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Ezra’s Pizza

September 15th, 2010 . by economistmom

cold-pizza

Yesterday Ezra Klein made a brilliant, foodie-that-he-is-oriented analogy between the debate over extending the Bush tax cuts–and transforming them magically into “the Obama tax cuts for the middle class”–and “making” pizza:

[P]utting the lack of planning aside, [the claim that the middle-class portions of the Bush tax cuts are Obama's policy for middle-class tax relief] won’t stick because it’s not true. Democrats are talking about extending the Bush tax cuts. They are not talking about expanding Obama’s Make Work Pay tax cut, or putting something new in their place. Bush is getting the credit because it’s actually his plan. Just because I’m the guy reheating a cold slice of Ray’s Pizza on the third day doesn’t mean it’s now Ezra’s Pizza.

I would carry that analogy still further, pointing to today’s Ezra post on the Bush tax cuts, to add it’s as if Ezra throws a big gourmet dinner party and serves this reheated then-Ray’s-now-Ezra’s pizza as the main “Ezra entree.”  ;)

(PS:  photo above is courtesy of the site “Cookie Madness” and their post on the best gourmet way, a la Cooks’ Illustrated no less, to reheat cold pizza.)

The “I Dare You To Be Fiscally Responsible” Election

September 15th, 2010 . by economistmom

The Washington Post’s Ruth Marcus is “despondent” about the victory of the Tea Party candidate (Christine O’Donnell) over the more moderate Republican candidate (incumbent congressman Mike Castle) in the primary for Delaware’s open U.S. Senate seat.  I agree that it’s bad news.  As Ruth explains:

First, I had thought the silver lining of this election year might be to produce a Senate with a more robust cadre of moderate Republicans. That caucus has pretty much dwindled to the two senators from Maine, with very occasional company from colleagues such as Massachusetts Sen. Scott Brown and departing Ohio Sen. George Voinovich. It’s awfully hard for a caucus of two to break with the party…

But not as scary as reason number two: the ripple effect of victories such as O’Donnell’s on other Republican lawmakers. Republican members of Congress look at races such as those in Utah, Alaska and now Delaware and think: There but for the grace of the Tea Party go I. They will be that much more watchful of protecting their right flank against a primary challenge. They will be that much less likely to take a political risk in the direction of bipartisanship. In this sense, it matters less whether O’Donnell will win the general election — that doesn’t seem likely — than that she won the primary.

The Delaware result might be good news for both Tea Partyers and Democrats. It is not good news for the cause of good government.

That is the irony–that the Tea Party movement has become not so much a movement for “good government” as a movement for “small government.”  Except that when you really listen to what most Tea Party candidates argue for, it’s not to shrink government by cutting the government’s largest programs (e.g., Medicare and Social Security).  It’s not to propose cutting any spending that actually benefits any of their voters.  In other words, it’s not to lay out any specific ways they would be able to reduce government spending to the levels that would qualify as “small government” spending.  That’s because most Americans don’t really want small-government spending, when you get right down to it.  Mostly these candidates seem to be promising what most Americans like to fantasize about:  small-government taxes (low ones), with big-government spending.  Of course, the basic math of that implies we’re going to be laden with many more years of big-deficits government.

With this early Tea Party victory, I expect candidates are just going to be more afraid of speaking any truth about the need to raise taxes or cut benefits.

So contrary to what these candidates may claim about their being for “fiscal responsibility,” I expect that whatever campaign slogans, promises, and attacks we hear shouted about during this campaign season leading up to the November general elections, they can be roughly translated as candidates saying to their opponents:  “I dare you to be fiscally responsible.” The lesson from yesterday’s election is that that’s a winning strategy.

So much for “good” government.

“WWRD” Addendum

September 13th, 2010 . by economistmom

wwrd-dog-shirt

Just had to share this image to go along w/ last week’s post on “What Would Reagan Do (WWRD)?” (This merchandise, not surprisingly, available via Cafe Press.)

Those “Best-for-Nothing” Bush/Obama Tax Cuts

September 13th, 2010 . by economistmom

First, isn’t it “special” that House Minority Leader John Boehner and President Obama might be ready to “compromise” on what to do about the Bush tax cuts?  From a story by Shailagh Murray and Lori Montgomery in today’s Washington Post:

House Minority Leader John A. Boehner (R-Ohio) surprised Democrats on Sunday when he said he might not oppose President Obama’s plan to extend the cuts for all but the wealthiest households, although he reiterated his preference for keeping the lower rates in place for all income groups.

Boehner’s comments, made on the CBS program “Face the Nation,” altered the landscape of the tax debate by suggesting that Republicans might not obstruct Democratic efforts to raise taxes on the top earners - a move advocated by Obama and many other Democrats as necessary to lowering the record deficit.

But read on in the same Washington Post story.  Boehner didn’t say he would support letting the top-end cuts expire.  He said he wouldn’t oppose extending all the rest of the tax cuts President Obama is already proposing to extend:

“If the only option I have is to vote for those at [$250,000] and below, of course I’m going to do that,” Boehner said. “But I’m going to do everything I can to fight to make sure that we extend the current tax rates for all Americans.”

And Mike Allen from Politico clarifies Boehner’s intention by quoting a Boehner aide:

A Boehner aide reads between the lines: “Despite what Obama says, Republicans are not holding middle-class tax cuts hostage and we’re not going to let him get away with those types of false claims. Our focus remains on getting bipartisan support for a freeze on all current rates, because that is what is best for the economy and small business job creation. Boehner’s words were calculated to deprive Obama of the ability to continue making those false claims, and as a result we are in a better position rhetorically to pressure more Democrats to support a full freeze.”

In other words, this is the same kind of “compromise” on fiscal policies we’ve seen in this town for the past decade:  “I’ll let you have your favorite deficit-financed policies (even those I don’t like) if I can have some of mine (that you don’t like), too.”

And more proof that this is what is likely to happen, from both sides of the “compromise”?  Later in the Washington Post story:

Senate Majority Leader Harry M. Reid (D-Rev.) and House Speaker Nancy Pelosi (D-Calif.) are pledging to back the president’s position as in sync with the views of a majority of Democrats in each chamber. But amid signs of a weakening economy, a growing number of Democrats would prefer to extend all tax cuts, at least for a year or two - a compromise that Obama did not explicitly rule out during his news conference on Friday. Another approach that is gaining traction would raise the $250,000 income threshold to $1 million per household, to exempt families who live in regions with high costs of living.

Yep.  That’s right.  The “middle class” might just become anyone who’s not a millionaire.

Republicans know this is a great way to keep getting their way on “tax cuts all the time for any reason.”  Newt Gingrich seems downright giddy about it (again from the Post story):

“Republicans would be very wise to say, ‘We will pass any tax cut this president will sign as long as it doesn’t have a poison pill of a tax increase,’ ” former House speaker Newt Gingrich told “Fox News Sunday.”

And what about the argument that at least some extension of at least some of the Bush tax cuts is necessary given the still-fragile economy?  And the argument that deficit-financed tax cuts are the only kind of stimulative fiscal policy that the Obama Administration and Congress will be able to agree on?

Well, even if we had to limit the universe of possible fiscal stimulus policies to tax cuts alone (and no spending programs), the Bush tax cuts–and even the “middle-class” Bush tax cuts–are far from the most stimulative kind of tax cuts we could come up with.  See, for example, this testimony by CBO director Doug Elmendorf which lists these tax-cut options as all having more short-term economic “bang per buck” than continuing the Bush tax cuts (reducing income taxes); in descending order of effectiveness:

  1. reducing employers’ payroll taxes (whether for firms that increase their payroll, or more generally);
  2. reducing employees’ payroll taxes;
  3. providing additional refundable tax credits for lower- and middle-income households in 2011;
  4. allowing full or partial expensing of investment costs.

What higher “bang per buck” means is that you could achieve either one of the following: (i) a larger increase in GDP for the same amount of money as the cost of extending the tax cuts; or (ii) the same increase in GDP for a smaller amount of money compared with extending the tax cuts.  Or any combination in between.  The point is: more benefit at lower cost.  (That’s what economists call “optimizing.”)

It’s not that extending the Bush tax cuts and turning them into the new “Obama tax cuts” wouldn’t have any benefit to the economy.  It’s that for whatever economic goal you can think of, whether short-term or longer-term, there’s some fiscal policy even better suited for that goal.  So the Bush/Obama tax cuts aren’t “good for nothing.”  They’re just “best for nothing.”  And as constrained as we are, we should be aiming at least to do better.

What Would Reagan Do (WWRD)?

September 9th, 2010 . by economistmom

Ironically, not cut taxes as much as President Obama is proposing!

Here’s an awesome story by Jeanne Sahadi on CNN-Money, citing several tax policy experts who explain that quite contrary to Reagan’s reputation, he actually signed into law what amounted to the “largest tax increase in (peacetime) American history”–upon realizing that our country couldn’t really afford the largest tax cuts that had he put in place earlier in his Administration.  But the Reagan Administration’s tax increases were large in terms of revenue gains, not in terms of marginal tax rates, because they did it the smart way: by reforming the tax system to make the tax base broader and more efficient.  (Pssst:  they accomplished this with a good deal of bipartisanship.)

From Jeanne’s story (emphasis added):

“Reagan was certainly a tax cutter legislatively, emotionally and ideologically. But for a variety of political reasons, it was hard for him to ignore the cost of his tax cuts,” said tax historian Joseph Thorndike.

Two bills passed in 1982 and 1984 together “constituted the biggest tax increase ever enacted during peacetime,” Thorndike said.

The bills didn’t raise more revenue by hiking individual income tax rates though. Instead they did it largely through making it tougher to evade taxes, and through “base broadening” — that is, reducing various federal tax breaks and closing tax loopholes…

“What people forget about Ronald Reagan was that he very much converted to base broadening as a means of reducing deficits and as a means of tax reform,” said Eugene Steuerle, an Institute Fellow at the Urban Institute who had helped lay the groundwork for tax reform in 1986 and served as a deputy assistant Treasury secretary during Reagan’s second term.

There were other notable tax increases under Reagan.

In 1983, for example, he signed off on Social Security reform legislation that, among other things, accelerated an increase in the payroll tax rate, required that higher-income beneficiaries pay income tax on part of their benefits, and required the self-employed to pay the full payroll tax rate, rather than just the portion normally paid by employees.

The tax reform of 1986, meanwhile, wasn’t designed to increase federal tax revenue. But that didn’t mean that no one’s taxes went up. Because the reform bill eliminated or reduced many tax breaks and shelters, high-income tax filers who previously paid little ended up with bigger tax bills…

All told, the tax increases Reagan approved ended up canceling out much of the reduction in tax revenue that resulted from his 1981 legislation.

Was this a politically-easy thing to do?  Probably not, but it was at least easier for a strong leader like Reagan back then, than it would be for an equally strong leader today.  Jeanne quotes Marty Sullivan:

“By today’s standards, the Gipper would easily qualify for status as a back-stabbing, treacherous RINO [Republican in Name Only],” wrote Tax Analysts contributing editor Martin Sullivan, in an article for Tax Notes in May.

Kind of ironic how President Obama’s current position on tax policy seems more in keeping with the ideals of at least today’s Republican party than would Reagan tax policies brought forward to today.

The Long-Awaited Sequel to the “Fiscal Wake-Up Tour”

September 8th, 2010 . by economistmom

OK, we’re done waking people up to the problem of the unsustainable fiscal outlook; it’s time to get down and dirty now into the business of talking about the not-so-easy solutions.  And in a campaign season, no less!

Today the Concord Coalition and the Peter G. Peterson Foundation, with the help of some of our fiscal policy friends who represent diverse political perspectives, embarked on the sequel to the “Fiscal Wake-Up Tour”–which we’re calling the “Fiscal Solutions Tour.” We had a “kick off” of sorts today at the National Press Club (link to Concord summary and video here).

You’ll be hearing more about the Fiscal Solutions Tour over the course of the next few months as we make several stops all over the country.  Talk about raining on the politicians’ (campaign) parades!  ;)

Peter Orszag “Breaking Free” from the Bush/Obama Tax Cuts

September 7th, 2010 . by economistmom

peterorszag-running(Photo from Runner’s World story by Amy Reinink.  Go, Peter!)

In today’s New York Times, this column by new “contributing columnist” Peter Orszag, only freshly retired from his position as Obama budget director (emphasis added):

In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.

Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned…

The beauty of extending the tax cuts for only two years is that canceling them doesn’t require an affirmative vote. It happens by default, so Congressional deadlock works in its favor. And it would essentially solve our medium-term deficit problem, reducing the deficit by $200 billion to $350 billion a year from 2015 to 2020.

Like all plans, this one isn’t perfect…

a key part of this deal is actually ending the tax cuts in 2013 — and that will surely require a presidential veto on any bills to extend them after that. (Failing to follow through would be particularly problematic if the high-income tax cuts are made permanent — at a 10-year cost of more than $700 billion.) Minimizing this risk requires as much upfront clarity and commitment as possible, including a strong and unambiguous veto threat from the president.

Senate Democrats and Republicans almost never come together anymore. This month, they should fight the dual deficits rather than each other. Let’s continue the tax cuts for two years but end them for good in 2013.

I must say, this warms my heart a bit.  I’ve been waiting for this moment for a long time–from my “saving face” idea back in January, to my open letter to the President on “Tax Day,” to my hearkening back to Reagan budget director David Stockman upon hearing that Peter was leaving the Administration.

But I still think even temporary extension of even just the (generously-defined) “middle class” portions of the Bush tax cuts is only a second-best (at best) solution to both the need for more short-term stimulus as well as the need to get back to fiscal sustainability over the not-so-long-from-now longer term.  They’re not the best solution for the short term because they have far from the biggest stimulative “bang per buck” in terms of deficit-financed fiscal policies and what they do to boost aggregate demand.  And the only temporary extension is not the best solution to the longer-term deficit problem (and our inadequate national saving), mainly because our government is really bad at letting expiring tax cuts actually expire (or for that matter letting any scheduled improvements to the fiscal outlook actually happen).

Coincidentally, I was featured in this story by Scott Horsley on NPR today–part of a series of stories NPR is running this week on the Bush tax cuts–doing some usual ragging of mine on the Bush/Obama tax cuts that sounded as if I might be reacting to Peter’s column (which Scott mentions in the story).  But Scott actually interviewed me over a month ago!

***UPDATE Wed. 9/8, 6 am:  for more to this point, made extremely well, see Ruth Marcus’ column in the Washington Post, where she leads with a little daydreaming related to Peter (although not in the “usual” way, I suppose):

Well, I know what question I’d ask President Obama at Friday’s news conference.

“Mr. President, your former budget director, Peter Orszag, has said that the Bush tax cuts should be extended for two years and then allowed to expire — even for those making under $250,000 a year. You have said those ‘middle class’ cuts should be made permanent. He says that is ’simply not affordable.’ Why is he wrong?”

There is no good answer to this question — something I think the president well understands, even if he is unwilling to publicly acknowledge it. Amazingly, in the midst of supposedly heightened concern about deficit spending, the current debate about the tax cuts involves whether to extend most of them (at a cost of about $2.3 trillion over the next decade) or all of them (adding an additional $700 billion to the tab).

This is not dumb and dumber — it’s irresponsible and irresponsibler.

And be sure to read Ruth’s take on the notion that we can extend these tax cuts only temporarily to avoid the longer-term problem.

Considering Better Alternatives to Extension of the Bush Tax Cuts for More Stimulus

September 5th, 2010 . by economistmom

The key word in the title of this post, from my perspective, is “alternatives”–not “additions.”  The Obama Administration is reportedly considering some new proposals for a variety of business tax cuts that they believe would be particularly effective in creating jobs quickly.  As the AP’s Julie Pace reports:

WASHINGTON — Seeking ways to spur economic growth ahead of the November elections, President Barack Obama will ask Congress to increase and permanently extend research and development tax credits for businesses, a White House official said Sunday.

Obama will outline the $100 billion proposal during a speech on the economy Wednesday in Cleveland, the official said. The announcement is expected to be the first in a series of new measures Obama will propose this fall as the administration looks to jump-start an economy that the president himself has said isn’t growing fast enough.

The motivation for this longer-term cut in business taxes is probably largely political, because while there are other types of tax cuts or spending that would be more effective as true “stimulus” in increasing aggregate demand immediately, these types of permanent business-side tax cuts are less likely to be opposed by Republicans, even if they are deficit-financed (or maybe even especially if they are deficit-financed).  Again from the AP story (emphasis added):

“I don’t think this is something that has … as immediate a job impact as, say, movement on the current tax credits for the unemployed or extending a payroll tax holiday of some sort. But I think it’s very important in terms of job creation over the longer term,” [Laura] Tyson [,a member of the President's Economic Recovery Advisory Board,] said.

While the idea is popular in Congress, coming up with offsetting tax increases or spending cuts has been a stumbling block. Obama will ask lawmakers to close corporate tax breaks for multinational corporations and oil and gas companies.

Congress has previously passed research tax credits on a temporary basis. The credits expired last year and a proposal for renewal is pending in the Senate.

While research credits generally have bipartisan support, Washington’s contentious political atmosphere means the White House isn’t taking anything for granted. Officials have watched other proposals they deem necessary to economic growth, including a bill to extend credit and cut taxes for small businesses, languish on Capitol Hill.

My first complaint about these new ideas for tax cuts is that they’re not really new at all; they’re repeats of essentially permanent (only technically temporary) tax cuts that are repeatedly renewed.  The Obama Administration seems to have adopted the mindset that many policymakers in Congress (and not exclusively those from one side of the aisle) have long had–that the prescription for any kind of economic ailment is more deficit-financed tax cuts.  But given the fiscal and economic outlook and how the CBO explains they interact over the longer term (large deficits reducing economic growth), there’s no justification for deficit financing permanent tax cuts–even tax cuts that may be good for longer-term economic growth (via the supply side of the economy) like the research tax credit.  Deficit-financing is only justified for policies that are designed to effectively and immediately boost economic activity where idle capacity exists–that is, policies designed to stimulate aggregate demand.

But let’s set aside that complaint and assume that the Administration thinks they have some good new ideas, better ideas, for effectively and immediately jump-starting the economy.  My suggestion:  If these types of tax cuts (or spending increases) have greater bipartisan support than other current proposals for additional stimulus, and if economists believe some of these ideas would be more stimulative than any portions of the expiring Bush tax cuts, why don’t we start considering these proposals as substitutes for the (already presumed to be) deficit-financed extensions of the Bush tax cuts?  (Why consider these proposals only in addition to the deficit-financed Bush tax cuts, which continue to get a “free pass” in this town?)  Substituting policies that are better at boosting the short-term economy (i.e., policies better at the “three Ts” in being “timely, targeted, and temporary”) would maximize the stimulative “bang per buck” while avoiding an additional, more permanent increase in the deficit that could undermine the longer-term economic effects.

Policymakers need to put together a list that ranks fiscal policies (tax cuts and spending increases) from most effective to least effective–and I mean including the various elements of the Bush tax cuts that are scheduled to expire at the end of this year–settle on how much of a short-term increase in the deficit they are willing to put up with (and that our economy can tolerate), and only “accept” the proposals (and the deficit financing of such proposals) that fall above the cut-off line.  And I mean regardless of the low bar they have already set for the full complement of the Bush tax cuts via the Administration’s policy baseline and the exemptions under statutory PAYGO rules.   In my mind we should be “leveling the policy playing field” and letting the Bush tax cuts “compete” with the rest of these proposals under fair terms.

Three Simple Truths About What Needs to Be Done in Tax Reform

September 2nd, 2010 . by economistmom

During this last week of summer, I am barely keeping up with the August-recess fiscal policy news.  Luckily there’s not much to keep up with.  But last week the President’s Economic Recovery Advisory Board (sometimes affectionately(?) referred to as “pee-rab” (PERAB)) issued their long-overdue tax reform report.  I was on a long drive to visit family in Michigan, but fortunately Dan Shaviro and Howard Gleckman, two of my favorite experts/commentators on tax policy, got right on the case and blogged on the report, right through their yawns.  Both were disappointed as well as bored.

In my mind this report was always doomed to be a boring disappointment–a pretty useless rehashing of academically-noncontroversial tax reform ideas that would do little to advance the political debate in the direction it desperately needs to go.  That’s because the effort began with the implicit premise that tax revenues don’t need to be raised–that what we need is revenue-neutral tax reform (raising the same level of revenue but more efficiently), when in fact the fiscal outlook makes it clear that we need revenue-gaining tax reform.  Then on top of that, the PERAB was told they not only couldn’t raise taxes on average, they couldn’t raise taxes on any households with incomes under $250,000–i.e., all but the top 2-3 percent of households.  This latter restriction makes it hard to do anything to address the major sources of economic inefficiency/distortions in the tax system, because people all over the income distribution currently benefit from the various and very expensive tax expenditures (”holes” in the tax base) under the current system.

As a result, the PERAB tax reform report is like the tax-side equivalent to a no-pain, “cut (only) waste, fraud, and abuse” report.  It doesn’t tell it like it is in terms of what really needs to be done via tax reform to help our nation fiscally and economically.  What we need to do isn’t complicated at all; it’s just kind of painful to hear.  Here’s my list that is simple if not sweet:

  1. Raise More Money. Raise revenues as a share of our economy above its “historical average” of 18 percent. The 18 percent figure is not the “right” number just because it’s been the average one.  In fact, we need to raise it above where current-policy extended would take us (just read the CBO reports to understand why), which means we have to start thinking of tax reform as how to raise more revenue, not just the same amount of revenue, in the most economically efficient and equitable way possible.
  2. Even Things Out. Raise revenues more efficiently by broadening and “leveling the playing field” called the federal income tax base. Revenue-increasing tax reform necessarily implies the overall, economy-wide average tax rate will go up–no matter how the reform is structured.  But raising revenues by filling in the “holes” in the income tax base (reducing tax preferences or “tax expenditures”) keeps overall marginal tax rates low by raising marginal rates only on those forms of income that currently face very low or even zero tax rates.  Raising effective marginal rates on those forms of income that are currently under-taxed would reduce rather than increase the distortionary effects of the income tax.  (There are also fairness concerns that motivate such “leveling” of effective tax rates.)
  3. Act European. Not in the way conservatives who oppose raising revenues/GDP warn about:  those “European level (marginal) tax rates” necessary to close the fiscal gap using increases in marginal tax rates alone.  I mean engage in more “European-style” taxation by taxing more things that are–if not more pleasant to tax–at least less economically harmful to tax than the things we tax now.  The two prime examples I’m thinking of:  (i) environmentally-harmful activities (e.g., carbon-based energy via a carbon tax), and (ii) consumption (via a value-added tax).  This is really a corollary to the “even things out” directive: by adding tax bases that are more efficient to tax (in addition to broadening our existing income tax base), we can raise more revenue by leveling effective marginal tax rates across different sources and uses of income rather than simply raising marginal tax rates on the types of income or consumption that are already taxed most heavily.

The President’s tax reform panel was prohibited from uttering any of these three simple truths.  I hope the President’s fiscal commission will be less constrained, because tackling the much broader task of achieving fiscal sustainability makes tax reform according to these truths even more critical to the overall mission.

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