[Republicans] are eager to cut checks averaging $3 million each to the richest 120,000 people in the country. … And where would this $680 billion go? Nearly all of it would go to the richest 1 percent of Americans, people with incomes of more than $500,000 a year. … How can this kind of giveaway be justified …?
In this view of the world, revenues belong to the government and are allocated by policymakers as gifts to those who need or deserve them. When you hear that “we cannot afford to cut taxes” and “we should not give tax cuts to ______,” you are hearing this philosophy.
Like a family or a business, the government does not “pay for,” “finance,” or “afford,” its revenue stream or changes to it. You pay for your spending or you finance your spending. If your revenues are insufficient to meet your spending, then in all other contexts we say you cannot afford the amount you’re spending. The same should be true for the government.
Money doesn’t just magically appear in the government coffers. A private citizen or firm earns income and the government takes a portion of that income. The money initially belongs to he or she who earned it. Using “we” to refer to the government suggests the funds being spent by the government belong to the government. This matters because if the money belongs to the government, then elected officials should apply their moral principles to figure out who needs or deserves it most. If the money belongs first to he or she who earned it, then elected officials should apply their moral principles to figure out whether they should take it from the earner and spend it on something else or give it to someone else. Those are fundamentally different decisions. The first philosophy ignores the costs (moral and economic) of government taking something from someone who earned it.
While these may seem like small rhetorical differences, they represent two critical divides in the fiscal policy debate. You can learn a lot about how an elected official approaches spending, taxes, and deficits by listening to how he or she uses the pronoun “we” and whether he or she refers to “paying for government spending” or “paying for spending and tax cuts.”
Language trick #2: “Extending the Bush tax cuts” is bad.
There are two tricks here – talking about “extending tax cuts” and labeling them with the Bush name.
At some point a policy flips from “extending a tax cut” to “preventing a tax increase.” The top marginal income tax rate has been 35% for almost ten years. The top capital gains and dividend rates have been 15% for almost eight years. As a real-world policy matter if action is not taken, these tax rates will increase above where they have been for a long time. Most DC Democrats try to have it both ways – they talk about “preventing tax increases on the middle class” but oppose “extending tax cuts for the rich.” This rhetorical inconsistency masks a parallel situation in law and policy. Either they’re both extending tax cuts, or they’re both preventing tax increases.
Most of the policies scheduled to expire December 31 were enacted in the bipartisan 2001 tax law. The only significant expiring changes from the Republican-only 2003 tax law are the lower rates on capital gains and dividends. The marginal income tax rate cuts, the new 10% income tax bracket, the estate tax repeal, and the marriage penalty reliefwere part of the 2001 law supported by current Senate Finance Committee Chairman Baucus, sitting Democratic Senators Carnahan, Feinstein, Johnson, Kohl, Landrieu, Lincoln, and Ben Nelson, as well as twenty-eight House Democrats. You never hear anyone arguing against “extending the Baucus-Feinstein-Landrieu-Lincoln-Nelson tax cuts.”
Revise history #1:
Why the cutoff date? In part, it was used to disguise the fiscal irresponsibility of the tax cuts: lopping off that last year reduced the headline cost of the cuts, because such costs are normally calculated over a 10-year period. It also allowed the Bush administration to pass the tax cuts using reconciliation – yes, the same procedure that Republicans denounced when it was used to enact health reform – while sidestepping rules designed to prevent the use of that procedure to increase long-run budget deficits.
In 2001 I was Senate Majority Leader Trent Lott’s tax policy staffer and was deeply involved in the procedure and tactics of the 2010 sunset date. Dr. Krugman suggests that we Republicans “used” the 2010 sunset date “to disguise” their revenue effect. He has his facts wrong. We wanted the tax cuts to be permanent. Since we were using reconciliation with a 10-year budget window, had we extended the tax cuts even for “that last year ,” we would have given 41 Senate Democrats the ability to kill the bill on a Byrd Rule point of order. We ended the tax cuts after 2010 because we had to, not because we saw some rhetorical advantage to doing so.
There are two controversial uses of reconciliation: one is to cut taxes without offsets, since reconciliation had generally been used in the past to reduce deficits rather than to increase them. The other is to enact major non-budgetary policy changes outside of the Senate’s regular order. The debates about the appropriateness of reconciliation are therefore different between the 01/03 tax cuts and the 09/10 health care laws. It appears twelve Senate Democrats and 28 House Republicans thought it was appropriate to use reconciliation for the ’01 tax cuts, since they voted for the bill.
Revise history #2:
Obviously, the idea was to go back at a later date and make those tax cuts permanent. But things didn’t go according to plan. And now the witching hour is upon us.
Actually, this was the plan, to wait until 2010 and then press for making these policies permanent, not to try to do so earlier. We knew in 2001 that a looming unpopular tax increase would maximize pressure on the fence-sitters, and that by ending them in an even-numbered year we would maximize the chance that in-cycle Members of Congress would vote to prevent a tax increase. Tax-increasing DC Democrats knew this as well, and they could have scheduled this vote last year when they would have had a better chance of winning. Or had they enacted a budget resolution conference report this year, they could have created a reconciliation bill that would have allowed them to get their policy win with only 50 Senate votes + the VP. Because they failed to enact a budget resolution and create a reconciliation bill, they must now wrestle with an Senate minority that has significant leverage. Democrats gave Senate Republicans this leverage by failing a basic task of governance.
Ignore the biggest part of the deficit effect:
According to the nonpartisan Tax Policy Center, making all of the Bush tax cuts permanent, as opposed to following the Obama proposal, would cost the federal government $680 billion in revenue over the next 10 years.
I’m not sure why he quotes the TPC’s $680 B figure when the Administration’s $970 B figure is larger. He focuses on the deficit delta between the two sides while ignoring the deficit-increasing effect of the tax policies President Obama has proposed. Setting aside the President’s AMT policy for a moment, and using Dr. Krugman’s language with Treasury’s numbers, he also could have written that “the Obama proposal to extend the Bush tax cuts for everyone but the rich would cost the federal government $3.1 trillion over the next 10 years.” The $680/$970 B delta between the two sides of this debate is a lot of money and an important policy difference. At the same time, if you’re worried about budget deficits, you shouldn’t ignore the much larger $3.1 trillion deficit effect that is not in dispute between the parties.
Focus on the super-rich while pushing a policy that also taxes the sort-of-rich:
And where would this $680 billion go? Nearly all of it would go to the richest 1 percent of Americans, people with incomes of more than $500,000 per year. … the majority of the tax cuts would go to the richest one-tenth of 1 percent.
Yes, the super-rich make a lot more than the rich. This is a feature of pre-tax income, not of tax policy. Thanks to our progressive income tax structure, the post-tax distribution of income is more compressed than the pre-tax distribution. The 2001 and 2003 tax cuts increased this compression. The post-tax distribution is still wide. The super-rich are still that way even after the government takes a greater share of their income than it does from the non-rich.
Multiplication tells us that if you raise their marginal tax rate by the same number of percentage points, you’ll collect a lot more money from a super-rich person than from a sort-of-rich person. Dr. Krugman flips this on its head by saying policymakers are “giving” these people money, rather than “not taking it.” It’s different.
If this is a big concern to Dr. Krugman, he could propose a much higher marginal income tax rate on the super-rich. He instead proposes we also raise taxes on someone earning $260K per year. That’s still a lot more than most people make, but there’s a big difference between $260K of annual income and someone who earns millions per year.
Dismiss the small business argument:
[W]e’re told that it’s all about helping small business; but only a fraction of small-business owners would receive any tax break at all.
True, but those are also the successful small business owners who are (a) employing people and (b) the ones we need to hire more people.
Dismiss the macro argument:
Or we’re told that it’s about helping the economy recover. But it’s hard to think of a less cost-effective way to help the economy than giving money to people who already have plenty, and aren’t likely to spend a windfall.
Note that he does not reject the argument that tax increases will decrease economic activity. He instead argues it’s inefficient – that the macroeconomic bang for the deficit increase buck is small. He argues that increased government spending is more cost-effective. Even if you think he’s right, Congress is not going to enact another few hundred billion dollars of increased government spending as he proposes. The question is therefore not the one Dr. Krugman would like, which is “Do you prefer preventing tax increases or increasing government spending?” The question Members of Congress instead face is, “In isolation, do you want taxes to go up on anybody four months from now, including successful small business owners whom we hope will hire more workers?”
Demonize those who disagree with you
So what’s the choice now? The Obama administration wants to preserve those parts of the original tax cuts that mainly benefit the middle class – which is an expensive proposition in its own right – but to let those provisions benefiting only people with very high incomes expire on schedule. Republicans, with support from some conservative Democrats, want to keep the whole thing.
And there’s a real chance that Republicans will get what they want. That’s a demonstration, if anyone needed one, that our political culture has become not just dysfunctional but deeply corrupt.
Dr. Krugman concludes by declaring it an outrage to oppose raising taxes in a weak economy because certain people whom he thinks are undeserving will get to keep more of their income. He ends with his usual view that anyone who disagrees with him is stupid, evil, and corrupt.