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Posted at 10:06 AM ET, 02/11/2011

The real budget solution, revisited

By E.J. Dionne

On Monday, I blogged in praise of Jonathan Chait's New Republic column suggesting that the solution to the budget crisis was to let all the Bush tax cuts expire. Jonathan also laid out a clever political analysis of how this might happen.

Clive Crook in The Atlantic came back wondering why I singled out Chait:

Can he really think that Chait is the first to come up with this? For a start, it's the letter of current policy. Here's a new idea: call me crazy, but let's do what we're already doing. Unfair, you might say: up to now, nobody has actually advocated leaving current law in place. Not so. The idea of reversing all the Bush tax cuts after a temporary extension has been in the air for ages.

Just to be clear: Clive is perfectly right that this idea is not brand new, so of course I did not think Jon came up with it first, and he did not claim to have done so. Indeed, a number of my colleagues at the Brookings Institution -- and, I am glad to say, Clive was once one of them as a guest scholar -- have long been arguing for the benefits of restoring the Clinton tax rates.

But since the Bowles-Simpson commission report, this obvious solution to our budget problem has fallen by the wayside. Lots of people who love all the cuts the commission proposed don't want it widely known that restoring the Clinton rates would reduce the deficit by about the same amount as all the complicated proposals put forward by Bowles-Simpson would. That's why I was glad Jon put the Clinton rates back into journalistic circulation.

Clive also makes this point:

It's ridiculous to think, as Chait and Dionne both seem to, that Obama will be able to campaign in 2012 without committing himself one way or the other on this. If a tax reform hasn't already been done by then, would he be willing to campaign on the pledge to let all the Bush tax cuts expire? But in replying to Clive, Jon correctly noted that the central point of his colum was that Obama would not have to campaign on this. As Jon writes, Obama

can campaign on maintaining the Bush tax cuts on income below $250,000. All he has to do is refuse to sign an extension of the tax cuts for income over $250,000. If he does that, Republicans will block the whole thing, and we'll revert to Clinton-era rates. Obama can turn the GOP's fanatical attachment to tax cuts for the rich against them. He can be in favor of middle-class tax cuts, and he can let Republicans block those cuts for him.

Jon's original point was that Republicans care far more about the tax cuts for the wealthy than the rest of the tax reductions. They would play chicken, and the likelihood is that no bill would pass. In the absence of legislation, we revert back to the Clinton rates.

In the course of his blog, Clive endorses bipartisan tax reform. I am all for tax reform, but we should start with the Clinton rates as the basis for a reform plan, not current rates. Starting with the Clinton rates would begin the discussion on the basis of a tax system that produces sufficient revenue to begin restoring fiscal sanity. This, in turn, would put less pressure on the reform process to raise lots of extra money, and might thus give reform a better chance.

But here's to Jonathan for provoking Clive to come back to an idea he had endorsed in the past, and to Clive for giving me a chance to plug it again.

By E.J. Dionne  | February 11, 2011; 10:06 AM ET
Categories:  Dionne  | Tags:  E.J. Dionne  
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Comments

How naive to think that "taxing the rich" will solve the budget problems. ALL income taxes, combined corporate and individual, account for slightly more than $1 trillion a year. Tweeking a few rates would add drops to an ocean of debt. You could double everyones taxes and still have deficits.

When you spend two thirds more than you bring in, a slight income increase does not fix your problem. You have to stop spending money you don't have.

Posted by: kitchendragon50 | February 11, 2011 10:33 AM | Report abuse

Speaking of Bowles-Simpson, E.J.: for an entire year, Obama answered every question about the deficit with the dodge that he was waiting for the Bowles-Simpson report.

The report arrived and was met with great indifference by the White House. A cynic might believe that President Obama has no intention of dealing with deficit spending, but just wants to kick the can down the road until after 2012.

Tax-and-spend-liberalism is not just a label, it's a life style.

Posted by: pilsener | February 11, 2011 11:56 AM | Report abuse

Restoring the Clinton era tax breaks won't do much to balance the budget when you spend twice what you bring in. The proposed cuts won't do much either.

In fact, you could cut EVERYTHING other than Social Security and Medicare and you would still run a deficit.

All the federal income pays for SS, Medicare and almost nothing else. The rest we borrow.

Posted by: BradG | February 11, 2011 12:14 PM | Report abuse

Restoring the Clinton era tax breaks won't do much to balance the budget when you spend twice what you bring in. The proposed cuts won't do much either.

In fact, you could cut EVERYTHING other than Social Security and Medicare and you would still run a deficit.

All the federal income pays for SS, Medicare and almost nothing else. The rest we borrow.

Posted by: BradG | February 11, 2011 12:15 PM | Report abuse

Mr Dionne; all,

the ONLY good or even acceptable solution to the MESS that BHO & the "DIMocRAT leaders" have made of our economy over the last 2 years is:
1. roll back all the "new spending" (the BHO "change, change, change" boondoggles!) that is NOT already disbursed,
2. "lay off" all the thousands of "new hires" since 2008,
3. ABOLISH "obamacare" and replace that UNCONSTITUTIONAL boondoggle with NOTHING
AND
4. SLASH all federal spending, across the board, by 20%. - YES, the DoD, too.

THEN:
1. freeze future federal spending/hiring to FY 2000 levels PERMANENTLY,
2. abolish or combine every CRITICAL federal function into many fewer departments/agencies to end "duplication of effort", fraud, waste & abuse,
(for example, WHY do we have over 70 federal police agencies, each with its own administrative bureauracy, when two or three would be fine?)
3. return every possible current federal activity to the lowest possible political level, which can accomplish the mission,
4. PROHIBIT any "federal mandates" to the states/counties/cities, whether funded or unfunded,
5. CUT Congressional/WH staffs by HALF, as there are FAR too many people on Capitol Hill to do the NEEDFUL office functions,
6. allow the VOTERS to set the future salaries/expenses/staff levels for their own Representatives/Senators
and
7. "sunset" all grants on at least a 2-year cycle & require that NEW supporting documentation be provided to the GAO, by the grantee. then ABOLISH all but the MOST critical of grants.

finally, pass a strict/comprehensive BALANCED BUDGET AMENDMENT that allows NO future deficit spending, except in time of DECLARED war.
(that provision should also curtail/end "overseas adventures", that are "off budget".)

just my opinion. = i do NOT & can NOT speak officially for our county's TEA PARTY group, absent a vote of the membership on each issue.

yours, TN46
coordinator, CCTPP

Posted by: texasnative46 | February 11, 2011 4:06 PM | Report abuse

I agree with you Kitchendragon that increasing tax rates alone will have little effect. However, if we remove all the tax loopholes that some of the extremely weatlthy enjoy and have everyone pay the same marginal tax rates on the same amount of earnings, then overall tax revenues would significantly raise enough to cover the current shortfall. The lower marginal tax rates could even be reduced further as long as the real effective tax become progressive like they were during our fastest economic growth periods.

The real reasons of our economic downturns stem from the extreme concentration of wealth and the removal of tens of trillions out of our economy to be shifted into the casino elements of the capital markets which circulates only between a handful of the very largest commercial banks. The financial services industry has grown from around 6% of GNP just 15 years ago to almost 40% today. The main reason for this large shift in American capital out of the business and job creating priviate sector that sells real products/services into the Wall Street casino, was the major tax breaks the entire financial services industry enjoys.

The price of every real product/service available in our economy is inflated by at least 15% from the embedded costs of all the taxes the business pays. The largest single componet of these embedded taxes is the federal payroll taxes. Everytime a product/service is sold in our economy tax revenues are generated. Not so with financial instruments, the only inclusive tax embedded in a financial instrument transaction is the .004% fee added by the exchanges to cover their operational costs. Earnings realized from capital market transactions are taxed at much lower rates than any other earnings and many in the financial services industry are exempted from paying payroll taxes. This all needs to change so that everyone pays the same taxes and the same marginal tax rates on the same amount of earnings/profits. Special are deals are destroying competitive fairness in the markets which ends up concentrating most of the available earnings at the very top tier of all income earners leaving the vasy majority of Americans very little.

If we actually had maintained the same progressive effective tax rates that were in force during the 5 decades after WWII when our economy grew at the fastest rates in our history and the vast majority of Americans really profited from our economic growth then we would not have seen the grave economic problems we now face. But these problems can be solved by evening out the playing field for everyone and having everyone pay the same marginal tax rates on the same amount of earnings as everyone else. No more special deals for anyone.

Posted by: RMForbes | February 13, 2011 5:34 PM | Report abuse

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