Bush Tax Cut Extension Near

Republican maneuvering to extend the Bush tax cuts for all Americans appears about to pay off.

Senate Republicans have signaled that they are prepared to stop most any legislation during the lame duck session unless Democrats cave in and extend the Bush tax cuts.  It appears that they’re about to get their wish.

White House officials and Congressional Republicans said Sunday they were closing in on a deal to temporarily continue the Bush-era tax cuts at all income levels, while bitterly frustrated Democratic Congressional leaders began exploring whether they would have the votes for such a package.

[…]

Rather than extending the tax rates only on income described by Democrats as middle class — up to $250,000 a year for couples and $200,000 for individuals — the deal would also keep the rates for higher earners, probably for two years. In return, Republicans said they would probably agree to extend jobless aid for the long-term unemployed.

Senior Democrats on Sunday said that they were resigned to defeat in the highly charged tax debate, and they voiced dismay.

Democrats aren’t happy, of course, but this was inevitable. Republicans have enough votes to force concessions or play out the string until the new Congress is seated a month from now, at which time they’ll have a majority in the House and half a dozen additional seats in the Senate.

Paul Krugman, for one, thinks the Democrats ought not go along.

hile raising taxes when unemployment is high is a bad thing, there are worse things. And a cold, hard look at the consequences of giving in to the G.O.P. now suggests that saying no, and letting the Bush tax cuts expire on schedule, is the lesser of two evils.

Bear in mind that Republicans want to make those tax cuts permanent. They might agree to a two- or three-year extension — but only because they believe that this would set up the conditions for a permanent extension later. And they may well be right: if tax-cut blackmail works now, why shouldn’t it work again later?

America, however, cannot afford to make those cuts permanent. We’re talking about almost $4 trillion in lost revenue just over the next decade; over the next 75 years, the revenue loss would be more than three times the entire projected Social Security shortfall. So giving in to Republican demands would mean risking a major fiscal crisis — a crisis that could be resolved only by making savage cuts in federal spending.

But, as Nate Silver points out, the politics of this would be a disaster for Democrats.  While it’s true that raising taxes on high earners is popular — after all, the vast majority of people would get something for nothing — the short term impact on the economy of Krugman’s position would be horrendous.  And elections are in the short term (every two years) not the long term.

Now, Krugman is right on the shell game.  It was obvious to anyone paying attention that the “temporary” tax cuts under Bush were designed to make those new levels the baseline from which debate could be held.  Despite the fact that, as a technical matter, the Clinton tax rates are the “normal” tax levels and are set to resume as the Bush cuts “expire” with the calendar year, the effect is a tax hike on January 1.

What Bush and company couldn’t have predicted is that the start and sunset of the cuts would both take place during post-bubble  recessions.   So, the Republicans not only have the standard “the Democrats want to raise your taxes” and “class warfare” rhetoric to fall back on but the more legitimate “it would be irresponsible to raise taxes when the economy is already struggling” argument.   So, the Democrats are in an especially tenuous situation.

Beyond that, however, Krugman’s calculating the effects of today’s tax policy 75 years into the future is inane.  Even if the Republicans got concession to make the Bush tax cuts “permanent,” the fact of the matter is that no Congress can tie the hands of a future Congress.  If taxes have to be raised — or spending in other areas cut! — to pay for popular social programs down the road, the policy debate will take place in a different atmosphere.

FILED UNDER: Economics and Business, US Politics, ,
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. TG Chicago says:

    On the front page, the subheadline reads, “Republican maneuvering to extend the Bush tax cuts for all Americans appears about to pay off.”

    Yet the Democratic compromise would have also cut taxes for all Americans. All income up to $250,000 would get the tax cut extension.

    The fact that the Democrats never managed to communicate this point clearly is a big part of the reason that they couldn’t make this popular proposal stick.

    My hope is that the Democrats have a plan to use this vote to show how they are actually more fiscally responsible than Republicans. However, I seriously doubt that’s actually the case.

  2. john personna says:

    So, we will get a politically popular but economically poor solution.

    The forgotten part of your narrative is that even before the bubbles burst, the temporary tax cuts were not productive. In fact, the unfunded spending they engendered pushed those bubbles to their final unhealthy heights,

    Remember. In the early 2000s, these very tax cuts were supposed to expand the economy and jobs in a healthy and sustained way. Didn’t happen then. I see no reason that it will happen now.

    More likely we are mired all the more, and keeping these cuts in place only protects the Democrats from the nonsense claim that all we had to do was keep them, to have nirvana.

  3. john personna says:

    Oh yeah, those early 2000s cuts were also supposed to increase total government revenue. Let’s not forget that part of the magic.

  4. Alex Knapp says:

    A better headline would read “Republicans likely to succeed in exploding deficit.”

  5. James Joyner says:

    @Alex

    I’m not sure how failing to raise taxes constitutes “exploding the deficit.” Absent higher revenues, there’s always spending less.

  6. john personna says:

    There’s always the Republican bait and switch. Cut taxes now, and cut unspecified spending at some vague point in the future.

  7. James Joyner says:

    @JP:

    Agree that there’s no Republican leadership on spending cuts forthcoming. But that’s a much more salient argument than “but they refuse to raise taxes on the rich, so they’re irresponsible.”

  8. john personna says:

    Is it? One closes the deficit, one expands it. When Alex used the word “explode” he probably went too far, but it’s hard to think that extending the tax cuts in the top bracket is more “responsible” at this point.

    If you want jobs, look to the payroll tax and do it directly.

  9. Steve Plunk says:

    This is not a tax cut. This is avoiding a tax increase during tough economic times. Exploding the deficit? Laughable. It’s the spending not the revenue that’s the problem.

    Throw in the payroll tax holiday and you might have some real stimulus instead of the public sector payoffs sold as stimulus.

    This is a common sense, economically sound move. We know the previous actions have been fruitless.

  10. Alex Knapp says:

    This is a common sense, economically sound move.

    What relationship is there between marginal income tax rates and economic performance? Cite sources, please.

  11. john personna says:

    Steve, the common sense, economically sound move would have been to balance action against the deficit, and to do those things which would have the highest impact.

    Given the deficit constraint, we could have shifted the tax cut to payroll.

    That would have been revenue neutral and stimulative.

    But no, you guys wanted _this_ as your stimulus.

  12. john personna says:

    (Isn’t it funny that as soon as anyone gets a temporary tax cut, they forget completely why they asked for it. Jobs creation? What?)

  13. Mark says:

    Ah, the sounds of liberal/leftist ignorance….let’s review two facts:
    – deficits are created by spending too much
    – we have four historical examples of reduced/lower tax rates = higher tax revenue
    However, it is much more sensible from a liberal point of view to continue to spin up class “warfare” or demagoguery. Small wonder the election results were so lopsided in November, and 2012 is setting up to be the next crushing blow to the Libutards.
    One last piece of daily humor….that the tax reductions for the high income earners = a cost in lost tax revenue….as if these people do nothing productive with the ability to use what is after all their own money, not the governments. It is enough to make you break out the pitchforks!!

  14. Alex Knapp says:

    we have four historical examples of reduced/lower tax rates = higher tax revenue

    Name them.

  15. john personna says:

    Mark, it is basic innumeracy to say “deficits are created by spending too much”

    Surplus = Spending – Revenue

    You can balance spending and revenue to make any surplus you want, including a negative one (deficit).

  16. john personna says:

    oops! lol

    I played with that equation a few times. It should have been:

    Deficit = Spending – Revenue

    or

    Surplus = Revenue – Spending

    same diff.

  17. Michael says:

    @James Joyner, but if part of the “compromise” is extending unemployment benefits, then spending less obviously isn’t part of their plan.

  18. Wayne says:

    Tax policies is by no means the only policies that influence the economy. Energy and regulatory policies IMO have as great if not greater influence on it.

    Never the less, to address Steve faulty claims, here is a link to the raw number of dollars the Federal government receive throughout the years. Remember it is the raw total dollars received not the B.S. percentage of GNP many liberals like to use. A higher % of a crash small economy would result in a lower total dollars received by the government than a lower % in a strong large economy.

    http://www.usgovernmentrevenue.com/downloadsrs_gr.php?codes=FTR_R00&units=b&group=&fy=fy11

    Bush tax cuts where done in 2001 and 2003 which take affect the next year. 2003 is the more important one for the economy IMO. Anyway take away the ROO “Revenue from Own Resources” and you get increases in revenue for the federal following tax cuts. 2003 tax cuts resulted in increase revenue even if you include ROO which decreased the immediate year following and a slight increase the year after that.

    The total revenue decreased from 2000 to 2001 even though the ROO was increased significantly (“perhaps” due to selling off large amount of oil reserved that year. not sure on that). Regardless the economy improved after the tax cuts and the Federal government received more total dollars from that stronger company.

    Only when you use the smoke and mirrors of % instead of actual dollars received does it fit the lefts agenda.

  19. Alex Knapp says:

    @Wayne – Those numbers don’t appear to be adjusted for inflation.

  20. anjin-san says:

    – deficits are created by spending too much

    Ah. You mean like Bush did after inheriting a surplus? Or maybe like Reagan did?

  21. Wayne says:

    @Alex that applies for all the years. The numbers and their trends still stand. When you start throwing in adjustments, it becomes subjective. Even though adjustment for inflation is subjective, I would be willing to take a look at it if you would produce a link to areliable resource since inflation is relevant. Of course it is relevant when looking at growth in GNP, military spending and all that to. Oh, a Huffington post link is not reliable.

  22. Wayne says:

    There was barely a surplus when Bush took Office. The surplus trend was trending towards deficit even before his first budget which would be the 2002.

    http://www.usgovernmentspending.com/downchart_gs.php?chart=H0-total&year=1900_2014&units=p

    The deficit balloon after the Democrats won in 2006. Yes Bush share part of the blame as he was President even though Congress was controlled by the opposition Party. Obama is to blame from an even greater ballooning of deficits under his watch especially since his Party Controls Congress by nearly a super majority and for awhile a super majority.

  23. Alex Knapp says:

    @Wayne,

    I don’t know of a source with adjusted dollars, which is why most reputable econometrics use revenues vs. GDP.

    The deficit balloon after the Democrats won in 2006.

    Well, the economy collapsed shortly after that, which explains a signficant decline in revenue. Plus, these #s don’t take into account paybacks on TARP (over $500 billion to date) b/c TARP was on-budget but the paybacks are off-budget.

  24. Wayne says:

    Alex don’t you see the flaw in using how much a government take in as a % of GDP?

    Just to illustrate, talking for revenues received in taxes, if taxes were decrease by 10% across the board and the GDP double, the Government would rake in a great deal more dollars from taxes yet would be still take in a smaller % of the GDP. Simplified in math terms, 7% of $200 is greater than 10% of $100 although is is a lower %. There are special exceptions of course but we are talking in general.

    Now of course, we don’t have tax policies that tax per se a % o GDP but do on elements within it such as income, sales, capital gains, inheritance, etc. So just because they lower the income tax rates does not mean that tax rate of across the board or as % of GDP is lower.

    Also GDP is an educated guess which throws in even more chances of errors. Raw income is pretty straight forward.

  25. Alex Knapp says:

    Wayne,

    I see that point but given that, as a matter of course, GDP almost ALWAYS increases, just looking at the raw numbers makes it hard to tell how the GDP growth impacted revenues.

    Maybe it’s better to compare them to deficits/surplus?

  26. Don L says:

    “…talking about almost $4 trillion in lost revenue. ” If you didn’t have it, you couldn’t have lost it!
    What’s so corrupted in the ruling class mind that such a simple thought could excape their ruling class minds?

    Obama found 4 trillion out of thin air -now you can cut 4 trillion in spending. In lieu of the failing job the Dept of Ed is doing -start there, we did get to the moon without them… and then the list of “we don’t really need this one” is a mile long. Defund the NEA, planned un-parenthood, NPR, And ICE since it refuses to do its job. and then there’s that Obama care monster, the politicized EPA, the….

  27. Mark says:

    @Alex…C’mon this should have been easy for you unles those Lib glasses are a bit fogged up.
    The four cuts were under Coolige, Kennedy, Reagan, and Bush II.
    All resulted in a surge of economic activity = higher reveue to the government.

  28. Wayne says:

    Alex the government either brings in more money or it doesn’t. Saying they bring in less money when they don’t is a lie. Comparing it to any increases in other number is being comparative. “My salary went up by 20% but it not really an increase because my brother’s new job pays him double of what he did before” is faulty thinking. Inflation is another argument.

    Comparing increase in revenue with increase in spending doesn’t change the fact you are still receiving more income. If you an idiot and greatly increase spending by more than the increase of revenue you received then you will have a deficit. The problem isn’t the increase of revenue but the large increases in spending. Democrats love spending. They are like one of those spouses who always spend twice as much as what their spouses receive in raises.

  29. anjin-san says:

    > Democrats love spending.

    Guess you missed the vast increase in the size of the federal government under Bush. Either that or you are simply a partisan hack.

  30. anjin-san says:

    > All resulted in a surge of economic activity

    The “surge of economic activity” under Bush was basically a huge spending binge with borrowed money.

  31. Wayne says:

    If Bush “vastly” increases the size of the federal government than what do you call what Obama has done?

    It doesn’t excuse a mass murderer by pointing to a murderer.

  32. anjin-san says:

    > If Bush “vastly” increases the size of the federal government than what do you call what Obama has done?

    Not the point. The point is that your “Democrats love spending” argument is childish. Clearly, both parties love spending. Do you have anything to contribute beyond lame Fox News talking points?

    > It doesn’t excuse a mass murderer by pointing to a murderer.

    Murderer. Interesting word to insert into the discussion. Are you saying that government is somehow inherently bad? No doubt you have opted out of use of public roads, sewers, airwaves and all that other evil government stuff.