Tag Archives: Bush tax cuts

Say goodbye to all Bush tax cuts?

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That’s what the New Republic‘s Jonathan Cohn wants to do:

Unfortunately, raising taxes on the wealthy will probably not be sufficient to solve our fiscal problems. If we are serious about living up to our financial commitments—in particular, the guarantees of financial security in retirement and provision of basic health care to all—then eventually we will need more revenue. There are lots of ways to do this. The ideal would probably be a carbon tax, because it would have the virtue of raising revenue and slowing global warming. There’s also a case for some kind of consumption tax, which economists tend to think is more efficient than income taxes. But since neither option seems to be viable right now, the next best thing might be to let all of the Bush tax cuts expire, so that everybody—not just the wealthy—go back to paying what they did during the Clinton era.

But wouldn’t raising taxes on the middle class slow the economy? Yes, if the rates went up right away. In fact, one of the most worrisome elements of the fiscal debate right now is that deficit reduction has so much focus. As the economist Peter Diamond has said, Washington is acting like we have a debt crisis and an unemployment problem, when the opposite is true: We have a debt problem and an unemployment crisis. Diamond’s point—which Paul Krugman made in the New York Times recently—is that we should concentrate on bolstering the job market now, while working to stabilize federal finances for the future. The former ideally would involve putting more money into the pockets of the poor and middle class, who are most likely to spend it. Raising taxes on the middle class immediately would, of course, have the opposite effect.

That’s why a better approach might be to preserve tax breaks on incomes up to $250,000, and to renew anti-recessionary programs like extended unemployment insurance and a payroll tax holiday, but only on a temporary basis. And rather than setting these measures to expire on a fixed date, Congress could try an idea economist Peter Orszag has floated: Setting these tax cuts to expire when, and only when, the economy had become stronger. For example, Congress could declare that the tax cuts stay in place until four consecutive months of unemployment below 6 percent, at which point they would slowly phase out. Or Congress could set the tax cuts to expire based on some other indicator, like the employment-to-population ratio, or a combination of several.

I’m with Cohn, at least on principle. I’d have to look more into the specifics to see exactly how this would work in practice. But eventually there’s no reason the Bush tax cuts for the middle class should remain as low as they are either, unless we enact significant reform of the tax code.

The beginnings of a thaw

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[youtube http://www.youtube.com/watch?v=X0Oa4gB28Co]

The Huffington Post reports on an unlikely ally for Obama’s attempt to allow the Bush tax cuts on the rich to expire:

Conservative commentator and Weekly Standard editor Bill Kristol said Sunday the Republican Party should accept new ideas, including the much-criticized suggestion by Democrats that taxes be allowed to go up on the wealthy.

“It won’t kill the country if we raise taxes a little bit on millionaires,” he said on “Fox News Sunday.” “It really won’t, I don’t think. I don’t really understand why Republicans don’t take Obama’s offer.”

“Really? The Republican Party is going to fall on its sword to defend a bunch of millionaires, half of whom voted Democratic and half of whom live in Hollywood and are hostile?” he asked.

One of the biggest fights as Congress returns will be over taxes, as cuts put in place by former President George W. Bush are set to expire at the end of the year. Republicans want to extend those tax cuts for all income brackets, while Democrats want to raise revenue by allowing them to expire for wealthy Americans.

Earlier, FOX News talk show star Sean Hannity underwent a sudden conversion:

We’ve gotta get rid of the immigration issue altogether. It’s simple for me to fix it. I think you control the border first, you create a pathway for those people that are here, you don’t say you gotta go home. And that is a position that I’ve evolved on. Because you know what–it just–it’s gotta be resolved. The majority of people here–if some people have criminal records you can send ’em home–but if people are here, law-abiding, participating, four years, their kids are born here… first secure the border, pathway to citizenship…then it’s done. But you can’t let the problem continue. It’s gotta stop.

Leverage and the fiscal cliff

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Unsurprisingly, Joshua Green sees a highly favorable situation for Obama now:

To keep the economy afloat, the White House cut the deals it felt it had to. Many, such as Obama’s agreement to extend all of the Bush tax cuts in 2010, were poorly received by Democrats. Now comes the payoff. The expiration of those cuts and the automatic reductions set to take effect at year’s end—the so-called fiscal cliff—mean that Obama and the Democrats can gain a huge source of new revenue by doing nothing at all. Republican priorities are the ones suddenly in peril. The combination of tax increases on the rich, higher capital-gains taxes, and sharp cuts in defense spending have congressional Republicans deeply worried. To mitigate these, they’ll have to bargain.

Despite their post-election tough talk, Republican leaders have dealt themselves a lousy hand. Obama can propose a “middle-class tax cut” for the 98 percent of American households earning less than $250,000 a year—while letting the Bush tax cuts expire for those earning more—and dare the Republicans to block it. If they do, everyone’s taxes will rise on Jan. 1. It’s true that going over the fiscal cliff, as some Democrats believe will happen, would set back the recovery and could eventually cause a recession. But Democratic leaders in Congress believe the public furor would be too intense for Republicans to withstand for long.

Going over the cliff would also weaken the Republicans’ greatest point of leverage: renewing their threat to default on the national debt. Right now, the Treasury expects to hit the debt ceiling in February. But if the cliff can’t be avoided, tax rates will rise and government coffers will swell, delaying the date of default—thus diminishing the Republicans’ advantage. Alice Rivlin, the founding director of the Office of Management and Budget and a senior fellow at the Brookings Institution, says that “as quickly as the IRS began changing the withholding schedule, the date would be pushed back.”