But no one is really willing to live with such large cuts to Medicare as implied by the Ryan plan, not even Ryan’s fellow Republicans:

What about Medicare? The recent healthcare reform includes some payment-system experiments intended to curb costs, though it would be rash to expect very much from these. Mr Ryan’s plan is far more radical. Again he calls for privatisation. He wants to replace the government-run insurance scheme with vouchers, which recipients would use to buy private insurance. The plan then imposes a far slower rate of increase in the vouchers’ value than in projected healthcare costs.

After many years, this wedge would drive Medicare spending way down – but unless costs fell commensurately, the vouchers would buy fewer treatments. No doubt, in this world, patients would force doctors and hospitals to supply services more economically. It is hard to believe that this could curb spending as sharply as Mr Ryan expects with no loss of healthcare quality.

In a way, Mr Ryan is right: dismantling Medicare and social security is what it takes if you rely on spending cuts alone. Can it be done? No. Republicans remember what happened to the Bush plan for social security and do not intend a rerun. During the healthcare debate, they furiously opposed cuts in Medicare. Do not trust Democrats to honour these government promises, the party says. So much for Mr Ryan’s plan.

And Clive concludes his second column with a simple reminder that the fiscal math is simple but the choices hard:

You cannot hold Medicare and social security unscathed, oppose all tax increases and close the fiscal gap. The big entitlements plus defence and interest amount to some 80 per cent of federal spending. With those off the table, there is not enough left to cut.

That ain’t no jive, Clive!

4 Responses to “No Jive from Clive on the Then-Bush-Soon-Obama Tax Cuts”

  1. comment number 1 by: VAT Brat

    Republicans don’t intend of re-run of UNILATERALLY proposing cuts to entitlement programs. That’s why Republicans aren’t jumping on board Ryan’s Roadmap. They’re not stupid.

    Don’t confuse their reluctance to commit political suicide vis a vis Democrats for their desire to cut spending.

    Until a Democrat steps forward to offer something similar to Ryan’s Roadmap for eventually balancing teh budget, then nothing is going to happen. Bruce Bartlett and Economistmom can shout all they want about how Republicans should just roll over and accept tax increases as inevitable. They may be inevitable, but Democrats are going to have to be the proponents and suffer the same electoral pain they inflicted on Republicans.

    Clive Crook finally wrote what I’ve been saying for months on this blog — that Obama is a coward for not being a leader and breaking his pledge not to increase taxes. If Bush 41 could do it, then so can he. However, he’ll also have to couple those increases with PERMANENT spending cuts if he wants bi-partisan assistance.

  2. comment number 2 by: AMTbuff

    Remember when Bush’s approval was at 20% or so and he went way out on a limb to implement the surge in Iraq when all the experts (including many in the administration itself) said it was doomed to fail?

    That’s what needs to happen with Obama and taxes. Obama needs to get so low in approval that doing the right thing is ironically less painful, since everyone already opposes him anyhow. The next president will take credit, just like Obama has for the Iraq surge that he opposed, but that’s politics. History may eventually assign the credit more fairly.

    Low presidential approval numbers might be just the ticket to fiscal sanity.

  3. comment number 3 by: STDog

    So lets see, if I have a pay cut, I should not reduce spending but instead should just increase my income.

    Gotta love the politicians. Cut spending. Do away with whole programs/departments for crying out loud.

    Especially ones that are 20+ years old. Get rid of these legacy programs and start fresh with a evaluation of what the current problems really are and how best to address them.

    It all needs a to be rewritten from the ground up, instead of piecemeal changes here and there.

    Same with the Federal income tax. Start over with a clean sheet. Re-evaluate all the deductions and exemptions. Would they be added today if they weren’t already there?

  4. comment number 4 by: Anandakos

    ST,

    Here’s my starter list of whole programs/departments:

    Crop supports
    Road building in the Federal forests
    Oh, hell. Just move food stamps and the school lunch program to HHS and the scientists in the Forest Service to NOAA and nuke the whole Ag department

    The “Commerce” department except for NOAA
    ESPECIALLY the “Small Business Administration”… GAG!

    Homeland Security except for the Coast Guard and whatever the latest name for INS is (oh, yeah, Citizenship and Immigration Services or something like that). Let the passengers take care of any nutcase hijackers. I think they’ll do nicely for themselves.

    All the contractors for DOD. ESPECIALLY the Black Ops freaks.

    The foreign outposts of the Pentagon, except in countries who really, really want us there (Britain, the Czech Republic, and South Korea).

    I totally agree on the tax deduction business. If they must exist, they should be credits up to a certain level.