My Take on the Bush Tax Cut Debate/Compromise

President Obama to OFA supporters
The full press conference (32 minutes) is here:

My take

This is a tough one for me. My knee jerk reaction is “ok, once again the amoral greedy bastards got their way”. But that is, well, a knee jerk reaction. I KNOW that I am prone to that.

I am also hampered by the fact that
1. Economics is NOT my specialty
2. I didn’t put months of detailed study into this
3. I am not as smart and wise as the President who HAS put a ton of time and effort into this.

As far as point one: I’d welcome comments from those non-experts with a different point of view (or the same) and I’d especially welcome comments from those who experts who KNOW economics (say, at the earned Ph. D. level).

So my biggest problem is that I don’t know where my liberal “knee-jerk” reaction ends and what is best for the country begins. Yes, I backed the Health Care Reform package in that it got us moving in a better direction whereas my fear is that this package might be moving us in the wrong direction. It goes beyond the political “oh, damn it, the Republicans won again” reaction.

To be brutally honest, I favor liberal policies because I think that they are better for the country. But if some deity were able to show me that a conservative policy would work better, then yes, I’d hope that the conservative policy prevailed.

This is NOT just a game for me where I am cheering my favorite team (the liberals against the hated conservatives) though I admit that this does influence my emotions. I hope that it doesn’t influence my thinking….though I am sure that it does.

What I hope happens: I think that the President did his job. Now I hope that the Democrats in Congress do theirs: filibuster this bill unless we get concession on the tax cut for the wealthy (say, at the 500K per year income level).
If the tax cuts expire, fine: let the new Republican Congress take it up…and then filibuster everything that doesn’t have at least some of what we want in it.

But my suggestions are worth…well, whatever you are paying to read them. There are many others who know more.

Update My writing this post has, believe it or not, warmed me a bit toward this compromise. Before I wrote this I was getting ready to ask my Democratic Senator to participate in a filibuster (the Republican we saw fit to elect is a liar and an idiot). Now, I am willing to see it go to at least an up-or-down vote.

What my friends are saying

A Republican Friend
“My general thoughts are

1. These tax cuts were a bad idea in the first place
2. I agree with extending only for incomes <250k
3. This agreement shows that neither Republicans nor Democrats are serious about the deficit. Nearly a trillion dollars added to the deficit with no offsetting spending cuts. Sigh.
4. I think the estate tax compromise is about right, although I'd exempt less and have a gradual increase in rates

That said, I do think we could use some sort of 2nd stimulus and I think tax cuts are more efficient than government spending.

The Dems are really having trouble articulating their position. Remember that the tax cuts apply to all income <250k even for those who make more. E.g. someone who makes $350K, gets all the cuts up to 250K, then pays 5% more on the extra 100K. Not too bad

For the record I make well under $250.
"

A “Clinton Democrat” on the idea of the Democrats filibustering this deal:

“The Rs would love that. The filibuster keeps anything from passing, and the Ds get blamed for a massive tax increase for everyone. They will use this as an argument as to why THEY should have a fillibuster proof Senate next time around. Gag.”

A liberal Democrat on the compromise

“Fascinating. I shall repost. Reminds me of that picture that was circulating around election time, with Obama making a “calm down” gesture with his hands. The caption was “Everybody just chill the fuck out. I got this.”"

More moderate Democrat than I
“Forget it, taxes will never be low enough for some folks. If the highest marginal tax rate is 25%, the Republicans will l be fighting to lower it to 22%.”

A Clinton Democrat

“You know the tax cut deal between President Obama and Republican leadership is the correct path forward for most AMERICANS when both Bernie Sanders and Jim DeMint plan to filibuster said deal for their own ideological reasons..”

A Moderate Republican

“You know why Clinton turned out to be a reasonably good president…because he got slapped back to the center from his liberal left…now it’s coming to Obama.”

Another Democrat
“”This compromise gets under my skin, but I also can’t see letting benefits run out for so many (thus also hurting the economy, because those benefits go right back in).”"

A distraught Daily Kos liberal who is leaving OFA over this (link).

Two liberal organizations, MoveOn.org and Bold Progressives are also opposing this.

The Policy

Paul Krumgan: well, we got something out of it (the payroll tax holiday) but the concessions were not worth the price.

Robert Reich says that the deal is expensive and won’t help that much:

It will cost $900 billion over the next two years — larger than the bailout of Wall Street, GM, and Chrysler put together, larger than the stimulus package, larger than anything that’s come out of Washington in years.

It makes a mockery of deficit reduction. Worse, the lion’s share of that $900 billion will go to the very rich. Families with incomes of over $1 million will reap an average of about $70,000, while middle-class families earning $50,000 a year will get an average of around $1,500. In addition, the deal just about eviscerates the estate tax — yanking the exemption up to $5 million per person and a maximum rate of 35 percent.

And for what?

Wealthy families won’t spend nearly as large a share of what they get out of this deal as will middle-class and working-class families, so it doesn’t do much to stimulate the economy.

The deal further concentrates income and wealth in America — when it’s already more concentrated than at any time in the last 80 years.

The bits and pieces the President got in return — extended unemployment benefits, a continuation of certain small tax benefits for the middle class — are peanuts. After last week’s awful jobs report, Senate Republicans would have been forced to extend unemployment insurance anyway.

Or, maybe it isn’t that bad of a deal for us?

The positives (as we’d see them): (via Eclectablog at Daily Kos)

# Working families will not lose their tax cut. A typical working family faced a tax increase of over $3,000 on January 1st. The framework agreement includes a mutually agreed upon solution to the impasse over taxes by extending the 2001/2003 income tax rates for two years and reforming the AMT to ensure that an additional 21 million households will not be hit with a tax increase.
# $56 billion for unemployment insurance extension. According to the Council of Economic Advisers, passing this provision will create 600,000 jobs in 2011 alone.
# $120 billion payroll tax cut for working families
# $40 billion in tax cuts for our hardest hit families and students
# 100% expensing for businesses next year
# Child Tax Credit: The $1,000 child tax credit will be extended for two years with the $3,000 refundability threshold established in the Recovery Act. This extension will ensure an ongoing tax cut to 10.5 million lower income families with 18 million children.
# Earned Income Tax Credit: The Recovery Act included an expansion of the EITC worth, on average, $600 in additional assistance to families with 3 or more children. It also helped working married families by reducing the marriage penalty in the EITC. Continuing this tax cut for two years will benefit 6.5 million working parents with 15 million children.
# American Opportunity Tax Credit: The Recovery Act included a new, partially refundable tax credit of up to $2,500 to help students and their families cover the cost of college tuition. This deal fully extends AOTC for two years, ensuring that more than 8 million students will continue to receive this tax benefit to help them afford college.
# A 2-year extension of the R&D tax credit and other tax incentives to support business expansion.

How do some Republicans see this? From National Review:

I basically think the deal was a net loss. It was a political win for Republicans, but not, in my view, a substantive win for fiscal conservatives. I’ve argued for temporary extension of all of the 2001 and 2003 tax cuts, yet I strongly think that a 3-year extension was preferable to a 2-year extension, as presidential politics will get in the way of a 2012 debate over the future of the tax code. Glenn Hubbard captures my sentiments on the broader question of where the tax reform debate should go.

I’ll also note that the best empirical evidence we have suggests that the tax provisions of ARRA, including the Making Work Pay tax credit, did not work as intended, as my Economics 21 colleagues recently observed:

The researchers [Matthew Shapiro, Claudia Sahm, and Joel Slemrod] find that in response to the one-time tax cuts in 2008, only 25% of households reported higher spending. This result is consistent with a large body of economic literature that suggests households smooth out their consumption over time, and so an unexpected windfall only slightly raises current levels of spending.

More surprising is the analysis of the tax cuts associated with the 2009 ARRA stimulus. These took effect through the form of reduced federal tax withholding on payrolls, and were widely expected to be more effective than one-time tax cuts in elevating aggregate spending. Yet the authors find that a mere 13% of households reported higher levels of spending due to the tax cuts.

The authors suggest that households that anticipate a decline in household income are saving the proceeds, which makes intuitive sense.

I’m glad to see that the Making Work Pay tax credit has been abandoned, though its motivation was sound. Assuming we’re not looking for a huge short-term stimulative effect, we can at least say that the extension of most of the ARRA tax provisions and the payroll tax cut will help middle-income households repair their balance sheets, and that’s certainly something. But let’s be cautious in advancing claims about the “jobs multiplier” we associate with these targeted tax cuts.

And (Greg Mankiw, a Harvard Economics Professor)

I am generally pleased with the compromise over taxes the President and Republicans struck yesterday. (The President should be too, but he seemed dejected at his news conference. Buck up, Mr President! You don’t want anyone to start thinking of the word “malaise.”)

One aspect of the deal struck me as worth discussing with econ students: The compromise includes a one-year cut in the payroll tax by 2 percentage points. The tax cut will be entirely in the employees’ share. Why do you think they designed the policy in this way? Was it the right choice?

Surf to the blog to read more.

And Howard Gleckman:

The tax deal reached by President Obama and congressional Republicans (but not Hill Democrats) includes a bit of good, some bad, and some really ugly.

To summarize, this package would make nearly the entire individual revenue code permanently temporary, which is horrible tax policy. It gives the lie to the pious talk about deficit reduction we’ve heard recently. And much of it will do nothing to stimulate the economy, fervent claims by supporters to the contrary. As George W. Bush might have said, “heckuva job, guys.”

Let’s start with the allegedly temporary aspect of a plan to continue the 2001 and 2003 tax cuts for two more years. Like the dozens of special interest tax breaks that get extended a year or two at a time, we now seem on the way to doing the same for the basic structure of the income tax. It is the worst of all worlds, combining the uncertainty of temporary tax law with the massive (but hidden) cost of never-ending tax breaks.

No-one can seriously think Congress will let any of these tax cuts expire on the cusp of the 2012 election, as they are scheduled to do under this deal. If the economy is still soft, pols will tell us it is not the time to let the tax cuts expire. If it is strengthening, they’ll claim low taxes were the reason and insist they should be continued. Either way, the 2001 rate structure will go on, a year or two at a time, until Congress finally agrees to enact major tax reform. And they will add trillions of dollars to the national debt, notwithstanding all the recent cries for fiscal responsibility.

It would be nice if Congress did what former Budget Director Peter Orszag, my Tax Policy Center colleague Len Burman, and others have suggested, which is to use the next couple of years to enact serious tax reform. It would be nice. But it won’t happen.

And let us not forget the bat-shit-crazy point of view, from my favorite drunken ladybug:

O’Donnell applauded President Obama’s hours-old proposal to enact a two-year extension of Bush tax cuts, but called the 13-month extension of jobless benefits a “tragedy” similar to the attack on Pearl Harbor and the Edwards’ death.

“[President Obama's] announcement today for economic recovery was more of a potpourri of sound bytes,” she said. “It’s like he took a little bit of what each party wanted and put it together. It’s not constructed. It’s not a solid plan constructed on sound economic principles.”

She later clarified that the tragedy was the huge increase in spending, she said, not the extension of the benefits themselves. The tragedy is how those benefits are funded, she said.

The Politics

One common reaction is that “if Bernie Sanders and Jim DeMint both don’t like it, it has to be good”. Hey, the President wanted bipartisanship, right?

Others seem to take glee in what they see as an unraveling to the Obama presidency; e. g. check out this National Review commentary and the contempt from a Hillary Clinton supporter on the left.

Rachel Maddow also talks about the Obama presidency sliding into irrelevancy but in a more mournful tone.

Some say that the President WANTS this fight with his fellow Democrats:

Obama’s advisers insist he didn’t go out of his way to pick a fight with fellow Democrats when he cut his highly controversial deal with Republicans to temporarily extend all Bush-era tax cuts earlier this week. But if the deal served to distance Obama not only from them but the entire partisan culture of Washington, all the better, they say.
[...]“Compared to these guys, the president looks mature and pragmatic,” the official said.

An angry Obama — in one of his most emotional public statements since taking office nearly two years ago — rebuked fellow Democrats during a White House news conference Tuesday, going so far as to suggest that some in his party put politics ahead of the American people by calling on him to block any extension of Bush-era tax cuts that includes the wealthy.
[....]
One administration official told POLITICO that Obama was so dispirited after his Nov. 18 meeting with the Democratic leadership that he decided, then and there, to place his faith in direct talks with Senate Minority Leader Mitch McConnell (R-Ky.).

“The point is the House and Senate [leadership] has proven they are incapable of getting things done,” the official said.
[...]
But Mark McKinnon, a longtime adviser to former President George W. Bush, and an admirer of Obama’s during the 2008 campaign, says the dynamic is much simpler: The president wants to disassociate himself from congressional Democrats because they are losers — even if he’s partly responsible for their historic losses in the midterms.

“If you’re going to pick a fight, better to hit the guy already on the mat,” McKinnon said.

Still, there are distinct dangers to straying too far from the Democratic pack. In the short term, Obama must wrangle the Democratic votes necessary to pass his tax cut deal — no easy task with hostility toward him bursting out in the open this week.

They go on to talk about the 2012 election and the possibility that the President might have to repair relations with his base. Nate Silver isn’t so sure that this will be an issue:

This is not to suggest that the pattern will necessarily be the same in 2012. In contrast to this year — when Mr. Obama ultimately had much to show off to liberals, including a health care bill and a financial regulation package — it is difficult to see how any major liberal priories will be advanced once Republicans take over the House in January. But Democrats could still pass some proposals popular with liberals, like the reversal of the military’s “don’t ask, don’t tell” policy, before the 111th Congress concludes its business later this month.

Still, just because liberals are disappointed with Mr. Obama does not necessarily mean they will fail to turn out and vote for him when the only other choice is a Republican. In some ways, it probably helps Mr. Obama that the country has become so polarized and that liberals view Republicans as such an unacceptable alternative, and vice versa. The prospect of a President Palin or a President Gingrich would surely motivate most liberals to vote — and even comparatively moderate Republican candidates like Mitt Romney will be under pressure to show their conservative stripes during the l Republican primaries and are likely to campaign on policies, like a repeal of the health care bill, that liberals overwhelmingly object to.

I can’t imagine any liberal not working their fingers to the bone to defeat Sarah Palin, no matter how much they despise Barack Obama.

There is a school of thought that says “block this even if it means that we get nothing because making the Republicans take it up in 2011 will stick them with a politically unpopular bill”.

On the other hand, there are elements of this compromise that the public likes or at least is willing to put up with:

One Final Issue: Robert Reich says that it sends the wrong message:

Americans want to know what happened to the economy and how to fix it. At least Republicans have a story – the same one they’ve been flogging for thirty years. The bad economy is big government’s fault and the solution is to shrink government.

Here’s the real story. For three decades, an increasing share of the benefits of economic growth have gone to the top 1 percent. Thirty years ago, the top got 9 percent of total income. Not they take in almost a quarter. Meanwhile, the earnings of the typical worker have barely budged.

The vast middle class no longer has the purchasing power to keep the economy going. (The rich spend a much lower portion of their incomes.) The crisis was averted before now only because middle-class families found ways to keep spending more than they took in – by women going into paid work, by working longer hours, and finally by using their homes as collateral to borrow. But when the housing bubble burst, the game was up.

The solution is to reorganize the economy so the benefits of growth are more widely shared. Exempt the first $20,000 of income from payroll taxes, and apply payroll taxes to incomes over $250,000. Extend Medicare to all. Extend the Earned Income Tax Credit all the way up through families earning $50,000. Make higher education free to families that now can’t afford it. Rehire teachers. Repair and rebuild our infrastructure. Create a new WPA to put the unemployed back to work.

Pay for this by raising marginal income taxes on millionaires (under Eisenhower, the highest marginal rate was 91 percent, and the economy flourished). A millionaire marginal tax of 70 percent would eliminate the nation’s future budget deficit. In addition, impose a small tax on all financial transactions (even a tiny one — one half of one percent — would bring in $200 billion a year, enough to rehire every teacher who’s been laid off as well as provide universal pre-school for all toddlers). Promote unions for low-wage workers.

But here’s the obstacle. As income and wealth have risen to the top, so has political power. Money is being used to bribe politicians and fill the airwaves with misleading ads that block all of this. [...]

Get it? By agreeing to another round of massive tax cuts for the wealthy, the President confirms the Republican story. Cutting taxes on the rich while freezing discretionary spending (which he’s also agreed to do) affirms that the underlying problem is big government, and the solution is to shrink government and expect the extra wealth at the top to trickle down to everyone else.