The President Nails It on Taxes (except for one itty-bitty part…)

July 10th, 2012 at 7:24 am

I understand that politics trumps policy right now, such that targeting your opponent looks more important than targeting, say, the economy.  But you might think that when there’s a large tax cut on the table targeted at the bottom 98% of households, partisans would be able to agree.

Of course, you’d be wrong.

Some background:  think of the Bush tax cuts — isn’t it a bit strange that we’re still tussling about these tax cuts enacted a decade ago? — in two pieces:  the upper income part that affect households above $250K, and the rest, typically called the middle-class part.  The full set expires at the end of this year.  No one wants the middle-class part to expire and the R’s want to extend them all.

Some numbers:  extending the middle-class part for one year costs $150 billion — the President said yesterday that if they expire, taxes for middle-income families will go up $2,200 next year.  The price tag for extending the whole package next year is $210 billion, so the upper-income part alone is $60 billion for one year.  The ten year numbers are: $3.3 trillion for the whole package, and about $2.5t for the middle-class part.

Why not just extend them all?  Because we simply won’t achieve a sustainable fiscal outlook without new revenues in the mix, and the right place to start, both in terms of fairness and economics, is the top of the income scale.  The upper-income cuts return $850 billion over 10 years to the Treasury, simply by reverting to the top rates under Clinton, when the wealthy fared perfectly well, the budget balanced, and growth was much stronger and more broadly shared than in the Bush years.

The fact that these upper-income increases hit only the top 2% of households and top 3% of small businesses is also important.  They won’t hurt the wobbly recovery, as these folks are not income constrained in the first place.  I don’t expect them to like one bit that their after-tax incomes will be a bit lower under this plan, but the history of such tax changes suggests they’ll continue to work, spend, and save in much the same way they would anyway, so I don’t expect any macroeconomic impact.

Why not just let them all expire?  Because a tax increase to all federal income-tax paying households is both economically worrisome — it would create too much fiscal drag right now — and too much to ask of middle- and upper-middle income families whose incomes were largely stagnant in the 2000s, fell sharply in the recession, and, unlike those at the top of the scale, still don’t have much to show for the recovery.

There may well come a time when taxes need to rise below this artificial line in the sand of $250,000, but it isn’t now.

I know the odds of reasonable action here are non-existent, but it would be incredibly refreshingly for policy makers to say, “hey, we all go on about all the uncertainty created by the looming tax expirations.  Since we agree on 98% of them, let’s extend the middle-class part for a year and keep fighting over the rest.”

Finally, if the Pres is being so reasonable here, what’s the itty-bit part with which I disagree?  It’s this, from his remarks on this yesterday:

“[Once we extend the middle-class part]…then next year, once the election is over, things have calmed down a little bit, based on what the American people have said and how they’ve spoken during that election, we’ll be in a good position to decide how to reform our entire tax code in a simple way that lowers rates and helps our economy grow, and brings down our deficit…”

This is too close to the tax reform trap for my comfort, where you start by agreeing on lower rates and then move on to base broadeners to make up the revenues you lose from lower rates.  The risk, of course, is that you get a lot more of the former (lower rates) than the latter (broader base) and we’re back in the same soup we’re in now.

Also, the logic here is that we’ll raise rates now (on folks above $250K) and lower them next year — which isn’t exactly the distant future.  I don’t think it’s good for households, businesses, and economic stability to go tweaking tax rates up and down with that kind of frequency.  Let’s set them where they need to be, using the Clinton rates as a good template, and leave ‘em there.


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3 comments in reply to "The President Nails It on Taxes (except for one itty-bitty part…)"

  1. jo6pac says:

    When does to 2% FICA break end? When it does it seems to me the little people lose again.