Tax Cut Compromise and Political Ratchets
If I had my way we would have just scrapped our currently inefficient tax system and started from scratch, but given the time to reach a deal this compromise between the White House and Republicans seems to have enough positive features to support. David Leonhardt correctly views this tax cut plan as an imperfect but necessary stimulus package.
Mr. Obama effectively traded tax cuts for the affluent, which Republicans were demanding, for a second stimulus bill that seemed improbable a few weeks ago. Mr. Obama yielded to Republicans on extending the high-end Bush tax cuts and on cutting the estate tax below its scheduled level. In exchange, Republicans agreed to extend unemployment benefits, cut payroll taxes and business taxes, and extend a grab bag of tax credits for college tuition and other items.
For the White House, the deal represents a clear shift in policy focus. Mr. Obama and Democrats spent much of the last year pursuing long-term goals like a health care overhaul and financial regulation, while hoping the economic recovery would continue. But with the recovery faltering and Republicans retaking the House, the administration is turning back to short-term job creation.
No, it doesn’t include spending projects such as a high-speed rail system or anything else but with those clearly off the political reality table, stimulus through tax cuts and credits was the best possible scenario for fixing our short term unemployment woes.
Many Democrats and those on the Left are upset at the President for giving so much to the GOP and to the wealthiest; I don’t share their anger since I don’t desire rich people to have to spend more money in taxes. Yet, I still have concerns. First, Paul Krugman is probably right about some of the “front-loading” problems with this.
Now we have unemployment insurance and payroll tax cuts for 2011, going away in 2012 — just in time to put the administration in big trouble as the election looms.
It’s not the political problem for me so much as the assumption that this will lead to a self-sustaining recovery. Additionally, this bill gives tax cuts to everyone (especially rich people) so costs a lot of money and is going to add to our deficit. As I’ve argued before, this is a medium to long term problem, but it is still a problem. I hope another good compromise can be reached on dealing with our long-term budget but this tax compromise adds some obstacles.
The compromise doesn’t cost as much as it could because many of the cuts are again temporary. But “temporary” tax cuts often act like ratchets. It is very difficult to allow taxes to rise once they’re lowered, which is exactly the reason why this debate over the Bush tax cuts are taking place right now and why Bruce Bartlett previously worried about a payroll tax holiday as a temporary form a stimulus.
My point is that if allowing the Bush tax cuts to expire is the biggest tax increase in history, one that Republicans claim would decimate a still-fragile economy, then surely expiration of a payroll tax holiday would also constitute a massive tax increase on the working people of America. And what are the odds that the economy won’t still be fragile a year from now? Zero, I would say.
He’s right of course, but Bruce being a bigger fiscal conservative than I am places more emphasis on the long-term budgetary impact than on the short-term relief and stimulus the tax cut will provide. We should not ignore that concern however. Just look at the top marginal tax rate through recent history and it becomes obvious that even raising taxes on the richest among us is difficult.
Coupled with that we have the dueling and more consistent ratchet of spending.
Only economic growth can do much to keep these forces from pulling everything apart. Eventually though it is not going to be enough and spending must be cut and taxes must rise. So let’s pass this compromise and start working on the next one.