Peter Orszag has moved from the White House to a contributing columnist position with the New York Times. And in his first effort, he addresses the Bush tax cuts, coming to a conclusion far removed from the standard position at the White House. The President wants to extend all the tax cuts for those making under $250,000 a year, and let the others expire. Orszag, the deficit hawk, would rather let all of them expire, and in order to do so, would strike a bargain of a temporary 2-year extension.
In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.
Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.
Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets don’t seem at the moment to view the budget deficit as a problem — take a look at the remarkably low 10-year Treasury bond yield — there is little reason not to extend the tax cuts temporarily.
My first reaction is that Orszag isn’t even a very good deficit hawk. He’s been around Washington long enough to know that a “temporary tax cut extension” is as rare as Bigfoot. These things get rolled over again and again. The R&D tax credit, the alternative minimum tax patch – I could spend the rest of the day naming “temporary tax credits” that get permanently extended year after year. There’s even a vehicle for this every year called the “tax extenders” bill, designed specifically to extend tax cuts.
What’s more, in two years, we will have either a majority of Republicans in the House and Senate, or a very small majority of Democrats. Who would you rather have set fiscal policy on these tax cuts, were you Peter Orszag? Clearly no Republican will allow any tax cut expire when they can demagogue it instead. Orszag responds by saying that any extension of the tax cuts into 2013 “will surely require a presidential veto on any bills to extend them.” I guess he’s looking to deliver Ohio for Barack Obama, then.
On the merits, I would say that the tax rates of the 1990s didn’t bust anybody. However, the extension of the lower-end tax cuts while letting the high-end ones expire, definitely in the short term, seems expedient and would make the tax code more progressive. I contend there are better places to find revenue needed to bring the budget into medium-term balance than out of the hides of working people.
Orszag, incidentally, lets his slip show a little further down this editorial.
How much savings is plausible on the spending side? Medicare, Medicaid and Social Security will account for almost half of spending by 2015. Even if we reform Social Security, which we should, any plausible plan would phase in benefit changes to avoid harming current beneficiaries — and so would generate little savings over the next five years. The health reform act included substantial savings in Medicare and Medicaid, so there aren’t further big reductions available there in our time frame.
Emphasis mine. Orszag is talking about savings to the federal budget, by looking at Social Security, funded separately through FICA. It’s double-speak, designed to arrive at benefit “changes” – read “cuts” – as if the program has anything to do with the deficit.
And of course, that’s not a shock at all – Orszag literally wrote the book on benefit cuts to Social Security.
UPDATE: I should note that the White House wasted no time in rejecting Orszag’s idea:
“The president has been clear about his support for extending tax cuts for the middle class and about ending the tax cuts for the wealthiest 2 percent of Americans, which would cost 700 billion over ten years to extend at a time when we are dealing with a fiscal crisis and the independent CBO has listed as the least effective form of growing the economy,” said spokesperson Jen Psaki.
Lots of good stuff in that article from Sam Stein.