Peter Orszag “Breaking Free” from the Bush/Obama Tax Cuts
September 7th, 2010 . by economistmom
(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.
Forget corporate welfare, give to the folks who really need the money. A better way to help people and stimulate the economy would be to dramatically raise the level at which income tax cuts in and also the amount that people on assistance can earn before losing benefits. The people at the bottom will spend the extra money on things they need, helping them and the economy both.
No chance that your logical proposal gets done- NONE. The party of NO has made it clear that the strategy is to block anything and everything and it is backed by disinformation machine of no equal. Not that democrats are faultless either-
The Bush tax cuts are in effect now. They are not stimulating the economy. The Stimulous (ARRA) saved or created 3.5 million jobs. In 10 years the Bush tax cuts drained 3 trillion dollars. We suffered through 3 recessions each greater than the other.
Where is that stimulous?
Economistmom,
What we really need are courageous Democrats who will offer entitlement program cuts in exchange for tax increases. That’s the way to get bi-partisan agreement on closing the deficit.
Unfortunately, it appears that you swim inside the Washington DC bubble of left-wing groupthinkers that only obsess over tax policy. You’re not part of the solution. You’re part of the problem.
Let’s see some articles recommending spending entitlement cuts of similar magnitude to the tax increases scheduled to occur. No federal aid to any states that don’t come up with a solution to the pension insolvency volcano scheduled to explode.
Instead, we hear supposedly non-partisan, technical budget recommendations cloaked in the garments of deficit hawks. In reality, you’re just trying to cement the Democrat Party’s unaffordable programs into place by suggesting that tax policies are the solutions.
Per your analogy with diet and exercise, I’d like to recommend a better one: eating = defecation + urination + retained waste.
Eating is equivalent to government spending. Defecation + urination = tax revenues. Retained waste = borrowing. If we don’t cut the spending, this nation more taxes are really going to stink up the economy, either now or later.
Perhaps dealing with the reality that the term “Tax Cuts” has no independent validity outside of the liberal concept that redistribution of wealth is only part of Natural Law is too much for this author to grasp but the assumption that it is in fact a Tax Cut with no historical perspective seems, at a minimum to lack journalist integrity. The truth is that originally the non-constitutionally supported idea of Income Tax was passed by a congress that assured the American Public that it would never exceed 10%. This was done with assurances that the federal government would not allow itself to get so fat and bloated that taxes would forever grow. When war and hard times came new justification was provided that a temporary increase was needed to help defend this country and its institutions and people at the time accepted exorbitant increases for the “common good”. There has been much reported and debated about the effect of increases in taxes to economic growth and to the inverse effect they have on actual tax revenue that the author also ignores, which are far too complex and detailed for discussion here but are worth noting as background. In short they are not really Tax Cuts. The wealthy and upper middle class already carry a hugely disproportionate share of the tax burden in this country why not state that continued extortion of one group of people is required to compensate for the other group who can not be counted on to make their fair contribution. It is only a Tax Cut for one who has a very limited historical perspective. That lack of historical perspective has grave consequences for our individual freedoms, which people who call them Tax- Cuts seem more than willing to surrender.
Anti.Antithetical
Taxes are driven by spending. You can whine all you want to the redistributive aspects of our tax code, but you’ll first have to confront the portions of the electorate who believe it’s ethical to make demands upon strangers to pay whatever costs of their retirement and medical they aren’t able to provide on their own. They’re the ones driving up your tax bill.
We don’t need Grover Norquist telling us that taxes are too high. We need Democrat stepping up to tell their constituencies that spending must be cut.
We have to pay our bills so tax increases will be part of the bargain. However, there is no bargain if the other side doesn’t cut entitlements.
I believe that any extension of the cuts is a mistake. But I do agree with Mr. Orszag that taking $400 billion per year out of the economy at this time would be a mistake.
Instead I would like to see the Bush Tax Cuts expire for all income levels and instead would advocate a more forceful but temporary form of tax cut, paid for by the income tax increases.
That more forceful tax cut is a declining payroll tax holiday spread over four years. In the first year the exemption would be on the first $20,000 of earned income, in the second on the first $15,000, in the third the first $10,000 and in the last year the first $5,000. If the economy does not respond by late 2011 the first tier could be extended for a year.
This would be only on the employee portion of the tax, to avoid self-employed people receiving a double reduction and to limit the impact on the trust funds.
Seven point five-one percent of $20,000 is $1,502 or about $125/month in reduced withholding. According to the Urban-Brookings Tax Policy Institute, the average yearly tax advantage under the existing Bush policy for households receiving $50,000 to $75,000 annual income is $1,132. The reduction for those in the $75,000 to $100,000 cohort averages $1,900.
That means that all families with at least one worker earning $20,000 or more and having an annual income of about $65,000 or less will receive a greater tax cut in the first year of this plan than they will pay in increased taxes from the expiration. Their withholding will go down.
An element of the plan would be that Congress would deposit an amount equal to the forgone revenue for Social Security and Medicare in the trust funds from the increased income tax revenues.
The stimulus from such a plan would be about $225 billion in the first year (150 million employed Americans times $1,500). That is just about half of next year’s tax increases, but the multiplier effect of a payroll tax holiday would be much stronger than that of extending the income tax cuts. Simply put, the rich have had ten years to “create jobs” but they’ve mostly created jobs in Italian marble quarries and in China.
It’s time to try another form of tax benefit.
President Obama has proposed a $400 billion immediate depreciation tax holiday for non-corporate businesses over the next two years, so that would absorb an additional $200 billion in 2011 and perhaps a bit more in 2012.
The combination of payroll tax holiday and investment tax cuts would be broadly revenue neutral but both have genuinely stimulative results (as long as the stuff the small businesses buy isn’t from China, which is certainly a potential pitfall).