The messaging and posturing is hot and heavy as the Senate nears a vote on competing tax plans that in large measure will define the election in November. The fact that the two plans happen to have a lot in common will not be heard – they envision the same individual income tax rate for 98% of the country – but you’ll hear plenty about the differences. Vice President Biden did a rare conference call with reporters to highlight them:
Vice President Biden seized the stage Tuesday in an ongoing election-year drama over taxes, arguing that Republicans would rather raise rates for 114 million middle-class families than give up massive tax breaks for the wealthy few [...]
“The other side claims this is the best way to grow the economy: If you take care of the very wealthy, everything will, as that old phrase goes, trickle down,” Biden said. “The problem is we’ve seen that movie before and we know how it ends. . . . What happened was the rich got richer . . . but most Americans got nailed.”
Republicans, in turn, accused President Obama and congressional Democrats of risking the nation’s economic health by threatening to let all the tax cuts expire unless the GOP capitulates. Economists generally agree that full expiration of the tax cuts, along with implementation of sharp cuts in federal spending also set for January, would plunge the nation at least briefly back into recession.
Economists don’t totally agree with that, as the emerging option on the Democratic side would be to start down the fiscal slope by letting all the tax cuts expire, and then passing a tax cut program that scores entirely as a cut. If this is done even a month after the January 1 deadline, the impact on the economy would be relatively minimal. Republicans have taken to call this “Thelma and Louise economics,” a bit dramatic for the group that almost caused a default on US debt last year.
Democrats sought to turn the tables on their counterparts by highlighting the stimulus tax cuts for the poor and middle class that they included in the bill and that the Republicans would allow to expire. Combined with increases to dividend and capital gains taxes, there is a distributional aspect to the competing plans.
Late yesterday, Sen. Joe Manchin said he would vote with the Democrats on the tax cut plan, probably giving Democrats the 50 votes needed to capture a fairly meaningless majority on the bill (Joe Lieberman and Jim Webb are already announced in opposition, giving Democrats precious little wiggle room). Republicans plan to filibuster and no movement forward will take place. The House plans to pass a one-year extension of all the Bush tax cuts next week, but the White House has already threatened a veto and the Senate will block that plan in a competing Republican vote today. So this is all about messaging and positioning for the elections.
However, there is a cliff that will get jumped at the end of the year, with the full support of both parties. The payroll tax cut will expire, the White House confirmed.
On Tuesday, even as Democrats complained that Republicans had failed to include an extension for a variety of smaller middle-class tax cuts in their bill, such as a credit for college tuition, White House economic adviser Jason Furman confirmed that the White House has no plans to extend the payroll tax cut, which boosts paychecks by 2 percent for virtually every American worker.
“That was always intended to be a temporary measure to support job creation and economic growth as the economy was beginning to strengthen,” Furman said on a conference call with reporters. “It’s not something we have at this stage called for extending into next year.”
That cost roughly $110 billion in 2012 to extend, so we’ll see at least that much – and probably more – fiscal tightening at the end of the year. This will have a macroeconomic impact on consumer spending, but it will also restore the full payroll tax to support Social Security, without any controversy about using general fund revenues for restoration of the cut into the Social Security Trust Fund 2011 and 2012. That dog never barked, thankfully.