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?