EconomistMom.com
…because I’m an economist and a mom–that’s why!

EconomistMom.com

3% of the Tax Cut Deal

December 15th, 2010 . by economistmom

tax-cut-deal-jct-scoring-dec2010

The Senate is about to pass the full tax cut “compromise,” but House Democrats are trying to hold out for a more fiscally responsible option.  From the Washington Post’s Lori Montgomery (emphasis added):

The strong Senate vote also appeared to have weakened resolve among House Democrats to block the measure when it comes to the floor this week. After meeting for two hours with rank-and-file lawmakers late Tuesday, senior Democrats said the House is likely to stage votes to change the terms of a revived estate tax that many Democrats view as overly generous to the wealthy.

Outraged by the agreement to exempt individual estates worth as much as $5 million from taxation, senior Democrats said they would press to lower the threshold to $3.5 million. They also want to impose a stiffer tax on larger estates, by setting the rate at 45 percent rather than the 35 percent demanded by Republicans and agreed to by Obama.

Those are the same terms that were in effect in 2009. The estate tax expired for the 2010 tax year but is set to spring back to life next month with much tougher provisions. House Democrats said their alternative would hit only about 6,600 of the nation’s wealthiest households while raising an additional $26 billion over the next two years compared with the Obama-GOP compromise - money that could be used to reduce the soaring national debt.

“There’s a real debate here between Republican proponents of tax cuts for the very richest Americans and our argument that that’s fiscally irresponsible and unfair to future generations,” said Rep. Peter Welch (D-Vt.), who was leading an effort to strip the tax package of what he called “indiscriminate giveaways” for the wealthy.

I agree that we shouldn’t need to deficit spend that additional $26 billion, which would benefit such a tiny fraction of the richest Americans who don’t exactly need any help–to spend or to save or to do whatever.  But this is an even more perverse version of President Obama’s wish to “save” the $700 billion 10-year cost of extending the high-end Bush tax cuts while urging the deficit spending of the $2.2 trillion 10-year cost of extending all the rest of the Bush tax cuts.  Note that the $26 billion House Democrats wish to shave from the estate tax cut, for fiscal responsibility’s sake, is just 3 percent of the cost of the ($858 billion) tax cut deal.  It’s really more about House Dems trying to avoid getting completely shut out from the deal than about them saving the whole deal from fiscal irresponsibility.

What might really make this $858 billion tax cut “compromise” nevertheless “fiscally responsible”?  From the policy piece the Concord Coalition issued a few days ago (emphasis added):

Two points are worth stressing.

First, there should be no professed “sticker shock” regarding the deficit impact of this agreement. Policymakers have always known, or should have known, that continuing current policies would substantially increase projected deficits. This would be true regardless of whether the tax cut extensions were limited to the “middle class” or applied more broadly. If fundamental tax reform is not undertaken soon, the $850 billion price tag of this agreement will be just a small sample of things to come.

Second, the extension of many narrow tax preferences in the Senate’s legislative version of the agreement runs directly counter to the widely praised recommendations of the President’s fiscal commission and the Rivlin-Domenici Task Force. Both groups made a strong case that scaling back or eliminating such “tax expenditures” could be used to build a more efficient system for revenue collection, lower rates and also raise needed revenue. Ignoring this advice, as the agreement clearly does, is a discouraging signal that business-as-usual in Washington has not yet been altered.

Whether this deal is fiscally responsible will ultimately be determined by what Congress does prior to the expiration dates of its main components. Ideally, these short-term policies will give Congress and the President time to consider fundamental tax reform along with the bi-partisan suggestions from the President’s fiscal commission for long-term spending restraint.

The sooner we can break out of the box from our current patchwork of tax-cut sunsets and tax expenditures and replace these policies with a more efficient, more permanent, and more responsible tax policy, the easier it will be to break out of the short-termism affecting the rest of the nation’s fiscal policy.

The outpouring of credible plans from partisans and policy wonks in response to the work of the President’s commission has made clear that nearly everyone in Washington longs to fundamentally transform the tax code — making it the most sensible area for the nation’s leaders to immediately begin our long march towards responsible budget policy.

I remain optimistic that a temporary extension of all of the Bush/Obama tax cuts is better than a permanent extension of any part of them, in increasing our chances that we will “trade up” to a better and more fiscally responsible federal tax system in the next couple years.

16 Responses to “3% of the Tax Cut Deal”

  1. comment number 1 by: SteveinCH

    Well, in the sense that a 1% chance is greater than a 0% chance Diane, I agree with you. The notion however of fundamental tax reform in an election year seems a bit unlikely to me unless both parties choose to campaign on it.

  2. comment number 2 by: AMTbuff

    Howard Gleckman has made the case for an idea that I also had a week ago: Obama should push the commission’s tax plan to a vote.

    Obama would err if he tried to improve on the plan or come up with his own plan. The beauty of pushing Bowles-Simpson is that it is NOT Obama’s plan. It’s a centrist plan, making it harder to oppose on partisan grounds.

    IMHO this is Obama’s best opportunity to regain public support. Coincidentally it helps the country avoid a fiscal crash.

    I put the odds of victory at 30%.

  3. comment number 3 by: SteveinCH

    Really, I can’t see B-S or anything like it passing the House. The Senate, I’d think 30% is reasonable but 30% in the Senate and 20% in the House and only 30% that the President decides not to tinker with in in the first place and you’re already down to 1.8%. : )

  4. comment number 4 by: SpendingHawk

    AMTbuff,

    I’m betting that Obama uses his SOTU address to outflank Republicans on deficit spending. B-S will form the core of his proposal. He’ll say something like the following:

    “The greatest crisis facing our nation is our willingness to impose a heavy burdern on the children of this nation who will be tasked with paying for the benefits of their elders. When you see the massive growth of federal debt what you should think about is what will your children have left over to receive from our government after they have finished paying for the debts incurred to pay for the beneifts you’re enjoying today and will receive tomorrow?

    “To rectify this growing and troubling injustice, I am proposing that we take radical steps to immediately reduce deficit spending. In December, the Simpson-Bowles commission developed a plan to do just that. My budget plan that will be submitted to Congress incorporates their recommendations.”

    And what will the Republicans say, then? “Ugh, we need to make the Bush tax cuts permanent, and we need to introduce Paul Ryan’s Roadmap as a way to reduce the national debt.”

    Not likely. The only chance the Republicans have is to agree to the B-S tax hikes, but then up the deficit reduction ante by proposing large cuts in spending as the price for accepting increases in tax revenue. My favorite would be a total phase-out of Medicaid at the federal level in 4 years. Let’s states decide their own funding levels and program design. Abolishing Ag subsidies, HHS, NPR, etc. would be nice to add on top of Medicaid.

    The Republicans won’t be able to use the vote to raise the debt ceiling as leverage unless they have a better plan to reduce the defict than Obama. Since I place a 15% chance that Republicans would agree to increase revenue in line with B-S recommendations, my bet is that Obama successfully outflanks the Republicans on the deficit.

  5. comment number 5 by: SteveinCH

    Want to bet on that?

  6. comment number 6 by: SpendingHawk

    SteveinCH,

    Bet on what? That House or Senate would ever pass B-S or that Obama will adopt it?

    I’ll bet on the latter, not the former.

    Obama doesn’t like the tax deal he just signed. But he understands that the Republicans have trapped him, and he trapped himself with his own destructive pledge to the middle class to not raise their taxes. B-S lowers rates and eliminated deductions so it’s not so straight forward that all of the middle class would pay more taxes. I think he gets enough wiggle room to claim that he doesn’t totally break his pledge to the middle class.

  7. comment number 7 by: SteveinCH

    I meant Obama, not the Congress. There’s no way he proposes B-S, straight up. He might say what you said but “incorporates” is just Washington speak for “changes”.

    Might he claim as you describe…sure but his proposal will look more like Schakowsky’s than the B-S report.

  8. comment number 8 by: B Davis

    Whether this deal is fiscally responsible will ultimately be determined by what Congress does prior to the expiration dates of its main components. Ideally, these short-term policies will give Congress and the President time to consider fundamental tax reform along with the bi-partisan suggestions from the President’s fiscal commission for long-term spending restraint.

    Agreed. I just got done looking at the deficit and debt under the CBO baseline, the tax cut deal, and the alternative whereby the Bush tax cuts are extended permanently and the AMT is indexed to inflation. I posted the results at this link. As can be seen from the second graph, the tax cut deal does limited damage to the debt causing it to be larger by a projected 3.7% of GDP in 2020. If the Bush tax cuts and the AMT fix are made permanent, however, the debt will just keep growing with the gross federal debt just about reaching its post-World War II peak of 121.7% of GDP by 2020.

    If we have learned nothing else from all this, I would hope that we have learned that a “temporary” tax cut lasting ten years is a very bad policy. Over such a long period, people naturally adapt to the new tax rate and it becomes politically difficult to end, regardless of how unsustainable it might be. We will find out if this also applies to a one-year tax cut when the payroll tax cut expires in a year. In any event, a ten-year “temporary” tax cut is pure madness.

  9. comment number 9 by: rjs

    simon johnson’s the only one dealing with this realistically: Voodoo Economics Revisited

    http://www.project-syndicate.org/commentary/johnson15/English

  10. comment number 10 by: SteveinCH

    B Davis,

    The problem with your argument is that we’ve now turned a 10-year temporary tax into a 12-year temporary tax. How, in your view, does this make it likely for the tax to change after year 12?

    As I said above, 1% is better than 0%. The only thing is, I’m not really sure that’s the case. I’m beginning to think that the temporary extension is actually worse than a permanent one. Here’s the logic.

    1. As the CBO “scores” the temporary extension, it’s a lot less costly than a permanent extension because the CBO is required to assume that the law will end at its sunset date.

    2. This in turn allows a lot of well meaning people (me included) to argue that the temporary extension is more fiscally responsible than the permanent one.

    3. But because the temporary extension is “cheaper” Congress can load more silliness into it (as they did with this bill) and actually make it worse on a per year basis than just letting the law expire.

    4. Every time such a law comes up for renewal, there will always be pressure to add ornaments to the tree, making the extensions always worse than the baseline law which they were designed to repeal.

    5. Perhaps the only way to force reform is to create a forecast so dire that the people require action. This approach makes the situation appear less dire when, in fact, it is likely to be more dire.

  11. comment number 11 by: Vivian Darkbloom

    Yes, although I generally don’t agree with Johnson’s excessive bank bashing, he’s much better on fiscal policy, even though he can’t quite balance his comments sufficiently to counter his natural partisan prejudice. The following quote struck me, because it somewhat echoes a discussion held here recently with respect to a different post:

    “More generally, fiscal stimulus is unlikely to have much lasting effect, as is the case now. There may be some temporary positive impact on demand, or higher interest rates could offset the entire fiscal push – rates on the benchmark 10-year Treasury bond are up significantly from a month ago (from 3.21% to 4.16%), when the discussion of tax cuts began in earnest”.

    His other comments further stress that we may be at the point where the additional costs of financing the debt might outweigh the benefits of additional stimulus from deficit spending, even in the short term.

  12. comment number 12 by: Vivian Darkbloom

    BTW, Johnson has another post on Economix which has a bit more of a partisan flavor (different crowd at the NYT, perhaps). He calls for a partisan Democratic tax commission to be headed by Alice Rivlin.

    http://economix.blogs.nytimes.com/2010/12/16/republican-split-democratic-opportunity/#more-93061

    I’m not sure about the partisan idea, but I’ve been impressed with the work Rivlin has done on the Deficit Commission and her health care plan proposals with Ryan and Domenici. She’s the real deal—and an Economist Mom!

  13. comment number 13 by: Brooks

    Simon Johnson writes:

    To be sure, no serious people are claiming the full Reagan effect today – partly because the Congressional Budget Office has kept everyone honest by showing in detail that the tax cuts will increase the deficit by close to $900 billion.

    Wrong on both counts. Just this morning I heard Pence on cable news saying essentially that tax cuts actually increase revenues (and no, he didn’t mean just revenue feedback effect vs. static scoring; he meant net effect). Which brings me to Simon’s error #2 (unless CBO has changed its practice of static scoring) — obviously a revenue loss calculated by static scoring does not, by definition, even address the argument that tax cuts increase revenues, let alone refute it.

    (Someone please tell me if the CBO figure he cites was from dynamic scoring)

  14. comment number 14 by: Vivian Darkbloom

    Brooks,

    I hope you are not clinging to the idea that tax cuts fully pay for themselves (or more), particularly as measured from current baseline rates.

    To answer your question, you can consult the following: http://www.cbpp.org/cms/index.cfm?fa=view&id=367

    In short, the CBO does not do scoring on tax legislation—the JCT does. The CBO then combines this with its own scoring on spending elements and releases the results under its own name.

    As the article associated with the attached link explains, the JCT includes very limited dynamic scoring in its estimates—the “dynamic scoring” involved is basically limited to estimating timing differences and there was very little of that in this bill.

  15. comment number 15 by: B Davis

    SteveinCH wrote:

    The problem with your argument is that we’ve now turned a 10-year temporary tax into a 12-year temporary tax. How, in your view, does this make it likely for the tax to change after year 12?

    In fact, I think that we will likely have a similar problem when the taxes expire in 2012. Because of the great difficulty in ending “temporary” tax cuts, I expressed my dismay at the new temporary payroll tax cut at this link. However, I think that it would be even more difficult to raise taxes, even if making the tax cuts permanent results in a more dire forecast. Afterall, the budget has been projecting an explosion of our debt over the long-term since at least 1997 (see the Long-run Budget Projections at this link) and the tax cuts and spending increases have continued unabated. I fear that Simon Johnson may be correct when he says that “both parties’ leaders will get there – but only when dragged, kicking and screaming, by the financial markets”. Still, many of us are likely here because we believe that a better outcome is possible.

    1. As the CBO “scores” the temporary extension, it’s a lot less costly than a permanent extension because the CBO is required to assume that the law will end at its sunset date.

    2. This in turn allows a lot of well meaning people (me included) to argue that the temporary extension is more fiscally responsible than the permanent one.

    I do agree that the misleading projections caused by temporary laws that are unlikely to be temporary is a problem. However, I think that the solution to that is 1) to avoid passing such temporary laws to begin with and 2) better account for those that exist. I’m not sure the exact form of the law that would have avoided it but I would argue that the original 10-year temporary tax cut should never have been allowed to be passed. (By the way, I found an interesting explanation of why the tax cuts were temporary here.) Similarly, the Alternative Minimum Tax (AMT) fix should not be allowed to simply be extended year by year. In the case of the AMT, I would favor just making the fix (adjusting it for inflation) permanent. The CBO does present the cost of a permanent extension of the tax cuts and AMT fix as alternatives but these are given much less notice that the regular CBO baseline, regardless of how much more likely these alternatives may be.

    3. But because the temporary extension is “cheaper” Congress can load more silliness into it (as they did with this bill) and actually make it worse on a per year basis than just letting the law expire.

    4. Every time such a law comes up for renewal, there will always be pressure to add ornaments to the tree, making the extensions always worse than the baseline law which they were designed to repeal.

    I don’t know that Congress needs that much of an excuse to give away goodies but that is an valid argument for limiting the number of extensions. I would have preferred that at least some of the Bush tax cuts had been allowed to expire. And I would support making laws upon which there is great agreement (like the AMT fix) permanent. Of course, that will need to be done with the knowledge that any needed revenues will have to come from elsewhere. But then, that is already the case since the AMT fix will likely never be allowed to lapse.

    5. Perhaps the only way to force reform is to create a forecast so dire that the people require action. This approach makes the situation appear less dire when, in fact, it is likely to be more dire.

    This sounds a little too much like “starve the beast” which has not worked. As I mentioned before, dire forecasts have not seemed to have had much effect up until now. Still, I support doing anything we can to avoid passing these bad “temporary” laws to begin with and doing honest accounting for those that do pass. I do find it strange that there seems to be virtually no public discussion of doing either of these two things.

  16. comment number 16 by: Gipper

    Today is a blessed day! The Republicans actually refused the temptations of bountiful buckets of pork ladened in the Omnibus Spending Bill. They actually took a stand on principle and refused to support ridiculous spending projects.

    It was a very, very small step. But it is the first evidence that the Tea Party had an effect on the Senate Republicans. Murkowski, Cochrane, Bennet, Collins and the other pork-loving RINOS actually fear the kamikaze Tea Partiers who would prefer to nominate clowns like Christine O’Donnell instead of RINOS like Mike Castle. The message was delivered, read, and followed.

    Hallelujah!

    Is it too much to hope for a debt limit vote impasse where Republicans will actually demand something significant — like the end of a federal support for Medicaid in exchange for some increases in tax revenue?

    It’s Christmas time so here’s hoping that Santa has me on his list.