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How the Bush tax cuts could sabotage tax reform

DebtTaxCutsJan2010projections_7-30-10_opt.jpg

If you're confused by the discussion over the Bush tax cuts, Derek Thompson has a nice primer. I'm not convinced by his conclusion, though. Thompson comes down on the side of extending the tax cuts while working on comprehensive tax reform. I don't, as I don't see any reason to believe that extending them will make comprehensive tax reform more, rather than less, likely.

Right now, taxes are at unsustainably low levels. Reform will have to get them somewhat higher. But if we end up asking Congress to choose between the current tax code with the Bush tax cuts and a reformed tax code without them, the latter will look like a huge tax hike. That'll make reform more difficult to pass, or it'll force us to pass a reform that doesn't raise any more money than the tax code with the Bush tax cuts. As you can see from the Center for Budget and Policy Priority's debt graph above, that's not a good situation.

I see a case for extending the tax cuts for stimulus reasons, but I'd really much prefer that we simply scrap them and pass a temporary payroll tax holiday, which would offer a lot more relief to the people who need it most, and a lot more stimulus for the economy. Unfortunately, Democrats have shown no interest in thinking creatively or strategically about this, and my hunch is that they're just going to capitulate and extend everything for two years.

By Ezra Klein  |  August 3, 2010; 4:10 PM ET
Categories:  Taxes  
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Comments

"Right now, taxes are at unsustainably low levels"

I think you'd better hope not. If that's really true (which I tend to doubt), the Republican's have successfully positioned tax hikes as something akin to armed robbery.

The politicians who vote to raise taxes on the majority of the electorate can look forward to being booted out come the next election.

And tax raising will have to be reform--reducing taxes on middle-income earners while increasing it on higher income earners, cutting capital gains and corporate taxes while increasing the individual income tax rate or removing the cap from social security deductions, etc.

A straight tax hike from a politician will be akin to Walter Mondale announcing that he couldn't wait to raise taxes as president, and the resulting 49 state devastation he encountered.

Posted by: Kevin_Willis | August 3, 2010 4:21 PM | Report abuse

Democrats seem to have a collective death wish. Positioning themselves as the party of the middle class and not the party of the banksters and the rich hedge fund guys who destroyed the economy 2 years ago would, more than anything, blunt the message of the tea partiers with independents. This would help the House conservadems who are in the most trouble.

But they won't go against their own personal ecomnomic interests and the interests of their donors and friends and the class they aspire to. They will deserve their defeat, but the country really can't stand even 2 years of GOP blindness on the deficit costs of tax cuts. When even David Stockman thinks you are charlatans, the game is pretty well up.

Posted by: Mimikatz | August 3, 2010 4:23 PM | Report abuse

Tax reform is the stuff of second terms.

Posted by: tuber | August 3, 2010 4:27 PM | Report abuse

Wait, let me get this.

The national debt is so bad that we can't do short-term, limited deficit spending for effective stimulus to turn the economy around.

But we absolutely MUST make the debt worse, with a permanent, long-term change, because this also happens to be a far less effective stimulus than the kind of stimulus we refuse to do because we're worried about long-term debt?

I'm sorry, but this is crazy talk. I loathe our discourse.

Posted by: theorajones1 | August 3, 2010 4:42 PM | Report abuse

The real problem with this analysis is it looks at taxes (income to government) only. The graph is "debt". When most people look at debt, they review spending, maybe look for ways to increase income and get a "budget". Our government (both parties) seem to view this problem as only a way to get more income (raise my taxes). A 10% cut in spending is very feasible.

Posted by: DBTool | August 3, 2010 4:43 PM | Report abuse

"Unfortunately, Democrats have shown no interest in thinking creatively or strategically about this, and my hunch is that they're just going to capitulate and extend everything for two years."

Presumably if you could find 40 Democrats out of the current 59 with the same discipline as the Republicans, they could simply filibuster any extension of the tax cuts and let them expire on schedule, correct?

Posted by: jnc4p | August 3, 2010 5:01 PM | Report abuse

@DBTool: 10% cut across the board, Defense, Social Security, Medicare, everything is feasible? In what political universe [where politicians have to stand for reelection] is this a feasible option?

Posted by: srw3 | August 3, 2010 5:07 PM | Report abuse

Ezra,

Couldn't liberal democrats in the Senate filibuster an extension of the Bush tax cuts? If the GOP can obstruct any legislation with progressive priorities, why can't a few liberal dems obstruct legislation that would enable conservative republican priorities? Why can't Feingold act as the Ben Nelson for tax cuts for rich people?

Posted by: keever66 | August 3, 2010 5:10 PM | Report abuse

hell ya jnc4p.. Can't we find 40 Senators who remember the days of 1964-1986, when hardball tactics went both ways amongst the parties?

Posted by: keever66 | August 3, 2010 5:13 PM | Report abuse

*****I see a case for extending the tax cuts for stimulus reasons, but I'd really much prefer that we simply scrap them and pass a temporary payroll tax holiday*****

Ezra: I'm with you there. But let's face it, the votes aren't there in the senate for this right now, never mind January. The GOP certainly isn't going to cooperate with anything they believe will help the economy -- and therefore help Barack Obama win reelection.

I've been of the opinion that Obama is the overwhelming favorite in 2012. But Krugman's latest column has got me a tad spooked. I think there's a non-trivial chance -- and I wouldn't have said this a mere two months ago -- that a weak economy could deliver the White House to the GOP. Under the circumstances extending the Bush tax cuts might be the lesser of two evils, because this is a short term growth-booster that WOULD get GOP votes in congress.

Posted by: Jasper999 | August 3, 2010 5:13 PM | Report abuse

I always get a kick out of Ezra's columns extolling the benefits of more government spending to "stimulate" the economy but then turning around and advocating for gigantic tax increases to pay for all the increased "stimulus" spending. Like goverment spending our tax dollars is so much more virtous than the American tax payer getting to keep his hard earned pay to spend as he likes. It's also much more efficient to allow the taxpayer to spend his own money as he sees fit as opposed to massive waste of the government bueacacy spending other people's money.

Posted by: RobT1 | August 3, 2010 5:37 PM | Report abuse

Isn't the economic theoretical consensus (Modigliani and Friedman) that temporary spending and tax measures are poor stimulus? Hasn't there already even been research done on the temporary tax cuts from prior administrations to this effect ?

Posted by: cdosquared5 | August 3, 2010 5:38 PM | Report abuse

Why can't Nancy Pelosi just refuse to bring a bill reauthorizing the tax cuts to the floor?

Posted by: mschol17 | August 3, 2010 5:45 PM | Report abuse

Of course, the Democrats in Congress could always quit spending so much.....

or better yet, a Republican Congress and a Democratic President. Worked out alright the last time.

Posted by: bgmma50 | August 3, 2010 5:46 PM | Report abuse

"Couldn't liberal democrats in the Senate filibuster an extension of the Bush tax cuts?
Posted by: keever66"

"Why can't Nancy Pelosi just refuse to bring a bill reauthorizing the tax cuts to the floor?
Posted by: mschol17"

The reason Democrats won't filibuster and Miz Nancy won't refuse is because the Bush tax cuts, Democratic demagoguery to the contrary, didn't only benefit The Rich. The Bush tax cuts took millions of the poor and lower middle classes off the tax rolls completely, and reduced taxes for everybody. They are stuck between the proverbial rock and a hard place.

Posted by: bgmma50 | August 3, 2010 5:57 PM | Report abuse

@RobT1: Even another 100 billion in stimulus (which is still to little given the depth of unemployment but too big for the "fiscal conservative" republicans) is less than 1% of the national debt which is the reason that taxes need to go up. We still have to pay for the 10 years of tax cuts, 2 wars, and medicare d all on the govt credit card by Bush and the "fiscally conservative" republican congresses. That is the big spending republican's legacy to us, massive spending without paying for it, tax cuts without commensurate spending cuts....If 100 billion gets more people working, they are not drawing unemployment and are paying taxes and supporting their families again. A temporary stimulus is a lot cheaper than making tax cuts that go overwhelmingly to the top 2% of income earners permanent...

Posted by: srw3 | August 3, 2010 6:11 PM | Report abuse

@bgmma50:reduced taxes for everybody.

Well everybody that pays income tax. For most people payroll taxes, sales taxes, property taxes (direct or indirect if they rent), etc. are much higher than their income tax burden.

25% of the bush tax cuts went to the top 1% of income earners and people with incomes over $1 million got 15% of the tax cuts. That's like giving a starving person a crust of bread while you dine on steak and defending your actions by saying, "Well, everybody is eating, aren't they?"

Posted by: srw3 | August 3, 2010 6:26 PM | Report abuse

The stupidity of extending them for two years is that it puts this back on the table in... 2012. You think the President and House and 1/3rds of the Senate is going to want to go out on the campaign trail to bite the bullet then? No.

If the Dems can't get want they want before the Election, they should punt it to the lame duck session rather than roll over. Once in the lame duck sessions, they have the fall back of letting them expire completely. It won't make people happy, but it's also two years at that point before anyone needs to run. And they can always point to it being a Bush & GOP tax bill that *they* created to expire in 2011. It's far easier in 2012 to run on that narrative if they've let them expire and banged that drum for two years:

"You guys wrote this law to expire. We'd tried to extended it for everyone making less than $250K, but you wouldn't go for that."

Bang a drum for two straight years and it becomes meme. Lord knows we've seen the GOP do it.

John

Posted by: toshiaki | August 3, 2010 9:08 PM | Report abuse

Marco Rubio, Floridas republican candidate for senate, handlers have told him to stop the republican big lie,” tax breaks for the rich create jobs” and is being abandonded in his talking points. Only because you can look around and see after 10 years of tax breaks, the job market is in the toilet, and the deficit has swelled. Greenspan,and a host of economist finally admit to that fraud. Tax breaks should remain the same for people making less than $250,000 , and big increases for above. Which is pretty much Obamas program………..Social security just needs the cap on it raised to about $110,000, and it will be solvent!

Posted by: roosboys | August 3, 2010 9:43 PM | Report abuse

"@bgmma50:reduced taxes for everybody.

Well everybody that pays income tax." posted by srw3

No s**t, Sherlock. The subject was the Bush tax cuts, which were income taxes, and why Democrats are scared out of their wits to let them expire.

As for your non sequitur on payroll taxes, property taxes, and sales taxes...whatever it is that your socialist little soul desires, be assured of one thing....you aren't going to get it, and if you do, you will be most disappointed in the results.

Posted by: bgmma50 | August 3, 2010 10:21 PM | Report abuse

I think you let them expire completely and then immediately do tax reform in the new Congress.

Posted by: mschol17 | August 3, 2010 11:24 PM | Report abuse

toshiaki, The reason that the GOP is interested in keeping those upper income tax cuts in place is because a huge number of small businesses file individually, and hitting them with increased taxes right now is going to mean the closure of a great many struggling concerns, along with layoffs of the people they employ.

And the tax cuts were given an expiration date at the request of democrats back in 2001. It takes some real chutzpah to now blame the GOP for the expiration date. I don't think you will get very far with that argument, no matter how often you beat the drum. Democrats are on video tape bragging about it.

Posted by: christacooper | August 4, 2010 6:38 AM | Report abuse

If we have to have a general tax hike, I'd like it to be based on the pre-Bush taxcut levels. Let all the taxcuts expire, then hike everybody's taxes on top of that. The Bush cuts were partially made in order to pre-offset the tax increases he saw coming down the road, and we should not let them stand.

Posted by: glenerian | August 4, 2010 7:42 AM | Report abuse

Americans have become feckless and irresponsible when it comes to the issues of taxation. We somehow think all this stuff we want (roads, schools, parks, multiple ongoing wars for cheap oil) is free! It's not. We have obligations and is high time that we live up to meeting those obligations. That may involve cutting spending for sure, but we cannot cut our way out of this. We must pay our bills and stop passing the buck to future generations.

Posted by: UrbanMechanic | August 4, 2010 2:53 PM | Report abuse

Americans have become feckless and irresponsible when it comes to the issues of taxation. We somehow think all this stuff we want (roads, schools, parks, multiple ongoing wars for cheap oil) it is free! It's not. We have obligations and is high time that we live up to meeting those obligations. That may involve cutting spending for sure, but we cannot cut our way out of this. We must pay our bills and stop passing the buck to future generations.

Posted by: UrbanMechanic | August 4, 2010 2:54 PM | Report abuse

"toshiaki, The reason that the GOP is interested in keeping those upper income tax cuts in place is because a huge number of small businesses file individually, and hitting them with increased taxes right now is going to mean the closure of a great many struggling concerns, along with layoffs of the people they employ."

Well, first, I'd argue that its not the "reason" so much as a politically appealing excuse/ratiionale that has an arguable amount of merit, but undoubtedly plays well on TV.

Out of the 34-40 million people that file personal income tax returns as "small business owners", about 1.5-2.5% of them fall into the top two tiers. I've seen estimates ranging from 470-900 thousand people. 1/2 a million to a million people is a lot, so you can argue that it is a "huge number". But it is a very small percentage of small business owners. These top earning 500,000 small business owners that would be affected have a net positive business income averaging over $700,000 (obviously its higher for some, lower for others). Most "small businesses" are just that, small. They're personal side ventures that bring in a little extra income (eg. the few pieces of jewelry my wife sells at the occasional craft fare).

You could argue that taxing these people more will hurt jobs. But, at the same time, you could also argue that keeping taxes low creates more gov't borrowing, which (at least in normal times) crowds out private investment.

In the long run, there is likely a trade off for small business between keeping taxes low or allowing easier access to capital to fund the expansion of these small businesses.

If this is your rationale, you have to ask yourself, how many people are really effected? and how many jobs are at risk? and way that against the long-term costs of expanding debt. My guess is that just from a jobs perspective, the revenue lost per job saved won't be a very convincing number. Billions of dollars for thousands of jobs. You can argue if those billions and thousands are measured in tens or hundreds, but either way, probably not that impressive of number for revenue lost per job saved.

Posted by: nylund | August 5, 2010 5:32 AM | Report abuse

Right now, spending is at unsustainably high levels.

I fixed it for you...in some states the total tax burden is around 40% (state, federal, local, cable, , utility, sales, property). How much more do you think would be fair?

Posted by: kingstu01 | August 6, 2010 6:02 PM | Report abuse

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