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Posted at 3:51 PM ET, 11/30/2010

The tax cuts vs. the pay freeze

By Ezra Klein

The pay freeze for federal workers will raise about $60 billion over 10 years. It's necessary, the president said, because these are times "where all of us are called on to make some sacrifices."

Contrast that with the tax cuts for income over $250,000, which benefit workers doing much better than the average federal employee and cost about $700 billion over 10 years.

Nor do the secondary effects favor the freeze. Holding federal pay does the Democrats few favors: It splits their base, reduces the regulatory talent available to work on financial reform and the new health-care law, drains some stimulative money out of the economy, and insofar as it scores the president some points with the public, does so by reaffirming the public's (largely untrue) belief that federal workers are overpaid -- a belief that continually hurts Democrats.

On the other side, going after the tax cuts for income over $250,000 is popular among the country, popular with Obama's base, much more important for the deficit, and difficult for the Republicans to oppose. One option would've been for the White House to announce a freeze on federal pay and a veto threat against tax cuts for the wealthy at the same time, grouping the two under the "sacrifice" theme. But they didn't.

By Ezra Klein  | November 30, 2010; 3:51 PM ET
 
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Comments

Read my lips.

Wealthy Democratic politicians DO NOT want the Bush tax cuts for wealthy people to expire.

They only PRETEND they want them to expire.

They had two years and enough votes to pass a new bill to extend tax cuts for the middle class only, but chose inaction.

They did that for a reason. That did that because they are no different than the GOP.

Posted by: lauren2010 | November 30, 2010 4:08 PM | Report abuse

The REALLY funny thing about all this is that nothing that happens with the Federal workers has as much effect on the deficit and the economy as the changes that happen daily, weekly and monthly in Treasury yields.

However, since we are by and large a financially illiterate nation, we post hundreds of comments about this, and nothing at all about the Fed, the Euro/dollar/yuan relationship and it's effects on the ten-year yield and ultimately the cost of YOUR and everyone else's mortgage!

Posted by: 54465446 | November 30, 2010 4:15 PM | Report abuse

how can you say it will save 60 bil over 10 yrs when it's only a 2 yr freeze?

Posted by: rjewett | November 30, 2010 4:15 PM | Report abuse

so we can't have both? you're also forgetting that tax cuts for "everyone else" (ie under 250k) costs 3+ TRILLION. I'd be agreeable to the pay freeze and all the cuts for 2 years (or when the economy improves to an agreeable amount) and then forgo all the tax cuts.

Posted by: visionbrkr | November 30, 2010 4:17 PM | Report abuse

"and insofar as it scores the president some points with the public, does so by reaffirming the public's (largely untrue) belief that federal workers are overpaid"

Or it might suggest that the government can, in fact, tighten its belt in hard times, just like the vast majority of people not in government have to. It could be a net positive from that point of view, and suggest that Obama is taking our economic doldrums at least somewhat seriously, even if it's a minor gesture in the great scheme of things.

Posted by: Kevin_Willis | November 30, 2010 4:25 PM | Report abuse

rjewett, presumably because raises build upon previous ones.

Posted by: Mike3211 | November 30, 2010 4:29 PM | Report abuse

Yeah, too bad wealthy Americans won't endure even a "minor gesture" and instead they'll be handed even more money.

In the current economic climate, the fed pay freeze coupled with a tax cut for the wealthy further proves that gvmt is controlled for, and by, the wealthy.

Obama continues to disappoint.

Posted by: lauren2010 | November 30, 2010 4:34 PM | Report abuse

Union bosses are already whining about the pay FREEZE. They definitely live in la-la-land, because most private industry workers have already taken 20% pay CUTS, pay their own health insurance, and don't have a pension, either....
Greedy, fat-cat union bosses have ruined this country and now they're whining about
a pay "freeze"....

Posted by: ohioan | November 30, 2010 4:37 PM | Report abuse

The equivalency argument would make more sense is Federal employees created jobs.

They don't.

However, those in the private sector that make over 250K *DO*!

Posted by: WrongfulDeath | November 30, 2010 4:44 PM | Report abuse

"On the other side, going after the tax cuts for income over $250,000 is popular among the country, popular with Obama's base, much more important for the deficit, and difficult for the Republicans to oppose."

How is this difficult for Republicans to oppose? They seem to have no difficulty opposing it whatsoever, and in fact gained seats in the mid-terms by running very clearly on the idea of extending the Bush tax cuts for all income brackets.

It will be interesting to see if the ultimate "compromise" here ends up being extending all the tax cuts in all the brackets for a vote on START II.

Posted by: jnc4p | November 30, 2010 4:46 PM | Report abuse

The pay freeze is another deception by the stiched-up socialist. The freeze that would really do something is one that would freeze federal hiring.

Posted by: leapin | November 30, 2010 4:58 PM | Report abuse

Let the tax cuts expire for everyone...as disfunctional
as this group is it may be our only hope to raise the
taxes on those incomes over 250,000...the rest of us
will survive and maybe gain some insight to our
aversion to paying our own way.

Posted by: LAGUNA3 | November 30, 2010 5:14 PM | Report abuse

Mr. Klein:
If you don't believe that Federal workers are overpaid, I suggest you read the USA Today article of 3/08/10 on the subject (http://www.usatoday.com/news/nation/2010-03-04-federal-pay_N.htm) that shows Federal workers making an average of 12.7% more than private company workers IN THE SAME JOBS in 2008. Of course, you may think that they are underpaid no matter what they make, but you should be out front about that when you say that it is "largely untrue" that Federal workers are overpaid.

Posted by: Max40 | November 30, 2010 5:26 PM | Report abuse

how can you say it will save 60 bil over 10 yrs when it's only a 2 yr freeze?

Posted by: rjewett | November 30, 2010 4:15 PM | Report abuse
__________________

Simple mathematics....

If I give you a 2 percent raise this year... and a 2 percent raise next year, the second raise is based on 102% of your original salary... if federal workers dont get a raise for two year the effect multiplies in the future... like compound interest.. so basically if we get a raise in 3 years of 2 percent... and would have gotten 1.4 percent in 2011 and 2012 before o-sellout's decision would be a difference of a 22 dollars for an employee with an 80000 salary.. not much, but it would add up for over a couple of million employees.

Still its worthless.. and just making a statement with working peoples' salary vs. the real problem.. millionaires not paying enough taxes.

Posted by: keirreva | November 30, 2010 5:28 PM | Report abuse

Fixing the 1099 provision in the Health Care Law fails again.

http://www.nytimes.com/2010/11/30/us/politics/30cong.html?hpw

Note that now it's the Democrats (i.e. Max Baucus) who want a clean repeal without offsetting it and the Republicans are willing to let the Obama administration specify where the offsetting cuts would come from.

Posted by: jnc4p | November 30, 2010 5:41 PM | Report abuse

"Contrast that with the tax cuts for income over $250,000, which benefit workers doing much better than the average federal employee and cost about $700 billion over 10 years."

Keep in mind that with tax cuts, we are talking about people being able to keep more of their own property, but with a pay freeze we are talking about people not receiving as much of other people's confiscated property.

Keep in mind that more resources will be conducive to private sector expansion, in multiple ways.

To begin with, tax rate uncertainty might be part of what's keeping aggregate demand down. The wealthy constitute a large share of consumption, and they might be reining in their spending plans in light of an expected tax hike.

On the other side of the coin, businesses might be reluctant to hire in part because the expiration of the tax cuts is expected to slow demand sharply in the first half of 2011 (not that I put much stock in macroeconomic models but if you do see the link):

http://macroadvisers.blogspot.com/2010/08/impact-of-sunset-of-tax-cuts-on-gdp.html

The chart assumes GDP would run at 4%+, and slow to a bit below 3% if you assume a full sunset (which is a possibility). Given that our trend rate is currently just 2.0% over the past two quarters, a similar slide might put us near recessionary levels.

Finally, by keeping tax rates low, that keeps more money in the bank accounts of profitable small businesses, and these are the businesses we want to expand to absorb the unemployed.

Extending the tax cuts would have beneficial effects for those reasons. Of course, a better option would be to restructure the tax code so that more revenue can be raised for any given level of deadweight loss, but it's a bit late in the game for that. My view is that we should have sharply lower taxes and spending, but given how unlikely that scenario is the least bad solution is to make the government we are going to get as efficient and streamlined as possible.

"does so by reaffirming the public's (largely untrue) belief that federal workers are overpaid"

Federal workers probably are overpaid on average given the low quit rate, but the important point is that the government can't know the appropriate value for each worker. Some are massively undervalued, others are extremely overvalued. The freeze doesn't go far enough for some, and goes too far for others.

The private sector doesn't have this problem to the same degree - few valuable workers go underpaid for long, whereas few low value workers are overpaid for very long. Errors will result in reduced profits and/or firm failure, and so you have a positive feedback mechanism which doesn't exist for the government.

Posted by: justin84 | November 30, 2010 5:53 PM | Report abuse

What a crock of dung.

You pigheaded lefties want the 'rich' to sacrifice $700 billion but aren't even willing to pony up 10% of that.

Posted by: krazen1211 | November 30, 2010 6:01 PM | Report abuse

"Note that now it's the Democrats (i.e. Max Baucus) who want a clean repeal without offsetting it and the Republicans are willing to let the Obama administration specify where the offsetting cuts would come from."


What kind of absurd dumbass would sign a law with the provision in the first place?

Those who voted in favor of the 1099 job killer should be tarred and feathered.

Posted by: krazen1211 | November 30, 2010 6:04 PM | Report abuse

Mr. Klein, I'd ask you to consider that the issue of debt and the federal budget is more complex than pay. There are 6 contractors for every government and the overhead costs and profits are upwards of 35%. So far, the various commissions go after the civilian workforce and contractor workforce. No comment on the increasing costs of contracted services and products.

There are endless oversight costs.

President Obama's announcement is disappointing because he didn't take any requirements off the list. He didn't put any legacy organizations or programs on the table. He didn't ask Americans to sacrifice.

Many government employees are under the restricted Hatch Act, aren't allowed to join unions, and don't have access to Omdudsman. The federal workforce hired after 1987 are under a new portable retirement system that includes social security, a basic pension, and a 401K like thrift savings plan. The attrition rate for those employees has increased as the most competitive move on to higher paying positions. Those under the old system are retiring at 55 and moving to private industry for higher pay.

The government needs to change. Sec Gates effort to make the DoD more efficient and cost effective are the right way to affect the budget. They are also painful because the standing down of duplicative orgs like JFCOM affect communities.

Until we deal with all the legacy programs, outdated regulations, and duplicative orgs, we will continue in debt.

If we freeze the pay of federal employees, cut it, or downsize independent of a plan for building the workforce of the future, we fail. It's time to make the hard decisions on what we want government to do and what we are willing to give up.

$2B savings in a freeze to federal employees pay, while we spend $165B for U.S. operations in Afghanistan and Iraq (just in 2010). Are we really dealing with the hard problems?

Posted by: sjbrown1 | November 30, 2010 6:16 PM | Report abuse

justin wrote:

"Keep in mind that with tax cuts, we are talking about people being able to keep more of their own property, but with a pay freeze we are talking about people not receiving as much of other people's confiscated property."

Ouch! Have you turned libertarian on me old friend?

Posted by: 54465446 | November 30, 2010 7:01 PM | Report abuse

Ezra is an incredibly smart guy and it took him three blog posts to make a semi-reasonable case against the pay freeze. Now, can you imagine the wallop the Dems would take it they didn't do a pay freeze given how hard it is to make a cogent call against it (I don't think many of them are as smart as Ezra)?!

Posted by: chrisgaun | November 30, 2010 7:14 PM | Report abuse

I think the conservative line is something like this: The rich worked hard for their money! They deserve their fair share!

I just don't understand why we give so many handouts to the rich. I don't understand why we tax the "foundation of our economy," the middle class, so much in comparison.

I think the rich should be taxed at similar effective tax rates (when you include social security and medicare) as the middle class. Bump up income tax to match the medicare / SSA tax!!

And Re: the USA Today article about gov't pay being 12% higher than private sector pay, the numbers were sourced from the Cato Institute. I would like to see numbers from a non-partisan study.

Posted by: will12 | November 30, 2010 10:21 PM | Report abuse

I'm about done with Obama.
What's the point?

Posted by: jefft1225 | November 30, 2010 10:26 PM | Report abuse

I'm about done with Obama.
What's the point?

It's like the Dems aren't even really trying and he's leading the way.

Posted by: jefft1225 | November 30, 2010 10:28 PM | Report abuse

to will12 and likeminded, it's just some barstool econ.

http://mungowitzend.blogspot.com/2010/11/oldie-but-goodiecapital-strike.html

Posted by: staticvars | November 30, 2010 10:43 PM | Report abuse

Two billion savings in 2011...laughable. We are wasting 2 billion a week in Iraq and Afghanistan on those failures. I dont know why there is so much quibbling about cutting federal employess, no one will want to work for the federal government since we are just above terrorists and child molesters in the social pecking order in public eye. Mission accompllished

Posted by: OldFed1 | November 30, 2010 11:49 PM | Report abuse

The Bush tax cuts ought to expire and the pay freeze is warranted,so why do Republicans continue in their support of extending these cuts? If it's all about helping your country get back and stay back on its feet, then why aren't the wealthy more visible in this debate about their tax breaks? The discerning American will notice that some wealthy,while speaking on a talk show, will say that they would be willing to pay more taxes but that's about as far as it goes. Turn the channel and you can watch a tv show that follows a wealthy group around;it'll show wealthy people trying to be average. They usually fail in this regard,but the producers are happy that the average jane or joe will tune in on a regular basis.Maybe that's the real problem; the average American has forfeited their vision and the American dream to those that care nothing about vision and only about their dream being even more embellished.

Posted by: jsasnooky | December 1, 2010 7:44 AM | Report abuse

Even extending the wage freeze on the federal employees can save 60 billions. Some are arguing that people earning 250k and above create jobs, oh really? After taking 700 billions bail out and about 160+ millions as bonus for 'PERFORMANCE' in such bailed out financial institutions how much they have lent money to businesses every body knows. So much for trickle down economy.

Thanks to congress republicans for not extending the unemployment benefits, you best Christmas present to the unemployed. Great way of balancing the budget, tax cuts to people who make 250k or more, unemployment benefits cut Estate tax cut and roll back the health care reform. Of course continue with no fresh taxes or defense spending cuts. As long as China is ready to give us another 2 trillions, ofcourse by mortgaging our future generations, that is okay with Republicans.

Posted by: sasidhargv | December 1, 2010 9:14 AM | Report abuse

Kevin Willis -

You're focusing on the wrong economic doldrums. The risk right now isn't inflation, but deflation. I don't see how taking money out of the economy helps that situation. From a perception point of view, it may be helpful, but the real effects of this are less than miniscule.

Posted by: klautsack | December 1, 2010 10:21 AM | Report abuse

jsasnooky -

"If it's all about helping your country get back and stay back on its feet, then why aren't the wealthy more visible in this debate about their tax breaks?"

Answer: Because it isn't about helping your country get back and stay back on its feet.

Posted by: klautsack | December 1, 2010 10:38 AM | Report abuse

--feds, like others in mid-class, havent had raise net of inflation since 1973-76
--nat'l income to rich is up 700% since 1980
--fed salary budget is hi dutu so many w/advanced degrees
--those hu selected TSP stok option in 1987 hav lost bulk of it
--govt can seldom be as efficient as sectors ruled by marketized wages, yet admin overhead in SSA is 2%[pentagon 17%]
--down w/libertarian 'Catology', up w/facts

Posted by: greenchoyss | December 1, 2010 11:34 AM | Report abuse

Giving tax cuts to rich people are absolutely essential to job creation.

Why, since the Bush tax cuts were signed in June 2001, the economy has only lost 966,000 jobs.

Posted by: suehall | December 1, 2010 12:13 PM | Report abuse

54465446,

Yup, more or less libertarian.

"--feds, like others in mid-class, havent had raise net of inflation since 1973-76"

greenchoyss,

The data I found suggest the typical federal worker has gotten a 32.6% raise net of inflation from 1976 to 2009.

Moreover, Fed pay fell 9.8% under President Carter due to inflation. Fed pay since 1980 is up 46.9%. Since 2000? Up 26.6%. All values after inflation. Would be higher if benefits were included.

See tables 6.6B, 6.6C, 6.6D, federal civilian workers.

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=199&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1973&LastYear=1987&3Place=N&Update=Update&JavaBox=no

See U.S. All items, 1982-84=100

http://data.bls.gov/cgi-bin/surveymost?cu

"nat'l income to rich is up 700% since 1980"

Source?

Increased income to the rich - both earned and reported - is an expected result of marginal rate cuts. It is income obtained through voluntary economic transactions. I wouldn't care if income to the rich was up 10,000%. As a quick look at a list of richest Americans and you can see the vast majority are self made rich (i.e. produced a good or service that provided tremendous benefits to customers). There are several heirs, but most of these are perhaps a generation removed from the wealth creator (e.g. Waltons).

"fed salary budget is hi dutu so many w/advanced degrees"

Why is fed salary budget growing more rapidly than other highly educated fields? Do all of these advanced degrees actually create value, or do they just place more warm bodies on a higher payscale?

"those hu selected TSP stok option in 1987 hav lost bulk of it"

Source?

That's almost impossible. Stocks are higher now than all but ~6 years of the past 23, in most cases far higher.

If this claim is true, it would be strong evidence against the notion that all of these advanced degrees are worth paying for.

"--govt can seldom be as efficient as sectors ruled by marketized wages, yet admin overhead in SSA is 2%[pentagon 17%]"

Don't worry, libertarians wouldn't spare the Pentagon from the budget axe.

"--down w/libertarian 'Catology', up w/facts"

Up with facts, I agree. Also, up with life, liberty and property!

Posted by: justin84 | December 1, 2010 1:56 PM | Report abuse

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