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

EconomistMom.com

How the “Super Committee” Can Become Our (Fiscal) “Superheroes”

August 29th, 2011 . by economistmom

superheroes

Here’s the full text of my latest column in the Christian Science Monitor, in the blockquote below.  Doing “good” by our economy–with its dual and large challenges–will take superhero-like powers and the courage to use them.  Enter the debt limit deal’s “super committee”–who in being tasked with reducing the deficit by (at least) another $1.5 trillion over ten years might just be forced into recommending policies that aren’t just good at reducing the deficit, but are good for our economy–both near-term and longer-term–as well.

The stock market’s wild roller-coaster ride and Standard & Poor’s downgrade of America’s credit rating are just the latest symptoms of the large problems confronting the United States.

We shouldn’t be surprised. The economy continues to face severe dual challenges: (1) a very slow recovery from an unusually bad recession, and (2) an unsustainable longer-term government budget outlook. If our policymakers had their act together and were making successful efforts to combat either one of these, progress with the other would follow. As it is, the lack of substantial policy progress that came out of the debt-limit talks means months – perhaps even years – of the threat of a continued downward spiral.

To be fair, it’s not clear that policymakers could have done much better before the August debt ceiling deadline. It seems to take real crises to bring Americans together on difficult choices. The subsequent turmoil in the stock market may be just what we need to get us to focus on real compromise in time for Round 2 of the debt-limit deal.

By Thanksgiving, the bipartisan “super committee” of sitting politicians appointed by congressional leaders will have the opportunity to become “superheroes” for America. All they have to do is come up with a package of fiscal policies that will pass Congress and reduce the deficit by another $1.5 trillion over 10 years.

Democrats are still reeling from Round 1 of the deal, which included no increase in tax revenues and relied instead on almost $1 trillion in cuts over 10 years from annually appropriated “discretionary” spending. To their chagrin, it also imposes more spending cuts and no revenue increases if a majority of the super committee fails to come up with a passable plan. But the committee has no such constraints as it takes up Round 2.

Meanwhile, back in the real world of the US economy, job growth is still too weak. The consensus view of economists is that, while government efforts to stimulate demand kept things from getting worse, they still haven’t been effective enough in making things better. But more fiscal stimulus would mean more deficits, and now more than ever there’s no political appetite for that.

So are we stuck between a fiscal policy rock and an economic hard place? Not necessarily. It’s possible to stimulate the economy further, now, without increasing the 10-year deficit. It would mean steering funds away from spending and tax cuts that offer low “bang for the buck” economic stimulus and toward higher “bang” policies.

Then the deficit would be no higher but the economy would improve. That growth, in turn, would help brighten our debt outlook, as our economy would be better able to keep pace with our still-growing debt.

What shifts would be needed? The nonpartisan Congressional Budget Office lists payroll tax cuts and aid to state and local governments high on its list of fiscal policies designed to stimulate demand. Care to guess what falls dead last on that list? Extended income tax cuts.

So why not let the Bush tax cuts (at a cost of $2.5 trillion over 10 years) expire, as scheduled, at the end of 2012? At the very least, we should insist that any portion of those tax cuts we wish to extend should be paid for.

Healing both of our economy’s ailments isn’t hard as long as we open our eyes to all options. Round 2 of the debt-limit deal gives us another chance to get it right.

64 Responses to “How the “Super Committee” Can Become Our (Fiscal) “Superheroes””

  1. comment number 1 by: Arne

    It would be marvelous if we did not have to depend on DC for our superheros.

  2. comment number 2 by: Vivian Darkbloom

    Sorry Mom, you’ve got the right diagnosis but your prescription falls short.

    The diagnosis is that the economy suffers from low employment, lagging performance and we have unsustainable long-term deficits. I don’t think there is any economist on the planet who is going to disagree with that.

    Where you are wrong is simply taking CBO’s numbers and arguing from that for a solution:

    “What shifts would be needed? The nonpartisan Congressional Budget Office lists payroll tax cuts and aid to state and local governments high on its list of fiscal policies designed to stimulate demand. Care to guess what falls dead last on that list? Extended income tax cuts.”

    This seems to be cited with approval and this type of thinking is what has gotten us into the problem we”re in. The CBO’s projections are always short term and the prescriptions are therefore equally short-sighted. What is needed is a break from this cycle of short-term thinking and every single one of the items in your that quote is a short-term fix.

    Rather, what we need are permanent structural changes that ensure the long-term viability of the US economy, not just measures that are going to stimulate for the next few years. Here’s a start:

    –Eliminate a lot of inefficient deductions, exemptions and credits in the tax code and lower rates. This will improve economic efficiency and lessen the distortions on allocation of capital. CBO might not even credit you with a $1 reduction in the deficit, but that’s part of the problem in relying solely on CBO and their “numbers”. And, your solution of just letting those tax cuts expire doesn’t do anything to advance much-need structural reform;

    –Reduce government expenditures that have nothing to do with “investment”. That means reducing entitlements significantly from their current levels. Spending money on investments does not mean throwing money at a problem such as education, that has nothing to do with lack of money; it means spending money on infrastracture and other investments that have a demonstrably positive return on investment in any economic climate. What, exactly, do cutting payroll taxes temporarily and giving aid to state and local governments have to do with this? Nothing, but these prescriptions fit nicely in the numbers game.

    Unfortunately, the way this game is rigged the Super Committee won’t recommend the needed reforms. Instead, they will look to solutions that fit only into the short term budget window and they’ll game the CBO just like everyone else. Unfortunately, we’re stuck in a system that ensures that type of thinking will only continue.

  3. comment number 3 by: Patrick R. Sullivan

    Econ Mom ought to read her comments section. Jim Glass just went into chapter and verse on why politicians are all about short-termism; it’s the incentives they face. Pretty much as economic theory predicts. Expecting anything else is hardly reality based.

  4. comment number 4 by: AMTbuff

    >Rather, what we need are permanent structural changes that ensure the long-term viability of the US economy

    Right. For example, raising eligibility ages for Medicare and Social Security would IMMEDIATELY reduce the present value of long-term liabilities. Markets would soar.

    Repeal of the recent health care reform would similarly immediately improve our fiscal picture. If the Supreme Court voids that law entirely, I expect the stock market to rise 10%.

    These are examples of long-term policy shifts that have short-term benefits to the economy, and therefore to politicians.

  5. comment number 5 by: Dave

    If you’re looking to Congress for super heroes, I suspect you’re going to experience the same thing as the kid who waited all night by the chimney for Santa Claus.

  6. comment number 6 by: Jim Glass

    So why not let the Bush tax cuts (at a cost of $2.5 trillion over 10 years) expire, as scheduled, at the end of 2012?

    Why not? The answer is painfully simple:

    1) The Republicans in Congress will get killed by their constituents if they vote for it.

    2) The Democrats in Congress will get killed by their constituents if they vote for it for the 80% of the cuts that apply to everybody else other than “the rich”. And many will be hurt even if they only vote to raise taxes on “the rich” — which is why the Repubs keep using this issue.

    That’s why not.

    Again, this politics of “let’s all just agree to do the right thing (which will get us all killed)”, is impotent and bankrupt, and hopelessly naive.

    What we need is articles that actually *do* propose an answer to the “Why not…”

    “Here is a proposal that will create incentives to give elected politicians a self-interested reason to vote *for* deficit closing now, instead of against it, always kicking it down the road….”

    This is what the smart pundits and policy wonks should be working on. Until we get that, we are going nowhere.

    Taking the old, old line, “we need politicians with more character and courage” and escalating it up to “we need politicians who are superheroes”… I mean, c’mon.

  7. comment number 7 by: Jim Glass

    Via the Tax Policy Center: A Grim Prognosis for Deficit Reduction

    Apparently the insiders in DC are unanimous that the politicians aren’t going to do it, deal or not.

    “To these veterans of the fiscal wars, the odds are awfully long that Congress’ new budget super committee will reach a broad deficit reduction agreement by Thanksgiving — perhaps one-in-three at best. But there is worse news for those who worry about long-term deficits:

    “Although the debt agreement requires an additional $1.5 trillion in automatic spending reductions over 10 years should the Gang of 12 fail, not one of these experts believes those cuts will ever happen.”

    (Remember that Hennessey has already explained the procedures they can use to get out of doing it, deal or not.)

    Apparently the insiders do not view these members of the super committee as being so super.

    But seriously, why should they be? What *reason* is there for any of these Congress people to vote to significantly cut the deficit?

    Unless we can think of one, why would we imagine it ever happening?

  8. comment number 8 by: Arne

    “will get killed by their constituents if they vote for it”

    If Congress does not find something they can vote for the whole of the tax cuts will expire. Letting them expire is the right thing, but Obama thinks he will be blameed, so he will cut a deal of some kind to keep them anyway.

  9. comment number 9 by: AMTbuff

    Arne, you are focusing on the form rather than substance. The public will interpret a non-vote by Congress as a vote to increase taxes from current levels. That’s why the last time the expiration loomed, Obama agreed to extend all the rates.

    Sometimes I think that if not for these time bomb provisions the two parties would never be able to compromise on anything. Maybe the best approach would be to sunset all revenue and all spending at the end of 2011. Then Congress would have to negotiate everything from scratch each year.

  10. comment number 10 by: Brooks

    AMT and Jim,

    Arne does point out an important distinction: the default (pardon the term) is expiration of the tax cuts and thus increase in all tax rates. That’s the result if no deal is reached. This puts Dems in a strong negotiating position, at least re: top rates, all the more so given that Dems will have a more popular argument if the R’s alternative consists of greater sacrifice for the middle class in lieu of tax rates going up on high income earners.

  11. comment number 11 by: Brooks

    …and that’s why, even though of course Hennessey and others are right that any deal, including “triggers” for spending cuts or tax increases, can be undone by a future Congress (perhaps even the same one), it’s worth something to set a more fiscally responsible default path. Although Congress has proven more prone to deal-making (less dysfunctional) when it comes to fiscal irresponsibility, it’s still better to use whatever dysfunction exists for good rather than allow the dysfunction to mean inaction and thus continued exacerbation of the problem by default.

  12. comment number 12 by: AMTbuff

    To be credible, the default path should be something that the public knows about, not a scheduled tax increase the existence of which is known to less than 10% of voters.

    That’s why prominent changes like raising eligibility ages are crucial.

  13. comment number 13 by: Brooks

    AMT,

    Surely when we get anywhere near the deadline and expiration/extension is debated, the public will be made aware that tax rates will go up unless legislation is passed to extend some/all of them.

    I’m not at all suggesting that those opposed to tax increases won’t blame one (or both) sides simply because it was the default, only that, given the dysfunction in Congress and given the stronger argument the Dems will have re: the top rate(s), expiration of at least top rate(s) is more likely with expiration as default than if continuation of current rates were the default.

    And same applies generally re: the benefit of a more responsible default path.

  14. comment number 14 by: SteveinCH

    Brooks,

    The dynamic you describe is exactly the same one that obtained in 2010 and in 2010 the Congress was entirely in Dem hands? How, in your estimation, does this put Obama in a strong position, vis a vis the top rates in 2012?

    He was in a stronger position in 2010 and all the cuts were extended.

  15. comment number 15 by: SteveinCH

    I continue to believe the least likely outcome is the extension of only some rates. That requires new legislation and once you are in the realm of new legislation, it’s far more likely to be all or nothing given the dynamics that AMT rightly described.

    Then of course there’s the fact that rates are massively lower today on the bottom 60% than they were 40 years ago and only slightly lower at the top of the distribution.

  16. comment number 16 by: Brooks

    Steve,

    Re: your 6:24pm:

    Although my recollection is rusty, I think in the previous case the choice was between (A) lower tax rates for everyone (vs. expiration) vs. (B) higher tax rates for only “the rich” to lower the deficit. Basically, A was the politically easy choice even for Obama because it meant the same old thing: rather than reduce (or have much constraint of) the deficit, hand out goodies for everybody, including “the rich”, and whatever additional stimulus lower taxes on “the rich” provides plus shelter for Obama/Dems against the Republican argument that “the rich” create jobs and any tax cut kills jobs.

    But now, with much greater focus on deficits, especially by Republicans, the choice is more between (C) lower taxes (meaning lower than the alternative) on “the rich” AND imposing greater sacrifices on the middle class vs. (D) higher taxes on “the rich” and imposing less sacrifice on the middle class, because now there is more of a presumption of deficit “reduction”, including focus on amount of deficit “reduction”. Particularly if the parties agree on the goal of a particular magnitude of deficit “reduction”, the debate becomes one of who sacrifices in what way, and most people (the “middle class”) would rather see “the rich” sacrifice more so that less sacrifice is imposed on the middle class.

    All Obama and Dems have to do is frame the debate in those terms. For any given level of deficit reduction, the Dem solution imposes a larger portion of sacrifice to come from “the rich” than per the Republican solution. Republicans can make essentially the “trickle down” argument all they want, and they can even talk of “waste”, but good luck telling middle class families and seniors that they have to sacrifice more in this way or that (on either revenue side [including "tax expenditure" subsidies] or spending side with programs they think do provide some benefit) so that “trickle down” can work.

  17. comment number 17 by: Jim Glass

    As for tax reform, Kotlikoff asks why settle for crumbs? He proposes a full loaf, the Purple Plan.

  18. comment number 18 by: Arne

    “rates are massively lower today on the bottom 60% than they were 40 years ago and only slightly lower at the top of the distribution”

    1971 rates
    top 70%
    median 22%

    2011 rates
    top 35%
    median 15%

    I guess it is a matter of perspective.

  19. comment number 19 by: SteveinCH

    Arne, marginal rates aren’t effective rates. Too bad you don’t seem to know the difference.

  20. comment number 20 by: SteveinCH

    Brooks,

    The choices are exactly the same. A bill with lower rates for all taxpayers is about to expire. That is exactly the case in 2010. The only differences are

    (A) In 2010, the Dems had majorities in both houses.

    (B) In 2010, the President was not running for reelection

    In my view, both of those changes make any tax increase less likely rather than more likely

  21. comment number 21 by: SteveinCH

    Arne,

    If you care to actually look at the data, I’ve analyzed it here.

    http://uspoliticaleconomics.blogspot.com/2011/07/talking-about-tax-progressivity-part-2.html

  22. comment number 22 by: Brooks

    Steve,

    Obviously you can point only to things that will be the same and continue saying that nothing else will be different, without addressing in any way the difference I’m asserting will exist.

    Obviously I’m saying I think there will be a significant difference: a greater deficit constraint (due to greater attention to it among the public and in particular to the Republican emphasis on it).

    As I explained, if the deficit has become a greater factor, then it’s quite possible that the debate will be significantly re-shaped into the extent to which sacrifice is imposed on “the rich” vs. on “the middle class” to achieve a given level of deficit “reduction”, as opposed to the previous, more lax attitude toward the deficit in which goodies could be handed out to everyone without the benefit to “the rich” coming, in effect, at the expense of “the middle class”.

    It’s unclear to me if you simply do not understand what I’m saying or if you are disputing my premise that there is at least a decent chance the deficit will be more of a constraint next time around, and that this will mean lower taxes for “the rich” will require greater sacrifices by the middle class (and perhaps also low-income) in order to achieve a given level of deficit “reduction”.

    So if you want to just keep your hands over your ears and repeat yourself I guess you can and I won’t waste further time, but if you want to try to have an actual discussion you could try to address my assertion.

  23. comment number 23 by: SteveinCH

    Brooks,

    You provide no rationale for why the deficit will be a greater constraint. I’m with AMT. Politicians will do what is in their short-term interest. The President will simply NOT raise taxes on the middle class in an election year. And thus, we are going to be in the exact same place unless someone produces comprehensive tax reform between now and then.

    The choices you describe aren’t real. The real choices, absent tax return are (A) all taxes go up; and (B) taxes go up only on the rich. This is exactly the same set of choices that existed in 2010. There will not be new choices, and, in my opinion, the politics are even less favorable to a solution that raises taxes than they were in 2010.

    That’s my judgment. I see that yours is different but, from my pov, the only facts that are different are the ones I’ve described, both of which make tax increases less likely than they were in 2010.

  24. comment number 24 by: Brooks

    Steve,

    Re: You provide no rationale for why the deficit will be a greater constraint.

    ok, so at least I now know you are rejecting my premise, so I’m not faulting your logic (and I’m glad you’re now pointing out why you disagree), just your assessment re: that premise. It seems to me that, in the overall political calculus the Republicans have substantially raised the weight of the deficit issue, and in particular have made it more difficult for themselves to back away from the goal of (arguably) substantial deficit “reduction”. If a “rationale” (supporting argument) for that assumption is lacking in my comments, it’s because I didn’t thought it was obvious to all that Republicans have raised the profile of the deficit (debt) issue and/or boxed themselves in somewhat on the issue, relative to the weight of the issue in 2010.

    I’m not saying the issue is so huge that either party is willing to really get serious relative to the scale of the long-term problem, but I do think there is a decent chance that there is a substantially greater constraint, meaning more pressure for more deficit “reduction”, and levels of “reduction” being a larger factor in the public’s opinion different proposals than in 2010, all of which means that next time around debate will likely involve more trade-offs of sacrifices — in particular sacrifices of “the rich” vs. “the middle class” — rather than the more abstract option of greater deficits.

    Re: The President will simply NOT raise taxes on the middle class in an election year.

    Let’s be clear about what we’re talking about: absence of a deal b/w Republicans and Obama/Dems resulting in everyone’s tax rates going up. To phrase it as Obama “raising taxes” is skewed.

    The Republicans will say they didn’t want anyone’s taxes raised, but they will also feel compelled to offer a proposal/plan/budget that will achieve deficit “reduction”(do you think they are likely to simply reject higher taxes without presenting any plan for deficit-reduction after all they have said and done this year??) So just to use percentages for illustration only (no real meaning behind them), it’s like Republicans are advocating a package that reduces deficits by $X trillion by imposing 95% sacrifice on the middle/lower class, and 5% on higher income earners.

    Obama will say that he wants instead a plan that also reduces deficits, but that does so instead by allocating sacrifice 75% on the middle class (via spending cuts and perhaps some reductions in “tax expenditure” subsidies) and 25% on the middle/lower class.

    Re: The choices you describe aren’t real. The real choices, absent tax return are (A) all taxes go up; and (B) taxes go up only on the rich.

    I have no idea what you think are the choices I’ve described. I’ve been talking about exactly the A and B you just described. I have no idea what you think I’ve been talking about and why this isn’t clear to you, but never mind.

  25. comment number 25 by: Brooks

    obviously instead of:
    “it’s because I didn’t thought it was obvious…”

    I meant to say:
    “it’s because I thought it was obvious…”

  26. comment number 26 by: Vivian Darkbloom

    I’ve addressed the situation before here, and I think most folks are not seeing the political situation accurately.

    You can’t simply say that letting the tax cuts expire is the “default” situation, as if there are no other dynamics at play. The situation is pretty much the same as in 2010 with two exceptions: The Republicans control the House and 2012 is an election year. Add to that, the fact that the economy continues to sputter and employment lags. So, how does this play out?

    My guess is that, failing a Super Committee agreement, sometime next year, in the middle of the election campaign, Republicans will get a bill through the House (and perhaps also the Senate with help of Blue Dogs) to extend the tax breaks for everyone. This puts the choice directly on the President’s desk: veto tax cuts for the everyone (including the middle class) or sign the bill. This puts responsibility directly on his shoulders. Letting the tax cuts expire in a de facto recession would also not be a good move. Of course, Obama can say, as he always has, “I would have extended the tax cuts for the middle class only”, but that is not the choice he will likely be presented with. And, this will become a serious campaign issue. Remember, there are only three weeks between the expiration of those tax cuts and the inauguration of the next President. If those cuts expire, they can be easily restored retroactively. The Republican candidate will likely argue “if you elect me as President the first order of business is that I will retroactively restore those tax cuts for everyone to January 1, 2013 (and perhaps even *lower* taxes). Obama will say, on the other hand, “if you elect me as President, the first thing I will do is restore those tax breaks for the middle class, but not for the “rich”. You simply cannot make *raising* taxes on *everyone* a campaign pledge in an election year.

    There is *no way* simply letting all those tax cuts expire (permanently) is a possible outcome.

  27. comment number 27 by: Vivian Darkbloom

    And, here’s another dynamic relevant to my prior post. Currently, Democrats are expected to have 23 seats up for election in the Senate, including 2 independents who caucus with the Democrats, while Republicans are only expected to have 10 seats up for election. Who will control the Senate after the election? It’s very likely the Republicans will at least gain some ground. As regards those tax cuts, it is not only the current situation that is relevant, but the Congressional situation after 2013. Both parties know this and it appears to me that absent significant changes between now and the election, Republicans have a stronger hand than now, even if Obama is re-elected.

  28. comment number 28 by: Vivian Darkbloom

    I meant *after 2012*.

  29. comment number 29 by: Brooks

    Steve,

    As follow-up to my comments last night, I was just about to acknowledge the possible scenario Vivian just described (she beat me to it — well done, Vivian) as she writes:
    Republicans will get a bill through the House (and perhaps also the Senate with help of Blue Dogs) to extend the tax breaks for everyone. This puts the choice directly on the President’s desk: veto tax cuts for the everyone (including the middle class) or sign the bill. This puts responsibility directly on his shoulders.

    But I was going to raise that possibility to make this point: Even if the House passes that legislation in isolation (not as part of a budget deal), Obama/Dems can still frame the issue as I’ve described (in the context of the overall mix of budget sacrifices). I assume also the Senate would likely pass an alternative bill with tax cuts for only “the rich” going up. And the rhetorical battle would proceed. I believe that Obama/Dems would win the rhetorical battle, framing the issue as the overall mix of sacrifices, and portraying the Republicans as “holding middle class taxpayers hostage to extend tax cuts to millionaires”, threatening the middle class with tax increases if they don’t get what they want: “tax cuts for millionaires, and deficit reduction almost entirely on the backs of the middle class and seniors”. I think this is an easy pitch right down the middle of the plate for Obama/Dems that they can knock out of the park.

    Obama/Dems can point to Republicans voting for Ryan’s plan to shift much of each retiree’s Medicare costs to coming out of their pockets, and point to whatever discretionary cuts Republicans have proposed and what the sacrifices are and on whom they fall, and make the case that these Republican objectives and the matter of “tax cuts for the rich” are part of the whole and are interrelated because of the need for deficit reduction — in other words, voters have a choice between different plans with different trade-offs, one that imposes more sacrifice on the middle class and less on “the rich”, and the other vice versa. I think vice versa will be more popular.

  30. comment number 30 by: SteveinCH

    But Brooks, as Vivian rightly points out, vice versa will never pass the House. So it comes back to the same thing as 2010 with worse fundamentals from the standpoint of revenues going up.

    At some point, a bill to extend all the rates will pass the House. A bill to extend some of the rates cannot (I think) pass the Senate. So from a legislative perspective, there will be only one proposal in place that avoids a tax increase on all Americans.

    Again, this is worse than the 2010 dynamic. In 2010, the Dem House passed the tax increase only on the rich bill and it still couldn’t get through. This time, the opposite piece of legislation will be in play and, again, nothing will be able to get through the Senate until the last second.

    So, in my opinion, the only two live options are full extension and no extension. The rhetorical battle you describe is the same one that was fought in 2010 only the Dems have less control than they did in 2010 and the President is up for reelection. The legislative battle will be fought on much less favorable terms for the solution you suggest.

    Of course, we shall see…

  31. comment number 31 by: Vivian Darkbloom

    “So, in my opinion, the only two live options are full extension and no extension.”

    That’s right, I think. In theory, though, the blame game could still be played out as Brooks argues. Remember that the legislation will need to be initiated in the House under Art. 1(7) of the Constitution. The bill to extend all cuts would pass the House and go to the Senate. At that point, any number of things could happen. 1) the bill could pass the Senate putting Obama on the spot; 2) the bill could be amended by the Senate to remove the tax cuts for the “rich” and go back to be killed in the House; 3) lots of possible variations, including possible filibuster in Senate (by Republicans!) to block any amendments on the bill or filibuster by the Democrats to block vote on the main bill.

    Admittedly, scenario 2 is not good for the Republicans. Scenario 1 is not good for the Democrats. Scenario 3 is arguably not good for anybody.

    On reflection, it’s possible that the Republicans will not risk a boomerang by not initiating a bill at all. This would mean the cuts would expire, but of course, the issue is then a campaign issue as to which version will be passed *after* the election to take retroactive effect to 1/1/2013. As I wrote earlier, there is also no scenario in which *all* tax cuts will expire, because even if they do, they will be restored after the election.

  32. comment number 32 by: Brooks

    Steve,

    First, I should correct something I said earlier: I should have said it’s likely that the Senate will get majority support/vote for legislation extending tax rates for middle class and below, not “pass” the Senate (60 votes).

    Nevertheless, Obama/Dems will have legislation they support, and the House Republicans will pass legislation to extend tax rates for everyone.

    Again, Obama/Dems will tell the public “The Republicans are insisting on greater sacrifice by the middle class and seniors [in terms of greater spending cuts in X, Y, and Z] so they can extend a tax cut for millionaires and billionaires. And they are holding 98% of Americans hostage! If they don’t get to place all the sacrifice for deficit-reduction on the backs of the middle class, they’ll let tax rates go up for everyone. America doesn’t want that. America wants the rich to share in the burden of deficit-reduction, and we won’t let the Republicans hold 98% of America hostage just to extend a tax cut for millionaires and billionaires.”

    I think Obama and the Dems will sell that, not just because they prefer that ideologically, but because it’s a winning strategy for 2012 elections. It will be advantageous brinksmanship for them if it comes down to the wire and even if expiration occurs. Obviously I can’t say I’m sure about all this, but my guess is that Obama and the Dems are salivating over this opportunity to contrast themselves vs. Republicans in terms of “Whose side we’re on and whose side they’re on.”

    I’ve long believed that, as the deficit issue grows in importance among voters and/or as one or both parties box themselves into a commitment to deficit-reduction, the center of gravity will shift left on the ideological spectrum, simply because the Republican “low taxes for everyone” pitch only works well when lower taxes for higher income earners does not require greater sacrifice by the middle class and seniors, and once as the deficit becomes a greater constraint and that trade-off among segments (how much sacrifice is imposed on each) becomes more the choice before voters, middle class and senior voters will see their immediate interest as much more compelling than some “trickle down” economic argument. At some point the politicians will not want to go further to the left (1) out of greater concern (and greater concern among the public) re: “trickle down” as tax rates at the top get higher, and (2) because higher income earners have disproportionate influence due largely to campaign contributions. But there will be a shift to the left until we reach that stopping point. It may not happen until the sh*t hits the fan and really major sacrifices are necessary, but that’s my medium/long-term prediction.

    As you say, we shall see.

  33. comment number 33 by: Brooks

    Oh, and when the Republicans say it’s stupid to raise taxes on anyone — least of all on “job creators” — amid a weak economy, Obama and Dems can reply that economists nearly universally agree that we will stimulate the economy much more if we use those incremental revenues from the rich to avoid deeper “cuts” in immediate spending that the Republicans want (assuming roughly apples-to-apples in terms of degree of deficit reduction — i.e., similar deficit constraint for the competing plans).

  34. comment number 34 by: Vivian Darkbloom

    Further food for thought:

    The official Dem posture today seems to be that the tax cuts should be extended for those earning less than $1 million (no longer $250,000). But, last December 4 when the Democrats ruled the House, two bills failed to clear filibuster in the Senate. First, an amendment by Baucus would have extended those cuts only for those earning more than $250,000. Cloture failed 53-47 (60 votes needed). A second amendment, submitted by Schumer, would have extended cuts for those earning less than $1 million. That failed by the same margin. Finally, Bernie Sanders attempted an amendment to the bill that eventually passed on December 15. His amendment would have extended the cuts only for those earning less than $1 million. That, too, failed. The final bill extending cuts for all passed the Senate 81-19 with obvious broad support from Democrats. According to polls afterwards, 60 percent of Americans approved the deal. What has changed since then is that the Republicans now rule the House. What has also changed is that the Dems have moved the threshold from $250,000 to $1,000,000. But, given those prior votes, it’s tough to see how this time will be different.

  35. comment number 35 by: Vivian Darkbloom

    should be *less than* on the Baucus amendment.

  36. comment number 36 by: AMTbuff

    >the Republicans have substantially raised the weight of the deficit issue

    No, they have raised the weight of the SPENDING issue. Big difference.

    >but they will also feel compelled to offer a proposal/plan/budget that will achieve deficit “reduction”(do you think they are likely to simply reject higher taxes without presenting any plan for deficit-reduction after all they have said and done this year??)

    The Ryan plan already passed the House. Although that plan is incomplete, nothing superior has been presented by either side, let alone voted on, let alone passed by a legislative body. On the long-term spending issue, the ball is in the Democrats’ court.

    We do have a good chance for a vote on a balanced budget amendment this year, and that will allow the Democrats to show support for spending reduction.

  37. comment number 37 by: Jim Glass

    Obama and Dems can reply that economists nearly universally agree that…

    I can hardly think of anything that would carry less weight with voters.

    A few years ago the AER did a survey of economists world-wide to find what they most agreed and disagreed upon. The #1 thing that all the economists in the entire world *most* agreed upon was “Rent controls for housing are bad”. (As put by Assar Lindbeck, former chairman of the Nobel Prize committee for Economics, “Next to bombing, rent control is the most efficient technique known so far for destroying the housing stock of cities.”)

    New York City just once again renewed its emergency temporary WWII rent control system. San Francisco has infamous rent controls that politicians proudly rise to defend from every challenge, etc. Who cares what economists universally agree about? Nobody.

    Or, as per “Blinder’s Law”: The *more* unified in agreement economists are on an issue the *less* influence they have on politics, while the more divided they are on an issue the more influence they have in politics (as the battling politicians start invoking their particular economists of choice on each side).

    Alan Blinder wasn’t being just amusingly cynical-cute when he said that. It is a perfectly rational and predictible result of the incentives that drive political behavior.

  38. comment number 38 by: Brooks

    Vivian and AMT,

    You each present fair points, but I still think that Obama/Dems will want to and will effectively frame the issue as a choice between different sets of sacrifices within the constraint of deficit reduction. I think they’ll want that contrast now, with deficit-reduction having a higher profile and Republicans boxed into that objective and Republicans pushing sacrifices by the middle class and (somewhat near-future) seniors (pushing with new proposals and/or continued support for standing proposals/bills like the Ryan plan), and having already caved embarrassingly on the debt limit deal.

    I think they will eagerly grab the opportunity to present that contrast, framed as “how” we’ll achieve significant deficit-reduction — Who wants to impose which proportions of sacrifice on middle class & seniors vs. on “the rich”. As opposed to the same old “goodies all around”, never mind deficits and debt approach that has predominated prior to this year. (And again, I don’t mean to overstate the shift I think has taken place; I’m just saying the weight of the deficit issue has increased and will be more of a constraint, forcing those trade-offs among more tangible sacrifices).

    I think Obama and Dems will have a strong hand to play, and my guess is they’ll either get an increase in the top rate or progressively structured reductions in tax credits/deductions/exclusions.

    We’ll see if I’m wrong.

  39. comment number 39 by: SteveinCH

    That’s too bad Brooks because, if that’s all they get, it will be woefully insufficient to address the problem and will exacerbate the already very high and higher than historical progressively of the US Federal income tax code.

  40. comment number 40 by: Brooks

    Jim,

    I certainly wouldn’t suggest that citing a consensus of economists is a generally reliable tactic of political rhetoric. But I do think it can be effective under some conditions, one being when the public cares enough to pay sufficient attention to experts in the mainstream media, and I think that will apply in this case.

    And I think your analogy is somewhat off. In your example one substantial segment would feel the pain very sharply while others don’t know if or how much they’d benefit from the economists’ prescription, and may even think they’d be better off without it (maybe they could get a rent-controlled place someday if anyone ever left one). In the case of lower taxes for “the rich” vs. more for the middle class in terms of spending and/or lower taxes (e.g., lower payroll taxes), most people (i.e,. the middle class and lower) do not have a reason to favor the former (lower taxes for “the rich”) or to want to believe the former would be more effective at stimulating jobs. They have no vested interest, nor any source of bias (other than general ideology and what they hear on hyperpartisan talk radio, etc.) making them inclined to reject expert consensus.

    As an aside, I’ve noticed (just anecdotally, from my own observations) that, compared to pre-2007/8 campaign, there is much less frequency of conservatives claiming that history proves that “tax cuts increase revenues”. I remember when FOX News moderator Wendell Goler called out the Republican candidates on that myth during a debate. Also around that time National Review’s Ponnuru also had the guts to inform readers of the consensus of economists. Maybe around then was a turning point. Anyway, that’s an extreme case and even there some headway was made (I think) in face of consensus of economists even with people determined to reject it.

  41. comment number 41 by: Brooks

    Steve,

    Well, I was playing armchair political analyst, not advocate.

    That said, it so happens I do favor tax rate increases on everyone eventually (starting at the high end if necessary) as PART of the eventual large-scale solution (and you know how I feel about…dare I say it?…”tax expenditures” — I’ll generally take those before tax rate increases).

  42. comment number 42 by: SteveinCH

    Brooks,

    Now I’ll play armchair analyst.

    Personal tax expenditures will not be eliminated by the Democratic party. The reasons are first they are popular, second, it would violate the pledge not to raise taxes on those making less than 250K and third, the elimination of tax expenditures makes the income tax code less progressive, liberal rhetoric to the contrary. At best, tax expenditures will be limited, which, in my view is closer to a rate increase than a spending reduction even were I to accept your argument about the equivalence of the two.

    Second, there is no way on high heaven that tax rates are going up on the “middle class” save as Vivian suggests for a month or so before being retroactively knocked back down. The simple fact is that Americans do not broadly want to pay more taxes. The only way in my view that they could be induced to do so is by trickery, that is, by the elimination (not restriction) of tax expenditures and the simultaneous lowering of rates. This gives the appearance of lowering taxes (and does lower them for some) while actually holding them or raising them.

    The notion of broad gauged tax rate increases just isn’t going to happen, at least not prior to some sort of market induced crisis.

  43. comment number 43 by: AMTbuff

    >Who wants to impose which proportions of sacrifice on middle class & seniors vs. on “the rich”.

    You could tax the $250k+ families to the sky and you’d still be much less than halfway to fiscal sanity. By necessity the middle class will take a large majority of the pain. It’s just math.

    Obama has damaged the progressive cause by his rhetoric that only the “rich” need to worry about the fiscal problem. When that problem hits Americans between the eyes politicians will not be able to hide from their past lies that only minor changes were needed.

    A few people like Ryan will be immune to this criticism, and even Ryan has not been forthcoming about the lower level of medical care his plan provides.

  44. comment number 44 by: Brooks

    You could tax the $250k+ families to the sky and you’d still be much less than halfway to fiscal sanity. By necessity the middle class will take a large majority of the pain.

    I have to assume you’re not presenting that as an argument that, just because sacrifice by “the rich” won’t be nearly enough, “the rich” shouldn’t have to sacrifice at all.

    And even if middle class people feel misled (accepting your premise just arguendo) by those they think made it sound like they’d be spared, that doesn’t mean they’ll think better of a party that wanted an even greater burden placed on them so as to spare “the rich”.

  45. comment number 45 by: Brooks

    Steve,

    I’m wondering again what it is you think I’ve been saying.

    I wasn’t saying I thought tax rates on the middle class are likely to go up next year.

    Also, I spoke of the Dems getting either the top rate to go up or getting progressive reduction in tax expenditures, meaning some sort of caps, however one wishes to think of such measures.

  46. comment number 46 by: SteveinCH

    Brooks,

    I didn’t say anything about next year either and caps on tax deductions are a terrible idea from a policy perspective.

  47. comment number 47 by: AMTbuff

    >I have to assume you’re not presenting that as an argument that, just because sacrifice by “the rich” won’t be nearly enough, “the rich” shouldn’t have to sacrifice at all.

    Not at all. Means testing is effectively a huge tax increase on all the non-poor, which includes the “rich”.

  48. comment number 48 by: Brooks

    Steve,

    You said:
    Second, there is no way on high heaven that tax rates are going up on the “middle class” save as Vivian suggests for a month or so before being retroactively knocked back down.

    That sounded to me like you were referring to the politics next year, as was Vivian. If not, ok. As for the long-term when larger sacrifices are needed, I hope reductions in “tax expenditure” subsidies comes before (or if possible, in lieu of) tax rate increases on the middle class, but I do think the latter will eventually occur too before this problem is solved (could be 5, 10 years from now or more). Don’t forget that the seniors percentage of voters will grow even more over the next decade and beyond, and they’ll vote heavily on defending their benefits.

  49. comment number 49 by: Vivian Darkbloom

    “As for the long-term when larger sacrifices are needed, I hope reductions in “tax expenditure” subsidies comes before (or if possible, in lieu of) tax rate increases on the middle class, but I do think the latter will eventually occur too before this problem is solved (could be 5, 10 years from now or more). Don’t forget that the seniors percentage of voters will grow even more over the next decade and beyond, and they’ll vote heavily on defending their benefits.”

    OK, on the tax expenditures, but I have to assume that what Brooks is implying is that seniors will defend their benefits, but they won’t defend their tax cuts (or both). Maybe, but I think it’s more complicated. Certainly, seniors care a lot about their benefits, to wit, social security and Medicare. Currently, the over-65 cohort is about 13 percent of the population and about 17 percent of persons of voting age. That will increase somewhat in the future. The key strength of the over-65 cohort is that they vote. They have a much, much higher voting participation rate than the younger cohorts.

    http://www.census.gov/compendia/statab/2011/tables/11s0416.pdf

    As I’ve written here before, maybe, just maybe, the way out of this quandary is that a voting majority forms among concerned younger folks and rational seniors, or self-serving seniors who don’t want their taxes raised. There are, of course, a certain percentage of seniors for whom a tax increase is more costly than a benefit cut. Thus, there is a real tension for some seniors here: do I want my benefits cut, or my taxes increased? (or am I rational and unselfish and do both).

    The key here, I think, is that the younger generation needs to start voting, and voting with one voice on this issue. If they do that, things may change. And, I see signs of growing awareness. Here’s a comment posted by a 22 year-old on CG&G that suggests to me the younger generation is waking up to the problems their profligate parents have caused:
    …………….

    For the 1000th time, NO

    The NY Times editorial board has been pushing nonstop for bailouts and government help for irresponsible homeowners and irresponsible bankers for the last three years.

    My wife and I are in our 20’s. We’ve done what many in our generation don’t do: work hard and go to school. Still, the prices are so high that even the thought of owning a house is laughable.?I refuse to pay and waste time for my parents’ generation mistake of using their houses as ATM’s.

    Posted by Alex on Aug 27th, 2011 at 1:00 pm.

    …………….

    Change almost always comes from the younger generation. It’s quite possible that they will be our “Superheroes”. I think, despite the changing demographics, the balance of power will favor benefit cuts. For the first time since the New Deal, the younger generation is painfully aware of the costs of a generous entitlement system and , in particular, that they will be the ones to bear those costs.

  50. comment number 50 by: AMTbuff

    >Don’t forget that the seniors percentage of voters will grow even more over the next decade and beyond, and they’ll vote heavily on defending their benefits.

    Only those seniors who are without children, who don’t care about their children, or whose children don’t pay taxes. Many if not most senior votes will realize that robbing children to pay their parents is pointless.

    I agree that the younger generation will end up fixing this whole mess for us, but they will have no lack of support from responsible seniors.

  51. comment number 51 by: Brooks

    AMT,

    Poll data would be interesting on this question, but anecdotally my sense is that seniors seek to defend their benefits, perhaps because, just as they care about their children and grandchildren, they know their children and grandchildren care about them (and in some cases, help support them), so perhaps they don’t consider the higher taxation (and lower spending elsewhere) to support them selfish or even an imposition (the latter if they assume less money from the government means more from their children).

    But again, that’s just my sense, along with what I think political analysts generally say, but I’d be interested in poll data to the contrary.

  52. comment number 52 by: AMTbuff

    Brooks, you have used the same faulty reasoning that leads many religious people to favor income redistribution. The reasoning is that private charity is good, therefore public charity must also be good. The problem is that while private charity starts with money honestly earned, public charity begins with confiscation of money. It’s not quite the same as theft by a mob, but is not particularly good and laudable. It also indulges the sin of envy. Religious leftists tend to be blind to this crucial distinction.

    Now I’ll move to your financial evaluation. If the government did not spill 20% or more of every dollar it attempts to redistribute, you would have a point that continuing current benefits is a wash, dollar-wise, on average, for an extended family. However there are also incentives. Elasticities if you prefer. Not to mention outright fraud.

    Less redistribution improves the overall economy, meaning people are financially better off on average. This is common sense that only highly “educated” people dispute.

    Grandparents who want the best economy for their grandchildren will not be screaming to keep their benefits.

  53. comment number 53 by: Brooks

    AMT,

    You seem to be confusing my armchair political analysis with advocacy and/or confusing an expectation of beliefs, perceptions and preferences (on the part of seniors) with what you think is good policy or what even they would consider good policy if they were well-informed.

    I didn’t engage in any such “faulty reasoning” because I wasn’t speaking of my own views, but rather of views I expect most seniors to have.

    And re: efficiency, you write:
    If the government did not spill 20% or more of every dollar it attempts to redistribute, you would have a point that continuing current benefits is a wash, dollar-wise, on average, for an extended family.

    Again here, I made no such point. I was speaking of my expectation that some seniors will assume a substantial degree of such a “wash”, not saying that that was my assumption.

    All I’m saying is that I think seniors do and will continue to defend their benefits at the ballot box, and part of their rationale in at least a good number of cases will be that lower benefits would mean more money coming directly from their children. Yes, there is some degree of inefficiency having government as a middleman of sorts, and yes, there is income redistribution even if we’re looking as a whole at cases in which seniors’ children make up all/some lost benefits, because of different levels of taxation on their children and grandchildren, and different levels of benefit consumption from senior to senior.

    But I think most seniors will come down to thinking about the most concrete thing before them: the bird in the hand that they will lose if their benefits are reduced. Abstract arguments about economic theory, regardless of merit, won’t have as much pull with a senior considering having his SS check and Medicare coverage reduced (or paying more in premiums). Most won’t even go through the trouble of trying to figure out the math of how much more in taxes their kids will have to pay as a result of their benefits not being reduced (or reduced further than some lesser reductions), let alone try to get a sense of the likely macroeconomic effects (how much lower unemployment, etc.) of whatever degree of lower tax rates to which benefit reductions would lead directly.

    Most of them will also feel they “deserve” and have “earned” their benefits, having paid into the system (and most won’t be swayed by arguments that they will be taking out much more than they put in, if that’s the case).

    And many/most would also think/rationalize that they are being asked to sacrifice unfairly only because of some sort of lobbyist-induced corruption, because of “waste” that should be rooted out, etc., which could avoid both reductions in their benefits and higher middle class tax rates — which means they’d oppose the latter also, but I think they’d vote more strongly based on the former. There’s always a grab bag of rationalizations people can manage to sincerely believe in when people really want to find one to avoid direct pain.

    As a note, one of the reasons I favor campaign finance reform (in some way that is least questionable on First Amendment grounds) is because of the objection/rationalization many have that they shouldn’t sacrifice just so “special interests” can get benefits (or avoid sacrifice). I think the fight for fiscal responsibility should include a fight for campaign finance reform.

  54. comment number 54 by: Jim Glass

    As I’ve written here before, maybe, just maybe, the way out of this quandary is that a voting majority forms among concerned younger folks and rational seniors, or self-serving seniors who don’t want their taxes raised. There are, of course, a certain percentage of seniors for whom a tax increase is more costly than a benefit cut.

    This is spot on, and the dynamic here drives straight towards means-testing of benefits in a serious way (as I’ve mentioned at some length previously).

    Buffett said in his Charlie Rose interview about his Times piece that it is absurd that he gets $30,600 of Social Security benefits, and that entitlements should be means-tested away from the rich. (As unnoticed as this has gone compared to his comments on taxes.)

    Now that may appear like Warren expressing nice progressive principle — but he’s also a guy well known for never leaving a dime on the table, and why would he want to pay millions of dollars of additional income taxes to protect that $30,600?

    People who throw out the mantra “Seniors are the most powerful voting block and will *never* vote to reduce benefits” forget that seniors pay income tax too — on their pensions, lifetime savings, IRAs and, yes, their Social Security benefits.

    The income tax hike coming just to service the SS Trust Fund is big — about 10% across-the-board on everyone, businesses and individuals (15% if you want to compenate for the loss of the surplus since 2007.) For comparison, the biggest tax hike in the last 50 years was the Clinton tax increase, which was only one-quarter as large as this — and which was able to get through a Democratic House by only one vote and a Democratic Senate only on a VP tie-breaker.

    There will be a large number of rich seniors in Buffett’s situation (remember the wealth distribution by age) and while they may be a small percentage of all seniors, they will be influential when they ask, “Means test us out of SS!”.

    But there will be many many more middle class tax-paying seniors asking “Why should I pay a big income tax increase on all the retirement income I get to protect the benefits of Warren Buffett and the rich *when they don’t want them*?”

    So now there is a major block of tax-paying seniors wanting to means-test the rich out of benefits, to avoid the trust fund tax increase. And if seniors are opposed to the SS tax increase, who else will support it? Corporations? The young? Labor unions? I can hardly think of anybody.

    As always, the situation for Medicare is much more complex with a lot more money (and much bigger tax increases) involved — but the dynamic is exactly the same.

    If we want to start looking for solutions to the fiscal problem that fit the political incentives, well, one can safely bet the house that means-testing of benefits is coming. (How are Paul Krugman and the rest of the left going to argue, “We should raise taxes on everybody to protect the benefits of the rich, it is the Progressive thing to do.”)? We could start with that.

  55. comment number 55 by: Brooks

    Jim,

    I agree with your thinking re: the political viability of some degree of means testing, but the question is how much would be saved if benefits are reduced how much per what level(s) of income (or other measure of “means”). I’m sure numbers have been crunched on versions of means testing, so perhaps you can provide quote & link to some particulars.

    I ask of course because, although many people would prefer means testing applied to “the rich” over many alternative fiscal sacrifices, the particulars matter, and obviously as we move down the income (or wealth) scale, the level of objections would grow.

  56. comment number 56 by: AMTbuff

    Australia means-tests its pension program. IIRC, payouts reach zero at $60k of annual income, including imputed income from assets.

  57. comment number 57 by: Brooks

    AMT,

    What I’m asking is how much is saved per what means-testing structure — $X trillion we could save if we cut benefits by how much at what income level(s).

    The political viability of proposals that would yield substantial savings via means-testing is entirely dependent on the extent to which benefits are reduced for people who are viewed (including by themselves) as non-rich, so as I said, the particulars matter.

  58. comment number 58 by: AMTbuff

    I don’t know the numbers on this, but politicians are bound to realize that the political pain will be similar regardless of the cut, so it might as well be a deep one. $60k per year income for a total cutoff would eliminate support to the non-poor, which is where we need to go sooner or later.

    Look for Congress to enact non-indexed means testing that tightens every year due to inflation. This same trick was used in “Obamacare” and earlier in both the 1983 tax on SS benefits and Clinton’s 1993 increase in that tax, not to mention Reagan’s 1986 AMT.

  59. comment number 59 by: Brooks

    AMT,

    Re: politicians are bound to realize that the political pain will be similar regardless of the cut

    That seem rather counterintuitive, much like saying that the political cost of a tax rate increase will be similar regardless of whether it’s across the board or just on the top rate. Am I missing something in your reasoning?

    I mean, I know there’s a difference in that means-testing would be new thing so we’d be moving from none to some (as opposed to raising a tax rate), but surely public opposition would be greater if the means-testing cuts much more deeply vs. much less deeply (the latter meaning a much higher income threshold before benefit reductions are applied or reach a given level of reduction), no?

  60. comment number 60 by: AMTbuff

    >I know there’s a difference in that means-testing would be new thing so we’d be moving from none to some (as opposed to raising a tax rate)

    Exactly. That move alone prompts most of the potential opposition, because people will correctly believe that it’s the camel’s nose under the tent. Congress might as well try for the whole camel, since that’s what the opposition is assuming.

  61. comment number 61 by: Vivian Darkbloom

    I suspect none of the current commenters would fit into this group, but I’ve always been very puzzled as to why progressives seem to be so set against means testing for social security or Medicare (regarding the latter, the Ryan Plan was quite progressive in the amount of support it would provide seniors based on income).

    Can some “progressive” chime in here and let me know what your problem is? It would seem to me that, based on simple distributional principles, a progressive should be quite in favor. Yet, on this point, non-progressives seem more “progressive” than the progressives.

  62. comment number 62 by: Vivian Darkbloom

    Perhaps AMT has hinted at the answer in his last post, but I’d rather hear it from the horse’s mouth than the camel’s mouth.

  63. comment number 63 by: Brooks

    Vivian,

    I think the rationale of liberals (I don’t like the term “progressives” because it sounds so self-congratulatory, as if all others oppose “progress”) is that means-testing those programs makes them more like welfare than like “an insurance program” and something with the beneficiaries have “earned”, and in addition to opposing this change in nature, they are concerned about the “camel’s nose under the tent” to which AMT refers.

  64. comment number 64 by: AMTbuff

    There in only one problem with means testing from the progressive point of view: When the middle class no longer expects to get anything from government programs, these programs will lose the support of middle class voters. Expanding these programs will then be impossible.