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

“Benign Neglect” Tax Policy

April 18th, 2012 . by economistmom

Yesterday (on “Tax Day”) NPR’s Scott Horsley was wondering about the prospects for doing something better about the Bush tax cuts this year.  He got a similar reaction from me, NYC Mayor Michael Bloomberg, and the Tax Policy Center’s Bob Williams–although I got to pull out an expression I believe my mom first taught me, “benign neglect.” (My mom is going to have to remind me in what context she would throw out that term, frequently.)  From the transcript (please go to NPR site to hear the full audio):

The tax cuts championed by President George W. Bush a decade ago, and extended in 2010, are due to expire at year’s end. That would mean higher taxes at every level of income, as well as higher taxes on dividends, inheritance and capital gains.

“The biggest hits would be on the very wealthy,” says Williams. “Those are the people who’ve benefited most from the Bush-era tax cuts. But people at the very bottom would be hit as well.”

All of this will happen automatically unless Congress and the president act in concert to prevent it.

“It’s the do-nothing option,” says Williams. “If Congress does nothing, taxes go up automatically.”

Not everyone is alarmed by that.

New York Mayor Michael Bloomberg told CBS last month that taxes have to go up for everyone in order to put a dent in the federal budget.

“Most of this country is middle class. And that’s where most of the tax revenue is. So if you want to raise $4 trillion over the next 10 years, which gets you halfway — only halfway — to a balanced budget, everybody’s taxes have to go up,” said Bloomberg.

Action, Or ‘Benign Neglect’?

Economist Diane Lim Rogers of the deficit-watchdog Concord Coalition agrees that stemming the tide of red ink will require more tax revenue. But she sees some problems with letting the Bush-era tax cuts expire all at once.

“It wouldn’t be the worst thing that could happen,” says Rogers. “I think economists would prefer that instead of things happening out of benign neglect, that better things could happen out of good policymaking.”…

I don’t know why I said “economists” would prefer; heck, everyone should prefer that, as long as we have some faith in the role of government to promote the public good. I had elaborated to Scott that the economists’ problem with just letting the tax cuts all expire is that we have other options to raise revenue that economists would consider more efficient and just as or more fair.

I go on to talk about my second favorite tax topic after the Bush tax cuts: tax expenditures and the need to reduce them as a way of cutting government spending in a progressive manner.  I am still hopeful that after we go through all the other possible ways to reduce the deficit and realize we won’t accept much of them or that they don’t work, we’ll come back to the goal of pursuing sensible tax reform.

5 Responses to ““Benign Neglect” Tax Policy”

  1. comment number 1 by: AMTbuff

    Pundits may believe the fantasy that Congress could escape blame for allowing taxes to increase. But the AMT alone (set to hit April 2013) is an $8000 increase on affluent couples. That’s a huge increase, not mitigated by any blame shirking.

    Fortunately politicians know that voters will blame them based on the end result without regard to any irrelevant arguments about the current law baseline.

    Only a bond market meltdown would provide sufficient political cover for ending the 2003 tax cuts and imposing AMT at unindexed 1993 rates. If that happens, most of us might not have any income to tax.

  2. comment number 2 by: Patrick R. Sullivan

    ‘…as long as we have some faith in the role of government to promote the public good.’

    Faith is exactly the right word.

  3. comment number 3 by: Jim Glass

    Tax Policy Center on the “do nothing” strategy.

    It has sometimes been said, even by me, that the easiest way for Congress and the White House to fix the deficit is to do nothing. Allow the 2001/2003/2010 tax cuts to expire as scheduled in eight months, let the automatic spending cuts enacted in 2011 kick in as planned and, voila, the short-term fiscal problem is pretty much resolved.

    There, however, one small problem: Such policy by paralysis would likely wreck a still-fragile economy…

    Taxes would increase by 2.5 percent of Gross Domestic Product in a single year, the Congressional Budget Office estimates. Nominal spending would fall for the first time since 1955. With interest rates already close to zero, the Federal Reserve could do little to offset this fiscal austerity.

    The deficit would fall, all right. The Congressional Budget Office figures the deficit would decline from 7 percent of GDP this year to 3.7 percent in 2013 and to a very manageable 1.5 percent by 2015.

    It would, that is, if the economy didn’t collapse.

  4. comment number 4 by: Vivian Darkbloom

    “With interest rates already close to zero, the Federal Reserve could do little to offset this fiscal austerity.”

    Would Scott Sumner agree with this? I doubt it. It would be interesting to know if this possibililty is in the Federal Reserve’s contingency planning.

  5. comment number 5 by: Jim Glass

    “With interest rates already close to zero, the Federal Reserve could do little to offset this fiscal austerity.”

    Would Scott Sumner agree with this? I doubt it.

    You’re right, he definitely wouldn’t agree that they couldn’t do much about it.

    But off the Fed’s recent record, he might well agree that they probably wouldn’t do much about it.

    Bernanke and the Fed have acted quickly with force and effect whenever deflation appeared a real risk. Otherwise, not so much. Off of Ben’s response to Krugman’s article on him, that’s the way they intend to keep it. Deflation will not be tolerated — but no risk of actual deflation, the economy’s on its own.