I like that only now, after nearly two years of deficit fearmongering, does the New York Times bother to mention that doing nothing on the deficit will reduce the deficit far more than any deal.
The latest Congressional failure to agree on a plan for balancing the government’s books could yield a surprising result: a sharp reduction in annual federal deficits, larger than anything contemplated by the special panel that reached its fruitless finale on Monday.
But the absence of an agreement also threatens to significantly slow growth in an already ailing economy by raising taxes on almost everyone while reducing government spending on almost everything.
Tax cuts passed in the Bush administration will expire at the end of 2012. By law, the panel’s failure triggers new caps on spending, cutting $1.2 trillion from the military, education, health care and other priorities over 10 years beginning next fall. The combined impact of higher tax rates and less spending would reverse the growth of annual deficits beginning in 2013, reducing by more than half the current $1.3 trillion gap between annual revenue and spending.
That has inverted the normal reality, in which spending rises inexorably unless Congress musters the political will to impose cuts. Now, although both parties say they are committed to more gradual approaches, an agreement is required to avoid the fiscal equivalent of shock therapy.
The story doesn’t mention the AMT, set to capture more income starting in 2012, and the doc fix, which if not extended would represent a 23% cut to Medicare provider rates (there’s also a 2% across the board cut to those rates in the trigger starting in 2013). But if you let the Bush tax cuts expire, suddenly you can do some of these things without having to fear “bankrupting our children’s future” or whatever deficit scolds want to tell us. At least for a while.
This was the case back in 2010, when the Bush tax cuts were on the table. The close to $4 trillion increase that would arise from allowing them to expire is as big a deficit deal as anyone in Washington has devised, as big as Bowles-Simpson, Domenici-Rivlin, the Gang of Six, the President, all of them. It’s approximately all you have to do, to return revenues back to the Clinton years, which had no impact on economic performance.
The problem is that the President is still talking about extending almost all of the Bush tax cuts, except for those above $250,000 of income. That is a budget buster, and there’s no real way to split the taxes out. The latest gambit is to threaten a veto of any attempt to extend the full suite of tax cuts.
“He won’t sign a full extension,” said one Senior Administration Official at a White House background briefing for reporters on the Super Committee.
“I think if you look at everything that happens in January 2013, it is a compelling argument that there’s a need to make real policy,” said another Senior Administration Official. “And I think the fact the sequester will hit in January 2013 and the expiration of the tax cuts hits in 2013, the right thing to do is tax reform that has both positive impact on the economy and is fair in terms of distribution of the tax burden, and then balanced savings that share the burden amongst all the different parts of the budget from the very rich to people on Medicare and Medicaid.”
This is party-wide, you still have people like John Kerry explaining that anything under $500,000 a year isn’t rich.
There’s a possibility that gridlock becomes an ally here, the Democrats won’t agree to extending the tax cuts without allowing those on the rich to expire, the Republicans won’t agree to anything less than a full extension, and as a result, all of the tax cuts expire.
I do agree that this path forward is an unnecessary and dangerous turn toward austerity, starting right away when the payroll tax cut and unemployment benefits (stupidly) expire. Given where we are, however, trying as much as possible to extend those two in the near term, while not caring a whole lot about tax rates for rich people (who benefit from the tax cuts at all levels; we have a marginal tax system), seems like the right move. And if it means saving cuts to programs for the working poor, saving Medicare, saving Social Security, the very minor increase on the tax rate at the low end is completely tolerable. After all, you can just come back with the “Obama tax cuts” and dare Republicans to block it. Heck, that even sounds like, dare I say it, a campaign platform.





45 Comments


Support this site!
Subscribe to the newsletter
Advertise on Firedoglake
Send
us your tips
Make us your homepage
About FDL News Desk
Taxes going up when unemployment is high has always been better than tax cuts because tax cuts always kill jobs.
If tax hikes killed jobs, then high unemployment would have continued throughout the 80s as Reagan hiked taxes through bracket creep – indexing was delayed and half the 1981 tax cuts were killed in 82 with many tax hikes signed by Reagan from 82 on. If tax hikes killed jobs, then unemployment would have increased from 1993 on.
Capital gains tax cuts without high inflation always create huge asset price bubbles that blow up after a few years as prices reach 150-200% of costs, an unsustainable situation in a free market.
Tax cuts have been clearly proven to kill jobs permanently. Taxes have been repeatedly cut in many different ways many times in the past decade and job creation has been the worst ever seen – over a decade that includes the great depression, a higher percentage of jobs was created for every decade you pick.
It is a total misreading of Keynes to argue large government deficits is Keynesian spending stimulus. Keynes described the reason Hoover and FDR’s borrow and spend on infrastructure and capital investment got the economy out of its contraction. Government deficits on consumption spending do not stimulate the economy, but merely slow economic contraction. Thus the Republican dictated Obama stimulus in 2009 was wasted too many job killing tax cuts, on slowing the contraction with extended unemployment, and too like Keynesian stimulus.
The reason doing nothing until 2014 works to create a growing economy is the $4 trillion in “tax hikes” from letting the Bush-Obama tax cuts expire along with the $1 trillion in spending cuts will re-establish the budget deficit baseline making it very difficult to cut taxes, or to cut spending. Thus politicians will be forced to promise to deliver good governance be solving real problems, like fixing the transportation system, the crumbling and energy costly building, the leaking plumbing, etc, all things that require capital investment. Increased capital investment always requires creating jobs.
The taxes on transportation are way too low because they have not been indexed for inflation for two decades, and they were always added to with far more general revenue than today, so the compromise on income tax can be rate cuts and gas tax hikes migrating to road use mileage taxes or comprehensive open road tolling.
The same principle can be applied to water fees, but eliminating the flat connection fee and hiking the unit water rate with no volume discount, while promoting the use of gray water in a dual water supply strategy – instead of simply replacing the existing single water line, large cities install dual water and waste systems. This would be a capital intense investment that would reduce water treatment costs over the long term.
Of course nothing like this can occur until more people run for office and get elected by saying “bad government is the problem, the solution is effective government that fixes the problems the free market has created over the past quarter century: decaying infrastructure and too high medical costs”
David, you are wrong about the impact of the tax cuts for the low end. The issue isn’t the rate increases so much as it is the expiration of refundable tax credits.
Due to the expiration of an expansion of the earned income tax credit, along with the expiration of an expansion of the child tax credit (and making it refundable), the refundable tax credit a family of 4 at the poverty line would receive would go down by over $3,000.
That would be an immediate reduction of 12% in disposable income. That is not “very minor” in any sense of the word.
‘scuse me for being dense (truly)
you mean “do nothing” as in do NOT extend the Bush tax cuts, right? As in do nothing and let them expire?
I know, Duh, Diva.
David, as “ericj115″ notes there was a minor expansion of earned income credits that will expire, along with the child tax credit increase of 500 per child and the 10% bracket disappears.
But the solution is to keep steadfast and let ALL the Clinton tax rates return, followed by new laws to provide the above.
The GOP refusing to pass such new laws is not not going to happen.
So the save the poor argument for saving the rich a few more trillion is bull shit.
Meanwhile, have a great time with your family over the Thanksgiving holiday.
The problem with a simple expiration of the tax cuts is that it’s too across-the-board.
In order for austerity to be austerity, the middle and lower classes must suffer the most.
yes – that is the NYT and David’s point.
Do nothing and let the Clinton rates return.
Yeah, I should have read more carefully.
I can has moar kawfee now!
Duh, Diva!
I sent that image to about 3 NY Times reporters when they falsely reported on the debt/deficit. Pretty unbelievable how co-opted the NY Times is by the deficit feitishtas.
Letting the Bush tax cuts expire would be horrendous for the economy. If we want people to spend more, why would we take more of their money?
Let the damn BushCo tax cuts expire in 2012, like stupid shit Obomba should have done last December.
Oh, dear. Maybe we should give the rich some more tax breaks. Poor babies. s/
If you wouldn’t support a spending reduction, you shouldn’t support a tax hike.
Tax cuts and spending increases are both expenditures. It is basic Keynesian economics that you do not cut expenditures in a down economy.
True, but they are not and do not affect the economy the same.
You can take an equal amount of dollars out of the pockets of two very different pools of Americans and have the resulting economic impact be VASTLY different, even though it’s the same in dollars.
Tax cuts are by far, the worst, at economic stimulus while direct government spending is by far the best.
So to just haphazardly suggest one equals the other is disingenuous at best. Or, what I would call, bullshit.
If we don’t give them more tax breaks, how will they inflate the next bubble?
Yes, expenitures for the government. Tax increases are not an expenditure for the government. Run along now.
:) I wonder what the next bubble will be.
And to add to that. In the degree they affect demand, tax cuts mainly affect personal private consumption. They do very little for investment, and absolutely nothing for the consumption of public goods like health care, education, social welfare and the like. Tax cuts skew the national income to private goods. One reason for letting the tax cuts expire is that they mainly affected the super rich, who already consume enough– or to put it another way — already suck more than their fare share of goods out of the economy.
Yes, thank you. Well said.
The end of the Bush tax cuts maybe a 1% win win, a massive increase in taxes paid by low income folk, reductions in earned income tax credit, etc etc, . The 1% already threw the 2nd through 5th% under the bus with the alternative minimum tax.
The 1% dont pay taxes, they avoid them. By selling their stock and real estate, but in tax adviced way such that it is not income.
http://www.bloomberg.com/news/2011-11-21/billionaires-duck-buffett-17-tax-target-avoiding-reporting-cash-to-irs.html
Well, bubbles are like lemming rushes. They have to follow someone, and Goldman Sachs have not announced the next big thing.
I am so tired of people refering to the “Obama tax cuts” passed during the Dec. 2010 lame duck session of Congress by the Dem controlled House and Senate as “Bush era tax cuts.”
The Bush era tax cuts expired last year. Stop with the bullshit.
James Galbraith refers to tax cuts as “spending”.
Tax increases and spending cuts are both contractionary, meaning they serve to shrink the economy rather than grow it.
What’s your point?
I’m not suggesting they’re not both contractionary. I’m saying the degree to which they may be contractionary is very, very different. I say this in response to your assertion that “If you wouldn’t support a spending reduction, you shouldn’t support a tax hike.” Because their impact on the economy is vastly different, then one can indeed support tax hikes while simultaneously supporting spending increases.
Also, too, if tax increases are contractionary, then can you show me the data supporting the assertion that the economy was contracting during the years 1993-1995? That’s a two year window, certainly long enough for the Clinton tax hikes to be fully implemented.
Tax increases being contractionary does not mean any tax hike will cause the entire economy to shrink. It simply means that tax increases fight against growth, while tax cuts and spending increases fight for growth.
Since tax increases are contractionary, why would you support them? Are you a debt hawk?
So, you can’t show data that supports tax hikes are contractionary, and I’ll save you the trouble of looking for data to support the theory that tax cuts are stimulative because there is no data to support that. If that were true, after the last 11 plus years of tax cuts we’d be swimming in jobs.
So, no data to support the assertion that tax increases are contractionary, yet you still frame the question as: Since tax increases are contractionary…”
I reject your framing of the question, but I will answer it. As long as we continue to insanely service our deficit spending with bonds that pay interest, then yes, I suppose I am somewhat of a debt hawk. The interest on our debt right now is bigger than the entire defense budget just recently. That’s a huge cost for which we get NOTHING.
I’m not, however, in the same league as the pundits and political class is in though regarding being a debt hawk. Right now we should be spending more. If they wanted to offset some of that spending with targeted tax hikes on mostly the rich, then yeah, I’d support that too. But no one is even remotely considering the kind of spending this economy needs.
I don’t need data to show that tax hikes are contractionary. It is a rule of economics.
Now you’re trying to argue that tax cuts are not stimulative? Paul Krugman disagrees with you.
Then where are the jobs created over the last 11 years???
Either they’re stimulative or they’re not.
The only real world examples we have to go by recently are Clinton raised taxes and the economy under Clinton boomed and Bush cut taxes and the economy under Bush tanked.
I’m not arguing anything, I’m asking you to back up your assertion that tax cuts are stimulative and/or tax increases are contractionary with real world data.
And I disagree with Paul Krugman all the time. I agree with sometimes too. I try and make up my own mind using whatever data is available to me. And the only data I see DO NOT support the assertion that tax increases are contractionary nor does the data support the assertion that tax cuts are stimulative.
In science when you have a theory but real world tests provide an opposite result, you consider that theory to have been proven wrong. I guess economics isn’t a science though.
Economics is definitely a science, and the best of scientists do not confuse correlation with causation. Randy Wray has argued quite convincingly that the economy of the 90s boomed despite Clinton’s tax hikes, not because of them.
Disagreeing with Paul Krugman is a doomed endeavor ninety percent of the time.
The unemployment rate fell after the Bush tax cuts.
As noted, they do not have the same impact/ Tax cuts first result in savings. They have to be spent to help the economy employ. And there is no quarantee that will happen. But they do satisfy savings demands of the rich IMO.
Umm, no it is not a science.
I certainly wasn’t arguing that the economy boomed because of the tax cuts. I’m just saying the data doesn’t support the assertion that tax increases are conflationary, unless I’m missing some data which I keep asking you to provide.
And what happened to the unemployment rate after Obama’s tax cuts at the end of 2010?? The payroll tax cut was a new one.
Look, I’m not here arguing that they aren’t stimulative. If I had to put my feelings into words I would say it this way: “Tax cuts are probably stimulative, but they are such a slight stimulus that in an economy this big they are for all practicle purposes neither stimulative nor contractionary.” At least tax cuts or tax increases that we’ve seen in the past and are talking about now. Of course if you raised taxes IMMENSELY than I think you’d see the contractionary result show up in the data.
Likewise, I think if you cut taxes to zero you’d see the stimulative affect show up in the data. But the cuts and increases that we’ve seen in the past and are talking about now for whatever reason don’t show up in the data as you would expect. Like your source said, the economy roared DESPITE the tax increases. Thus, their effect was very little.
The problem with tax cuts during a period of high unemployment is that they only target those who already have a job. Whereas direct government spending can target everyone, including those that don’t have jobs. This results in a much much better stimulative expenditure.
Well, if you follow sectoral balances you can assert with certainty and to the exact penny that a deficit in the federal budget will equal a surplus in the private economy less the current account deficit. To the freaking penny. And these last three years we have had deficits of over a trillion dollars and yet, no jobs. So putting money in the pockets of the private economy does not, by itself, create jobs. It has to be targeted. Our deficits were much smaller in the clinton years and yet,, we had lots of jobs. For a few years, the fed was even in surplus but that some economists call the goldilocks years. It cannot continue and still have full employment. Except for a few years, our entire history has seen deficits and we have had gawd awful depressions. You could look this shit up.
That’s about right.
Economics is a science in that it follows the scientific method. Its not a hard science, but the premise still follows the following tenets:
Observation
Hypothesis
Measurement
Experiment
Disproof or revision of Hypothesis or Confirmation
Yet, we have such vastly different ideas about the economy and how to fix it.
I suggest that this (economics) resembles many, if not most of the conversations I have with my IT guy when he says, “Well, that SHOULD work.”
Perhaps we should approach the economic crisis the way he does. “Just, unplug it. Leave it off for a few minutes, And then plug it back in.”
That is one theory of fixing the economy:just let it be.
Economics is a social science but it is a long way from lets say, the science behind the atomic bomb.
It actually would be good for the economy. In fact, it would be stimulative.
(All you have to know to realize what I’m saying is true is to watch the budgets of any large organization. Money flows away from taxation).
-stewartm
Sorry. You don’t get it. You are correct that tax cuts are expenditures. Spending does stimulate the economy. But not all spending stimulates equally. You could raise a certain amount of revenue with a tax increase on millionaires and spend every nickle extending unemployment benefits. The combination would be revenue neutral. But the effect would be a significant stimulus, because the unemployed tend to spend unemployment checks.
Similarly, there is substantial difference between continuing the cut in social security tax, whether you think it’s a good idea or not, and continuing tax breaks for hedge fund managers. The former would be more stimulating even if the amounts were equal. There is high quality data on the relative stimulative power of various types of tax cuts and spending increases. It is easy to increase taxes on millionaires and spend the revenue in ways that cause a net gain in stimulus.
If all the DC politicians including the President and Congress would simply take a 10year sabbatical the Country would be in great shape!!!!
http://www.youtube.com/watch?v=wjAOrNn36Ns
I never said that all spending stimulates equally.
You’re arguing that taking four trillion dollars out of the economy would be good for the economy. That is complete nonsense. You should be happy that the Bush tax cuts were extended 2010 because it probably saved us from a double-dip recession.
Fiscal austerity is not the answer to our current woes. Check this out.