Bush tax cuts
Long-time CG&G readers know that my Beautiful and Talented Wife (The BTW) is a professional actor. What you don’t know is that one of The BTW’s favorite and most celebrated roles was when she played Sarah Daniels, the lead in Rebecca Gilman’s wonderful, and wonderfully controversial, play, Spinning Into Butter.
The phrase “Spinning Into Butter” comes from the now largely discredited children’s story Little Black Sambo. In that book, Sambo gives his clothes, shoes, and umbrella to four tigers so they won’t eat him. But instead on agreeing among themselves on how to divide up what Sambo gives them, the tigers chase each other around a tree so fast as they argue that they spin themselves into butter.
Say the word "tax" to me and I'll pitch you higher carbon taxes, sometimes paired with lower payroll taxes in the form of a green tax swap. That's what I said to Chris Farrell, who wonders what else we might do to improve the tax code while everyone fights over whether the tax cuts from 2001 and 2003 should be extended. Jim Poterba and Joel Slemrod are also quoted in the article, pointing out the virtues of capping deductions in the current income tax system -- broaden the base so that marginal rates can stay low.
I think tax reform, fundamental tax reform, and the debate over the extension of these tax cuts are a distraction. Our big problem is that we don't raise enough revenue, not the particular forms in which we choose (not) to raise it. I think the right policy on the "Bush tax cuts" is to let them expire.
Tuesday, House Ways and Means Democrats presented Jackie Calmes of The New York Times with tables from the Joint Committee on Taxation showing the average income tax cuts of extending the Bush tax cuts for those under $250,000. Taxpayers in all income groups would receive large tax cuts, even those with incomes over $1 m. Here's her article from yesterday. Where's the tax increase on those over $250,000? That's the magic of averages. Extending all of the Bush tax cuts would cost approximately $3.8 tr. over the next 10 years, and about $700 b. of that would be lopped off from those over $250,000 under President Obama's proposal. However, the remaining $3.2 tr.
The more you hear about the business community being worried about the future because it is "uncertain" about federal income taxes, the more you realize that it actually is the one pushing for increased uncertainty.
There already is absolute certainty about the tax cuts enacted in the early 2000s: Under existing law they expire at midnight December 31, 2010. Do nothing and we can all be absolutely certain that rates will go up. Somehow, however, that certainty is being defined as creating uncertainty.
By contrast, the changes to the existing law the business community is saying are so important to economic growth will require new legislation and, especially these days, the legislative process is about as unpredictable as you can get. So pushing for the three changes the business community says are so important to the economic recovery -- keeping the current rate on upper income individuals and the existing rates on capital gains and dividends -- has nothing to do with certainty and everything to do with lowering taxes compared to what they would be under current law.
My New Year's Plea from 2007 has been getting some attention in the recent discussions over whether cutting tax rates will raise revenue. In this post, I'd like to follow up on the last line of that plea, which I have not seen recently quoted:
If I'm wrong, show me the evidence ... and tell me why the tax cuts were so small given their effects on revenues.
Restated, if these tax cuts raised revenue, then why not keep cutting them until the point at which revenues actually begin to fall? I presume the reason is that none of the proponents of this line of argument have any idea what the revenue-maximizing tax rate is. They only like to assert that we must have been past it because tax revenues eventually went up at some point after the tax rates were cut (ignoring the obvious counterfactual that it was economic growth unrelated to the tax cuts that pushed revenues higher and that they would have been even higher at the higher tax rates).
So the next question is simply, "What do the experts on your staff tell you that the top marginal tax rate should be in order to maximize tax revenues, leaving everything else about the tax code the same?" Journalists should relentlessly ask it of the Republican leadership in Congress who continue to make fallacious claims, and the Democratic leadership in Congress ought to ask it politely in a letter to CBO Director Doug Elmendorf.
Coming up in tomorrow's Washington Post, Brookings economist Bill Gale discusses these five myths about the tax cuts passed in 2001 and 2003:
- Extending the tax cuts would be a good way to stimulate the economy.
- Allowing the high-income tax cuts to expire would hurt small businesses.
- Making the tax cuts permanent will lead to long-term growth.
- The Bush tax cuts are the main cause of the budget deficit.
- Continuing the tax cuts won't doom the long-term fiscal picture; entitlements are the real problem.
I recommend the whole thing. You can look through nearly 6 years of my blogging and not find a single post in support of these tax cuts. Whatever is left of them should be allowed to expire, and Congress should make its tax policy changes in a deliberate fashion.
Of the five myths that Bill discusses, I continue to find the first to be the most frustrating. Here's what Bill says about extending the tax cuts as a means of fiscal stimulus:
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We now know some of the decisions reached at last Thursday's closed-door Senate Finance Committee meeting. According to this morning's Washington Post, committee mark-up won't occur until September, and Chair Max Baucus (D-MT) won't rule out extending the tax cuts for those with incomes over $250,000 ($200,000 for singles). From this morning's New York Times, we find that Baucus refused to give Republicans any assurances about an open amendment process. So last week's rumblings were about having the debate over extending the Bush tax cuts before the election and were not about enacting an extension before the election.
Stan's onto something here. Senate Democrats have suddenly shifted into high gear to pass the Bush tax cuts for those under $250,000 before they go out for their August recess. Democratic staff will meet at 12:30 p.m. tomorrow, and Democratic senators will caucus at 4:30 p.m. There's still a lot of work to do to bridge the big gaps within the caucus on the estate tax and on the top rates for capital gains and dividends. Senate Democratic leaders want to put Republican senators on the spot defending tax cuts for the rich before the election. The Statutory PAYGO Act of last February exempts most of these tax cuts, except for keeping the dividends rate below 39.6%, but that too may be set at 20% or even 15% I'm told. It's none to soon for the stock market, which has had this as one of its concerns lately.
This story from Jay Newton-Small of Time confirms what I posted earlier today about the Senate Democratic leadership wanting to vote before the election on extending the tax cuts enacted during the Bush administration.
I will resist the strong urge to say I told you so.
Here's the money quote:
The emerging tax plan is designed, as much as anything else, to clarify the differences between the two parties as they hurtle toward the fall elections. Following on their success with the financial-regulatory-reform bill, Democrats are betting that Republicans will once again take up a legislative battle on behalf of the wealthy. "Republicans are going to have a real choice ahead of them," says a Democratic aide.
