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'The range of options under consideration...is remarkably narrow'

DebtTaxCutsJan2010projections_7-30-10_opt.jpg

Business Week's look at the Bush tax cuts is a useful reminder that "the cuts weren't designed as Keynesian energy shots. They were supposed to promote long-term growth by realigning incentives." Which is to say, they're not the right cuts to use if we're looking for Keynesian energy shots. But that's all a theoretical question. In reality, Democrats are going to fold almost totally on the tax cuts:

Today, high unemployment is coloring the debate over whether to extend the tax cuts. Democrats who originally opposed them on grounds that they favored the rich are open to continuing them now, figuring that the economy needs all the help it can get. Macroeconomic Advisers, a St. Louis-based economic consulting firm, estimates that a "full sunset" of the Bush tax cuts (and President Barack Obama's modest middle-class tax cut of 2009), as called for by current law, would cut 0.9 percentage points off the growth in gross domestic product next year—a big hit considering that economists surveyed by Bloomberg News expect growth of only 2.9 percent next year.

As a result, the range of options under serious consideration in Washington is remarkably narrow. Republicans want to extend the Bush tax cuts for 100 percent of taxpayers; the Obama Administration wants to limit the extension to a mere 97 percent or 98 percent, excluding individuals earning $200,000 a year or more or families earning $250,000 or more. On Aug. 4, Treasury Secretary Timothy F. Geithner said "the country can't afford" to keep the top-end reductions.

Obama's plan isn't so affordable either. According to the staff of the congressional Joint Economic Committee, the Obama plan would forgo revenue of $2.8 trillion from 2010 through 2020. Protecting high-income taxpayers from the tax-cut expiration as well would cost an additional $700 billion in forgone revenue over the same period, Geithner says.

And anyone want to guess who'll be blamed when CBO adds $3 trillion to its deficit projections?

By Ezra Klein  |  August 9, 2010; 10:29 AM ET
Categories:  Taxes  
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Comments

"And anyone want to guess who'll be blamed when CBO adds $3 trillion to its deficit projections?"

Oh, I don't know maybe the one that liberals have NAMED the tax cuts for, GWB?

I say let them all go. We need to start realizing sooner rather than later that there's a new world out there and we can't continue to spend and not tax like we used to.

Heard on Morning Joe today also that we spend $2 Billion a DAY in Afghanistan now. There's a good enough place to start as any to cut back.

Posted by: visionbrkr | August 9, 2010 11:03 AM | Report abuse

I have to admit that Ezra has done a credible job of presenting the facts here. He rightly reports that the Bush Tax Cuts are currently responsible for over 1/3rd of our current GDP growth, and over 1/3rd of next years projected GDP growth.

Ezra also reports, though not in so many words, that about 4/5ths of the Bush Tax Cuts go to people making less than $200 thousand (or families making over $250 thousand)

He could have gone a bit farther by mentioning that the portion of the Bush Tax Cuts that Obama is considering allowing to expire amount to only about $40 Billion next year.

Posted by: mgsorens | August 9, 2010 11:24 AM | Report abuse

The blame is going to be placed squarely where it belongs, and that's on the Democrats. If they weren't prepared to take the political hits for raising taxes to pay for this tsunami of spending they've embarked on, they shouldn't have spent the money.

Surely they didn't indulge in the notion that the Republicans, who opposed every spending package every step of the way, would raise taxes to reduce the Democrats' deficits? Right. Just like Democrats reduced spending in order to reduce deficits that resulted from Republican tax cuts.

Lesson? Starving the Beast and Gorging the Beast are two sides of the same deficit coin, and both massively miscalculate the willingness of the other side to actually do anything about deficits.

Posted by: bgmma50 | August 9, 2010 11:41 AM | Report abuse

mea culpa
I obviously meant to say that 4/5ths of the Bush tax cuts go to (families making less than $250 thousand).

Posted by: mgsorens | August 9, 2010 11:59 AM | Report abuse

Can we all agree that no one REALLY truly honestly sincerely cares about deficits except a small group of policy wonks? And to the extent that those folks "care", it's that they realize that our deficits are unsustainable in the long run. Not that deficits are causing us to create fewer jobs this month, or some nonsense like that.

Democrats don't care about deficits -- because there is no political will to come to consensus on reforming entitlement programs, which are the largest contributor to the deficit in the long run (although they deserve a bit of credit for extending the life of Medicare through the recent health reform law).

Republicans don't care about deficits, because they've never met a tax cut they didn't like. They'll even tell you with a straight face that reducing the tax rate will bring in more revenue. (Huh?) They refuse to acknowledge there is any waste in our bloated defense budget. And their record on the deficit from 2001-2006 (unpaid for Part D? Wars? Tax cuts?) was the worst of any government in American history.

And the public doesn't care about deficits. They might say so in a poll, but in the same poll, they'll almost always put reducing the deficit at a lower priority than reducing their own taxes or maintaining spending on programs they like. "I care about the deficit" is just a psuedo-principled cheap shot at whatever party is in power, because you don't like how THEY are spending your money.

I'm not saying we should focus on the deficit more or less than we do. I'm not an economist. It DOES seem like common sense that we can't keep printing money forever. But at the same time there's a lot more political opportunism out there than genuine concern, and we should be willing to call it out when we see it.

Posted by: vvf2 | August 9, 2010 12:02 PM | Report abuse

I think it more appropriate to refer to the scheduled tax increases as 'the scheduled Bush tax increases' as these tax increases were passed during the Bush administration using the reconciliation process.
Avoiding the planned Bush tax increases on the middle class is what the Dems should be fighting for.
My 2 cents

Posted by: alexhb | August 9, 2010 12:10 PM | Report abuse

alexhb,

you could also argue that IF the Dems didn't push back against the cuts originally then they wouldn't have a sunset period.

Posted by: visionbrkr | August 9, 2010 12:15 PM | Report abuse

Wait, I just wanna make sure I have the facts right here, so when I go to converse with all my very serious friends, I don't sound like a tool:

Ezra's claims/articles he cites say:

1) If Bush tax cuts are extended for everyone, deficit increases by $3.5 trillion.

2) If Bush tax cuts are extended for individuals under 200k/families under 250k, deficit increases by $2.8 trillion.

3) Presumably, if all tax cuts are ended, revenue increases by $3.5 trillion?

Also, mgsorens claims that 1/3 of this years GDP growth is directly attributable to Bush tax cuts? How can that possibly be determined? That sounds baseless. Think I need a source. My serious friends would embarrass me if I said something like that without backing it up.

Finally, a question regarding the hallowed small business owner. What percentage of SBOs fall under the 200k/250k threshold, and what percentage is above?

Posted by: girlscoutsamerica | August 9, 2010 12:21 PM | Report abuse

I think the public does care about deficits. Governors like Cris Cristy and Mitch Daniels have proven that the people in their states are will to make massive cuts in government in order to reduce state deficit.

That bodes well for the potential of returning to fiscal policies that balanced the federal budget at the end of the Clinton term.

Posted by: mgsorens | August 9, 2010 12:26 PM | Report abuse

I am a little confused here. Ezra says the Democrats are going to "fold almost totally on the tax cuts" but what we are talking about here is keeping Obama's campaign promise to not raise taxes on families making less than $250,000 a year. How is upholding one of your main campaign promises folding? Yeah, the Dems extend the whole Bush tax program is certainly folding but I just don't see what Ezra was expecting here.

This is like my fellow liberals who are shocked that Obama escalated the Afghan war when he had only promised to do that in every major speech of the 2008 campaign. Sometimes you just can't win.

Posted by: unitas19 | August 9, 2010 12:27 PM | Report abuse

mgsorens - you speak about the balanced federal budget at the end of the Clinton term. But that was before the Bush tax cuts. So that meant the government had a whole bunch (like $3.5 trillion maybe?) more revenue. That would make it easier to balance the budget and reduce the deficit.

Also, regarding your previous claim that the Bush tax cuts provided 1/3 of GDP growth for this year (and will for next year as well?), can you provide some data for that?

Posted by: girlscoutsamerica | August 9, 2010 12:32 PM | Report abuse

"Also, mgsorens claims that 1/3 of this years GDP growth is directly attributable to Bush tax cuts? How can that possibly be determined? That sounds baseless. Think I need a source. My serious friends would embarrass me if I said something like that without backing it up. "
=========================================
My source is Ezra Klein in the article above.

Ezra says his source was "Macroeconomic Advisers, a St. Louis-based economic consulting firm." Again this is in the above article

I hope your "serious friends" don't embarrass you in the future.

Posted by: mgsorens | August 9, 2010 12:35 PM | Report abuse

mgsorens - you speak about the balanced federal budget at the end of the Clinton term. But that was before the Bush tax cuts. So that meant the government had a whole bunch (like $3.5 trillion maybe?) more revenue. That would make it easier to balance the budget and reduce the deficit.

Also, regarding your previous claim that the Bush tax cuts provided 1/3 of GDP growth for this year (and will for next year as well?), can you provide some data for that?

Posted by: girlscoutsamerica | August 9, 2010 12:39 PM | Report abuse

mgsorens - Got it. I'm sometimes easy fodder for my serious friends, but that's why I like to double check my facts before I engage them. wink.

Still, while the firm in question does forecast 0.9 percent hit on GDP next year, I don't see any mention of the impact on this years GDP growth. Is it fair to make the assumption that, if the tax cuts sunset next year and will hit GDP by 1/3, that they are responsible for 1/3 of GDP growth this year? I'm not trying to be snide, just asking.

Posted by: girlscoutsamerica | August 9, 2010 12:48 PM | Report abuse

The person to be blamed is the person running the deficits.

That was the case for Presidents 33 thru 43. Should also be the case for 44.

Posted by: krazen1211 | August 9, 2010 12:58 PM | Report abuse

girlscoutsamerica,

If you could raise taxes without reducing GDP that would reduce the deficit yes.

At the end of the Clinton term spending was 18.4% of GDP, much smaller than the 25.1% of GDP today.

Before Democrats took control of Congress, for fiscal year 2007 revenues were 18.8% of GDP.

So... in spite of the Bush Tax Cuts, there would have been budget surpluses if the size of government had been held to 18.4% (Clinton levels)

Posted by: mgsorens | August 9, 2010 1:11 PM | Report abuse

Just to second Unitas19, my impression has been that the Dems will do what Obama always said he'd do - end the cuts for indivs over $200k/families over $250k only. Would he not veto any total suspension of the cuts? Also, where does restoring the estate tax figure into budget projections.

Posted by: sprung4 | August 9, 2010 1:14 PM | Report abuse

girlscoutsamerica: "Is it fair to make the assumption that..."

I don't think you are snide at all. Many economists seem to come up with the same .9% GDP. Presidential adviser Christina Romer and her husband's most recent paper came up with a formula for calculating such.

The short answer would be, yes it is a fair assumption because it is relative to the size of GDP, rather than a specific dollar amount.

Posted by: mgsorens | August 9, 2010 1:21 PM | Report abuse

If Dems cave and extend all tax cuts, they simply need to IMMEDIATELY try to pass a new bill to give new tax breaks to those under $250,000.

Then if the GOP balks, then it becomes the GOP's fault that taxes went up for those under $250,000.

If at the end of the day, the Dems don't find a way to extend tax rates for those under $250,000 while allowing the higher bracket to expire, then the Dems DESERVE to be blamed for adding 3 trillion, and in this scenario, they can count me out for any future vote or support.

Posted by: lauren2010 | August 9, 2010 1:25 PM | Report abuse

Q. Who stands to benefit from tax cuts? The wealthy?

A. Oh, defict's don't matter!

Q. What about on health care? The working class?

A. Oh, can't afford that! (Or, social security according to your employer... The post is going off-the-rails there.)

Posted by: rat-raceparent | August 9, 2010 1:41 PM | Report abuse

"At the end of the Clinton term spending was 18.4% of GDP, much smaller than the 25.1% of GDP today.

Before Democrats took control of Congress, for fiscal year 2007 revenues were 18.8% of GDP.

So... in spite of the Bush Tax Cuts, there would have been budget surpluses if the size of government had been held to 18.4% (Clinton levels)."
===================
Hypothetically, you say that if spending had not increased from 2000-2007, with the Bush tax cuts in place, we would now be running budget surpluses.

I suppose that could be true, although it'd be tough to prove, being a hypothetical. For example, isn't it possible that some of the spending during the Bush era was what allowed that 18.8% of GDP revenue to remain constant? Truth be told, I'm a bit out of my element here - the number game isn't my forte.

What strikes me about what you are arguing, though, is that it seems ahistorical. I can't help but think if you mention Cris Christie and Mitch Daniels and the huge spending increases enacted by the Democrats once they gained Congress in 07, that you are inclined towards the Republican view of things. Which is fine, as long as you recognize the Bush year policies that created the need for that massive uptick in spending in 2007-08, namely TARP, the stimulus, the auto-bailouts. I'm not too familiar with Obama's first budget - I know it also increased spending over previous years, but that can be fairly argued that it was simply a rededication by a Democrat to priorities that had been neglected under a Republican administration. In other words, a pretty normal, different allocation of funds to different priorities based on ideology. I don't think the same can be said about TARP or the stimulus. Those were crisis-motivated spending projects, borne not out of ideology but of a desire to cut losses quickly. And they were the crises that fomented under Republican leadership. Which leads me to be skeptical of returning those policies, and their proponents, to power.

Posted by: girlscoutsamerica | August 9, 2010 1:42 PM | Report abuse

@mgsorens:

We could maintain the 90s spending levels, but the reality is that demographics have changed since then. Basically 0 boomers qualified for medicare or social security through the clinton and most of the bush administration; now millions do with another million qualifying every few months.

So we could have stuck with 18.4% or whatever you say, but it would require significant cuts: maybe a 100% cut to defense spending would have covered most of it. that seems like a fairly stupid option to take; in practice, we had long planned ahead to deal with the major change in cash flow until the '01 cuts gutted our fiscal outlook.

Posted by: eggnogfool | August 9, 2010 1:55 PM | Report abuse

Though I'm a Conservative, I'm very impressed with Ezra's high facts to spin ratio in this piece. On both the left and the right, we are all subjected to so much spin, that it is hard to tell what is the truth.

For example, in the media we hear claims that the current $1.4 Trillion yearly deficits are caused by spending on the Iraq War. When we find out the actual cost of the Iraq War is now around only $50 Billion per year we realize that argument is ridiculous.

Others blame the $1.4 Trillion deficits on the Bush Tax Cuts. Well how much are the Bush Tax Cuts in 2010? Paul Krugman argued they cost $1.8 Trillion in revenue over the first ten years, or $180 Billion per year. Over the next ten the article above claims the tax cuts will cost more than twice that. I don't know what they cost in 2010. Somewhere around $200 Billion I guess.

I think we need young journalists like Ezra to find the facts and report back to us.

Posted by: mgsorens | August 9, 2010 2:01 PM | Report abuse

girlscoutsamerica: "Which is fine, as long as you recognize the Bush year policies that created the need for that massive uptick in spending in 2007-08..."

Let me disagree with your second premise first, that massive spending was necessary. One example, Canada, made exactly the opposite response to the 'global' recession as the Democrats in the U.S.. Canada cut spending and tried to make their tax system more business friendly. All the other 19 nations of the G20 have publicly rejected big spending to rescue their economies. So, I think my disagreement is not just a partisan talking point.

On your second premise, that Bush policies caused the recession or "created the need" as you say. I can only guess you are referring to both the tax cuts we discussed above and overspending. Of those two, I disagreed with the overspending.

I did agree with much of the spending Bush did. $40 billion per year for old folks medicines, almost $1/2 Trillion spent on Katrina, $40 Billion to the State of New York after 911, are things I agreed with outright.

Posted by: mgsorens | August 9, 2010 2:20 PM | Report abuse

eggnogfool,
Yes you are right that entitlements will continue to surge due to the increasing ratio of old to young.

I think that is a different issue than the $1 Trillion budget increases that started in 2009, continued in 2010 and 2011. That is $1 Trillion more spent each year than was spent in the 2007 budget.

Some claim that The $700 billion TARP program is responsible for that. But the TARP was meant to be loans and many of those have been paid back. The CBO estimates that TARP will end up costing only $109 Billion. That is a pretty small cost for completely rescuing our financial system from the mortgage crisis and associated problems of mortgage derivatives.

Others claim that the $787 Billion 'stimulus' is responsible for the above $3 TRILLION budget increases. Not only is that bad math, but isn't the 'stimulus' supposed to pay for itself? Why do people constantly say tax cut stimulus doesn't pay for itself 100%, but they don't expect Keynesian stimulus to pay for itself even 10%?

Posted by: mgsorens | August 9, 2010 2:51 PM | Report abuse

girlscoutsamerica: "I'm not too familiar with Obama's first budget - I know it also increased spending over previous years, but that can be fairly argued that it was simply a rededication by a Democrat to priorities"
=========================================

Well, Obama is actually the President who signed the 2009 budget, with the $1.3 Trillion deficit he claims to have inherited. You may recall that in 2008 Dems refused to vote on the 2009 budget because Bush said he would veto it. Dems ran up that $1.3 Trillion deficit on continuing resolutions.

The following year Dems produced a budget that also had a $1.4 TRILLION deficit for fiscal 2010, and for 2011 they have again refused to vote on any budget at all.

The last Republican controlled budget was 2007. That total budget was $2.7 Trillion. The deficit was $161 Billion.

http://www.cbo.gov/budget/data/historical.pdf

By 2009 the budget was $1 Trillion higher. I don't think anyone can claim this was a legitimate adjustment of priorities.

The next two years budgets were approximately the same.

Posted by: mgsorens | August 9, 2010 4:23 PM | Report abuse

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