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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.

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

  1. comment number 1 by: AMTbuff

    I’m puzzled. If Republicans stall until late January, they can control the content of the tax bill that reaches Obama’s desk. As a political matter, why would any party compromise right before its power increases? The compromise removes the pressure for further action, essentially killing any movement to reduce taxes. Unless Republicans secretly desire that outcome (do they?), this makes no political sense to me.

    For what it’s worth, my opinion is that any 2011 changes should maintain the current progressivity. Otherwise later changes will need to be highly regressive to avoid losing revenue at the high end. In other words, we shouldn’t eat only our dessert this year and save the vegetables for next year.

  2. comment number 2 by: Grocer John

    I agree that the payroll tax should be cut rather than the income tax. Payroll tax discourages employers from hiring, instead using independent contractors.

  3. comment number 3 by: Heather

    “It’s good for us, it shows we’re for the middle class, they are for the rich.”

  4. comment number 4 by: AMTbuff

    Lost in the debate about tax rates for 2011 is the fact that the AMT has not been patched for 2010 yet! Neither party has even proposed a patch with specific numbers. This is getting annoying.

    I expect the AMT to be patched for 2010 when the 2011 deal is cut, but that might not be until March at the rate things are going.

  5. comment number 5 by: BillSmith

    I would think the AMT would be a big issue but the tax cuts seem to be taking up all the oxygen. Could this be on purpose? Who will take the blame if the AMT isn’t fixed up yet again?