Free Markets, Free People

Orszag – keep Bush tax cuts for now

Obama’s former Budget Director has landed a job at the NY Times as a columnist, and for his first column, essentially says that plans to end the Bush era tax cuts at this time are, well, stupid.

Apparently, finally being able to breath the air outside the beltway has reinvigorated the “common sense” node in his brain

In the face of the dueling deficits [jobs and budget –ed.], the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.

Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.

Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt.

Instead, what we got today from the administration was more of the same – a proposal for $50 billion in infrastructure spending over 6 years.  Not only that, dear friends, but within that proposal is one for a new government run “infrastructure bank”   After our glowing successes with Freddie and Fanny, this is the perfect answer.  And, if you’re as cynical as I am, you’ll probably assume the only jobs that will come out of this are those in the new “infrastructure bank” and those who will still be doing the environmental impact studies in 6 years time on the projects Obama wants to fund through the bank.

Back to Orszag though.  While he is right about the tax cuts, he then says this:

Despite a dire fiscal outlook, many progressives want to make the tax cuts permanent for all but the very highest earners. Many conservatives are even worse: they’d make the tax cuts permanent for the likes of Warren Buffett, even though he’d prefer they didn’t. Making all the tax cuts permanent would expand the deficit by more than $3 trillion over the next decade.

Anyone – what hasn’t been calculated in all of this?   That’s right, cut spending by that amount over the next decade.  That’s 300 billion a year. 

And, note carefully what Orszag is saying here.  He’s talking about ending all the Bush era tax cuts, not just those for the “rich”..  Per the CBO, leaving those cuts for the very highest earners in place will only cost $700 billion over 10 years. The $3 trillion number includes the middle class.

Orszag, as expected of a former budget director, goes on to analyze the future budgets.  He notes that by 2015 – a mere 5 years from now – the deficit will comprise 4 to 5 percent of the GDP.  His analysis is below:

How much savings is plausible on the spending side? Medicare, Medicaid and Social Security will account for almost half of spending by 2015. Even if we reform Social Security, which we should, any plausible plan would phase in benefit changes to avoid harming current beneficiaries — and so would generate little savings over the next five years. The health reform act included substantial savings in Medicare and Medicaid, so there aren’t further big reductions available there in our time frame.

The other half of the budget is mostly net interest (which is not negotiable unless we renege on our debt) and discretionary spending. Discretionary spending is split roughly equally between defense and non-defense spending. The defense component already assumes a phase-down in both Iraq and Afghanistan; saving an additional 5 percent of the Pentagon’s base budget would be a substantial accomplishment and would yield about 0.2 percent of G.D.P. Cutting 5 percent out of non-defense discretionary spending, a stretch politically, would save about as much.

It would be tough, then, to squeeze more than a half percent of G.D.P. from spending by 2015. Additional revenue — in the range of 0.5 to 1.5 percent of the economy — will therefore be necessary to reduce the deficit to sustainable levels.

Summary – cut defense spending … a lot.  Not going to happen with Republicans poised to sweep into the House and possibly take it over.   Cut non-defense discretionary spending – most likely not going to happen regardless of who is in control of the government or the legislature … at least not the the level Orszag thinks is necessary.  “Additional revenue”, a code phrase for “raise taxes”.

Don’t believe me?  The first thing out of his pen after his analysis is this:

One possibility would be to establish a new source of revenue, perhaps through revenue-increasing tax reform, and possibly including a modest value-added tax (that is, a V.A.T. of 5 percent to 6 percent). This approach has many potential benefits, including the opportunity to improve our tax code by cutting back on loopholes and shifting toward a consumption-based tax system. It is also politically impossible, at least in the era of the 60-vote Senate. Those who fear a V.A.T. have little reason to worry — the votes aren’t there.

But the desire sure is.  And, like health care, this is going to be on the left’s agenda from now on.  Orszag just throws it out there as the panacea for capturing the revenue necessary to help “pay down” the deficit.  They may have spent all the money, but it is up to you to pay it back. 

Orszag finishes it up with this:

Some may complain that higher marginal tax rates, even if deferred until 2013, will cripple small businesses and economic activity. It’s hard to believe, however, that effectively returning the tax code to its 1990s form would lead to economic catastrophe, especially when many leading Republican economists — including Alan Greenspan and Martin Feldstein — agree that we can’t afford to continue the tax cuts forever. More troubling, middle-class and lower-class families would be saddled with higher taxes. That’s a legitimate concern, but also a largely unavoidable one if we are to tackle the medium-term fiscal problem.

In fact, if I’m not mistaken, what Greenspan and Feldstein have said is the tax cuts can’t continue forever without commensurate spending cuts.  That’s a much different point than the one Orszag is making.  Frankly, most Americans, at least right now, want to see those spending cuts before they see any additional taxes.  And they’re going to remain angry and uncooperative (or as the Dems like to say, ‘ungovernable’) until they actually see government serious about addressing the deficit with spending cuts.

Got that, Mr. Orszag – spending cuts are the key to deficit reduction, not new taxes.  Put that in your economic model and crank out a new plan, will ya?



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18 Responses to Orszag – keep Bush tax cuts for now

  • “modest value-added tax (that is, a V.A.T. of 5 percent to 6 percent)”
    Entertaining how these ‘modest’ proposals always seem to treat the proposal as if it were the only ‘modest’ tax increase planned, stacked on all the other ‘modest’ taxes already in place.
    Pile of straw, camel.  Clowns.

  • Mr. Orszag tells us in a NYT op-ed piece that “Medicare, Medicaid and Social Security will account for almost half of spending by 2015.”
    His proposal for a temporary extension of the Bush tax cuts of 2001 and 2003 until 2012 simply results in two more years of additional unfunded deficits of $300 Billion a year and moves the discussion to the 2012 election. Mr. Orszag’s call for the expiration of all the Bush tax cuts in 2012 is untenable and impossible in a Presidential election year.
    He neglects to tell us that the Social Security outlays are matched by incoming Social Security payroll taxes. The current $2.5 Trillion Dollars of U.S. Treasury securities and the payroll taxes can sustain full benefits until 2037, at which point it will reduce payments by approximately 22% – 25%. Of course, increasing the payroll base of $106K/year would eliminate ever running out of sufficient funding.
    Medicare outlays are matched substantially by Medicare payroll taxes. President Reagan and the Congress set up Medicare to have part of the expenses paid by Medicare payroll taxes and the rest out of the general revenues coming into the government.
    Medicaid was originally created as a welfare program with 50% – 90% coming from the Federal government and the rest coming from the states. Congress gave it to Health and Human Services because of its historically low 3% cost of administration rather than set up a new federal agency.
    Ever since its creation, Congress loves to include the Medicaid program funded annually by Congress by general revenues with Social Security and Medicare programs funded by employer and employee payroll taxes as a “whipping boy” even though Medicaid has nothing to do with either program.
    While bemoaning the cost of Social Security and Medicare, the U.S. Congress, including the Republicans, gleefully take the surplus revenues of Social Security and Medicare to fund non-Social Security and non-Medicare programs.
    We live in a quixotic world. The Republicans hate Social Security which runs a surplus; i.e. it collects more than it pays out, and demand the extension of the unfunded Bush tax cuts of 2001 and 2003 which will increase the deficit approximately $3.1 Trillion Dollars for the next ten years.
    The Republicans, along with some Democrats, want to introduce means testing of Social Security and extending the retirement age to 70, while continuing to collect and spend the payroll tax surpluses.
    The Republicans, conservatives, and tea party are no more interested in fiscal prudence than Willy Sutton; they simply want to rob the Social Security and Medicare trust funds because that’s where the money is (to once more pay for tax cuts they want, but do not want to fund).
    In short, the Bush tax cuts of 2001 and 2003 should be allowed to expire (just the way the Republicans deliberately set them up) and start addressing the Federal deficit now.

    • Social Security is no longer running a surplus. Medicare and SS will drive up spending sharply in the coming decades, and will banckrupt us if nothing is done to stop it.

    • Social Security which runs a surplus; i.e. it collects more than it pays out

      You are living in yesterday. Ever since LBJ (think mid 1960’s), the Congress and White House have been spending the Social Security surplus, sending IOUs to that file cabinet in West Virginia, but no more. Social Security no longer runs a surplus .. a victim of lower payroll taxes and increased early retirements, both due to the current recession. It was going to end in 2016, so this isn’t much of a surprise.

    • ThoseWhoServe has provided us a useful reference to the left’s talking points.  It is a series of talking points that can only have been developed by those who want to obscure the problem and confuse the discussion.  I suspect, though, ThoseWhoServe actually does not understand the situation and so he falls victim to those talking points.

      First, this year Social Security is paying out more in benefits than it is taking in.  That is not 2017, that is today. ThoseWhoServe wants to extinguish the Bush tax cuts.  Yet, he must have (or never thought of) the idea that expiring those tax cuts will negatively effect the economy.  In other words, more jobs will be lost and, hence, there will be less Social Security (and income tax) revenue received by the government.  For sure, there will be less Social Security income and we can argue where we are on the Laffer curve, but we can easily agree the additional income from expiring the Bush tax cuts will not be as great as the claimed “cost” of the tax cuts.  It never is.

      ThoseWhoServe also does not understand the mythical Social Security trust fund.  There is none.  There are however a series of special treasury bonds that cannot be sold, only turned into the treasury for real money.  Where does that money come from?  The general fund.  You know, the one that is already running a $1.3-1.4 trillion deficit.  How anyone can thing that is a viable method of sustaining Social Security escapes me.

      The Republicans do not “hate” Social Security.  Everyone with an iota of accounting sense knows Social Security cannot continue.  It is premised on a rapidly growing population.  We do not have that and there is no prospect we will have again.  Means testing has been proposed for a long time and it has not been proposed by Republicans.  It is a Democratic proposal.  The increase in full retirement age has been going on since 1984.  At that time the age was raised to 66 for those born  in 1946 and it will continue to rise.  In the end, raising the reitement age to 70 will not be so far away.  The argument that anyone want to “rob” the Social Security and Medicare Trust funds is so idiotic, only an insane person could make that claim.

      ThoseWhoServe would never be able to carry on a debate with any knowledgeable person.  He is a prime example of the Reagan admonition: “So much of what they know is not so”.  Yet, we can be sure, ThoseWhoServe thinks he has made a “telling” post.  He has, but not in the manner he thinks.
      All this is only to flesh out Rag’s succinct comment.  That is just in case ThoseWhoServe actually comes back to see the responses (doubtful, since he is seemingly a ‘concern’ troll) and cannot claim no one justified their complaint.

  • “…they’d make the tax cuts permanent for the likes of Warren Buffett, even though he’d prefer they didn’t.” Is something preventing Buffet from writing an extra check to the US Treasury?

  • Anyone else hoping he’s writing a tell-all book that will come out in 2012?

  • It’s hard to believe, however, that effectively returning the tax code to its 1990s form would lead to economic catastrophe, especially when many leading Republican economists — including Alan Greenspan and Martin Feldstein — agree that we can’t afford to continue the tax cuts forever. More troubling, middle-class and lower-class families would be saddled with higher taxes.

    Either from native talent, or from his mentoring in the WH, Orszag has quite a capacity for propaganda.
    Note the straw man “returning the tax code to its 1990s form would lead to economic catastrophe”. Nobody would assert that.  Raising taxes would not, of its own, cause a “catastrophe”.  It WOULD contribute to further recession/depression, quite possibly.  It would certainly IMPEDE growth.
    As McQ noted, Greenspan et. al. have said something approaching the OPPOSITE of what Orszag attributes to them.
    Also, note the use of the Collective “middle-class“, rather than the correct “middle-income”.  People in our economy move fluidly from one income level to others.  There is no “class” except in Collective dogma.
    The killer was the lie that “middle-class and lower-class families” would be burdened with higher taxes.  Most in those categories PAY NO TAX whatsoever, which is obscene.

  • Orszag must have gone to the Krugman school of economics.

    “….over the medium term, the tax cuts are simply not affordable.” Excuse me, bit this is our money we’re talking about not the government’s. If the government can’t afford their level of spending, there is one thing they can do, Don’t spend so much! 

    “Cutting 5% out of the non-dense discretionary spending, a stretch politically.” Screw politically. What country does this guy live in? I don’t know. But in this country people want less government not more of the same. “Discretionary” means it doesn’t have to be spent.

    Imagine for a moment. If as of tomorrow, the only source of income that the government had was a retail sales tax. People would would see with every purchase just how much this government is costing them. I think we would a civil war within a week.

    • “our money” – no, I’ve seen it argued by theoretically adult and rational people that we should feel privileged that our government lets us keep as much of our income as it does.

      • I’m put in mind of something the Texans put on a flag sometime or other…
        Come and Take It

        • Boggles the mind doesn’t it – it means to me, in their minds, that ‘government’ is something that actually exists as an entity with or without the citizens.  A beneficent entity, akin almost to a deity, that has condescended to watch over us in return for our yearly (weekly, monthly, bi monthly and daily)  ritual sacrifices to it.
          It’s a closet religion.
          Progressively through my lifetime, I’ve watched that thought pattern extend itself until we have what we have today, where Washington (and many State and municipal governments) thinks the citizens are here to support and enable THEM, rather than the other way around.

  • Even if higher rates increased revenues more than the negative effects and expenses of  a declining economy, there is still no evidence that politicians would use this money to decrease the deficit.

    Since they are still spending at an ever increasing rate even though the administration admits that we are headed to debt crises, then there is no reason to assume that they will ever use more money to close the deficit.

    Instead we will just have higher taxes, a worse economy, and more deficits.