Posts Tagged ‘ bush tax cuts ’

End all of the Bush tax cuts

The Bush tax cuts have to go. They are a huge giveaway to the rich, are almost single-handedly causing our long-term debt problems and are one of the most inefficient ways to stimulate the economy. That’s not just me talking either. That’s according to the Congressional Budget Office. Take a look at this slideshow from the CBO (below). Slides 7 and 15 show that the Bush tax cuts will have an increasingly negative effect on our economy the longer they are in place, while slides 5 and 12 show that these particular tax cuts are about the most inefficient way for the government to create jobs or stimulate the economy.

The non-partisan CBO is actually saying some amazing things about the Bush tax cuts on these slides. Basically, their charts state that it would be better for the economy if tax rates were higher than if they stay at Bush’s low levels. Usually, we say that taxes take money out of the economy while reducing taxes keeps money in the economy. However, the CBO tells us (slides 7 and 15) that keeping Bush’s low tax rates will actually shrink the economy. Even if they are coupled with a decrease in government spending later on, the economy will still grow slower than if we just raised tax rates.

Bush’s tax cuts are just so inefficient, so  badly targeted and so damaging to our national debt, that keeping them around will strangle our economy.Getting rid of the would solve our long-term debt problem. Done. Debt debate finished.

There are tax cuts that are good for growth and there are tax cuts  that don’t do anything for growth. The Bush tax cuts (as the CBO and anyone who lived through the 2000s can tell you) are in the latter category. Tax cuts for the poor and middle class are in the first category, so once Bush’s tax cuts are gone, America should use the money to pay down the debt and enact a payroll tax cut.

Everyone with a wage-earning job pays payroll taxes, but the tax is actually a regressive because once you make more than about $100,000/yr, you stop paying Social Security payroll taxes on your earnings. This means that someone making $50,000/yr will pay 6.2% in FICA taxes (12.4% if you count the matching contribution made by their employer) while someone making $1,000,000/yr in wages will pay only one tenth as much of their earnings in taxes.

Cutting payroll taxes will help the poor and the middle class, while stimulating the economy as a whole (slides 5, 12), so its a really smart thing to do. But, cutting payroll taxes will do relatively little to directly line the pockets of the rich. That’s why Republicans love the Bush tax cuts but are indifferent to payroll tax cuts.

Questions? Clarifications? Disputes? Hit “write comment” on the bottom or on the top left side of the post.

How the debt deal could get even worse for the Democrats

The structure of the debt deal is as follows in this flowchart posted by Ezra Klein:

from Ezra Klein

Basically, there is an initial $900 billion in cuts (and a raise in the debt ceiling by that amount), followed by a vote on the balanced budget amendment (groan) and then once it fails, a “super committee” of Congressmen and Senators will be formed to recommend at least $1.2 trillion more in debt reduction. If that group either can’t agree on debt saving or Congress refuses to pass the debt cuts it recommends, then a “trigger” will kick in. This trigger will make automatic, huge cuts (to total $1.2 trillion) to both military spending and domestic spending in the absence of a deal. The trigger, then, is supposed to force Congress to come up with a good plan by threatening a consequence that both parties will find unacceptable. Presumably, Democrats will want to work out a deal because  they don’t want to see huge cuts to domestic spending and Republicans will be forced to work out a deal because they do not want to see huge cuts to the military. Presumably.

This is where I think the Democrats have been completely snookered. There are two reasons and they both have to do with the trigger. The trigger is the mechanism that is supposed to force the groups to come to a deal. If the trigger is weak, then it will not force the parties to make a deal, and if the trigger is  uneven (it hurts one party’s core interests but not the other’s) it will force one party to make a deal on the terms of the party that stands to be hurt less by the trigger.

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How Obama wants to bring down our debt.

Everyone in Washington has released their own plan on how to close down our debt over the next 10-12 years. Progressives, conservatives, Paul Ryan, the Democratic caucus (due to release today) and the President. Throw all those plans out the window because none of them will likely ever become law. Big plans put out by partisan interests have very little chance of going anywhere and mostly serve as talking points and political footballs for debate. The plans that actually get passed are generally determined by the politics of the moment, deals worked out, and compromises made to placate special interests. You think it would be awesome to replace our  payroll taxes with a carbon tax? So do a lot of people, but it isn’t gonna happen. The two big events that will shape our debt debate will be the fight over the debt ceiling and the fight over the Bush tax cuts in Dec. 2012.

Most thinkers agree that the US needs to enact a plan that cuts $4 trillion in debt over the next decade or so. Let’s see how Obama is probably angling to get there, keeping in mind the two critical junctures we have coming up.

Republicans have forced a political crisis over raising the nation’s debt ceiling. Their demands are for about $2 trillion in spending cuts before they will agree to do what has  to be done anyway and raise the debt ceiling. This provides us with a political situation where debt reduction seems to be required. Obama has accepted Republicans’ terms on the condition that there also be $400 billion in revenue increases gained by getting rid of tax loopholes and tax breaks for the richest of the rich. Its obviously Obama’s intention for this plan to go through- $2 trillion in spending cuts and $400 billion in revenue increases for a total of $2.4 trillion in debt reduction this year.

So if that plan passes (which is far from certain) Obama is over halfway to his goal. The next test comes when the Bush tax cuts are up for renewal in December 2012. Note: this analysis assumes (as Obama certainly does) that Obama will be re-elected in 2012. Obama has all the power in December 2012 to say that he will not agree to renew Bush’s tax cuts for the top 2% and will veto any bill that tries to do that. That is what his base wants him to do and is likely what he will campaign on. At that point, Republicans have a choice- allow tax rates to rise on the top 2% or allow income tax rates to rise on everyone else. If they pick the first option, as is Obama’s intention, then there is another $830 billion in debt reduction, bringing Obama’s total to about $3.2 trillion in debt reduction. If the Republicans decide that everyone else’s rate should go up if they can’t get their precious tax cuts for the rich extended, then that would be $2.4 trillion in debt savings (we’ll call it 2.8 trillion including interest). $2.8 trillion would solve our debt problems by bringing Obama debt-reduction total to $5.2 trillion.

Even if only the cuts for the rich are ended, Obama can come up with an extra $800 billion in deficit savings by various methods like simplifying the tax code, enacting a public health insurance option, encouraging greater-than-expected economic growth, cutting down on tax cheats, cutting the military, etc.  He will work out a deal with Congress to save a bit more money. It will be a tough compromise and will burnish the President’s image as a compromiser and neutral arbiter. It would be small beans at that point.

Republicans seem to know that if Obama is re-elected, the scale beings to tilt in his favor, which is probably why they are pushing so hard right now for a completely one-sided debt deal. Its also no coincidence that a huge debt deal right now will hurt our economic prospects over the next few years. A weak economy makes  it harder for Obama to win re-election and if he doesn’t win re-election, the Republicans can basically dictate whatever “debt-reduction” deal they like.