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Democrats and the Bush Tax Cuts

Tuesday, 06 March 2012 10:50 By James Kwak, The Baseline Scenario | Op-Ed

Mark Thoma provides an excerpt from Noam Scheiber on Peter Orszag’s attempt to let all of the Bush tax cuts expire. In short, Orszag wanted to extend the “middle-class” tax cuts for two years (letting the tax cuts for the rich expire); then he expected the middle-class tax cuts to expire as well. President Obama was interested in the plan, which Scheiber takes as evidence that “the president is a true fiscal conservative.”

Thoma frames this as a bad thing:

“The explanation, of course, is that despite hopes to the contrary (and denial by some), the president is, ‘a true fiscal conservative’ — it’s not just an act in an attempt to capture the middle — and that could be bad news not just for middle class tax cuts, but also for important social insurance programs such as Social Security.”

I like and respect Mark Thoma a great deal, and I generally think of him as a mainstream Democrat on economic issues, neither a socialist nor a “moderate Democrat” (what we used to call a Republican). To me, his post is evidence that many Democrats think that most of the Bush tax cuts were an are a good thing. This confuses me. When did we become the party of tax cuts?

Let’s leave aside the question of whether Barack Obama is a fiscal conservative (and whether that term has any meaning anymore) and focus on the narrower question of whether it would be good to let the “middle class” tax cuts (usually defined as tax cuts for married couples making less than $250,000) expire.

There are three logically separable issues here. The first is whether, leaving aside considerations of the business cycle, we would be better off with the Clinton tax code (mainly set in 1993, tweaked in 1997) or the Bush tax code (set in 2001 and 2003, extended in piecemeal fashion during the Bush administration, and finally extended in 2010 through 2012). On this question I think the answer has to be that the Clinton tax code is preferable, at least for people with generally Democratic preferences.

One way to think about it is this: In 2001 and 2003, did you think the Bush tax cuts were good policy? If you didn’t think they were good policy then, why would they be good policy now? If you can’t remember what you thought about them then, let me remind you. EGTRRA and JGTRRA were huge tax cuts for the rich and small tax cuts for the middle class and the poor. EGTRRA was passed at a time when large majorities of the country wanted to bolster Social Security and Medicare rather than cut taxes;* JGTRRA was passed after a recession and September 11 had already wiped out the Clinton-era surpluses and less than two months after the invasion of Iraq.

More generally, tax cuts always have to be paid for, one way or another, in lower transfers, fewer services, or higher taxes in the future. Since the poor and middle class are net beneficiaries of transfers and services, the Bush tax cuts were, on balance, bad for the poor and the middle class (unless they would be paid for by tax increases that made the tax code even more progressive than before—an unlikely prospect). For a quantitative analysis, see Elmendorf, Furman, Gale, and Harris (2008). (I’m not going to bother rebutting the supply-side justification for the tax cuts since, for now, I’m talking to Democrats; I know why Republicans liked the tax cuts.)

If the tax cuts were bad a decade ago, what has changed since then (for now, leaving aside cyclical issues)? We have had one more decade of aging and health care inflation (and war), so the long-term budget outlook looks considerably worse. The need to ensure the long-term survival of Social Security and Medicare is greater. Increased income inequality has made provision of basic safety net services even more important. These are all things that demand more tax revenue, not less. The case against the Bush tax cuts has only become stronger.

Assuming you’re with me so far, the second issue is whether it would be good to have just the middle-class tax cuts and not the tax cuts for the rich, which is what President Obama has proposed. (Leave aside for now the question of whether this would be politically feasible with today’s Republican Party.) This is a closer call, but I still think the right answer is no tax cuts.

To begin with, who among you (again, I’m aiming this at Democratic policy wonks) thought that the thing we needed in 2001 was a middle-class tax cut? Not many, if I recall correctly. Democrats wanted more money for education, infrastructure, job training, and child care. We wanted better health care. We wanted to set aside money for Social Security and Medicare. We didn’t want tax cuts. Again, I think the past decade has just strengthened all of these concerns. Yes, the middle class is struggling with stagnant wages and rising economic insecurity. But in aggregate, middle class families need robust social insurance programs to protect them from falling into poverty more than they need a few hundred dollars of after-tax income. And given the current political climate, that is the choice we face.

The third issue is whether, given the actual business cycle, we should raise taxes on the middle class right now. Here I will go along with Thoma and DeLong and Krugman and all the rest and agree that it might not be good to raise taxes on the middle class on January 1, 2013. If I were king, I might extend the middle-class tax cuts for another two years and then let them expire.

But this “if I were king” stuff is meaningless. First of all, if I were actually king, I would still let all the tax cuts expire; then I would use the additional revenues to increase government spending. (Remember, fellow Democratic policy wonks, we usually say that spending has a higher multiplier than tax cuts.) Second, I’m not king, and neither are you. We are dealing with a Republican Party that will block any package that raises taxes on anybody. They will block any tax increase, even if it hurts them in the general elections, because they are completely locked in by the Grover pledge and the Koch brothers. The only choice we have is between extending all of the tax cuts and complete gridlock, which means that they all expire. And if we extend the Bush tax cuts, we are just four Senate seats away from making them all permanent.**

Given that choice, I vote for gridlock. I understand the counterargument: tax increases would weaken the recovery and increase unemployment in the short term. But those tax revenues are crucial to the long-term health of the middle class. Ending the Bush tax cuts will slash projected deficits and push right-wing claims about the bankruptcy of Social Security and Medicare decades into the future. Yes, conservatives will always want to privatize Social Security and dismantle Medicare, but they only have a chance of actually succeeding when government deficits make those programs seem unsustainable, bringing so-called centrists over to their side.

So, for me, letting all the tax cuts expire on December 31 is better than making them permanent. Letting them all expire is also better than making just the “middle-class” tax cuts permanent. (Another note to Democrats: since when do we push for tax cuts for families making $200,000 a year?)

There’s one more option you may say you prefer: letting the tax cuts for the rich expire, extending the middle-class tax cuts for another two years, and then letting them expire (assuming we are back to trend growth). As I said above, I don’t think this is politically feasible, given who’s in charge of the Republican Party. But if that’s what you want, that’s also what Peter Orszag wanted and Barack Obama seriously considered. So why are they the bad guys?*** (Note that I’m not defending Obama’s willingness to negotiate away Social Security and Medicare, which I do not agree with.)

In the end, I think the Bush tax cuts were one of the two most catastrophic policy decisions of this century (the other was the Iraq War). They were a terrible idea then and they are a terrible idea now. I think letting them all expire would be good for the world and for the middle class. And whether or not that makes me a “fiscal conservative,” I think it makes me a Democrat.

Notes

* See Hacker and Pierson, Off Center, pp. 49–53.

** Does anyone think Obama would veto a bill passed by both houses that locks in lower taxes?

*** You could say that Orszag wanted to implement this policy two years ago, which meant a tax increase in 2013, while you want to implement it now, which means a tax increase in 2015. I see the point, but that’s a tactical distinction, not a difference of philosophy.


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Democrats and the Bush Tax Cuts

Tuesday, 06 March 2012 10:50 By James Kwak, The Baseline Scenario | Op-Ed

Mark Thoma provides an excerpt from Noam Scheiber on Peter Orszag’s attempt to let all of the Bush tax cuts expire. In short, Orszag wanted to extend the “middle-class” tax cuts for two years (letting the tax cuts for the rich expire); then he expected the middle-class tax cuts to expire as well. President Obama was interested in the plan, which Scheiber takes as evidence that “the president is a true fiscal conservative.”

Thoma frames this as a bad thing:

“The explanation, of course, is that despite hopes to the contrary (and denial by some), the president is, ‘a true fiscal conservative’ — it’s not just an act in an attempt to capture the middle — and that could be bad news not just for middle class tax cuts, but also for important social insurance programs such as Social Security.”

I like and respect Mark Thoma a great deal, and I generally think of him as a mainstream Democrat on economic issues, neither a socialist nor a “moderate Democrat” (what we used to call a Republican). To me, his post is evidence that many Democrats think that most of the Bush tax cuts were an are a good thing. This confuses me. When did we become the party of tax cuts?

Let’s leave aside the question of whether Barack Obama is a fiscal conservative (and whether that term has any meaning anymore) and focus on the narrower question of whether it would be good to let the “middle class” tax cuts (usually defined as tax cuts for married couples making less than $250,000) expire.

There are three logically separable issues here. The first is whether, leaving aside considerations of the business cycle, we would be better off with the Clinton tax code (mainly set in 1993, tweaked in 1997) or the Bush tax code (set in 2001 and 2003, extended in piecemeal fashion during the Bush administration, and finally extended in 2010 through 2012). On this question I think the answer has to be that the Clinton tax code is preferable, at least for people with generally Democratic preferences.

One way to think about it is this: In 2001 and 2003, did you think the Bush tax cuts were good policy? If you didn’t think they were good policy then, why would they be good policy now? If you can’t remember what you thought about them then, let me remind you. EGTRRA and JGTRRA were huge tax cuts for the rich and small tax cuts for the middle class and the poor. EGTRRA was passed at a time when large majorities of the country wanted to bolster Social Security and Medicare rather than cut taxes;* JGTRRA was passed after a recession and September 11 had already wiped out the Clinton-era surpluses and less than two months after the invasion of Iraq.

More generally, tax cuts always have to be paid for, one way or another, in lower transfers, fewer services, or higher taxes in the future. Since the poor and middle class are net beneficiaries of transfers and services, the Bush tax cuts were, on balance, bad for the poor and the middle class (unless they would be paid for by tax increases that made the tax code even more progressive than before—an unlikely prospect). For a quantitative analysis, see Elmendorf, Furman, Gale, and Harris (2008). (I’m not going to bother rebutting the supply-side justification for the tax cuts since, for now, I’m talking to Democrats; I know why Republicans liked the tax cuts.)

If the tax cuts were bad a decade ago, what has changed since then (for now, leaving aside cyclical issues)? We have had one more decade of aging and health care inflation (and war), so the long-term budget outlook looks considerably worse. The need to ensure the long-term survival of Social Security and Medicare is greater. Increased income inequality has made provision of basic safety net services even more important. These are all things that demand more tax revenue, not less. The case against the Bush tax cuts has only become stronger.

Assuming you’re with me so far, the second issue is whether it would be good to have just the middle-class tax cuts and not the tax cuts for the rich, which is what President Obama has proposed. (Leave aside for now the question of whether this would be politically feasible with today’s Republican Party.) This is a closer call, but I still think the right answer is no tax cuts.

To begin with, who among you (again, I’m aiming this at Democratic policy wonks) thought that the thing we needed in 2001 was a middle-class tax cut? Not many, if I recall correctly. Democrats wanted more money for education, infrastructure, job training, and child care. We wanted better health care. We wanted to set aside money for Social Security and Medicare. We didn’t want tax cuts. Again, I think the past decade has just strengthened all of these concerns. Yes, the middle class is struggling with stagnant wages and rising economic insecurity. But in aggregate, middle class families need robust social insurance programs to protect them from falling into poverty more than they need a few hundred dollars of after-tax income. And given the current political climate, that is the choice we face.

The third issue is whether, given the actual business cycle, we should raise taxes on the middle class right now. Here I will go along with Thoma and DeLong and Krugman and all the rest and agree that it might not be good to raise taxes on the middle class on January 1, 2013. If I were king, I might extend the middle-class tax cuts for another two years and then let them expire.

But this “if I were king” stuff is meaningless. First of all, if I were actually king, I would still let all the tax cuts expire; then I would use the additional revenues to increase government spending. (Remember, fellow Democratic policy wonks, we usually say that spending has a higher multiplier than tax cuts.) Second, I’m not king, and neither are you. We are dealing with a Republican Party that will block any package that raises taxes on anybody. They will block any tax increase, even if it hurts them in the general elections, because they are completely locked in by the Grover pledge and the Koch brothers. The only choice we have is between extending all of the tax cuts and complete gridlock, which means that they all expire. And if we extend the Bush tax cuts, we are just four Senate seats away from making them all permanent.**

Given that choice, I vote for gridlock. I understand the counterargument: tax increases would weaken the recovery and increase unemployment in the short term. But those tax revenues are crucial to the long-term health of the middle class. Ending the Bush tax cuts will slash projected deficits and push right-wing claims about the bankruptcy of Social Security and Medicare decades into the future. Yes, conservatives will always want to privatize Social Security and dismantle Medicare, but they only have a chance of actually succeeding when government deficits make those programs seem unsustainable, bringing so-called centrists over to their side.

So, for me, letting all the tax cuts expire on December 31 is better than making them permanent. Letting them all expire is also better than making just the “middle-class” tax cuts permanent. (Another note to Democrats: since when do we push for tax cuts for families making $200,000 a year?)

There’s one more option you may say you prefer: letting the tax cuts for the rich expire, extending the middle-class tax cuts for another two years, and then letting them expire (assuming we are back to trend growth). As I said above, I don’t think this is politically feasible, given who’s in charge of the Republican Party. But if that’s what you want, that’s also what Peter Orszag wanted and Barack Obama seriously considered. So why are they the bad guys?*** (Note that I’m not defending Obama’s willingness to negotiate away Social Security and Medicare, which I do not agree with.)

In the end, I think the Bush tax cuts were one of the two most catastrophic policy decisions of this century (the other was the Iraq War). They were a terrible idea then and they are a terrible idea now. I think letting them all expire would be good for the world and for the middle class. And whether or not that makes me a “fiscal conservative,” I think it makes me a Democrat.

Notes

* See Hacker and Pierson, Off Center, pp. 49–53.

** Does anyone think Obama would veto a bill passed by both houses that locks in lower taxes?

*** You could say that Orszag wanted to implement this policy two years ago, which meant a tax increase in 2013, while you want to implement it now, which means a tax increase in 2015. I see the point, but that’s a tactical distinction, not a difference of philosophy.


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