Fiscal Cliff Debate: Report from the Trenches

November 10th, 2012 at 9:01 pm

I spent the whole day yesterday arguing fiscal cliff issues with conservatives, specifically, whether new revenues should be raised through higher tax rates–expiration of the upper-income Bush tax cuts–or by lowering rates and broadening the base.  Here’s my field report (btw, my wife suggested raising the top rates and broadening the base–first time I’ve heard that one):

–It is big–HUGE–for conservatives that the President has not mentioned higher rates since Tuesday, including in his comments yesterday.  His spokesperson did say that he’d veto a bill that fully extended all the cuts, but the White House has been careful not to come down on one side or the other of the rates/base question.  His opposition is quite emboldened by this.

My view: I’m not saying he should say “my way or highway” but he should clearly open negotiations with them next week with the plan he ran on: rate expiration on households above $250K (the top 2%).

–I encountered two camps of Republicans on this: dynamic scorers, full stop, and partial dynamic scorers.  The former are those who say: just lower the tax rates and watch the revenues flow in…problem painlessly solved!  They’re very, very wrong, and thankfully most of the folks I argued with yesterday are in latter camp.  In fact, this is their concession from the election: the recognition that we cannot achieve a sustainable budget path on spending cuts and dynamic scoring fairy dust alone.

–Some, though not Leader Boehner yet, are starting to make sounds about taking unearned income, like capital gains and dividends, which current enjoy favorable treatment in the tax code, off the base-broadening table.  That’s exactly what the President and his negotiating team should suspect: the bait and switch of the tax reform trap–they lure you in with broader base rhetoric but once it’s over, you’re left with just the lower rates.  That’s why I suspect this tactic leaves R’s with a mini-Romney math problem.

–They are not constrained by meeting the $1 trillion in revenues over 10 years we’d get from upper-income rate sunsets.  Sen. John Kyl, for example, on the Larry Kudlow show, cited Sen. Toomey’s budget plan as a great place to start.  That raises $250bn in new revenues, one-quarter of the top rate sunset amount.

–The President was absolutely right to begin his comments with the imperative of any deal protecting and strengthening the current recovery through additional jobs measures.  My experience from yesterday: he will not find willing partners on this among Republicans.

Yesterday, CNBC anchor Brian Sullivan made what I thought was an intuitive point that’s under-appreciated: it would be a lot simpler and cleaner to just raise the top rates than to have a battle of which loopholes to close.  The point above about taking unearned income off the table underscores Sullivan point.  Me, I’m a huge advocate for simplicity in the code.  Once they start moving around income definitions, watch out.

The counter-argument here, which I appreciate, says: OK, then let’s just cap deductions.  That’s pretty simple, clean, and progressive, but probably doesn’t yield the revenue we need without breaking the $250K barrier.  There may well come a time to break that barrier.  But this is not that time.


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20 comments in reply to "Fiscal Cliff Debate: Report from the Trenches"

  1. foosion says:

    We don’t have a deficit problem today, we have an employment and growth problem. It would be nice not to lose focus on the immediate issue.

    For the long-term issues, we can raise rates as appropriate and cut healthcare costs (not shift costs from the government to individuals). Most everything else is rounding error.

    This seems a great situation for triggers that kick in changes when, for example, for a few straight quarters we have normal GDP growth and employment.

  2. B Keane says:

    Not sure who I should give credit to for this idea but the most sensible jobs/recovery/debt reduction program I’ve heard is a phase in approach linked to the unemployment rate. Hell, you could phase deficit reduction to unemployment and GDP growth. Nate Silver could work it out but the fiscal cliff is nuts, austerity doesn’t work. We’d have a double dip recession with a vengeance. So the variables on the deficit reduction side would be Clinton era tax rates on upper incomes and Romney’s bucket of loophole reductions. Both of these variables would be phased in or out dependent on unemployment numbers and GDP. Get a number cruncher to work out the alogorithm but we need jobs now and a logical plan for deficit reduction later. The two have to be linked and in reality they are. No tax revenues without jobs and no jobs without increased demand (government spending).

  3. Merrill Goozner says:

    “. . . it would be a lot simpler and cleaner to just raise the top rates than to have a battle of which loopholes to close.”

    Though you didn’t say this explicitly, closing loopholes gives Congress and the president the room to give upper income people rate relief off the new, higher rates. You estimate the government raises $1 trillion over 10 by going back to the 39.5 percent rate for the high-end. If you treat unearned income (cap gains, dividends, carried interest, which overwhelmingly go to that group) as ordinary income, you’d raise close to a half trillion. That will allow lowering the top tax rate to 37.5 or so and still raise the same amount of revenue. Or you could reduce the preference of unearned income, and reduce the rate less. It’s a negotiation.

    The same is true for capping deductions. Yes, a low cap hits the middle class. But if you lower the rates sufficient to keep the amount of revenue raised constant, all you’ve done is shift the composition of who pays — from those with few deductions to those with lots. Romney, in the second debate, put his suggested cap at $25,000. How many people earning under $100,000 a year have that many deductions? Not many. You could raise the same amount of revenue even after lowering rates by 5% or or 10% with such a cap. The math doesn’t work for Romney’s 20% rate reduction, of course, but it could be made to work for something smaller. Such reform would benefit the lower and middle-class at the expense of the upper-middle class and rich — not a bad policy objective given the growing inequality of income across the income distribution in recent decades. It would also remove distortions in the tax code that cause the rich and upper middle class to over invest in housing.

    One final thought, a strategy that uses loophole-closing, deductions cap to lower rates could also be adjusted to allow for fewer cuts in domestic or more investment — even as you lowered rates. That’s why I think Obama should just let ALL the tax cuts expire, postpone the new withholding schedules for three months, and say to Congress: let’s get tax reform done before they go into effect.

    • Jared Bernstein says:

      Good ideas, some of which may be politically pliable. Though it would be a heavy lift to end up with higher rates relative to current policy (eg, your 37.5) and broader base. When R’s say lower rates, they don’t mean off of 39.6–they mean off of 35. I strongly agree with your strategy point in last ‘graf.

      • Fighting Armadillo says:

        Which is by way of saying that the Republicans have to find a way to save face here. But as a matter of policy, using loophole closings to reduce the size of the rate hike on incomes over $250k (but not reduce it to zero) seems like a very good suggestion.

  4. readerOfTeaLeaves says:

    Ending Bush’s tax rates for those over $250,000 was part of the Democratic agenda. Anyone who says otherwise is smoking wayyyy too much of what we just legalized in Washington state.

    As for Sen John Kyl, since when did he garner 303 electoral votes?!
    A few facts regarding John Kyl:
    — his state has only 11 electoral votes,
    — his state has the 33rd largest population, so he’s not representing a national majority opinion by any stretch of the imagination, and
    — his party just lost 5 Senate seats.
    If people were enamored of John Kyl and the GOP’s tax policies, then the Senate GOP would have picked up seats. They didn’t.

    Unearned income – cap gains and dividends – has been coddled in the tax code. Now that the GOP has fewer votes, particularly in the Senate, they’ll probably try to use a bait-and-switch to get cap gains and dividends ‘off the table’. What else can they do, given their diminished political clout? It’s a sign of desperation. I intend to relish the spectacle and put extra butter on my popcorn.

    The GOP economic assumptions have now been repudiated by a majority of voters.

    This is a time of incredible opportunity, but the GOP appears to be so fixated on protecting economic rents that they don’t seem to see the potential upsides. I actually find that a bit baffling.

  5. Sue says:

    Two points:

    1. I wish the President would point out that the “middle-class” tax cut that he is currently urging Boehner and R’s to pass is actually also a pretty significant tax cut for those in the upper income brackets, i.e., it’s a tax cut on all of their income that is below $250,000.

    2. I REALLY hope the President doesn’t cave on restoring the taxes on unearned income, which are absurd. I currently receive most of my income from dividends (from inherited stock) so that my taxes dropped from $113,000 to $54,000 in 2003. I run a non-profit, but I wouldn’t have to, and it’s ridiculous that I only pay 15% on what I consider free money. If we’re going to have the double-taxation argument, then get rid of the tax on the corporate side, but individuals really need to pay taxes based on the AMOUNT of money they receive, not the kind of money it is!!

  6. Rima Regas says:

    It’s time for Nancy Pelosi to start poaching from the few GOP members who are not extreme right-wing and are from more moderate districts. If she can get close to half, it means all GOP members would have to be present for every single vote. That alone is worth it.

    Then, the DNC needs to go on a full-scale grassroots campaign to get people calling, emailing, and faxing House members.

    The President does need to say I won, repeatedly.

    Boehner is now playing the same game Romney did during the election, saying one thing in public appearances and then taking it back via Twitter. The famous line from Michael Specter’s book, The Climate Fixers, applies: “Fool me once, shame on you. Fool me twice, shame on me.”

    As for what should be done? Everything. Raise taxes some on the middle-class. We all want better value and better value (healthcare) costs. We don’t want to break the social contract and, for as long as there is high unemployment and more poverty, it will keep costing. At the same time, there should be a demand to reinstate benefits to the 99ers. These people have zero help now and it’s unconscionable. Raise taxes on the rich. Close all the loopholes. Write new legislation that will make it a losing proposition to move a business overseas or sell products overseas when x percentage of its components are 100% made and assembled overseas. Make it costly to keep your money overseas. I am sure there is more. Write special legislation to fix the North East in the wake of Sandy. Make it big and tie it to employing people who have been unemployed the longest, first. Fix roads and bridges…

    There is a lot that we can do.

    But the first thing is to push the GOP all the way back. They either think they have the mandate or think they can get away with appearing to think they won the mandate. Either way, they have no mandate. The left needs strict parliamentary discipline and a lot more aggressiveness this time around.

  7. Mark Thomson says:

    Jared, I think you do your argument a disservice when you talk about cap gains and dividends as “unearned”. Try explaining that to the person who builds a business or who sacrifices near term consumption to save for a better retirement.

    Of course, investment income is *different* from wage and salary income, and there is a perfectly legitimate debate to be had about how these things should be taxed, and room for differences of opinion. But calling income “unearned” strikes me as a device designed to *frame* the debate, not as a way to encourage the issue to be debated on its merits.

    • Jared Bernstein says:

      Fair point. ‘Investment income’ is more neutral.

      • wkj says:

        But isn’t effective framing a basic tool in persuasion? The R’s talk endlessly about “death taxes,” “job creators”, “job killing tax hikes, etc. Why to the D’s have to play nice?

        • Fighting Armadillo says:

          Tempting not to. But at the end of the day, we’re going to have to strike some kind of a bargain. Calling them all demons won’t make that any easier.

  8. Auros says:

    Jared, I don’t suppose I could persuade you to promote a petition to the White House to pledge to neutralize the debt ceiling debate by promising to bridge any period that Congress can’t raise the ceiling using coin seignorage?

  9. Greg says:

    Do you suppose that John Boehner’s preference for “tax reform” over tax rate increases is a veiled indication that the Republicans are willing to consider changing the rules regarding the carried interest deduction? This is the deduction that allows hedge fund managers to pretend that their income from running their funds is not salary or consulting fees, but investment income? I have not seen any analysis that values the relative cost of this perk for the masters of the universe, one that allows them to pay a much smaller rate than their secretaries. If the CBO or some other non-partisan group has valued the cost of this rule, it should be made part of the discussion. The administration’s budget has proposed eliminating this perk for 4 years. says the administration values the elimination of this break as $14.8 billion through 2021. You probably have a top-five list of tax policy changes that could be included with carried interest and the total value associated with them. Let’s get them to be part of the discussion.
    Wouldn’t it be great if there could be a bi-partisan agreement to throw hedge fund managers under the deficit bus?

    • jayackroyd says:

      No. That’s not what that means. The real problem Boehner faces is that his caucus includes people who have been brought up to actually believe in voodoo economics. They are going to be especially unwilling to tax any kind of capital gain as normal income because they really seem to believe that you can raise tax revenue by cutting rates, ESPECIALLY rates to return on capital. This is obviously, provably false to fact, but it is a core value of the post Reagan Republican belief system.

  10. jayackroyd says:

    “Cap deductions” sounds good, but wtf does that mean? There’s a line on the instructions that says “Enter the lesser of your total deductions or 25000 on Schedule A”? Does anyone really think that’s a serious proposal?

  11. Bill Gatliff says:

    Could someone explain to me why the fact that investments make money while you sleep isn’t reward enough? Why do we have to double up on the benefit by taxing investment returns at such low, unsustainable rates?

    Low capital gains tax rates definitely sweeten the total investment package, but do higher taxes really DISCOURAGE investment? I wonder if the guys that came up with the idea are the same ones that created the trickle-down voodoo.

  12. Fighting Armadillo says:

    I’d love to see the Democrats come up with a tax plan that is simpler than anything the Republicans have ever put forward, but is rigorously progressive. Treat ever dollar of income as equal, regardless of source (wages, investment income, social security). Eliminate all deductions and credits, except for one very large deduction for every taxpayer. Eliminate the separate payroll tax, which has been a scam to convince people that there really is some separate trust fund from which their medical and retirement benefits will be paid, rather than simply “the public treasury.” Add in a carbon tax so that the entire brunt of the elimination of payroll taxes is not reflected in income tax rates. At least then, everyone would know what everyone paid. Effective tax rates would be progressive — very progressive, if the single large tax deduction was big enough. If we could have that system, I’d even be willing to let go of the corporate tax. It’s generally more trouble than it’s worth.

  13. KTM says:

    This is tiny compared to the tortured way that Democrats forced CBO to score ObamaCare so that money could be spent twice in the budget.

    CBO used their archaic accounting practices to say that $716 billion of Medicare Advantage savings could both offset massive new spending on subsidies AND be counted toward the Medicare trust fund to extend its solvency.

    If you can spend one pot of money multiple times, accounting becomes meaningless.