Wherein I Land on Planet Money

November 14th, 2011 at 11:27 am

The Planet Money folks have posted a piece I wrote on whether we’ll ultimately need to tax households below the $250K line-in-the-sand set by the Obama administration.  It’s a two part answer: 1) ultimately yes, but as long as the middle class is getting clobbered on their pretax income, especially relative to the high-end households, we should hold off for a while, and 2) the President’s recent budget recommendation actually achieves temporary stability without taxing the middle.

I’m afraid it’s become a sign of how tough you are—a kind of budget machismo—to say you’re willing to go after the middle class on taxes. 

As I note in the piece:

To hit those families with a tax increase while the economy remains weak strikes me as what a football referee would call “unnecessary roughness.” For many of these families, economic growth has largely been a spectator sport, as whatever prosperity this economy has achieved has done an end run around them on its way to the top 1 percent. (Ok, enough with the sports analogies!)

But it’s the second point above that’s not as well known or understood as it should be.  Back in September, President Obama introduced a pretty balanced, progressive budget as his recommendation for the supercommittee, one that cuts the deficit by about $4 trillion over ten years. 

The thing is, the budget achieves sustainability, at least temporarily, as measured by stabilizing the ratio of government debt to GDP within the 10-year budget window, as shown in the figure below from this piece by my CBPP colleague Jim Horney.  And it does so while sticking to the administration’s policy re protecting the broad middle.

Like I said, in order to collect the revenues we need for an amply funded, sustainable government sector, we’ll need to raise more revenues from more families.  And, of course, as I stress in the piece, if we don’t control the growth of health care spending, we’re toast no matter how tough we want to get on the middle.

In that sense, the current hand wringing about the administration’s pledge feels like a distraction…especially given that we could achieve medium term sustainability without going there.

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8 comments in reply to "Wherein I Land on Planet Money"

  1. Nylund says:

    “I’m afraid it’s become a sign of how tough you are—a kind of budget machismo—to say you’re willing to go after the middle class on taxes.”

    That does seem to be the case. In fact, I’d suggest it spreads even lower than the middle class with ideas to cut benefits for those on Medicaid, unemployment insurance, etc. What’s odd though is that one still has to suffer through a barrage of “class warfare!” screams if one suggests something similar for those above the $250k line (or even the $1 million line). The “reasonable center” (think David Brooks, etc.) have a major fetish for “shared sacrifice” (ie, cut benefits, and/or raise taxes on the middle class and working class) but still get all bent up out of shape when one suggests that such sacrifices should also be shared by companies making record profits or individuals taking home record bonuses. In fact, it seems like the “sacrifices” people are asking them to take include more tax cuts and more tax exemptions. They’re the job creators after all.

    I can’t help but get the feeling that whatever “compromise” the parties can come up with won’t be anything that helps the long-term budget problems. It’ll just be something that finds a way to get the middle and lower class to accept less so that those at the top can get even more. For every dollar saved by cutting Medicare, Medicaid, etc. there will be another dollar given to pay for the continued low rates on capital gains, corporate tax exemptions, etc. The net effect on the overall budget scenario will be nil.

  2. Tyler says:

    Middle-class taxes should not be raised until the unemployment rate falls under four percent. That’s another way of saying taxes should never be raised on the middle class.

  3. Tom Shire says:

    I agree with you and President Obama, Jared, about the middle class getting squeezed over the last few decades as opposed to the top earners who have been benefiting so much from outsourcing and excessive compensation packages.

    But merely stabilizing the debt-to-GDP ratio is inadequate in my humble opinion. We have been fighting two unfounded wars, with no one but our professional military class making any sacrifices. That’s wrong. It undermines our social contract.

    We all need to have skin in the game, and Clinton-era tax rates are a good starting point. Of course, we could phase in the Clinton rates over time.

    We could also create a carbon tax that initially would be rebated to the middle/lower classes, with the rebate gradually phased out in order to pay off our debt. I’d also like to see higher taxes on super-high incomes in order to discourage the kind of inequality we’ve seen increasing over the last few decades.

    Perhaps some combination of all of the above would be good. But putting the entire burden of war on a sliver of the population is wrong. And merely stabilizing our debt level as a percentage of GDP means a steady increase in borrowing as the economy grows. That is unsustainable and simply not good enough.

  4. Procopius Furioso says:

    I really wish I could find out why President Obama keeps coming back to the myth about the government budget being just like the family budget so that we have to cut the deficit now now now, and even more how he has been persuaded that we absolutely must cut Social Security. He has apparently had an obsession with cutting Social Security since before his inauguration, but it is not supported by any data I have been able to find. Social Security may (is projected to) have a shortfall 25 years from now, if the economy does not grow more than the worst case scenario examined by the trustees, but there are alternatives to cutting benefits. At worst the shortfall is not large, but President Obama seems to be fixated on only cuts, and he seems to want them very badly, so much so that he keeps pushing the Democratic leadership to demand them. Is it possible that his strategy is to protect Social Security by calling for cuts because he knows that the Republicans will not tolerate any move that he approves of?

  5. Jim says:

    What sense can it mean to say we need to raise revenue when we have massive unemployment and under-utilization of resources? Surely with just a little thought it becomes obvious this is not a “real” necessity but one that makes sense only in the hall of mirror universe of “financial orthodoxy”. It’s sad that so many center-left economists are so stuck on the artificial world and refuse to enter the real. How can austerity ever be justified when we have such great productive power and there’s so many unused resources?

    The US government as the sole producer of the dollar can create as much as it needs. It would not be inflationary as it would simply bring online unused potential. “Resources” aren’t dollars, they’re society’s productive capacity. To talk of increasing taxes or reducing living standards is an outrageous position when we’re so far from fully using our available real resources.


  6. perplexed says:

    If progressives don’t stop the proliferation of these myths, who will? Why is it that no one exposes the embedded assumptions in these memes that work to increase income and wealth concentration and have destroyed our “land of opportunity” sentenced our children and grandchildren (at least) to live in a county of drastic inequality of income, wealth, and power, and undermined our ability to invest in their future? Are these things no longer important enough to strive for to even explain how the arguments that support these destructive policies work to deceive people?

    One can only begin to accept this nonsense if you first accept the following “truths” that they are supported on:

    1. Taxing the wealthy won’t solve our problems because the wealthy really aren’t wealthy enough to do that. John Boehner said this again on “This Week” with Chrisiana Amonpour and she said nothing to counter it. Does she not know that the wealthiest 5% of the country have more the 2/3’s of the wealth of the entire country, that this wealth is in excess of $40 trillion, enough to pay off the entire national debt almost three times! Has no one told her this fact or has supporting this deception that Boehner promotes now entered the realm “quality journalism?” Our press has failed us so miserably that we need to do something to improve it. Maybe we need to establish steep fines for “news show” using the “public” airways to promote deceptions that can be shown to be false with a reasonable amount of checking. Everyone has a right to free speech but why does this necessarily imply a right to use public airways to present obviously false statements as “truths” in a “news show.” We need some standards that can at least help to separate the propaganda from what we know to be objectively false. If its just entertainment and carries no standards, maybe you shouldn’t be allowed to present it as “news.” Who pays the price of our accepting of this false “truth” as fact?

    2. We can’t tax wealth and estates. Adamson’s article is presented by NPR as support that the “only way to fix the economy is to squeeze the middle class” as if the article is a comprehensive discussion of “all” of the ways to “fix the economy” without ever mentioning wealth and estate taxes or any other of a myriad of other ways to “fix the economy” that wealthy oligarchs would prefer we not discuss? Thoma and Baker http://economistsview.typepad.com/economistsview/2011/11/does-the-middle-class-have-to-take-the-hit.html suggest a number of alternatives that Adamson never touches on in his “comprehensive” review of “our” “only options.” Many of these options that seemed to never occurred to Adamson would go a long way towards “fixing the economy.” Combined with wealth and estate taxes, these might even succeed in time for our children to have better lives than they are likely have if current discussions continue to drive out realistic solutions. In a sense he’s right: if we won’t discuss any of the alternatives that don’t protect the income and wealth of the oligarchs, we have very few options other than impoverishing more of the “lower” classes. Again, who pays the price of our accepting of this false “truth” as fact?

    3. That we need to further subsidize a form of legal structure that is itself a form of public welfare for the wealthy. Operating as a corporation only allows the wealthy to transfer risk to the public with “limited liability” that prevent them exposing their tremendous wealth to damages that their corporate “persons” cause to the public at large. Why does no one discuss that the only reason we are forced into this false choice is that we supported the wealth concentration that is most protected by this public welfare to begin with. Let’s instead talk about why it is that the only investment that we need is that which is supported by a form a public insurance, and that a public with a wealth Gini of .84 can no longer afford to provide this free insurance to its wealthy aristocrats. Maybe we should be discussing how much we need to raise corporate taxes to offset the costs of this free public insurance and increase the incentives to real “investors and entrepreneurs” that aren’t dependent on this free public subsidy. Again, who pays the price of our accepting of this false “truth” as fact?

    4. That taxing revenue is the same thing as taxing income. These “tax rates” are usually discussed as if they are applied to similar things without mention of the fact that corporations and businesses are taxed on “income” after deduction of expenses (including lots of “expenses” that have little or nothing to do with generating that income) while individual are taxed on “revenue”? (Unless someone wants to argue that the standard deduction accounts for the “expenses” of supporting a family of the respective size they apply to; if so, its time for a similar “standard deduction” for business. That should raise all the revenue we’d need.) Again, who pays the price of our accepting of this false “truth” as fact?

    Let’s start demanding plans that solve the country’s wealth and income concentration problems in addition to its deficits. Many of the solutions to all of these problems have a significant amount of overlap. Excluding them from the discussions only promotes the deception and delays the implementation of the solutions to the benefit of the wealthy; its why they promote it. Its probably better to say nothing at all than to support their strategies by accepting the deceptive premises their arguments are built on.