Schumer Avoids Tax Trap; The Payroll Tax Cut in Trouble; Pernicious Politics

October 10th, 2012 at 12:46 am

Here it is the afternoon and I’m just getting around to some articles and blogs for your attention.

Senator Avoids Trap: First, Senator Chuck Schumer, to his great credit, understands the tax reform trap.  Here at OTE, we’re always warning folks to be aware that when politicians talk about a “grand bargain” on taxes that lowers the rates and broadens the base, you’ve got to be extremely vigilant about not getting stuck with a lot of the former and a little of the latter.

“Rate cuts” sound good to everyone and “base broadening” sounds harmless enough.  But the way these debates go, your loophole is my prized “job-creating investment incentive.”  Just ask candidate Romney, who’s very specific about those rate cuts—20% across the board!—but completely silent on the base broadeners.

So I was happy to see Sen Schumer say this about that:

“If upfront rate cuts are the starting point for negotiations on tax reform, it will box us in on what else we can achieve. Certain conservatives will pocket the rate reductions and never follow through on finding enough revenue elsewhere in the code to reduce the deficit. Or, if they do, it will almost certainly come out of the pockets of middle-income earners.”

An Economist I Like Denounces Austerity Measure: Jan Hatzius is the chief economist at Goldman Sachs.  That may alienate some readers but in his case, it should not.  He’s someone who understands the economy’s moving parts as well as anyone and he’s just as unhappy as I am about the persistent slack in the economy.

As Matt Yglesias notes here, Jan doesn’t get why both parties are so ready and willing to allow the payroll tax cut to expire at the end of this year when unemployment is still so elevated.  That 2% cut to take home pay that aggregates up to $120 billion, contributing to precisely the fiscal contraction you see in the second figure in this post (see the black parts of the bars).

I know that some people worry that this tax cut diverts money from the Social Security trust fund, and in doing so, provides great comfort to those who would destroy social insurance, and does so in the name of progressive, Keynesian stimulus, which is pretty diabolical, actually.  I hear them and understand their concern—I know how much the enemies of Social Security would love to weaken the trust fund.

But the law specifies that any and all diverted dollars must be replenished by general revenues.  A few months back I even identified the ledger within the government accounts that specifies the transfers, and they were, in fact, being made in accordance with the law.

Why is no one fighting to preserve this important stimulus right now?  I’m not sure but I wonder if part of the reason, and not an unreasonable part, is that little evidence has been brought to bear showing its impact.  The results that Hatzius and others, including myself, tout are based on plugging the stimulus into economic models that map the extra pay onto growth and jobs, but it might help to have some empirical evidence about the actual impact of the cut (I know…there I go again thinking that facts matter).

The problem in working up such evidence is statistical…the payroll tax cut went to so many people that it’s hard to think of a control group against which to gauge its impact.  One idea to use the fact that some state and local workers don’t get Social Security benefits so don’t pay into the system and thus didn’t benefit from the cut.  If there are geographical areas where a lot of those folks live, that might be a useful source of variation.

What to Make of Mitt’s Pivot: I liked Jon Cohn’s take on Gov Romney’s etch-a-sketch moment, and Jon’s cataloging of Mitt’s flips and flops is useful.  I’d like to add another dimension.

I’m constantly struck and always struggling with the implications of what I view as a large and serious problem here.  At least since Reagan ran against government, too many people are ready and willing to believe that most politicians are liars who will say whatever it takes to win and that government is a corrupt institution that just doles out the goodies to the privileged who’ve bribed their way in, with said goodies coming from the middle class.

A deeply obfuscating performance, like Mitt’s the other night, very much feeds into that narrative.  Jon and I and others are left to try to straighten things out the next day, but by then, it’s onto the playoffs or something.

Moreover, this dynamic is just a cousin of the even more noxious one I’m always going on about around here: the conservative politicians who run for office on a platform that “government is broken” and then, when they get elected, makes sure it stays broken.

Again, what’s so pernicious about these dynamics is that they create a negative feedback loop, and the damage done by that loop is not random: it hurts those of us who believe facts matter and that government must play a significant role in advanced economies, and conversely, it helps the YOYOs.

All of which is to say, we’ve got a lot of work to do to get our butts back on the path of enlightenment.

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5 comments in reply to "Schumer Avoids Tax Trap; The Payroll Tax Cut in Trouble; Pernicious Politics"

  1. Figs says:

    I’ve never really understand the “lower the rates, broaden the base” idea, especially in the context of revenue neutrality. Is the idea that collecting the same amount of revenue in this different way (assuming that revenue neutrality is achieved) would be somehow more optimal and foster more growth? What is the theory that says our current level of revenue is optimal and must be maintained where it is?


  2. Nick Batzdorf says:

    Hear, hear.

    My hero Jared Diamond has a lot to say about WITT from an anthropological perspective.

    (How ironic that Romney chose him of all people to misunderstand. http://www.nytimes.com/2012/08/02/opinion/mitt-romneys-search-for-simple-answers.html)


  3. no_body says:

    We should replace the payroll tax with a VAT or National Sales Tax except for 4% paid by the employee. This would leave the progressive\insurance nature of the tax intact, broaden the base and move the employer’s contribution to point of sale. Which in effect would lower the cost of US goods and services and raise them on imports, robots and productivity.

    The other 4% the employee could use to opt into a state pension much like an annuity. This would be run through the creation of a State bank like North Dakota has. The bank then invests anti-cyclical to the business cycle and
    instate before sending the funds to Wall Street. The goal would be to invest in entities that would pay a usage fee so it could later be sold to the private sector or made into a public utility.

    Allowing ALL a state’s citizens to opt in would broaden the base and fix the current demographic issues. This would be a one-time fix to many pension plans and would begin the process of moving pensions off the bargaining table and into the hands of a public-sector banker.


  4. PeonInChief says:

    “Base-broadening” is extending income taxes to those who do not pay them now. The problem with that is easy to see if you look at the people who don’t pay federal income tax: the elderly, people with children and relatively low incomes, people with incomes so low that the standard deduction and exemptions eliminate tax obligations. Gee, let’s go after those people who are supporting a family of four on $27,500! What we really need to learn from this is that there are families of four out there trying to make it on $27K a year.

    Perhaps we should do an educational on computing taxes. People seem to have real trouble doing the arithmetic.


  5. John Beatty says:

    One additional point: imagine that you work for the government and meet with the public frequently. If all you hear on the news and in blogs is “government doesn’t work” and “gov’t employees are overpaid,” what’s your attitude likely to be when interacting with the public? What you end up with is a negative feedback loop, just as you do when politicians run on “gov’t doesn’t work” and then under= or defund it when elected.


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