Congress, the Bush Tax Cuts, and the Perils of Pauline
If you think this year’s battles over health care, stimulus, climate change, and financial regulation have been nasty, just wait ‘til Washington tackles the Bush tax cuts.
Democratic leaders on Capitol Hill say they will consider the fate of those tax cuts–due to expire at year's end– just before the congressional elections. That will set up a high-stakes brawl on a political and economic high-wire.
Washington often gets bogged down in symbolism. And there will be plenty of that in this donnybrook. But this argument is also about real money. Huge piles of it. At issue: $3.5 trillion in tax revenues over the next decade, $200 billion in 2011 alone.
There are two very different ways to think about all that cash. On one hand, nearly three-quarters of households will pay more in taxes in 2011 than they will this year if the Bush tax cuts expire and the Alternative Minimum Tax (AMT) is allowed to bite millions of middle-income households.
On the other, if the tax cuts are extended, the overall average tax rate would fall from 23.5 percent to 20.7 percent by 2012 (relative to current law).
Then there is the economic environment. With the economy still on uncertain footing, do we want to raise anyone’s taxes next year? And what would be the short-term impact if Congress does what President Obama wants and extends the tax cuts only for those making $250,000 or less? Would the economy suffer if high-earners had to pay pre-Bush rates? Few economists think so.
Finally, there is the politics. Nearly every congressional Republican will oppose allowing any of the tax cuts to expire, even for high-earners. “No new taxes” is a no-brainer for most Rs. By contrast, Democrats are torn. Lawmakers such as Senate Budget Committee Chairman Kent Conrad (D-ND), usually a fiscal hawk, are also against ending any of the tax breaks, given the fragile economy. But most Democrats prefer to restore the top rates of 36 percent and 39.6 percent. And polls suggest many voters agree with them.
Unlike most recent congressional debates, the Democrats may have the procedural upper hand this time. With health care, for instance, Republicans would have “won” by blocking congressional action. Gridlock would have preserved the status quo, an outcome favored by about half of voters–and overwhelmingly supported by the GOP base.
But this time, stalemate means the Bush tax cuts expire for everyone. For most households, that will feel like a tax increase—an outcome favored by a handful of budget wonks but very few real people. Democrats believe this will give them the leverage they need to force the GOP to deal. Republicans, by contrast, feel they’d be able to blame the ruling Democrats for failing to tackle the pending tax hike.
My best guess is that, in the end, Congress will extend the Bush tax cuts for all but the highest earners. And it will probably do so for a year or two. But after watching Congress fail to address the expiring estate tax last year, no outcome would shock me.
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OASI is pretty much solvent the way it is, especially with more generous productivity assumptions over the long term. Medicare and Medicaid are another matter. I don't expect these to be dealt with until the private health insurance industry collapses, at which time a single-payer system will be set up (single-payer catastrophic if the GOP as a significant pressence, else not) and will be funded by some kind of payroll tax, replacing all other funding modalities for health (private premiums, the HI tax or state funding of Medicaid).
It's a very interesting debate.
The Democrats say the want to stimulate the economy and that it isn't necessary to start cutting deficits yet.
The Republicans says the most important thing is to get the fiscal house in order, reduced the deficit now.
So Democrats should be working to extend the Bush tax cuts and Republicans to end them.
The 250 k earners, top 5 %, part of overall consumption is 30 %. If you let the tax cuts expire it might lead to a reduction of up to 30 % of spending. Consumers are very sensitive to changes on the margin especially if they believe that even more and worse tax hike is coming. They might stop spending all together and then the economy will really tank, double dip.
The Republicans on the other hand should rejoice that the taxes will drastically reduce the deficit.
On a personal note I believe that the economy is weak and need to be strengthened and restored. I am of the opinion that the Bush tax cuts should be extended. I disaproved of Stimulus I and a Stimulus II is political suicide for the Democrats so a tax stimulus is the second best.
The tax debate is partisan politics at it's worst. What should be done and what should have been done before enacting the Health care bill was to drastically cut Medicare spending and cut Social Security AND tax increases. The Health care bill should have been fully funded i.e. all cuts taken upfront in other programs and all taxes raised in the bill.
The Dems cannot extend the tax cuts through reconciliation. The budget resolution for FY 2010 (the last one to be passed) only included instructions to the HELP and Finance committees to report recommendations to reduce deficits by $1 billion. Those instructions were used to produce the education and health reconciliation bill. No new budget resolution has been passed providing the finance committee instructions to reduce revenues by some $2 trillion over 10 years.
The other reason the Dems have an upper hand is that they can extend the tax cuts to all but the top brackets under reconcilliation. They don't need any Republican votes and not all Democratic votes.
I suspect that most high income families don't have spending over 250K, although they might have retirement saving over that amount. If savings is the last thing to be paid, nothing will happen to spending.
No vote is required for taxes on the wealthy to go up. This issue will be remembered for about a minute as an electoral issue for Republicans. Indeed, no one will vote GOP who otherwise would not have because tax cuts on the wealthy are allowed to expire.
If the GOP wanted to deal on this, they should have done so before they lost the White House. Indeed, they should have opened talks when it became obvious that Mark Foley and Jack Abramoff would cost them the Congress.
I think the R's will vote against the below 250k bill if it gets that far.
Bruce Bartlett says today:
“It would have been far better to use the expiration of the Bush tax cuts to reform the tax system and put everything on a permanent basis or get rid of it. But these are not normal times, either economically or politically. Consequently, kicking the can down the road is really the only option available under the circumstances.”
Here's a political point he didn't mention explicitly. The 2001-2003 tax cuts were designed as a package to be approximately neutral towards progressivity. If the top rates only are restored, progressivity will increase.
More importantly for the politicians, this new level of progressivity will become the new baseline for measuring progressivity of further changes. This will greatly reduce the chance of ever getting anywhere near the rates established in the bipartisan 1986 Tax Reform.
Based on this, I expect Republicans to be willing to see all the tax cuts expire rather than agree to selective extension. Expiration of all the tax cuts would not significantly change the progressivity baseline.
His point is that no action involves the tax cuts ending. The real debate is going to come down to what is offered. If the D's can get separate bills to the floor for above 250k and below (plus the AMT), then they can block action on the above 250k bill and dare the Rs to vote against the below 250k bill (which I don't think they will).
No action means rates go up. In HCR, no action meant nothing happened.
PS I'm always suspicious of the statement, most economists agree. What do they agree to? That raising rates at the high end won't crash the economy or that it will have no effect at all? I rather suspect it's the second but you write it to allow the reader to read it as the first.
“Unlike most recent congressional debates, the Democrats may have the procedural upper hand this time.”
This is inane. Democrats have HAD the procedural upper hand in “recent debates,” with 59 Senate votes, right of first recongition on the senate floor (and the ability to reconsider votes, fill the amendment tree, etc), and imperious control in the House. What could possbily qualify as the “upper hand” if that doesn't? Or is your sole notion of such legislative potency a 60 vote super-majority ability to ram anything through the Senate?