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Five Myths About the Bush Tax Cuts and the Scourge of Stimulus

Capital Gains & Games - 31 July 2010 - 3:51pm

Coming up in tomorrow's Washington Post, Brookings economist Bill Gale discusses these five myths about the tax cuts passed in 2001 and 2003:

1. Extending the tax cuts would be a good way to stimulate the economy.
2. Allowing the high-income tax cuts to expire would hurt small businesses.
3. Making the tax cuts permanent will lead to long-term growth.
4. The Bush tax cuts are the main cause of the budget deficit.
5. Continuing the tax cuts won't doom the long-term fiscal picture; entitlements are the real problem.

I recommend the whole thing.  You can look through nearly 6 years of my blogging and not find a single post in support of these tax cuts.  Whatever is left of them should be allowed to expire, and Congress should make its tax policy changes in a deliberate fashion. 

Of the five myths that Bill discusses, I continue to find the first to be the most frustrating.  Here's what Bill says about extending the tax cuts as a means of fiscal stimulus:

But a good stimulus policy can't just be big; it should also offer a lot of bang for the buck. That is, each dollar of government spending or tax cuts should have the largest possible effect on the economy. According to the Congressional Budget Office and other authorities, extending all of the Bush tax cuts would have a small bang for the buck, the equivalent of a 10- to 40-cent increase in GDP for every dollar spent.

I don't even think about tax policy in this way.  I think the government should be only as large as it has to be to complete its essential functions.  Given the required spending, taxes should be high enough to balance the budget over a business cycle.  So I would never suggest a cut in tax rates without also suggesting a time frame over which the foregone revenue would be recouped.

In December 2008, I wrote:

If I had my druthers, the word "stimulus" would be expunged from public discussion, along with "bailout" and "rescue."  These words convey the idea that, because we have so mismanaged our economic and financial affairs, we are somehow able or entitled to conjure up additional funds out of thin air to fix our problems.  There are two problems with this idea. 

First, the purpose of government spending is to purchase goods and services that the government needs to meet its responsibilities, not to hand out resources to those who pandhandle most loudly for them.  The reason to spend more in a recession is not to employ idle resources -- it is to be able to stretch the taxpayers' money further by getting a better price for its purchases because workers without jobs will work for less and owners of empty factories will charge less. 

Second, there is no free lunch: the money we spend today is a loss to the Treasury, whether as "timely, temporary, and targeted" tax cuts that have no discernible impact; payments to delay bankruptcy for large, mismanaged entities, whether AIG or the Big 3; or the largest public works program since the interstate highway system.  That loss to the Treasury must be made up at some future date, by later cohorts of taxpayers. 

Fortunately, both of these problems can be overcome by focusing all new spending on investment rather than consumption and on public investment rather than private investment.  By their nature, capital investments last for years or decades, so that there is a better chance that those who are paying for the spending are reaping its benefits.  Public investment also meets the criterion that the spending goes for projects that are within the government's responsibilities.  Repairing roads today removes the need to repair them for a number of years.  In 2005, the American Society of Civil Engineers released a report card in which it estimated that $1.6 trillion would be required over a five-year period to restore the nation’s physical infrastructure to good condition.  If I had a target of $500 billion to spend, every dime would go for public infrastructure investments, and we'd still have quite a bit of work to do.

Shorter version: Buy what you need and only what you need.  Given that we need trillions of dollars of public investment to meet the government's essential functions, there is plenty of room for fiscal stimulus.  Cutting taxes while leaving needs unmet makes no sense.

Tax Writing and Sausage Making

Capital Gains & Games - 29 July 2010 - 9:26pm

Pete's post reminds me of the first time I ever dug into the details of a revenue forecast. It was some time early in the Carter administration, which proposed a crude oil equalization tax on oil producers. I was curious about the revenue forecast for this legislation and made some calls. The Joint Committee on Taxation told me that they didn't do their own estimate and were using one from the Treasury. So I called the Treasury and they said that they basically extrapolated from a forecast of oil consumption that they got from the Department of Energy. The people at DOE told me that they hadn't done the oil forecast themselves but were using one that was produced by a private consultant. Finally, I reached the consultant, who was horrified that this huge legislative fight was essentially based on his analysis, which, he told me, was nothing more than a back-of-the-envelope calculation.

At the time I was working for Congressman Jack Kemp, who was strongly opposed to the oil tax. Ironically, he became the prime congressional sponsor of the legislation. He had sponsored a private relief bill for one of his constituents who had been screwed over by an obscure tax provision. The details are unimportant. What matters is that Kemp's bill had passed the House and was awaiting action in the Senate Finance Committee when the oil tax bill came up. For whatever reason, it was decided that the Senate should move the bill first. But revenue bills must originate in the House of Representatives according to the Constitution. A Senate-initiated tax bill can't be sent to the House unless it is appended to a House-passed tax bill. But the only House-passed tax bill the Senate had available was Kemp's private relief bill. The crude oil equalization tax was therefore added to Kemp's bill as an amendment so that the legislative process could move forward, thus technically making Kemp its sponsor.

Mark Zandi And John Taylor Debated Stimulus Tonight

Capital Gains & Games - 29 July 2010 - 8:26pm

A few minutes ago, I watched two top economists, Mark Zandi and John Taylor, debate whether the government's massive fiscal and monetary stimulus was effective on the PBS Newshour. The video will be posted here tomorrow. Wednesday, Zandi and Alan Blinder published a Moody's macro simulation that estimated 8.4 million more jobs and 6.6% of real GDP would have been lost 2010 without either stimulus. Taylor argued that much of the stimulus was ineffective, that the economy revived because of business investment, and that now we are saddled with massive debts which will burden future growth. It's hard for an experienced economist to come to an informed choice between these two positions, so most viewers tonight came away with one conclusion: Economists can't agree on anything, just like our political leaders.

  No model is perfect, or even that accurate. I'll never forget when I dug into the macro simulation from a top economics consulting firm years ago and found that nearly half of the variation in the simulation resulted from add factors and not from the equations themselves. That doesn't mean I didn't find that model useful. It just had to be used properly, and it's limitations had to recognized.   Was some of 2008-2009 stimulus ineffective? Yes, of course. But that's not the right question. The right question is what would have happened without it? We can't observe that, so we have to simulate it.   Taylor, who should have won a Nobel Prize by now for his work on monetary policy and who has performed yeoman service in the Washington and international economic policy jungles, posted his critique on his blog today. Read his testimony before the House Budget Committee on July 1, 2010. It presents other macro model simulations from the European Central Bank's Research Director Frank Smets and from Harvard Professor Robert Barro showing little and no effect from stimulus.   When such highly qualified economists disagree so completely, what do we do? I'm sure some would push for more research, but this debate has been going on for 80 years, ever since John Maynard Keynes took on the entire economics profession in the middle of the Depression, so I'm skeptical that another few years of research will resolve this disagreement.   Therefore I fall back on something I've learned from my experience making policy and flying small planes: Doing something is usually better than doing nothing. Isn't that why Franklin Roosevelt beat Herbert Hoover in the 1932 election and kept getting reelected until he died?  

TroySchneider: I'm at Parkhurst Park. http://4sq.com/9mA44o

@troyschneider - 29 July 2010 - 7:26pm

TroySchneider: I'm at Parkhurst Park. http://4sq.com/9mA44o

In Search Of Tax Rate Certainty?!!

Capital Gains & Games - 29 July 2010 - 2:58pm

I just gave the following speech to the National Economists Club at 12:30 p.m. in D.C. For 10 years, Congress has known the Bush tax cuts would expire at the end of this year, but Congress still hasn't set next year's tax rates. Extending all of the Bush tax cuts through 2020 would cost $3.2 trillion, not including indexing of the Alternative Minimum Tax. President Obama has proposed extending $2.2 trillion of those tax cuts for those with incomes under $250,000 ($200,000 for singles). That would continue the present law 10% bottom bracket, marriage penalty relief, and $1,000 refundable child credit, but it would raise the top marginal tax rate from 35% to 39.6%.   Mr. Obama would raise the top rate on capital gains and dividends from 15% to 20%, but Congress would have to "pay for" keeping the dividends rate at 20% under last February's new PAYGO law. There's considerable doubt whether Congress can come up with that money, so the top rate on dividends could easily rise to 39.6% next New Year's Day. That possibility is already beginning to weigh on stock market valuations. Furthermore, beginning in 2013 under the recently enacted health reform law, both capital gains and dividends of high income individuals would be subject to the 3.8% HI (health insurance) payroll tax.   The new PAYGO law exempts paying for extending the Bush tax cuts for those under $250,000, but Congress is still having trouble mustering support for adding $2.2 trillion to the deficit and resolving the ideological battle between most Democrats, who want to raise taxes on those over $250,000, and most Republicans, who don't. The depth of this ideological battle was made clear by Congress' failure late last year to extend the estate and gift tax. It expired on January 1, 2010, but, on January 1, 2011, it will revert to 2001 law with a top rate of 55% and a $1 million exemption, quite an increase from the 45% top rate and $3.5 million exemption in 2009. The political brinksmanship over the estate tax and over the Bush tax cuts in general may not be resolved by the election. If the Republicans take the House, which many observers expect, this year's gridlock may become worse next year.   Alan Greenspan recently urged Congress to allow all of the Bush tax cuts to expire at the end of this year to avert a U.S. debt crisis he sees looming ahead. He admitted such a large tax increase would lower the growth rate of a very weak recovery. Greenspan famously helped propel Ronald Reagan's 1981 tax cuts and George W. Bush's 2001 and 2003 tax cuts, so that's quite a turnaround, which will add to the gridlock in Congress.   So what's the endgame? 

In my opinion, from talking with top Hill staff in both parties, the Senate may debate, but not necessarily pass a Bush tax cut extension in September, but the House is very likely to wait until a lame duck session in December to pass a one-year extension of the Bush tax cuts for those under $250,000 ($200,000 for singles). This will maximize tax rate uncertainty for small businesses and will hit the equity markets with a 39.6% dividends top tax rate. This would be bad news for American business and for American workers. It wouldn't resolve our budgetary gridlock. It would just continue tax rate uncertainty for a very weak economy. There is also the small possibility that Congress could fail to extend the Bush tax cuts, tightening fiscal policy by 1.5% of GDP and very possibly throwing us back into recession. 

CG&G's Own Bruce Bartlett Is Interviewed By The Economist

Capital Gains & Games - 28 July 2010 - 8:04am

If you haven't looked at this yet, you should: It's Bruce at his absolute best.

To say the least, Andrew, Ed, Pete, Troy and I are so proud.....

You Think There's Going To A Deficit Reduction Deal Next Year? Think Again.

Capital Gains & Games - 27 July 2010 - 4:19am

As my column in today's Roll Call explains, I'm having a very hard time figuring out why anyone thinks a deficit reduction  deal is going to happen next year. 

 

Deficit Deal Only Gets Tougher After the Election

July 27, 2010  

If you listen to the pre-election hype that’s going on in advance of the November Congressional elections, you can’t help but get the sense that a deficit reduction deal next year is very possible.

Frankly, that doesn’t make a great deal of sense.

Start with what Congress is likely to look like after the election. Polling indicates that the Democratic majorities in the House and Senate will decrease substantially or be replaced by a narrow Republican majority in one or both chambers. Therefore, unless the situation changes substantially in the months ahead or the actual election results are different from what the polls predict, in one way or another the voting margins for the majority party next year are likely to be much smaller than the ones that exist today. That’s not something that typically leads to bold decisions on controversial issues such as the deficit, spending cuts and revenue increases.

Then move to what over the past two years has become standard fare in Washington: the politics of obstruction. The subtext for the many filibusters, nomination and bill holds, and other types of parliamentary delays is that this will all be over next year when, after the presumed post-election changes, members of both parties will hold hands and sing the legislative equivalent of “Kumbaya.”

That also doesn’t make a great deal of sense.

Indeed, the opposite — more obstruction and delays — seems far more likely. If there are substantial Republican gains in both houses, the GOP take-no-prisoners strategy of making it as difficult as possible for the legislative process to move forward will appear to be vindicated. That will make it hard for party leaders to convince their more militant members that moving in another direction is the correct thing to do.

Even more important, however, is that the GOP is likely to see a cooperative stance over the next two years as a way of giving the White House victories it wouldn’t otherwise get. That doesn’t make much political sense when the next election will be the one where the president’s performance is judged directly by voters. This is especially true when it comes to dealing with the deficit because it’s one of the issues on which the Republicans have most criticized the White House. Cooperation that leads to a budget deal will eliminate that issue; obstruction and no deal will keep it alive through November 2012.

Much the same will be true if there’s a Democratic minority in one or both houses. Is it really likely that Democrats will want to make legislative life easier for the new Republican majority if they lose control of the House and/or Senate? Having seen that there is far less voter retribution than might be expected from constant filibusters and the like, will it really be a surprise if Democrats adopt many of the same obstructive tactics on budget-related issues that Republicans have used the past two years?

Much of the hope and expectation for a budget deal next year seems to rely on the deficit reduction commission developing a plan that somehow makes likely what up to now has been politically impossible. As desirable as that might be, it’s hard to see how that will happen given what the commission, or for that matter anyone dealing with the deficit, will have to recommend. It’s also hard to see a newly elected Congress feeling bound by revenue and spending changes that, regardless of which party was in control, Capitol Hill has been reluctant to support when the options were openly discussed.

This is particularly the case because, although poll after poll over the past two years has shown widespread unhappiness with the deficit in general, other than foreign aid few of the specific changes needed to make substantial progress appear to be acceptable to a majority of Americans. It’s hard to see how even a unanimous recommendation from the commission will change that significantly.

Add to this one more critical factor next year: the economy. As the mid-session review of the budget released Friday by the Office of Management and Budget and last week’s Congressional testimony by Federal Reserve Chairman Ben Bernanke indicates, substantial improvements in the unemployment rate are still expected to take place over a number of years. That will make the spending and revenue changes needed to reduce the deficit significantly less economically justified and the politics of the deficit even more difficult.

The mid-session review shows that, under baseline assumptions, the deficit will fall by about $500 billion and from 9.2 percent to 5.6 percent of gross domestic product next year, that is from fiscal 2011 to 2012. That would be the largest nominal reduction in U.S. history and the biggest change as a percent of GDP since 1947. Given the politics of next year’s budget debate and the small probability that a deal can or will be possible, that’s about the most that should be expected.
 

Now Legal In The U.S.: Jailbreaking Your iPhone, Ripping A DVD For Educational Purposes

Shared Items From Google Reader - 26 July 2010 - 12:04pm

It’s no longer illegal under the DMCA to jailbreak your iPhone or bypass a DVD’s CSS in order to obtain fair use footage for educational purposes or criticism. These are the new rules that were handed down moments ago by the U.S. Copyright Office. This is really big. Like, really big.

Categories: Reads Worth Sharing

TroySchneider: Troy Flight delays with a four year old are pretty much the opposite of fun. Almost home, though...: Flight delays with a four year ol...

@troyschneider - 25 July 2010 - 7:10pm

TroySchneider: Troy Flight delays with a four year old are pretty much the opposite of fun. Almost home, though...: Flight delays with a four year ol...

Bush Tax Cut Extension May Be Considered By The Senate In September, But Enactment After The Election Still Seems Most Likely

Capital Gains & Games - 25 July 2010 - 7:03am

 We now know some of the decisions reached at last Thursday's closed-door Senate Finance Committee meeting.  According to this morning's Washington Post, committee mark-up won't occur until September, and Chair Max Baucus (D-MT) won't rule out extending the tax cuts for those with incomes over $250,000 ($200,000 for singles).  From this morning's New York Times, we find that Baucus refused to give Republicans any assurances about an open amendment process.  So last week's rumblings were about having the debate over extending the Bush tax cuts before the election and were not about enacting an extension before the election.

Time for New Thinking on Stimulus

Capital Gains & Games - 24 July 2010 - 11:00am

For the last three weeks, my Fiscal Times columns have been focusing on Fed policy. The main reason is that although I think there is scope for additional fiscal stimulus, there is simply no support in Congress for doing more than has been done. Like it or not, those favoring stimulus got one bite at the apple and they didn’t do enough.*

With fiscal policy effectively off the table, the burden of further stimulus necessarily falls on the Fed, which still has freedom of action. This may be a blessing in disguise because I have believed all along that monetary policy is at the root of our economic problem. We are essentially suffering from a deflationary recession identical to the Great Depression except about one-third the size.   I tried to explain why this is the case in my July 9 column, where I showed that the economy’s fundamental problem is a decline in velocity—the speed at which money turns over in the economy. When velocity falls it has exactly the same economic effect as a decline in the money supply—reducing both prices and output. By my calculations, velocity has fallen by 11 percent—exactly equivalent to an 11 percent shrinkage in the money supply.   From the beginning of the crisis there have been economists who said that monetary policy was sufficient to stem the deflation and turn the economy around without fiscal stimulus. Just pump up the money supply, they said; that will stem the deflation all by itself and save the country from a destabilizing increase in debt, a lot of wasteful pork barrel spending, and avoid an implicit tax increase via Ricardian equivalence. (I explained this mechanism in more detail in my July 2 column.)   The problem is that the Fed did increase the money supply a lot. So much so, in fact, that some of the very economists who said that the Fed could end the recession all by itself quickly became alarmed and began warning about imminent inflation.**   Of course, there has been no inflation because deflation remains the economy’s central problem. That is because all the money created by the Fed never got spent; it just piled up in bank reserves. I explained this problem in my July 16 column. This was the fallacy of the monetarist view. Monetarists just assumed that increases in the money supply would be spent.   In my 2009 book, The New American Economy, I went through the economic debate of the early 1930s very thoroughly. There were monetarists then too, the great Irving Fisher being the prime example. And there were also Austrian-types like Henry Hazlitt and Benjamin Anderson who kept crying “inflation” every time the money supply rose, even as the price level fell 25 percent between 1929 and 1933.   In my book I explain how virtually all economists, including Fisher, eventually came around to the view that monetary policy by itself was impotent in a deflationary situation because the money simply would not circulate by itself. It needed fiscal policy to generate spending in the economy to be effective.   Another problem, which I discuss in my July 23 column, is that the Fed can’t cut the fed funds rate below zero. But a Taylor rule calculation says that we need a negative funds rate of five percent or so. Since the funds rate is the Fed’s primary monetary tool, the zero bound essentially makes that tool impotent.   Of course, this doesn’t mean that the Fed is completely out of ammunition. One thing it could do, which I advocated in my July 23 column, is for it to stop paying interest to banks on reserves. Even though the rate is low—just 25 basis points—it reduces the opportunity cost for banks not to lend. It also sends an important signal to banks that the Fed is okay with having them sit on more than a trillion dollars of excess reserves. Eliminating interest on reserves, therefore, would be a signal to banks to get the money moving. If this failed to lift lending, I suggest that the Fed follow the lead of the Swedish central bank and start imposing a penalty rate on bank reserves.***   On Thursday, Ben Bernanke was asked about why the Fed doesn’t cut the rate on reserves to zero. He responded that interest on reserves was necessary to the functioning of the fed funds market. This strikes me as a very weak argument, especially given that the Fed is now allowed to pay interest on reserves, which is essentially a substitute for managing the fed funds rate. Unfortunately, bureaucratic inertia often determines policy at the Fed until a crisis forces action.   I still believe that monetary policy requires fiscal expansion to be effective under current economic conditions. For example, those who advocate a monetary helicopter-drop of money to stimulate growth concede that the Fed doesn’t have the capacity to do it without some action by Treasury to distribute the funds, which would be fiscal in nature. It would also require congressional action that is very unlikely in the current political environment.   That basically leaves two things that the Fed can do: buy longer term securities and buy very unconventional assets such foreign currency denominated bonds. The first it has already done some of without doing much to get money circulating. The second would put the Fed at war with the Treasury, which jealously guards its dominion over exchange rate policy. It will also raise holy hell with the “strong dollar” crowd and undoubtedly invite foreign retaliation. It’s even possible that China could effectively sterilize the intervention by soaking up all the dollars created by the Fed.   Thus it appears that there is virtually nothing that can be done to stimulate the economy. For various reasons—political, institutional and substantive—there is no prospect of either fiscal or monetary stimulus. It’s time for new thinking.   * In a revealing interview with the Fiscal Times on July 16, outgoing House Appropriations Committee chairman David Obey said that Obama administration economists originally wanted a $1.4 trillion stimulus package. But Republicans demanded that the package be scaled back and the White House political people were unwilling to fight for a bigger package. Perhaps they thought they would be able to get more stimulus through the regular appropriations process.   ** See Allan Meltzer, “Inflation Nation,” New York Times (May 4, 2009); Arthur Laffer, “Get Ready for Inflation and Higher Interest Rates,” Wall Street Journal (June 10, 2009); Alan Greenspan, “Inflation Is the Big Threat to a Sustained Recovery,” Financial Times (June 25, 2009).   ***I put together a bibliography of research on the problems of deflation, the zero bound, and the payment of interest on reserves in a July 23 Fiscal Times post. Addendum It appears that Paul Krugman and I were channeling each other. He posted this while I was writing the above. Stephen Williamson has a related comment.

OMB Just Estimated A $1.416 Trillion FY11 Deficit, $150 billion Higher Than In February.

Capital Gains & Games - 23 July 2010 - 6:19pm

Because of the bad news about the FY11 deficit, OMB withheld the Mid-Session Review 8 days beyond its statutory deadline until 3 p.m. this afternoon.  Technical reestimates of individual income tax and Social Security taxes were the primary reason for the deterioration along with somewhat weaker wage growth.  Usually that means taxpayers fell into lower tax brackets and claimed more deductions and credits than estimated.  The FY10 deficit was reestimated $79 billion lower than in February because of lower outlays for unemployment compensation, FDIC deposit insurance, and a broad range of discretionary spending.  The real GDP forecast was raised to 3.2% for CY10 from 2.7% in February and was lowered to 3.6% for CY11 from 3.8%.  This is confirmation of my long held expectation that we're going to see deficits of at least $1 trillion for years to come.

Bernanke Kept Monetary Stimulus Options Open This Afternoon

Capital Gains & Games - 21 July 2010 - 6:13pm

Fed Chair Ben Bernanke kept monetary stimulus options open this afternoon in his semiannual monetary policy  testimony and report before the Senate Banking Committee. Ranking Republican Richard Shelby (R-AL) put the question this way:

SHELBY: Thank you.

Mr. Chairman, the minutes of the June FOMC, the Federal Open Markets Committee, meeting stated, and I'll quote, "The committee would need to consider whether further policy stimulus might become appropriate if the Outlook were to worsen appreciably," end quote.

Aside from taking the federal funds rate and the interest rate paid on reserves to zero, it's not clear to me what further policy stimulus would mean. If further stimulus were to involve more asset purchases that you alluded to by the Fed, would the Fed buy treasuries or would they try to channel credit to specific segments of the financial market, such as housing or perhaps even municipal debt?

BERNANKE: Senator, I think it's important to preface the answer by saying that monetary policy is currently very stimulative, as you, I'm sure, you're aware.

We have brought interest rates down close to zero. We have had a number of programs to stabilize financial markets. We have language which says that we plan to keep rates low for an extended period. And we have purchased more than $1 trillion in securities. So certainly, no one can accuse the Fed of not having been aggressive in trying to support the recovery.

You know, that being said, if the -- if the recovery seems to be faltering, then we would at least need to review our options, and we have not fully done that review, and we need to think about possibilities.

But broadly speaking, there are a number of things that we could consider and look at. One would be further changes or modifications of our language or our framework describing how we intend to change interest rates over time, giving more information about that. That's certainly one approach.

We could lower the interest rate we pay on reserves, which is currently one-fourth of 1 percent.

The third class of things, though, has to do with changes in our balance sheet, and that would involve either not letting securities runoff as they are currently running off, or even making additional purchases.

We have not come to the point where we can tell you precisely what -- what the leading options are. Clearly, each of these options has got drawbacks, potential costs. So we are going to continue to monitor the economy closely and continue to evaluate the alternatives that we have, recognizing that, as I said, the policy is already quite stimulative.

 

 

The Senate May Extend The Bush Tax Cuts In August

Capital Gains & Games - 21 July 2010 - 6:08pm

Stan's onto something here.  Senate Democrats have suddenly shifted into high gear to pass the Bush tax cuts for those under $250,000 before they go out for their August recess. Democratic staff will meet at 12:30 p.m. tomorrow, and Democratic senators will caucus at 4:30 p.m.  There's still a lot of work to do to bridge the big gaps within the caucus on the estate tax and on the top rates for capital gains and dividends.  Senate Democratic leaders want to put Republican senators on the spot defending tax cuts for the rich before the election.  The Statutory PAYGO Act of last February exempts most of these tax cuts, except for keeping the dividends rate below 39.6%, but that too may be set at 20% or even 15% I'm told.  It's none to soon for the stock market, which has had this as one of its concerns lately.

Extra! Extra! Read All About It! Senate To Stay In Session In August To Consider Tax Cut Extension

Capital Gains & Games - 21 July 2010 - 2:32pm

This story from Jay Newton-Small of Time confirms what I posted earlier today about the Senate Democratic leadership wanting to vote before the election on extending the tax cuts enacted during the Bush administration.

I will resist the strong urge to say I told you so.

Here's the money quote:

The emerging tax plan is designed, as much as anything else, to clarify the differences between the two parties as they hurtle toward the fall elections. Following on their success with the financial-regulatory-reform bill, Democrats are betting that Republicans will once again take up a legislative battle on behalf of the wealthy. "Republicans are going to have a real choice ahead of them," says a Democratic aide. "Are you for extending these tax cuts for middle-class families or are you against them because you want to protect tax cuts for the wealthiest 1% of Americans?"

The showdown could come as early as August, now that Senate majority leader Harry Reid has decided to keep his colleagues in Washington through the middle of next month.

 

Fiscal Consolidation

Capital Gains & Games - 21 July 2010 - 8:20am

In my Fiscal Times post today I provide more links to the rapidly growing literature endorsing fiscal consolidation and throwing cold water on the value of fiscal stimulus. (Earlier links here.) The German-dominated European Central Bank is pushing the idea especially strongly, but the IMF and OECD are on the same team. 

Senate Vote On Extending Tax Cuts More Likely Before Than After The Election

Capital Gains & Games - 21 July 2010 - 7:28am

It's hard for me to disagree with Pete's reporting and analysis in his post from July 14 that Congress will likely vote to extend the tax cuts enacted during the Bush administration in a lame duck session after the election.

But Pete's statement is misleading.  Although Congress as a whole is more likely to act after the election, the Senate is far more likely to debate and pass the extension before the election.  In fact, the only way the Senate may be able to get enough votes to stop what may be a virtually inevitable filibuster is if it acts before anyone goes to the polls in November.

The calculus for the Senate Democratic leadership has become a bit easier in recent days as the Republican leadership has increasingly indicated it wants all of the tax cuts -- including the three provisions (the 35 percent top marginal rate on individual income and the 15 percent rate on dividends and capital gains) whose extension the White House did not propose -- included in the bill.  That provides a strong clue to what's ahead: a filibuster in the Senate if the tax extension does not include these provisions. 

That kicks in what by now is the standard voting analysis.  There are 59 Senate Democrats, but at least one (probably Ben Nelson of Nebraska) is likely to vote with the GOP on this issue.  That forces Democrats to look for two Republican votes to get the 60 needed to invoke cloture.

As yesterday's vote on extending unemployment benefits shows, if the vote is taken after the election, there are only three GOP senators likely to vote with the Democrats: Scott Brown (MA), Olympia Snowe (ME), and Susan Collins (ME). 

But several others could be in play if the vote is taken before and that will make the debate far easier to manage. The reason is simple.  Those senators who vote against cloture on the tax extension debate before the election will create a substantial political problem for themselves because their vote will be characterized as preventing the tax cut for millions of middle class taxpayers from staying in place and, therefore, and increase in taxes.  The GOP senators will say, of course, that this will be taken care of in a lame duck session.  But, given the limited amount of trust voters have these days in what they are told by elected officials, a vote and outcome that is promised to happen in the future won't be as powerful as one actually already taken.

A vote before the election will neutralize some GOP senators who otherwise would vote in lock-step with their leadership every tax issue.  For a handful of GOP senators, the Democrats raising the "they-are-preventing-you-from-getting-a-tax cut-and-here's-the-vote-that-proves-it" claim may make it impossible not to vote with the Democrats.  As a result, the number of potential GOP votes could rise from the three usual candidates to as many as ten. 

This same situation doesn't exist in the House because, with a substantial margin and no possibility of a filibuster, a vote after the election will be much the same as one before.  In addition, voting after the election on a tax cut extension without the top marginal rate, dividends, and cap gains provisions will be easier for many House members who would prefer not having to explain why they weren't included.

Voodoo That I Don't Do

Capital Gains & Games - 20 July 2010 - 12:19am

Courtesy of The Rachel Maddow Show last evening:

Visit msnbc.com for breaking news, world news, and news about the economy

 

 

TroySchneider: @maxwelldt Had I heard you at @Newamerica today, I totally wouldve judged...

@troyschneider - 19 July 2010 - 7:56pm

TroySchneider: @maxwelldt Had I heard you at @Newamerica today, I totally wouldve judged...

George W. Bush: Screwup-in-Chief, 2001-2008

Capital Gains & Games - 19 July 2010 - 9:30am

Over the weekend Republicans unveiled their brilliant new political strategy strategy: the George W. Bush years were the good old days and we should go back to them. A stupider strategy is hard to imagine. The Bush years were an unmitigated disaster. Here is a quick list of his screw-ups off the top of my head in no particular order. Readers are encouraged to add others in the comments.

Thinking that Iraqis would welcome liberation and immediately embrace Western-style democracy, and failing to manage the occupation of Iraq properly. (How can people defend Bush on the basis that he kept us safe after 9/11 without also blaming him for 9/11? If he had the power to keep us safe after 9/11 then why didn’t he keep us safe on 9/11?)

Bullying the intelligence community into giving him the justification to start a war in Iraq over non-existent WMDs.  Ramming through a massive new, unfunded Medicare drug benefit when the system was already broke.  Rushing to enact the hugely expensive Sarbanes-Oxley Act in reaction to the Enron scandal even though there was no evidence that it would have prevented it from happening.  The total failure to deal with Katrina.  Nominating the totally unqualified Harriet Miers to the Supreme Court and appointing other nincompoops to high level positions solely on the basis of slavish loyalty.  Not vetoing anything until two years into his second term.  Thinking that tax rebates and tax credits stimulate growth and failing to make any of his tax cuts permanent.  Destroying the Doha round of trade negotiations by imposing steel tariffs and enacting a massive new agricultural subsidy program at its outset.  (The whole point of Doha was to reduce agricultural subsidies.)  Failing to name a new vice president in 2004 who would have been a viable Republican candidate for president in 2008.  Thinking that cooperating with Ted Kennedy on the No Child Left Behind Act was a good idea and believing in “compassionate conservatism.”  (Made ordinary conservatism look uncompassionate.)  Signing McCain-Feingold after promising to veto it during the 2000 election.  Neutering the Treasury secretary and failing to push for tougher oversight of Fannie Mae and Freddie Mac, thus contributing to the housing crash and economic crisis we have experienced for going on two years with no end in sight. Addendum Jesse Walker made a similar list 6 years ago. Menzie Chinn comments here.