Monday, December 06, 2010

On The High-End Income Tax Cut

Last week, the President pledged to "correct our long-term fiscal course" and proposed a two-year pay freeze for all federal civilian employees. "The hard truth." he maintained, "is that getting this deficit under control is going to require broad sacrifice."

Now, however, not so much. President Obama Monday

announced a tentative deal with Congressional Republicans on Monday to extend the Bush-era tax cuts at all income levels for two years as part of a package that would also keep benefits flowing to the long-term unemployed, cut payroll taxes for all workers for a year and take other steps to bolster the economy....

The package would cost about $900 billion over the next two years, to be financed entirely by adding to the national debt, at a time when both parties are professing a desire to begin addressing long-term fiscal imbalances.

But even as he took a major step toward increasing the deficit and the national debt, the President couldn't resist implying that he is simultaneously cutting the deficit:

A permanent extension of these tax cuts would cost us $700 billion at a time when we need to start focusing on bringing down our deficit....

President Obama assures us that the impact of the cuts will be short-lived, as

.... these tax cuts will expire in two years. And I'm confident that as we make tough choices about bringing our deficit down...

Expire in two years? These income tax cuts were due to expire on December 31, 2010. Currently, the President faces a Democratic House and a Democratic Senate (which this fellow does not find a happy circumstance) and nearly two years to turn his presidency around- and he negotiates with himself and accedes to Republican demands. In two years, the House will be, and the Senate probably will be on the verge of, being run by Republicans.

Nate Silver explains how the tax issue, sure to return in 2012, will play out if the economy, as is likely, rebounds, modestly or otherwise:

See, this is proof that lower taxes work, I would argue if I were a Republican.
The stimulus — all that government spending — didn’t work. It just increased unemployment. But keeping taxes low worked, and the economy is finally recovering. So why on earth would we want to raise anyone’s taxes now?

What if the economy doesn't recover? Republicans are in favor of tax cuts on high-income brackets in good times. In times that are neither good nor lean. And in lean times. And for that, they have a playbook, and this time they don't have to steal it. As Republicans move in a year and a half (they won't wait till after the election), to make tax cuts a campaign issue as they lobby for the wealthy, they then could quote the President saying

It's not perfect, but this compromise is an essential step on the road to recovery. It will stop middle-class taxes from going up. It will spur our private sector to create millions of new jobs, and add momentum that our economy badly needs.

Unfortunately, as the CBO reported in February of this year (captured in the hard-to-read graph below), the impact of an income tax cut on employment is likely to be minimal:

Responding to the same analysis, Paul Krugman explains

A two-year extension of the Bush tax cuts, it estimated, would lower the unemployment rate next year by between 0.1 and 0.3 percentage points compared with what it would be if the tax cuts were allowed to expire; the effect would be about twice as large in 2012. Those are significant numbers, but not huge — certainly not enough to justify the apocalyptic rhetoric one often hears about what will happen if the tax cuts are allowed to end on schedule.

Of course, the impact upon the unemployment rate of an extension strictly on the upper incomes, which was the only extension at issue, would be even less.
Were he a Democrat, the President might note that, under the tax plan which he originally proposed and House Democrats fought for (cuts only on the brackets under $200,000/$250,000), upper-income Americans themselves get a tax break. They, too, would benefit from the decline in rates for income beneath that threshold. Unfortunately, GOP talking points die hard, and not at all in the mouth of this President.

Halloween came and went nearly two months ago. Apparently, Mr. Obama finds little need to go to his closet and drag out his Democratic costume, donned only for special occasions.

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