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Giving In On Tax Cuts for the Rich to Raise Taxes on the Rich?

July 10th, 2011 . by economistmom

boehner-and-obama

Saturday night’s news on the debt ceiling talks is depressing even if not surprising.  As the Washington Post’s Paul Kane and Lori Montgomery report:

House Speaker John A. Boehner abandoned efforts Saturday night to cut a far-reaching debt-reduction deal, telling President Obama that a more modest package offers the only politically realistic path to avoiding a default on the mounting national debt.

On the eve of a critical White House meeting on the debt issue, Boehner (R-Ohio) told Obama that their plan to “go big,” in the speaker’s words, and forge a compromise that would save more than $4 trillion over the next decade had fallen victim to the toughest ideological issues: how to raise taxes and cut spending on popular health and retirement programs…

“Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt reduction agreement without tax hikes. I believe the best approach may be to focus on producing a smaller measure, based on the cuts identified in the Biden-led negotiations, that still meets our call for spending reforms and cuts greater than the amount of any debt limit increase,” Boehner said in a statement released less than 24 hours before the White House meeting was to take place.

The Post story goes on with some insights as to what went wrong (emphasis added):

Obama, at least, was willing to make that leap and had put significant reductions to entitlement programs on the table. But on Saturday, Boehner blinked: Republican aides said he could not, in the end, reach agreement with the White House on a strategy to permit the Bush-era tax cuts for the nation’s wealthiest households to expire next year, as lawmakers undertook a thorough rewrite of the tax code…

In private negotiations with the White House this week, Boehner had dangled a tax deal that he thought might bridge the divide. Republicans would immediately extend the Bush tax cuts for middle-class households, leaving the cuts that benefit the nation’s wealthiest taxpayers on track to expire next year. That would have been a huge win for Democrats, whose liberal base views ending tax cuts for the rich as a top priority — and one that Obama has failed to deliver.

Democrats, in turn would agree to a rewrite of the tax code by the end of the year, to lower rates for everyone. Talks broke down, according to sources in both parties, over the terms of tax reform: The White House insisted that changes in tax law not shift the burden more heavily onto households earning less than $250,000 a year. After that, said a Democrat familiar with the negotiations, “suddenly things went dark.”

It’s probably too late to bring tax reform back on the debt-limit-negotiations table, but assuming we get past this debt-limit crisis, I think it might be time for the President to rethink (and renege on) his campaign promise about raising taxes on those people with incomes under $250,000 AND his claim that he’d “never again” extend the Bush tax cuts for the rich (those over $250,000).  Perhaps it’s time we think about ways to extend all of the Bush/Obama tax-cut rates in exchange for enough base broadening (reduction of tax expenditures) to fully offset its cost.  I’ve been looking at some numbers (from CBO and the Joint Committee on Taxation), and I think it could be fully doable with a more aggressive version of the limit on itemized deductions that President Obama has proposed in his own budgets (all three of them so far), combined with a reduction in (but not elimination of) the exclusion of employer-provided health benefits.

Why would the President agree to extend those high-end tax cuts he despises so much?  Well, why has he agreed to them before?  It was always in the name of bipartisan “compromise” but always at the cost of a higher, not lower, deficit.  If this time he caves again on the upper-bracket rate cuts but holds Republicans to their claim that they’re willing to broaden the tax base as long as it pays for rate cuts, this could be a “more perfect” and truer tax policy “compromise”–which this time around would lead to deficit reduction relative to current policy, and deficit neutrality relative to current law and the CBO revenue baseline (which remember, provides a fiscally sustainable level of revenues).  Then the Democrats would get their desired revenue-side solution (bringing revenues/GDP up), Republicans would get their upper-end Bush tax rate reductions paid for by base broadening rather than higher tax rates, and those truly worried about the fiscal outlook would get a strictly PAYGO-compliant version of the Bush/Obama tax cuts, for a change!  And by the way, the debt-limit-and-beyond negotiators will have found another $2.5 trillion or so over ten years with this perfect tax compromise.

What am I missing other than some specific numbers to back this idea up?  Don’t worry, they’ll come soon.

12 Responses to “Giving In On Tax Cuts for the Rich to Raise Taxes on the Rich?”

  1. comment number 1 by: SteveinCH

    Diane,

    Why this obsession from both you and the White House on increasing the progressivity of Federal income taxes and why $250K as a cutoff.

    If you look at the Piketty and Saez work, effective Federal income and payroll tax rates are higher from P90-99.9 (even if you include imputed corporate taxes). I’m leaving their payroll tax approach out because I think it’s wrong since they are counting estates as income in the calculation.

    I see you trapped in the same bind as all left leaning people who oppose tax expenditures. You recognize that eliminating any of the large tax expenditures makes the tax code less progressive. You then abandon all the high sounding rhetoric about simplification (since a cap is less simple than the current system) and the discussion about payments by another means and come to this notion of a cap as the only potential solution.

    It’s rather funny to watch I must admit. Your only real approach that is consistent with your value system is the B-S approach, adjusting rates and tax expenditures at the same time but, as Boehner is probably correct to assume, that’s not going to happen in the next 2 weeks.

  2. comment number 2 by: SteveinCH

    Sorry I meant to say estate tax in the second para above.

  3. comment number 3 by: Brooks

    Diane,

    Re: What am I missing…?

    Many have the view (which I don’t consider unreasonable) that keeping tax rates where they are doesn’t constitute a “tax cut”, but merely not increasing taxes. Yes, by law the default is that rates will go up, absent legislation to the contrary, but that doesn’t mean that it’s unreasonable for someone to consider tax rates that have been in place for about a decade (i.e., current policy) to be the baseline. From that perspective, extension of the Bush tax cuts is not something conservatives get as part of a hybrid solution to the fiscal imbalance problem. Rather, it is viewed as merely no harm done.

    Couple that with the much less sensible view that many conservatives also have that cutting any tax expenditure subsidy constitutes “higher taxes” and “bigger government” even though they would view cutting the same subsidies in explicit expenditure form as “lower spending” and “smaller government”, and what you are left with is the view by many conservatives that they would be agreeing to “tax hikes” via cutting tax expenditure subsidies but not getting even a partial offset in terms of lower tax rates.

  4. comment number 4 by: Shadowfax

    President Obama made a huge error in not letting the Bush tax cuts expire at all levels. He could then have “caved” to ridiculous Republican demands to unwind 70 years of Progressive policy and still gotten a fair shake.

    Instead, he is now forced to take whatever terms the Republicans dictate or face a downgrade in our debt rating.

    It is a shame, as the “we have a spending problem, not a revenue” conservative baloney has gotten far more play than it deserves.

    If we tax at 27% GDP at all levels vs. 36% for the OECD developed countries per the TPC, revenue is clearly part of the picture.

    We can also tackle tax expenditure elimination in a progressive way. For example, we can start treating healthcare premiums paid for by corporations as income for say the top 35% of wage earners. We can similarly phase out the deduction for home interest. Who says the capital gains tax rate has to be roughly a flat tax? It can also be graduated.

  5. comment number 5 by: PulSamsara

    Boehners gotta’ lay off the sauce and get something done.

  6. comment number 6 by: Gipper

    Economistmom thinks that this great conflict is about deficits. It’s not about deficits. It’s about the share of GDP spent by the federal government.

    The Republicans aren’t fighting to reduce deficits. They’re fighting to the percentage of GDP spent by the federal government. The Democrats are freaked out about any attempts to hack off large commitments to seniors in the form of SS and Medicare benefits and don’t want to reduce the percentage spent by the feds.

    The debt limit is merely a sideshow in this grand conflict about the scope of government. And this time, because the Republicans have shown a seriousness to cut expenditures that has been completely AWOL during the Bush years, we are finally having a sensible discussion between real small-government conservatives and big-government liberals.

    The conservatives hold almost all the cards in this battle. They only things the Democrats can weild are falsehoods and fear mongering.

    Obama will have no choice but to cave in. His base cannot tolerate a 44% cut in federal expenditures brought on by crashing into the debt ceiling. We’ve all discovered that, ultimately, revenue flow dictates what you can spend. Starvation of the beast is finally going to be implemented — and Bruce Bartlett will have to eat crow.

  7. comment number 7 by: AMTbuff

    Gipper, it is entirely possible that politicians will continue to claim that the gap can be closed without major pain for the middle class. Voters may believe such claims.

    If this happens, the result will be much worse for everyone, both right and left. A crisis will occur that will make Greece look like a Sunday picnic. The safety net will be destroyed, rather than merely reduced. Tax rates will soar, rather than merely increasing moderately.

    Any objective observer would have to expect this lose-lose outcome. What I don’t understand is why Democrats in particular do not appear to fear it and why they are trying to hold onto the full suite of middle class entitlements plus ObamaCare. The math says that result is completely impossible. Two of three benefit promises kept are better than all three broken.

  8. comment number 8 by: ST Dog

    Gipper, if only your were/are right.

    Sadly I just don’t see it happening. The republiccn will cave yet again (see the budget results from earlier this year).

    ATMbuff, the Dems have done a fine job with the class warfare argument. So too large a group in the middle is convinced that it’s all a matter of taxing those in a higher bracket and everything else will stay the same. This is in part due to the poor state of education today, as most of those people cannot perform the simple math and logic analyis it takes to reach the conclusion.

  9. comment number 9 by: AMTbuff

    Deceiving voters is easier than deceiving the bond market. I still don’t understand how Democrats in particular don’t seem to be concerned that the bond market will force virtual abandonment of entitlement programs.

    Or am I the one who is not seeing this danger accurately? Can we escape a fiscal crisis without radical means testing of benefits such as Australia has done? Or do Democrats prefer triple the cuts that would otherwise be needed, as long as they can blame the cuts on evil bond traders?

  10. comment number 10 by: Brooks

    AMT,

    Couldn’t all you’re saying about the Democrats also be said of the Republicans. We are talking about how much of the solution should come from spending “cuts” and how much from higher revenues via tax rate increases and reduction of subsidies via tax provisions (hopefully also via incremental growth of the tax base, which is affected by policy, but is not itself policy).

    A party rejecting a solution with whatever proportions would plausibly work (including factoring in dynamic effects) could be accused of the kind of intransigence and irresponsibility you attribute only to Democrats. I’m not saying that any set of policies are just as good or responsible or representative of the wishes of the people as any other, only that for you to single out the Democrats merely because they want to preserve more of X by demanding some amount of Y seems to reflect more your policy preferences than an objective attribution of blame.

    What about Republicans rejecting any set of tax changes that would be expected to result in a net increase in revenues? Why is it no less intransigent for them to reject any portion of the solution coming from the revenue side?

  11. comment number 11 by: Unsympathetic

    It’s fun to see the adults in the Republican party finally silencing the children. McConnell is going to give Obama the power to raise the debt ceiling and Republicans will pass a “measure of protest” instead.

    Is there anything Boehner has done right?

  12. comment number 12 by: AMTbuff

    What about Republicans rejecting any set of tax changes that would be expected to result in a net increase in revenues? Why is it no less intransigent for them to reject any portion of the solution coming from the revenue side?
    Because any “fix” that does not address the root of the problem is not a solution. It is worse than doing nothing in that it consumes resources (ability to raise taxes further) which will be needed desperately to close the gap AFTER spending has been cut to sustainable levels.

    The analogy would be Democrats insisting on tax revenues sufficient to sustain current programs and promises before forswearing further expansion of government promises (e.g. enhancements to Obamacare). The problem with this analogy is that its contemplated level of spending cannot be sustained. It grows without limit (as a fraction of GDP) due to the nature of the programs. Therefore the premise (sustainability of current benefits) cannot be met.

    The entitlement spending curve has to be flattened before revenue is added to close the gap. I am confident that regardless of their current posturing, Republicans would eagerly accept tax increases following repeal of Obamacare and enactment of hard caps on entitlement programs.