Ahh, Thanksgiving…the turkey, the trimmings, the pies, the family…including those brothers-in-law, uncles, and other friendly antagonists who sputter out worn out arguments along with bits of corn-bread stuffing.
So, in the holiday spirit, let us pray prep for the expected onslaught.
[Updates: Since we're-in-this-together, I've pasted in some tasty side dishes from comments about shenanigans at their tables and what to do about them.]
Even my 13 year-old just asked me about the fiscal cliff, so let’s start there. Like I’ve said before, expect to get a big dose of “Sure, you won. Now here are my demands!”
“OK, somehow your guy won. But how could he possibly want to raise taxes! That’s just going to tank the economy and kill small businesses.”
You’ll want to start out with some context here: “Hold on, bro—remember we’re only talking about the top two percent of taxpayers and top three percent of small businesses. And re the latter, we’re definitely not talking about the corner shop—we’re talkin’ the corner office in the hedge funds, law firms, high-end medical practices–folks that have been makin’ a killing lately (knowing glance as heads nod around the table).”
Quickly now, before he can come back at you: “But you’ve got a point, dude. We all know this economy ain’t exactly great yet, so you’re right to wonder if this is a good time for any tax increase at all. And here I can assure you: don’t worry.”
You veer from instructive to annoying in these settings if you start citing CBO, but you should know there’s authoritative research to substantiate this point. Still, it’s probably just as effective to remind folks that we’re just talking about the upper income tax rate structure that prevailed in the Bill Clinton years—can’t lose when you invoke the big dog (well, maybe prudish old Aunt Glady’s might wince at the name)—the last time we had a truly strong economy that lifted low and middle incomes and moved the federal budget into surplus.
Finish up by reminding the rest of the folks around the table—likely to be sympathetic to this point—that really, with so much of the economy’s growth accruing to the folks at the very top of the income scale, along with the clear need to start to get our budget back in line, it makes sense to ask the “folks on the hill” to kick in a bit more.
“We can’t just keep giving poor people more and more stuff. At some point, we’ll all just be working to support welfare and food stamps.”
I recommend putting down that drumstick and employing the old “stroke and kick” here.
“I know it seems that way, what with all the unemployment benefits and food stamps. There’s no question a lot folks have been facing hard times (not subtle shift towards agreeing with Uncle Righty but introducing concept of safety net). But that kind of stuff always goes up in recessions. I mean, you can’t blame people for working when there’s not enough work.”
[If he spouts “there’s tons of jobs out there if only people would take ‘em” then you need to point out that the unemployment rate has been highly elevated since 2008.]
So the question is has there been an increase in spending on low-income programs over time.
And the answer is that, excepting health spending—Medicaid—and recessions, spending on low-income programs has been about 1.5% of GDP forever (see figure here). And the increase in health care spending is a) an economy-wide problem, not unique to low-income programs, b) actually happening less quickly in the public sector programs (Medicare, Medicaid) than in the private sector, and c) not exactly “welfare” implying layabouts on the dole. In fact, over time programs for the poor have solidly shifted towards a work orientation, like the Earned Income Credit, a wage subsidy for low-wage workers and Ronnie Reagan’s favorite anti-poverty program! (Be careful he doesn’t choke on a giblet when you hit with this last bit.)
“Don’t you get it!? Our debts are in the trillions! What kind of family could run their affairs like that? Certainly not this one or any other responsible family I know of.”
Oooh…careful here. She’s comin’ right attcha with the homespun aphorism about government needing to tighten its belt just like everyone else—this framing is likely to get a lot of heads nodding around the table. It sounds right…but it’s way wrong. So you’d better start by getting on their page.
“That makes a lot of sense, Auntie Teabag, and I’m with you 100% that when the economy is back on track and people’s paychecks are rising again, the government needs to tighten its belt, just like you said, and start getting rid of those deficits. But the problem is this: if everyone’s tightening their belt at the same time, the economy will do much worse, people will be stuck without jobs and with no help at all.”
In fact, it’s really the opposite of where Auntie is: when families tighten, the government needs to expand. And if that means a larger budget deficit that’s okay, as long—and folks might like this point—as it’s temporary. I can’t stress this last point enough. (It doesn’t help you here that politicians of all stripes, including the President, recite this damaging mantra.)
“You know what really hurts our deficits, Auntie? Not stuff like the Recovery Act—an $800 billion belt loosener by the feds. That’s over now—after adding millions of jobs and helping a lot of families do a little better over the downturn—and its and contributing absolutely nothing to the increase in the debt. It’s the stuff that keeps going but isn’t paid for, like those Bush tax cuts!”
You win this argument not by denying the government ever needs to tighten its belt but by stressing the dynamics that have been understood by economists since Keynes (though many are trying hard to forget them today): fiscal policy loosens when the private economy is slack and tightens when it’s strong.
OTEers: feel free to submit others and I’ll see if I can get to them between courses!
1) “You should be prepared for the “I can’t earn more or I will jump into a higher bracket” issue. If the 39.6% rate is restored, it will only apply to the amount of any taxable income IN EXCESS of $250,000. A common belief seems to be that once someone’s taxable income gets to $250,000.01, the higher rate would apply to ALL of their taxable income down to the first dollar. That fallacy seems to be the only explanation for the zany statements attributed to the Vienna, VA. chiropractor in the Nov 19 NYT.”
[JB: great point that's often misunderstood. One interesting wrinkle here though. Suppose we went with Gov Romney's idea of capping deductions at a fixed amount, like $25K, instead of raising rates. Well, there you really would have a problem as a family with AGI of $249K could deduct as much as they do now while a family at $251K could take a big hit. So you'd have to phase it in which means you'd be short the revenue you'd get from the upper-income rate expirations.]
2) “It’s interesting how easy it is to get confused between “revenues” and “profits.” My cousin, who is a moderate and pretty smart, was convinced that $250,000 wasn’t much for a small business. He didn’t know that revenue that pays for expenses is not taxed, and that it’s actually profits/income that are taxed. I wouldn’t be surprised if this unclear distinction b/w revenues and profits is the source of the “high tax rates hit small businesses” trope.”