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Posted at 10:27 AM ET, 12/ 8/2010

Two options on the Bush tax cuts

By Ezra Klein

It's worth taking a step back from the current politics of the tax cut deal and just thinking about the two basic options here.

Option 1: Let the tax cuts for the rich expire. We keep the tax cuts for income under $250,000. The extensions of unemployment insurance are pared back somewhat, and what's left is paid for by spending cuts elsewhere. There's no payroll tax cut, and the extra funds the stimulus gave to the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit expire. Perhaps some form of the tax credit for business investment passes during the next Congress.

This means hundreds of billions of dollar less in deficit spending, but also hundreds of billions of dollars less in stimulus. Some families relying on unemployment benefits are cut off, and many more see their checks reduced. Families relying on the tax credits the stimulus expended also find themselves with less money in their pocket. The payroll tax cut is worth about $1,000 to a worker making $50,000, and because they don't get that in their paychecks, that money doesn't make its way into the economy.

Option 2: Extend the tax cuts for the rich and add tax cuts for everyone else. This is the deal we're looking at. The tax cuts for the rich get extended, and the estate tax is lower than its 2009 level (though higher than it's 2010 level). The cost of extending them is about twice as much in progressive tax cuts and unemployment insurance that have a much larger stimulative effect (if you look at the old Mark Zandi estimates, payroll tax cuts and unemployment benefits are among the most stimulative options). The Center for American Progress estimates that this package will create 2.2 million jobs over the next two years.

If you'd offered me these two options three months ago, I'd have taken No. 2. I said then, and I believe now, that the short-term need is more stimulus, not deficit reduction. If the cost of stimulus is tax cuts for the rich, well, that's not ideal, but the stimulus is more important. But No. 2 wasn't on the table.

The Obama White House, in a move I and others lamented, stopped pushing for more stimulus. They didn't say that if the Republicans were going to insist on more tax cuts for the wealthy, the cost would be more help for those who are hurting. They defined success on the Bush tax cuts in terms of the Bush tax cuts, not in terms of economic recovery. This gave the Republicans the ability to position themselves as defenders of the economy: "We shouldn't be raising taxes during a recession," Rep. Kevin McCarthy said.

The way this should have gone is that Democrats should have proposed turning the Bush tax cuts into a two-year payroll holiday, and adding some other relief measures besides. We should be cutting taxes during a recession -- the cuts just shouldn't be focused on the rich. But Democrats didn't run that play. They didn't really run any play. Obama simply opposed the tax cuts for the rich. And so this outcome, in being completely different than the one they said they were going for, is being understood as a loss, and even a capitulation. But they're losing their way into a better deal, and one that looks more like the deal they should've been going for in the first place.

By Ezra Klein  | December 8, 2010; 10:27 AM ET
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Next: What the tax deal is likely to do to the economy


"Losing their way into a better deal"

Somehow anything that the Democrats or Obama do correctly is somehow seen through this lens of abject failure. Isn't possible that they saw the writing on the wall six months ago and decided on a Holiday-Season game of brinksmanship that would land them in a better position overall?

I like Ezra's commenting as much as anyone's, but if you take a step back from the blogosphere, you realize that they create their own reality and then everything flows from that. If you already decided that the Democrats lost this issue, then the only thing that makes sense now is that they lost so badly that they may have won somehow.

I think there's more strategy here than a lot of people are giving the Democrats (and Obama in particular) credit for.

Posted by: willows1 | December 8, 2010 11:19 AM | Report abuse

Making Work Pay was a massive load of dung. I work hard and I didn't get a cent of that.

Posted by: krazen1211 | December 8, 2010 11:22 AM | Report abuse

Additional stimulus makes sense for the economy. However, 2 months from now when the debt ceiling vote comes up Republicans will demand significant spending cuts which will counter any stimulative impact of the payroll tax holiday. This is something the Dems should have thought through.

Posted by: Skippy21 | December 8, 2010 11:23 AM | Report abuse

The problem is, this isn't a "deal" at all. It was always clear we were going to end up with something like option 2. Plenty of people in the Senate were already talking about what it should look like. Instead of negotiating with Democrats in the room on a package that could work, the WH sat down only with Republicans and took what looks like an opening offer from the Republicans.

In exchange for the giveaway on the "rich-only" cuts and the massive giveaway on the "very, very rich-only" estate tax cuts, the President got a payroll tax holiday (which Republicans love and have passed before on their own) and UI extension (which Republicans did on their own in 1983 and had folded on previously in this Congress). Imagine Bush were in the White House - he wouldn't dare dream to get so much in exchange for so little and would be hailed as a conquering hero for so badly snookering the Democrat-controlled Congress.

The same people who were going to vote against any new stimulative programs will still vote against this deal and the President is vilifying Democrats as somehow being unrealistic because they actually wanted something in exchange for the massive giveaways. Amazing.

Posted by: dcmike2 | December 8, 2010 11:24 AM | Report abuse

krazen1211 - Hard work is its own reward.

Posted by: willows1 | December 8, 2010 11:26 AM | Report abuse

i love the overall tenor of the Democrat's. They've complained now for two years now that Republicans are the "Party of NO" and nothing got done and they brought the country to their knees and blamed them for everything they could and now that we have a tax cut compromise brought forth by a DEMOCRATIC President that includes (as per Ezra) 85% stimulus and benefits for $250k and under and 15% for the "rich" as they're termed its seemingly not enough for them and they're threatening to filibuster so that everyone gets a tax increase during a recession.


Posted by: visionbrkr | December 8, 2010 11:29 AM | Report abuse

Ezra, because you don't understand bonds and currency, you vastly overestimate this deal.

Treasury yields have already risen a quarter point on the ten-year to about 3.20. Today's 1 PM auction will be tremendously important, though you won't even notice it.

JP Morgan has already raised their budget shortfall outlook for the fiscal year to 1.5 trillion, from 1.25 trillion.

So to make a long story short, all the numbers you have played with in the last two days you can throw out, because we have to factor in new, and currently unknown borrowing costs, AND to re-evaluate the rise in the 10 year's influence on mortgage rates and it's effect on housing/construction employmnet, the area that could possible see the biggest increase in jobs, OR the biggest lag.

Somehow I doubt you discussed this on MSNBC yesterday!

Posted by: 54465446 | December 8, 2010 11:29 AM | Report abuse

54465446 -

There are too many houses on the landscape now as it is. The last thing we need is another housing bubble to fuel growth in insecure construction jobs. A falling dollar isn't the end of the world because it will probably help exports. China ain't buying our T-bills out of the goodness of their heart.

Posted by: willows1 | December 8, 2010 11:33 AM | Report abuse

Is it hard to carry water without a bucket?

Posted by: obrier2 | December 8, 2010 11:34 AM | Report abuse

I'm usually on the technocrat-wonk side of things versus the DailyKos view, but I just can't buy it on this one.

Other than the UI extension, all of the stimulus is tax cuts. I have a number of concerns about this.

1) It becomes much harder to keep this stimulus as temporary STIMULUS. Rather, it will be very easy for these to become permanent tax cuts when Congress lacks the willpower to "raise taxes" in two years. This would be terrible for the long-term deficit and ultimately bad for the continued existence of important social programs, especially Social Security.

2) There is no strong counterfactual for what would have happened in the absence of the stimulus that already passed, so it's hard to know what worked and what didn't work. There is some evidence that the stimulative tax cuts included in this plan would be beneficial, but a more balanced stimulative package would be MUCH better - include investment in infrastructure and education, aid to states, aid to unemployed via UI, AND some of these tax cuts. Now that would be stimulus I could get behind.

3) Overall, the benefits still seem to go disproportionately to the richest Americans. (Even though there's a higher $$ value on the "stimulus" tax cuts than on the Bush tax cuts + estate tax, there are fewer rich people than middle-class people, so they get more of a benefit per person). At a time like this, where the bad is especially bad for those at the bottom of the income distribution, we can't afford to continue contributing to record high income inequality. In the future, when we have to make this up in order to reduce the deficit, you know that the burden of repaying these debts will fall higher on the low-income and middle-class.

Posted by: madjoy | December 8, 2010 11:55 AM | Report abuse


Hmmm where to begin. Don't look for big increases in employment unless construction/remodeling jobs are on the upswing. I am in the minority that I think 7-8& unempolyment is the "new normal", but we won't even get there without housing.

Sorry to be direct, but you don't know much about the dollar or exports. The dollar isn't falling but rising, as it has been since I told yoo to buy it at least a month or more ago. The dollar won't fall significantly anytime soon because of Eruopean instability and the fact that the Chinese will raise rates to combat inflation, probably this week, or early next.

The dollar will fall by late spring however, absent world instabillity which you can never discount. It won't help exports though.

We are supreme at two types of exports, heavy equipment/big tranport, and ag commodities. Both of these have a long lag time and are already working on near full employment, so don't expect any pickup there. Everything else would take a precipitous drop in the dollar to become competitive. If that happens, we will be very far down the road to a bad place!

Posted by: 54465446 | December 8, 2010 11:56 AM | Report abuse

Did they abolish the USDA, yet? How about the Dept. of Education? FDA? FCC? FTC?


Klein is still drooling over other people's money and ignoring the continuing abominations?

There is a reason Klein must obsessively tinker with "policy". It keeps him firmly insulated from contact with any "principle".

Posted by: msoja | December 8, 2010 12:01 PM | Report abuse


Ok, all kidding aside, you can't seriously want to get rid of the FDA can you?

Posted by: 54465446 | December 8, 2010 12:10 PM | Report abuse

Democrats only want to FURTHER BURDENT this country, and their policies continue to prove this.
The "Dream Act", for instance.
Instead of sending ILLEGALS/CRIMINALS back,
Democrats want to "help" them further.
These people have been DRAINING this country, our education system, our hospitals, prison system, etc....
but Democrats want to add insult to injury,
and further "SUBSIDIZE ILLEGALS" !!!
This is nuts, it increases our deficit, and
it doesn't help Legal immigrants, or U.S.
citizens who pay the Taxes!
All "Dream Act" does is get more votes for
Democrts from Illegals.

Posted by: ohioan | December 8, 2010 12:10 PM | Report abuse

54465446 -

Whatever the "next" is for our economy, it just can't be another housing / construction bubble. Take a look at this:

It might be a 20-30 year deal to restructure our economy to something approaching sanity, but it seems that higher rates (wages, unemployment, inflation, interest) at least get us pointed in the right direction.

Posted by: willows1 | December 8, 2010 12:19 PM | Report abuse

54465446 -

My apologies for the multiple postings, but -

3.2 % 10-yr bonds in persepctive:

Posted by: willows1 | December 8, 2010 12:29 PM | Report abuse


The conditions that created the housing bubble no longer exist. The next bubble will be commodities. Oil hit $90 a barrel yesterday before falling back. Look for a precipitous rise, which has already begun, followed by a big dropoff on any "black swan" type international news.

The things you lumped together under "higher rates" are often diametrically opposed to each other. I'm not trying to castigate you because you have shown a positive interest in problem solving. However most of us in this country know next to nothing about finance, because we think teaching geometry and chemistry are more important in school.

We shouldn't be surprised then that Wall Street has such an easy time getting their way with us.

Posted by: 54465446 | December 8, 2010 12:32 PM | Report abuse

msoja is obsessed with trolling because keeps him/her firmly insulated from contact with thought.

Posted by: MosBen | December 8, 2010 12:42 PM | Report abuse


You have to love Krugman:

"What is true is that perpetuating the Bush tax cuts raises the probability of a fiscal crisis somewhere down the line; it’s very different from short-term stimulus spending, because it raises the prospect of a permanent worsening of the outlook. But that’s not what is moving markets now."

Let me translate. Pay no attention to those things that contradict what I tell you. My models are the only universe that matters. Krugman's knowledge of the markets is tiny, it's not his specialty.

I have done this for some time, devouring financial news, and the only place I have ever heard Krugman quoted is in a general interest newspaper like this one or the times, never by anybody actually involved in finance. It's easy to say that we're only back to late June.

However look at the acceleration. It went from late June until November falling but has since shot up to the late June level in less than a month. That's an outlandish move for the ten year.

I would love to look at what Krugman does with his own money. My bet is that he counter's in private what he extolls in public.

I'm just Joe Nobody, and if I have made money by shorting Treasuries, either one of two things is true

1) Krugman is deceiving everybody by saying one thing and doing another, or

2)Krugman is losing his own money, in which case why listen to him at all?


Posted by: 54465446 | December 8, 2010 12:51 PM | Report abuse

Wait: you lost me at "the two basic options here." Option number one, in which only the tax cuts for the wealthy disappear, was clearly never an option -- given Republican's rabid avowal to oppose it in lockstep, as the vote last Saturday in the Senate proved. It was the Democrats' and Obama's preferred option, but it simply didn't have the votes in the Senate, and I don't see the imaginary scenario in which a game of chicken would have changed that fact. So it was not really an option. That makes the rest of the discussion sort of moot, doesn't it?

Posted by: JJenkins2 | December 8, 2010 1:01 PM | Report abuse


On an emprical basis, we should consider rising yields to be a positive sign. Movements in treasury yields tend to be positively correlated with economic growth.

The 10 year yield jumped from 3.11% on 6/13/03 to 4.56% on 8/13/03. That surge was accompanied by a 6.9% surge in GDP in the third quarter.

The 10 year opened 2009 at 2.21%, with GDP falling 4.9% in the first quarter. It closed the year out at 3.84%, with a sharp improvement in GDP over the course of the year to -0.7% in Q2, +1.6% in Q3 and +5.0% in Q4.

In the first quarter of 2010, the 10yr remained in the mid to high 3% range, and was at 3.83% on 3/31/10. GDP growth came in at +3.7%. By 6/30, the 10 year was yielding just 2.93%, and by 9/30 it was down to 2.51%. With Q2 and Q3 coming in at +1.7% and +2.5%, growth averaged a 2.1% pace vs. 4.4% in the prior two quarters when yields were much higher.

The same is true in weak economic environments - chart treasury yields and GDP from early 2003 to mid 2003, and mid 2007 to early 2009 and you'll see a similar pattern for weak growth and low yields.

Posted by: justin84 | December 8, 2010 1:08 PM | Report abuse

Hilarious post...there are 'only 2' options...or were you being serious???

goofy stuff going on, system is in a shambles, need entire gov revamp, who are these people?
complain about too much debt and spending but instead of raising taxes on people that can afford to pay more (and a whole group of em admittedly not against it) - the leaders give up 300 bills of income and then decide to freeze wages for middle class (federal workers) to save 2 bills...

big pic of economy and taxes boils down to(as my mama used to say) one person only buys 2 packs of underwear from kohls each year no matter if they bring home 5000 or 5 million...

end result this time could be a reverse trickle down effect, low middle frozen wage earners will cut expenses anywhere they can to stay afloat (buy one value pack of underwear instead of 2 or maybe stop wearing it altogether)... but anyway, end result is lower incomes have no more than they had the last few years, maybe less considering increasing cost of healthcare and energy again, therefore the masses spend less...the mega rich that were supposed to create a job with the extra tax money they kept getting (the same money they got over the last several years to create all the jobs) see no demand to make more underwear (see reasons above) so no need to hire more workers or buy new epuipment, maybe even cut some more jobs since demand is so low...

sounds like start of a second deflationary cycle...

on the other hand...

is this maybe just a tactic by O'Bama so that in election campaign he can say he went with gops on taxes, agreed with them 100%, left them in control of your econonomic destiny, so he can say 'look where it has gotten us, WTF do we do now'???

...point is, there are limitless number of options...the problem is the way they everytime try to make it fit into some kind of "package" (give your team this if you give our team that ...your team sucks etc.)... time to really let the people have control of the issues in a different system, let us all vote on each issue over the net as we see the need....can save gov on all the needless salaries of our lawmakers and any conflicts of interest, vote yes etc. and we'll pay this or that would have to be on a large scale (i.e. unaffordable) and so the (majority) of people would get what "they" really wanted, not what some schmuck on some team wants at the moment for the benefit of their team.

Posted by: Nazraelli | December 8, 2010 1:12 PM | Report abuse

justin, and willow:

The auction went mediocre at best. Yield rose to 3.34, though it will undoubtedly jump around.

Justin what you're missing is the Fed's particpation, in effect, rigging the game. Bernanke was trying to nail the rate down to keep recovery going, especially worries about the housing sector. Don't forget, the Fed still holds a gynormous amount of CDO's, etc on it's balance sheet which are worth?????

Without an effective housing recovery, that's like Confederate money. Remember the little talked abut efforts by Maiden Lane to get B of A to do a "take back" on some of this stuff in that suit announced weeks ago.

Also the rise in Treasuries will hurt the municipal and state bond market too, especially now that we are ending the Buiild America Bond program.

Posted by: 54465446 | December 8, 2010 1:28 PM | Report abuse


Additionally, the rise in GDP that you pointed out did not see a concomitant rise in private sector employment, except to a tiny degree. That is more proof, to me at least that this is essentially a jobless recovery and likely to remain so as I have posted yesterday and today.

Rising Treasuries, falling dollar (by late spring), rising commodity prices and stubborn unemployment is a real witches brew to work wtih.

Posted by: 54465446 | December 8, 2010 1:35 PM | Report abuse

With respect to rising treasury yields and improving economy...
money rotating out of treasuries and bonds
for whatever reason...end of year profit taking or something changing direction...?
could it be rotation into stocks, thus a climbing stock market which would lead to an inproving economy... to me it looks like the treasuries have finally turned up, target looks to be near 5 (longer term w/in 2 yrs)

but since dollar looks like it has a few weeks (at least) to climb here, and market has been tanking with strong dollar recently, rotating into stocks going to vanish into thin air again? or WTF is going on here?

maybe beginnign of the bond crash - second dump on the public after eveyone got into bonds?
whatever reason for rise in yields it is not going to help people with low and stagnant incomes buy more houses or stuff...less houses less need for home handyman, leads to less need for coffee for home handyman, etc. etc

Posted by: Nazraelli | December 8, 2010 1:44 PM | Report abuse

I support President Obama's deal with Republicans now that I know more of the benefits for all Americans. At least with this plan, both the Unemployment rate and the Deficit as a percentage of GDP are projected to go down. At the end of the day, that is more important and beneficial to all Americans.

I am/was angry too, but it’s at the GOP for holding nuclear proliferation hostage to tax cuts for Billionaires and their ability to buy more Mansions, Villas and Yachts. In the end, it's about getting things done and most certainly not about throwing another six million long term unemployed people under the GOP Billionaire bus.

Both Cash and COBRA subsidies for the unemployed should be renewed as COBRA payments increase by 300% for Millions of American families on Jan 1st. You may as well go all in for COBRA subsidies, Immigration reform, the DREAM act, DADT repeal, Renewable Energy Tax Credits, Home Star/Cash for Caulkers, Building Star, the START treaty to resume nuclear inspection and prevent nuclear proliferation, accountability for border state gun dealers, the elimination of tax breaks for highly profitable Oil companies and Cotton and Feed-stock agricultural subsidies, and free but equal trade with China, Korea, Columbia and Brazil balanced with tariffs.

Deficit?? That was just a smoke screen/ruse to get elected. The Tea Party Caucus has already taken 764 earmarks valued at $1,049,783,150.00,0

Deficit Smeficit; it's all about getting paid and in this case, everybody; including the troops, are getting paid.

Now, where can I buy one of those Prince Georges council women Leslie Johnson $79,600 bra for my lady?

Posted by: Airborne82 | December 8, 2010 1:46 PM | Report abuse

Right now, America has critical needs in transportation, water systems, schools, levees, bridges, etc., infrastructure investment. At the same time, construction unemployment is high (17%), borrowing is low (less than 3%) and construction input prices for Labor, Gasoline, Steel and Lumber are cheap (20% less than in 2008).

Now's the time to invest in infrastructure, but U.S. plan is too modest (Ezra Klein)

Invest, create jobs and improve the economy while lowering unemployment and reducing the deficit in relation to GDP.

Posted by: Airborne82 | December 8, 2010 1:54 PM | Report abuse

The last two paragraphs of this post are absolutely bang on, and should be quoted and circulated as widely as possible among the left blogs.

The real disgrace here is that, long before the election, the Democrats had a winning hand on the tax cut issue, both substantively and politically, but refused to play it. So although this compromise is certainly better, on substance, than no deal at all, it represents the outcome of a massive unforced error, and a total lack of political leadership.

Posted by: amileoj | December 8, 2010 1:59 PM | Report abuse

Hopefully this will make you think: it's not just about political points

Marysville, Ohio
December 7th, 20109:27 am

“ I have been unemployed since April, 09.

I've used every trick to get face time with decision makers during these challenging economic times. I've networked. I've contacted friends and colleagues from previous jobs....but to no avail. During better times, I earned in the mid 50s. Within just the last 2 months, I interviewed for 4 jobs, quite an accomplishment. One was in low 30s, high 20s, $9.00 an hour, and $11.00 per hour. The third shift juvenile delinquent prison guard position ($11.00 per hour) was the only one to let me know by mail that I had been passed for another more qualified candidate.

So today's news about the President's compromise greeted my family during this holiday season with some relief since the state of Ohio sent us notification that our Unemployment Benefits were set to end on December 19, 2010. While I feel as though we dodged a bullet as a family, I have an extreme pain in my head knowing that I will be starting my 3rd year without gainful employment next April.

I genuinely believe the President when he states that he reads letters of pain and suffering each night before he retires for rest. My family is a living testimony of the "collateral damage" he referenced in his remarks.

From my family to yours Mr. President, I wish you the best this holiday season. “

Posted by: Airborne82 | December 8, 2010 2:07 PM | Report abuse

I think our economic main problems have more to do with energy and transportation than taxes and unemployment. If the politicians really want to put people back to work, than a sorter work week and more holidays is a no brainier instead of another unemployment extension don't you think?

Posted by: schaller2000 | December 8, 2010 2:40 PM | Report abuse

You forgot option #3: Let all the Bush tax cuts expire on schedule.

Posted by: jnc4p | December 8, 2010 3:20 PM | Report abuse

--*Ok, all kidding aside, you can't seriously want to get rid of the FDA can you?*--

Most certainly. In a free country, the FDA is an abomination from start to end. It is both a bottleneck to innovation and excellence, and a costly drain of both the nation's time and money. It is but one more politicized bureaucracy, the main work of which is agitating for ever greater amounts of other people's money, and ever greater power over other people's lives.

The idea that the country needs a bloated federal agency to determine the safety of our medicines is ludicrous. The notion that the FDA somehow protects the sanctity of our food supply is nonsense. Private companies could do the same work, insofar as it might be needed, far more efficiently, cheaply, and reliably.

That people these days have a hard time even conceiving of a world without the FDA shows how far this country has fallen.

Reason had a fairly good article on the FDA just last week:

Posted by: msoja | December 8, 2010 8:43 PM | Report abuse


Ok that makes sense. I also think water purification is overrated. I think we put way too many chemicals, possible carcinogens, in our supply. I think we should stop additives to municipal water supplies, and let anyone who wants to add them at the residence or business level.

Posted by: 54465446 | December 8, 2010 9:30 PM | Report abuse


Here's why you should not listen to Krugman about Treasury yields not being important.

"The 10-year note yield advanced 15 basis points, or 0.15 percentage point, to 3.28 percent at 12:28 p.m. in New York, according to BGCantor Market Data. Yields are up 35 basis points the past two days, the most since after the collapse of Lehman Brothers Holdings Inc."

"Trading patterns suggest the 10-year U.S. Treasury note yield is poised to rise to 4 percent in the next three months if it remains above 3.1 percent on a weekly closing basis, according to Citigroup Inc.

“We’ve come up a long ways in a short space, but if we get that close on a weekly basis we could see a continued push to 4 percent in the first quarter,” Tom Fitzpatrick, chief technical strategist at Citigroup in New York said in an interview. “The danger would be quicker than people think"

I think we could see 4% much faster, but this guy obviously knows more than me.

Posted by: 54465446 | December 8, 2010 9:36 PM | Report abuse

The kids are guaranteed gruel and mac&cheese for a year, Daddy got a brand new flat-screen TV (84"!!) and Mom is pissed.

But seriously. Having experienced the obliteration of the Dem majority in the House in a drubbing of historic proportions based largely on the premise that deficit spending has to end, I didn't even realize "we" were going for another stimulus package. I'm not at all surprised the GOP piled on another trillion (it's what they DO), having promised the opposite (it's what they DO), but if we were going to add more debt, why the heck wasn't the election about how?

Posted by: rmnelson | December 9, 2010 12:47 PM | Report abuse

For Ezra and other critics of the Bush tax rates, why is a tax rate on top income earners of 39.6% good and the Bush top tax rate of 35% evil? Isn't the appropriate inquiry - what level of taxation in a free society makes sense? Even a 35% rate is confiscatory.

Posted by: AlexChandler | December 9, 2010 1:53 PM | Report abuse

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