Tax Cut Smackdown: Obama v. Boehner (and Orszag)

By :: September 9th, 2010

The outlines of the Great Tax Debate of 2010 are coming clear. Yesterday, President Obama insisted on permanently extending the 2001-2003 tax cuts for those making less than $200,000 while allowing those aimed at the highest earners to expire at the end of the year. By contrast, House Republican leader John Boehner (R-OH) said he wants Congress to temporarily extend the Bush-era tax cuts for everyone. Boehner took his cues from an op-ed in Tuesday’s New York Times by Peter Orszag, Obama’s former budget director, which included a similar proposal for the next two years.

Who has the better argument?  I disagree with all three of them, but if I had to choose, I’d go for the Boehner/Orszag short-term solution. Before I explain why, it may be helpful to clarify a few issues.

First, while fun, this argument is not all that important. A ‘permanent” tax cut is a fiction. No tax cuts are forever. Congress amends the Internal Revenue Code annually, and sometimes more than once a year. Since World War II, it has done a major overhaul about once a decade, and is overdue for its next renovation. And given massive budget pressures, one is likely to come sooner rather than later.And when it does, the entire Code will be in the mix, notwithstanding what it permanent and what is not.

At the same time, our recent experience with four dozen allegedly time-limited tax cuts that Congress extends more or less routinely each year suggests the word “temporary” does not carry the same meaning in Washington as it does elsewhere. 

However, there are reasons why this debate does matter, at least inside the Beltway. To start, there is the matter of budget accounting. By offering a two-year extension of the 2001 and 2003 tax cuts, Boehner can make the 10-year cost of continuing the tax cuts for high earners look like a relatively modest $75 billion, far less than the than the $700 billion, 10-year price tag of a permanent extension. By contrast, making tax cuts permanent only for those making less than $200,000 forces Congress to build the $3 trillion, 10-year cost of Obama's plan into future budget baselines, while keeping tax cuts for high-earners out. The result: If the GOP does take control of Congress, it will have to scramble to find the money to pay for restoring tax reductions for those in the top brackets, or explain why it is "busting the budget" to do so.

Btw, it is important to note that while both Boehner and Orszag would both extend all the tax cuts for a couple of years, their long-run proposals differ profoundly. Orszag would let all the Bush-era tax cuts die after 2012. Boehner, by contrast, would not.

But my biggest objection to the Obama plan is that is manipulates expectations. It implies that the nation can solve its budget problems by simply raising taxes on the wealthy. But this is not possible. As a recent Tax Policy Center study showed, even trying to do so would result in top rates approaching 80 percent. One day, a president and Congress will have to agree on a deficit reduction package that raises taxes across the board and cuts spending. That’s when those allegedly permanent tax cuts will disappear. Pretending otherwise is irresponsible.  

As I’ve written previously, I wish Obama and Congress could agree on a brief extension of only those tax cuts that are most likely to boost the short-term economy. But if that isn’t going to happen and we are forced to choose between the Obama solution and the Boehner/Orszag package, I’ll reluctantly take a temporary extension for all.  

 

7Comments

  1. Anonymous  ::  2:18 pm on September 9th, 2010:

    Wash post
    Let the tax cuts for the wealthy expire now. That's a start. Then cut taxes on the middle-class, cut the deficit and pay for both with increased taxes on the wealthy. All this could be done if the wealthy were just taxed at the same rates as poor and middle-class workers.
    Warren Buffett, a billionaire, recently paid a total tax rate (combined federal, state & local) of 0.2% of his income and investment gains. A millionaire couple can easily pay only 4% of their annual investment gains in total taxes. A typical single person earning a minimum wage pays taxes amounting to 22% of her wages, a rate more than 100-fold higher than Mr. Buffett’s. From http://fairsharetaxes.org
    The top 1% in the US have gone from owning 22% to 40% of the nation's wealth in the last thirty years. This is largely due to the tax cuts for the wealthy investor class, started under Reagan 30 years ago. They were supposed to encourage investment and strengthen the economy. Instead, average GDP growth during 1951-86, when the top federal income tax rates ranged form 50-92%, average annual GDP growth was 3.6%. Since then, when the top tax rates were cut and ranged from 35-39%, average annual GDP growth dropped by one-quarter to 2.7%. Favored tax treatment of the rich doesn’t help the economy In fact it hurts it…..
    The favored tax treatment for investments and the wealth concentration that resulted has lead to the demand for investments exceeding the supply of worthy investments … Investment bubbles … our last two recessions … and then all but the wealthiest are at risk of losing their jobs, their homes, their opportunity to educate their kids, and their retirement savings.
    For more, including a proposal for comprehensive tax-reform that would cut taxes on the middle class, cut the deficit and strengthen the economy, see http://fairsharetaxes.org

  2. Anonymous  ::  2:30 pm on September 9th, 2010:

    >our recent experience with four dozen allegedly time-limited tax cuts that Congress extends more or less routinely each year suggests the word “temporary” does not carry the same meaning in Washington as it does elsewhere.
    “Temporary” tax increases are even more durable than “temporary” tax cuts.
    >my biggest objection to the Obama plan is that is manipulates expectations. It implies that the nation can solve its budget problems by simply raising taxes on the wealthy.
    I very much agree. This is Obama's greatest disservice to the country. More than the huge expansion of health care entitlements, because that expansion will have barely begun by the time the government bond market crashes.
    Had Obama chosen to deliver a strong dose of fiscal reality to the public in January 2009, when the public was ready for harsh measures, we might have been able to avoid the coming crash. Instead he continues to peddle fiscal fantasy. It's just a different flavor of that fantasy than the Republicans were selling before.
    In my opinion, the Tea Party movement shows that voters are ready to hear the truth about our bleak fiscal future.

  3. Anonymous  ::  9:36 pm on September 9th, 2010:

    I agree that not all the tax cuts for the middle class should be permanent.
    The 10% surchage on the wealthiest should go back into law as of Dec 31, 2010 – if not retroactively to Jan 1, 2010. That 10% surtax should be on the 33% rate, not the 36% rate – resulting in a top tax rate of 36.3%.
    The 33% rate and the 28% rate should be extended for one year only and then go back to 36% and 31%, resectively, with the surtax going back to 39.6%.
    The 25% rate, the 10% rate and the $1000 Child Tax Credit should be made permanent, whie the permanent law on inheritance and the dividend rate should be allowed to go back to 2000 levels.

  4. Anonymous  ::  7:04 pm on September 10th, 2010:

    One the problem faced by the Obama administration is what to do to stabilize the economy after the financial crisis and the housing bubble caused by the financial sectors who was able to maintain the status quo for the past 30 years with the help of the Republicans in Congress and by extension Bush. Even then they were able to get the help due to the bad bets and we bailed them out but not help the homeowners who were underwater from the start. What you failed to recognize that the Tea Party and the right were blaming Obama for the deficit while conveniently ignoring the facts that it was Bush who initiated the action and consequently the majority of the deficit. Factcheck.org have point this out at the time. Yet, it refused to die.
    One of your argument about Obama delivering strong dose of reality miss entirely the point that Congress is the ultimate decider on what to do with the budget and the priorities. By extension they are influenced by the lobbyists who will expend money to get what they want at the expense of the need for responsible budgeting and the growth of the economy.
    Lastly, the Tea Party movement have made ignorance statements without realizing the impact of the Federal level on the state and local- Many of them don't have an understanding of economics even to make rational argument.
    Largely it is the “certain media” that creates the problem by manipulating the argument by leaving out facts when making a story that is parroted by others.

  5. Anonymous  ::  7:33 pm on September 10th, 2010:

    Actually, James Q. Wilson did a study a few decades ago that showed that Congress decides the details, but the executive has a profound influence over the overall shape of budget and tax policy, especially with regard to the size of the deficit, etc.

  6. Anonymous  ::  7:02 pm on September 28th, 2010:

    this is silliness. that site mixes apples and pomegranates indiscriminately. their “solution” would cripple small businesses (even the smallest would entail a net worth that would be hit with the “wealth tax”), and could be evaded by someone with the means to hire a good corporate lawyer (i.e., the “rich” that they seem to hate so much) in a dozen different ways (trusts, corporations, and partnerships come to mind).

  7. state laws book  ::  4:56 am on July 10th, 2014:

    The leaders always get paranoid when they lose popular support and turn on their own ranks looking for spies, dissidents, etc.
    Riders of the bicycles will also use the bicycle helmets for safety.
    Martin even claims that the Head Trainer (who was fired on 2-19-14)
    laughed at some of the racial insults directed to the Assistant Trainer.