December 14, 2010
Tax Cuts Clearly Explained
If you go to the White House website, right at the top is a bar you can click on to see "Tax Cuts Clearly Explained." If you click, you see a video of one of President Obama's economic advisors using a whiteboard to explain that Republicans are bad, that Obama is above politics, and that if Obama gets his way, jobs and growth and goodness will spring forth.
The video starts out simply enough. Republicans want to extend the Bush tax rates for everyone; Obama wants to leave out the top 2% of income earners. It was all about the Bush tax rates and for how long, and to whom, to extend them.
But then the video starts talking about a host of things unrelated to those tax rates. The economist even lists them on his whiteboard.
- Unemployment insurance,
- Earned income tax credit,
- American opportunity tax credit,
- Child tax credit,
- Payroll tax,
- Investment incentives.
The "clear" explanation is that since the current tax rates for the top 2% would be extended another couple years, this list of unrelated "targeted and temporary" tax cuts must be added to the package to somehow offset them. The concern was that extending current tax rates for the top 2% would increase the deficit too much. So politicians compromised in a way that would increase the deficit more than either party's initial proposal. (Kind of like the way they compromised on TARP in 2008. Remember "sweeteners"?)
Since Congress got into the compromise act, tax credits for ethanol, alternative fuels, and who knows what else have also been added.
In the spirit of clarity, what follows is my attempt to explain tax cuts.
The Republican position was to keep tax rates where they are now and where they've been since 2003.
- Democrats fought to keep the Bush tax rates only for those making less than $250,000 in a year. That is curious, since they've been saying for about ten years that the "Bush tax cuts" went only to the wealthiest Americans. Democrats are arguing to keep something they said never existed.
- According to the Congressional Budget Office, the entire package, as currently proposed in the Senate, would add $858 billion to the 2011-2020 deficit. Without it, the 2011-2020 deficit would be $6,246 B. So this package theoretically increases the ten-year deficit by 14%.
- Of that $858 B, about $544 B comes from keeping current tax rates; the rest comes from the new goodies unrelated to the Bush rates. So because Democrats said some part of that $544 B adds too much to the deficit, they added another $314 B to the deficit. That is how compromise and "the middle way" work in Washington.
- The CBO calculates future revenues under the assumption that tax rates have zero effect on the behavior of investors, consumers, employers, etc. Congress forces the CBO to make that assumption. Every economist this side of Paul Krugman knows that that assumption is wrong. One such economist is Christina Romer, President Obama's first choice as chief of his economic advisors. She said a tax increase of 1% of GDP reduces GDP by about 1.84%. And she said that this year in a published, peer-reviewed academic paper.
- Another top economic adviser to President Obama, Larry Summers, was more direct. "If they do not pass this [tax cut agreement] in the next couple of weeks, it will materially increase the risk of the economy stalling out and that we would have a double-dip [recession]." Bill Clinton advised that passing the tax cuts would "minimize the chances that it [the economy] will slip back [into recession]." Again, top Democrats say we must keep the Bush tax rates or the recession resumes.
- President Obama's view is that not keeping the Bush tax rates on those making under $250,000 "would be a grave injustice" and "would deal a serious blow to our economic recovery." Again, this is curious because Democrats keep saying that Bush's tax cuts went only to the wealthiest Americans and caused all the harm we now see to the economy. But apparently, not continuing the Bush policy for 98% of taxpayers would be a "serious blow" to the economy.
- President Obama believes that keeping the current tax rates for those making over $250,000 in a year "would cost us $700 billion" and do "very little to actually grow our economy." He assures us that "economists from all across the political spectrum agree" on that. I believed he polled the same economists who said his stimulus would keep the unemployment rate below 8%.
- As a matter of record, the final Bush tax rates passed Congress in mid-2003, shortly after Republicans retook the Senate. From August 2003 to December 2007, over eight million net new jobs were created, and real GDP grew almost 3% per year. At that same time, federal revenues increased by 2.3% of GDP ($785 B), putting revenues above the average level of 1960-2000, the forty years before Bush. Unemployment fell to 4.4%, and the deficit fell to 1.2% of GDP. Such was the catastrophe of four years of Bush's tax rates and Republican-written federal budgets.
- You will hear that this or that group (the top 2%, those who inherit dad's farm, etc.) does not "deserve" to have its taxes kept at the current rate. There are only two alternatives for where that money goes: the family that earned it, or the government. If the family doesn't "deserve" it, does the government?
As usual, this is not about anything the Democrats say it is about. If they are worried about the deficit, why did they add to the deficit to get this deal?
Republicans would have compromised by simply extending the current rates for two years instead of permanently. Obama saw that bet and raised unemployment insurance, earned income tax credit, American opportunity tax credit, child tax credit, payroll tax, and investment incentives. Congressional Democrats saw that bet and raised it ethanol and alternative fuels subsidies.
This is all about the Democrats rewarding their interest groups and blaming the certain deficit on Republicans. As usual, the Stupid Party will see that bet, holding a pair of deuces.
I'll try to clarify it with another analogy. A 700-pound man goes to the doctor. The doctor says the man needs to diet, and in fact prescribes a certain salad as the man's meal for the next few months. The 700-pound man agrees to eat the salad each meal -- along with three roasted chickens, two pounds of bacon, a large pizza, and four cheeseburgers with the works. In his view, he compromised with his doctor.
Then when the man weighs 800 pounds after a few months, he blames his doctor.
Now you play doctor. Would you make that compromise, given you'll be sued for malpractice if the man gains weight?