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Headed for a Typical “Compromise”

December 14th, 2011 . by economistmom

Concerning congressional negotiations over the extension of the payroll tax cut, this Washington Post story seems to offer a prediction as to how this impasse will be broken (emphasis added):

To pay for extending the cut, Democrats have pushed for a surtax on those making more than $1 million a year. Although the Senate has twice blocked bills that would fund the reduction with a millionaire tax, [Senate Majority Leader Harry] Reid said again Tuesday that the wealthy should be asked to fund the tax cut for middle-class workers. He also said Democrats would be willing to extend the tax cut without outlining a way to pay for it.

And of course, House Republicans are perfectly willing to extend the payroll tax cut as long as the construction of that (”job creating”) oil pipeline can be sped up and avoid the usual environmental impact scrutiny, and as long as long-term unemployment benefits are made less long term (and the recipients subjected to drug testing).  They would only partially pay for the payroll tax cut by cutting the pay and number of government workers.

It seems to me we’re headed for the typical “bipartisan compromise” agreement where the Republicans bully the Democrats, the Democrats call the Republicans bullies, and they ultimately all agree to just deficit-finance the whole thing, feeling good that the other side gave up their proposed offsets.

It wouldn’t be so bad (this payroll tax cut is supposed to be stimulus, after all) if it weren’t a scene played over and over again, not just for deficit-financed stimulus policy, but deficit-financed anything.

8 Responses to “Headed for a Typical “Compromise””

  1. comment number 1 by: Arne

    “It wouldn’t be so bad…”

    Reading others comments here has changed my mind on some things. I would have agreed with this sentiment before, seeing it as an expression of the belief that stimulus now IS more important than deficits now. But as important as fixing the current economy is, stimulus now does require paying for it later, and so the legislation should include an offsetting increase in taxes to come later. It should also have an increase in the debt ceiling.

    If they are going to vote for stimulus, they should admit it is stimulus, and craft the bill as such.

  2. comment number 2 by: Vivian Darkbloom

    Arne,

    I see there is still a little work to be done with you. “Paying for it later” need not necessarily involve increasing taxes; it could also entail reducing spending. But, one never knows; you strike me as someone who keeps an open mind.

  3. comment number 3 by: Underwriterguy

    Why the quotes around job creating? Is there doubt that the project will increase employment? Hadn’t heard that this was suspect. Any details?

  4. comment number 4 by: AMTbuff

    If the primary drag on the economy is the increasingly realistic fear of a full Depression due to a fiscal crisis, then anything that adds to the debt could backfire, shrinking the economy. I don’t know if this is the case yet, but at some point it will be.

    Reductions in promised benefits are now or soon will be the best stimulus.

  5. comment number 5 by: SteveinCH

    Arne,

    Sadly, in my view, “paying for it later” on a historical basis is shockingly close to “not paying for it at all.”

    On the specifics, I think any policy that pays for a 1 year change with a 10 year change (as the various House and Senate bills have done) is horrible policy.

  6. comment number 6 by: B Davis

    SteveinCH wrote:

    Sadly, in my view, “paying for it later” on a historical basis is shockingly close to “not paying for it at all.”

    I agree. This may be necessary in a true emergency such as a natural disaster but the current impasse is not a natural disaster (unless you consider Congress to be “natural”!). There was an interesting article on this in the Economist titled A year of living pigheadedly.

    By the way, I answered your comment number 47 in the What Now for “Fiscal Responsibility?” thread before I noticed that it was closed. I does seem good to close threads after two weeks as it gets people to move along to the new threads. I won’t give it here since it’s off-topic but I did post the reply at this link. I may work it a post on my blog if I have time over the holidays.

  7. comment number 7 by: Vivian Darkbloom

    B. Davis,

    You wrote at your blog:

    “Yes it’s in the numbers but I don’t think that you understand the problem that I’m describing. It’s probably best done with an example. Suppose that in one year, a person earns $1,000,000 that is taxed as regular income and $500,000 that is taxed as long-term capital gains. Then, suppose that the next year that person earns the same $1,000,000 but just earns $250,000 in long-term capital gains due to a down market. Also, suppose that the regular income rate is 35% and the long-term capital gains rate is 15%. Then the estimate of taxes paid for the two years is as follows:

    year 1: 1,000,000 * 0.35 + 500,000 * 0.15 = 350,000 + 75,000 = 425,000 total tax

    year 2: 1,000,000 * 0.35 + 250,000 * 0.15 = 350,000 + 37,500 = 387,500 total tax

    The effective rate is the total tax divided by the income which would be:
    year 1: 425,000 / 1,500,000 = 28.3 % effective tax rate

    year 2: 387,500 / 1,250,000 = 31 % effective tax rate”

    In essence, you are arguing that “yes, it’s in their numbers, but if we ignore what’s in their numbers, the result is different”.

    Instead of using 15 percent as the tax on capital gains/dividends, you would need to tax it at the rate of 44.75 percent (35% corporate tax plus .65 x 15% shareholder tax). Of course, you could argue that the shareholder does not bear the full burden of that corporate tax, or that the effective corporate tax rate should be lower, but so long as the combined rate is higher than 35 percent, the result of your example is exactly the opposite of what you claim. In other words, because the combined tax on CG/dividend income is *higher* than ordinary income, the greater the mix of investment income to ordinary income, the higher the effective tax rate.

    Also, in the normal business cycle, not only would CG/dividend income decline, but income taxed at ordinary rates does, too, albeit perhaps not at the same ratio.

  8. comment number 8 by: B Davis

    Vivian Darkbloom wrote:

    In essence, you are arguing that “yes, it’s in their numbers, but if we ignore what’s in their numbers, the result is different”.

    That’s not what I’m arguing (but I suspect that you know that). I’m saying that capital gains income and the taxes paid on them are included in the numbers. That, in fact, is what causes that effect that I described. Regarding your contention that corporate taxes would more than offset that problem, that is not the case. SteveinCH’s source in comment number 22 gives the effective corporate income tax rate on the top 1 percent as 10.4% in 2006, far short of the 35% you quote. In addition, corporate tax revenues and realized capital gains do not move in lockstep. The latter was effected by the bubble in tech stocks and the former largely was not. In addition, there are other possible effects such as the fact that income at the top increased faster, pushing those taxpayers into higher tax brackets (called bracket creep) at a faster rate. The point is that you need to analyze complex numbers like the effective rate more closely before you use four data points from them to draw broad conclusions about progressivity of the Bush tax cut.

    As I said before, I suggest that we just agree to disagree on this and move on to the current topics being discussed on this blog.