Stockman on the Latest “Triumph of Politics”–the Bush Tax Cuts
August 3rd, 2010 . by economistmom
When Peter Orszag first announced he was leaving the Obama Administration, I was itching to post something about Reagan’s budget director, David Stockman, and how Peter would now be free to write the latest version of Stockman’s “Triumph of Politics” book (which was one of the first books on fiscal policy I read as a budding economist, in fact). My idea was that Peter would finally be able to talk about how he really feels about the economic wisdom (or not) of the Bush tax cuts–the policy President Obama is now trying to turn into his own.
You see, Peter spent many years researching and writing about the Bush tax cuts with his Brookings colleague Bill Gale (who just wrote this nice updated summary of stubborn myths on the Bush tax cuts in the Washington Post), and most of what the two of them had to say over all those years and papers was not very flattering. I’ve assumed that Peter’s been biting his tongue a lot over the past couple years (or maybe not?) as President Obama has blamed the deficit-financed Bush tax cuts for the awful fiscal situation he inherited and yet at the same time has been insistent on keeping the very same tax cuts as part of keeping his campaign promise not to raise taxes on anyone with incomes less than $250,000 (you know, that very “fat” definition of “middle class”).
So that’s why I immediately was reminded of David Stockman’s “Triumph of Politics” book when Peter announced he was leaving. But it turns out I didn’t have to build any bridge to make that connection between Peter Orszag and the Bush/Obama tax cuts and David Stockman (and the Reagan tax cuts). Stockman himself built it for me, in his opening paragraph of his recent op-ed in the New York Times:
IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.
And later, Stockman bemoans the fact that whether tax cuts fail and are undone (in his Reagan era), or tax cuts fail and are continued (in the Bush-int0-Obama era), tax cuts continue to earn praise and deflect criticism by the “free lunch” fiscal policy types:
Through the 1984 election, the old guard earnestly tried to control the deficit, rolling back about 40 percent of the original Reagan tax cuts. But when, in the following years, the Federal Reserve chairman, Paul Volcker, finally crushed inflation, enabling a solid economic rebound, the new tax-cutters not only claimed victory for their supply-side strategy but hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts.
By fiscal year 2009, the tax-cutters had reduced federal revenues to 15 percent of gross domestic product, lower than they had been since the 1940s. Then, after rarely vetoing a budget bill and engaging in two unfinanced foreign military adventures, George W. Bush surrendered on domestic spending cuts, too — signing into law $420 billion in non-defense appropriations, a 65 percent gain from the $260 billion he had inherited eight years earlier. Republicans thus joined the Democrats in a shameless embrace of a free-lunch fiscal policy.
I think it’s funny how history repeats itself, how fashions come back in style, and how old budget directors sound new again.
If President Obama would show real leadership, then he would be out front and center demanding that the expiration of the tax cuts should not be impeded.
Forget the Keynesian fine-tuning about letting them expire for over $250,000, but allowing them to continue for under $250,000. That’s just giving political cover to make President Obama’s campaign pledge not to raise taxes on those making less than $250,000 look intellectually respectable.
In fact, his pledge was ridiculous political opportunism and fiscally irresponsible.
The Republicans cannot prevent the tax cuts from expiring. So why are David Stockman and all the other pundits and policy wonks talking about the Republicans? Well, it’s a clever way to deflect attention away from the party that’s in charge — the Democrats!
If the Democrats are proud of the welfare state, then they should be proud to ask ALL Americans to pay for it.
In defense of the Republicans, they don’t like the welfare state, and they don’t want to ask Americans to pay more to support it. They’re just too chicken to ask voters to receive fewer benefits.
Selective renewal of the tax cuts creates a problem with the progressivity ratchet as I explained recently.
The more important hazard of selective renewal is that it reinforces the myth that the fiscal problem can be solved without major pain to the middle class. For this reason it’s better to hit all taxpayers and spending recipients hard, all at the same time.
I like the idea where the tax cuts only renewed in high cost congressional districts. Like in the north east and the west coast. Low cost districts like in the south and mid west the tax cuts expire.
Bill, let me guess what part of the country you live in…
Please enlighten me as to why different parts of the country should have different Federal Income Tax rates/brackets.
In case you didn’t know, incomes in those “low cost:” areas are lower by a larger degree, making the standard of living there lower (not accounting for some non monetary considerations)
Please enlighten me as to why different parts of the country should have different Federal Income Tax rates/brackets.
In case you didn’t know, incomes in those “low cost:” areas are lower by a larger degree, making the standard of living there lower.
Not so. The cost of living varies sharply around the US. The tax code does not. Thus, in higher cost-of-living areas, the same cost-of-living-adjusted income incurs a higher income tax rate, while in lower-cost-of-living-areas it is subject to a lower tax rate, due to the progressive tax rate structure.
Because of the big differences in cost of living, “lower income = lower standard of living” is just not so.
The Tax Foundation put together the data on this for near 300 metropolitan areas for 2003, explaining in the study intro…
As another example lifted from the data in the study, cost-of-living adjusted median income in NYC, where I am, results in an income tax hit of 19.1% of income, while in Abeline, Texas it is 10.2% I get to pay almost twice as much income tax on the same cost-of-living adjusted income. Lucky me!
But Jim, doesn’t microeconomics dictate that wage levels have already adjusted upward in NYC so as to equalize after-tax purchasing power? If not, why hasn’t everyone moved from NYC to Texas? If it’s because living in NYC provides intangible benefits, what’s wrong with taxing that consumption decision?