Sunday, July 25, 2010

The last Congressional battle of the year

[Note: this is the second post of the weekend. Don't miss the first, below.

The major newspapers today announce that a new legislative battle will take place this fall--quite possibly on the eve of the Congressional elections. The issue is the tax cuts put in place by George W. Bush in 2001, 2002, and 2003, all of which, if I am not mistaken, will end this year, restoring the rates that prevailed during the Clinton Administration, when they produced the first sustained surplus since the time before the Depression. As usual, we can look at this issue from a number of revealing angles.

In retrospect the cuts were both disastrous and clearly irresponsible. The surplus in the budget was a terrible threat to Republican plans to cripple the federal government--an invitation to government to do more. The cuts and the recession eliminated it and turned the surplus into a large deficit, one that ballooned again when the defense and intelligence budgets expanded tremendously after 9/11. But the decision to make the cuts temporary showed their irresponsibility. I am not sure why the Republicans took this step. It may have been because calculations showed these cuts would produce a permanent deficit, but it may also have been designed to create a new political issue eight or nine years down the road, when a Democrat might be back in power. If so, it succeeded.

The Administration, it seems to me, faces a rather interesting decision, and it seems that it is quite likely to blow it. For once, inaction would have the best outcome. It would raise income taxes on all Americans doing well enough to pay federal income taxes--at a time when the government desperately needs the money. The highest increases would of course fall on the highest brackets--including yours truly, some of whose income is taxed at the higher rate. But the Obama Administration wants to limit the reversion to individuals making $200,000 a year or families making $250,000. That would keep my own taxes where they are--and I think that would be a big mistake.

It's a dirty secret many of us would prefer to forget, but the recession isn't bad news for people with steady employment. Prices are down and labor is cheap. If one did not invest in an extravagant mortgage and holds a well-paying job, one's standard of living has not fallen. The country needs our help to reduce the deficit--and I'm willing to give mine. But in addition, the Administration's apparent plan to seek a new law this fall may well be politically or economically catastrophic.

The reason, of course, is that any new proposal will need 60 votes in the Senate, votes the Democrats will not have. The Republican Party is bound to insist that the Bush rates be retained for everyone--and several Democrats are already hinting that they may go along. That means the Republicans will surely filibuster any proposal to simply raise rates on the highest brackets and restore the estate tax (which already included a very generous exemption before it was temporarily eliminated by Bush.) That filibuster is very likely to be successful. Having kept many incumbent Democrats in Washington when they desperately need to be in their home districts campaigning, the Republicans will claim the credit for stopping another crippling Democratic tax increase designed to give hard-working Americans' money to the unworthy.

I would like to see the Administration simply let the laws lapse, but if they insist on trying to give middle-class earners (including some pretty well-to-ones) a break, they should simply let the cuts lapse this year and introduce new legislation to change middle-class rates next year. Then the Republicans will have to propose cutting the rates of higher earners as well, and the Republicans will have to filibuster explicitly against lower rates for the middle class. In fact, I would like to see the Administration go even further and combine a small rate cut for the middle class with an increase in the top rate to, let's say, 45% of income over $1 million a year. That is the kind of hike that could begin to make an impact on Wall Street compensation practices--and it would still be only half the top rate back in the 1950s.

For 18 months the Administration has been trying to split various differences with the Republicans. It hasn't worked, either for policy or politically. It is time for a real fight. The Administration should make it at a more favorable time, and do it on its own terms. And meanwhile, it can strike a blow for a truly responsible measure in the face of a deficit crisis.


Anonymous said...

I believe that the Bush cuts were temporary because they had to be. They were passed under reconciliation, to avoid needing 60 votes in the Senate--but a consequence of this, under Senate rules, was that they had to sunset in 10 years--an eternity in Washington time. I agree that the simplest thing would be to just let this happen, and deal with it later.

lwlittle said...

I suggest you review the charts on Federal spending and Revenues before you imply tha tthe problem is entirely due to reduced tax rates.

YOu neglect to mention the rampant Fed spendign trends and the underlying causes.

Anonymous said...

Iwlittle should review the origin of the Heritage organization before suggesting we review their charts!

Dave Clark said...

I couldn't agree more, David. Good article. Let's fight!

B Popma said...

One point that many may not recall right away - There is no income tax cut that does not go to high income earners. Everybody pays the same rate on the first $8k-$16k/depending upon status. Like wise the $x dollars earned within the next tax bracket - all the same.

So it is not like low / middle income earners receive a benefit that does not go to the highest earners as well.

And yes, I would gladly accept higher taxes yesterday, today, and tomorrow for: better health, better education, better roads, better transportation options, better infrastructure, community lighting and safety, sanitation, disease control, higher productivity, better access to information and knowledge, and all the technology that makes cleaning my house easier.

Anonymous said...

Pompa, I agree however, we keep getting hit with the taxes but the better health, better education, better roads, better transportation options, better infrastructure, community lighting and safety, sanitation, disease control, higher productivity ect.... are not appearing!

B Popma said...

The fact base does not support a claim that 'we keep getting hit with taxes'. Yes, we pay taxes. But federal tax rates are at lifetime lows. Most state tax rates have not been raised, and many lowered. Property tax rates are frequently limited to amounts based on inflation.

My state schools have had annual per-pupil funding cuts for years. We have roads that can't be maintained because gas tax revenue decline.

It is not a sustainable model and has not been for some time.

Dave Clark said...

It never ceases to amaze me that just because "we" don't see the effect of our taxes from our comfy couch, we want to cut taxes instead of building a surplus. Please re-read David's article, specifically about "Republican plans." Isn't it outrageous that they would want to dismantle our government rather than have a surplus for hard times? And, only for their Party's sake and for power's sake and not for the good of the country? Dr. Kaiser has a very good perspective and grasp of what's happening. Also read George Packer's latest articles in the New Yorker on our dysfunctional Senate, that support Dr. Kaiser's read on things. The Republican and corporate attack on our government, from all sides, are not minor events in our history. I think our Democracy is swimming through very dangerous water and times and our payment will be much more dearly than a few taxes. Wake up.

Anonymous said...

Please review the actual history and context before generalizing about what caused the surplus.

In 1993, Clinton and the Democratic majority congress did pass a range of tax increases. These tax increases came at a time of expected economic growth (coming out of the relatively mild recession) and relatively low inflation (oil prices were around $20/bbl). Also, the Federal Reserve did not take any significant monetary action, despite the worry that the expected economic growth would cause inflation.

We can argue to death the "on/off" budget numbers and certainly the surpluses in trust fund accounts, especially social security, makes budget numbers appear more favorable. However, the "surpluses" did not occur until the last couple of years of Clinton's presidency.

What is overlooked is in 1997, the Republican majority congress (along with Clinton, or in spite of him depending on your source) passed a series of tax CUTs, especially on capital gains. These cuts combined with the booming gains in stock values over the decade created the environment for a significant rise in tax revenue in addition to the overall real growth in incomes. Throw into the mix that rising productivity and lowering of rates globally delayed the expected tightening of monetary policy by the Federal Reserve.

So, back to the present, the economic conditions are not conducive to raising taxes, especially given the financial environments in states and communities. Monetary policy has no where left to go except tighten.

Also, it is very easy for you to say if you have steady employment, then you have done okay in a low inflation period -- someone whose public sector salary is never going down nominally and protected for the most part even in real terms (I didn't get even a 1.5 or 2 % pay raise in this economy - just happy to keep a job). If you are happy to contribute more, then perhaps you support the Republican proposal to put a pay freeze on federal employees this year?

While property values have gone down for most, communities are slow to adjust down assessments or simply raise the tax rate to offset the lower assessments. You live in a state where teacher salaries are 150% of the state average salary and generous retirement plans, yet has some of the lowest educational performances (K-12).

Charlie said...

When will evreyone relize that this president got elected by pandering to the poor, promising them money that he can't deliver, buying their votes and catering to their woes! He can only do that once!!

Anonymous said...

The key problem with the Democrats social care programs is that there is no exit strategy as to how Welfare recipients become trained and gainfully employed. When you have generational welfare recipients it should tell you that the benevolent system of welfare is not functioning properly.
If assistance programs continue to get increased funding without having the proof of social program recipients actually getting back on their feet and supporting themselves then all you have is a benevolent form of slavery. Those on state and federal assistance have just enough to live but not enough to get ahead. They have no prospect of achieving gainful employment and as a result they cease trying and begin voting for the Democrats who tell them that the Republicans want to take away their only means of living, I would say assistance but they do nothing to provide their own provision, and this fear keeps them in poverty and at the mercy of their benevolent Democrat slave masters.
The Republican party on the other hand fails to take definitive action to correct the problem and merely takes the safe route until the public gets tired of status quo and votes in the Democrat party who in turn expand the social programs even more and gain more of a support base of social dependants.
IF the party power base could be removed then maybe representatives would be more proactive, not reactive.