Tag: Bush tax cuts

Fiscal Cliff I: The Search for More Money

As Thrill noted, the so-called fiscal cliff was semi-averted last night. I didn’t pay too close attention to the debate since the basics of the deal had been hashed out days before. All we had last night was political theater. It’s true that 2/3 of the Republican House voted against it. But they allowed it to come to a vote and most voted after they were sure it would pass as an ass-covering maneuver. I’m reminded — and not in a good way — of the TARP vote where the Republicans and Democrats agreed to let vulnerable House members vote against it once they’d secured passage.

To be honest, I’m OK with the deal, since the alternative was letting all the tax cuts expire. I would have preferred it be paired with entitlement reform but the Republicans apparently scuttled that, to judge by the GOP Senate leadership’s statements over the last few days. It will mean about $60 billion per year in revenue — a few drops in the bucket that only looks large in comparison to the trivial budget maneuvers we’ve gotten until now.

What no one is mentioning, of course, is that there is a much larger tax increase going into effect: the expiration of the payroll tax holiday, which is expected to add about $100 billion to federal revenue. That means every working person is going to see a 2% slice taken out of their next paycheck. I’ve long been in favor of this, feeling that the longer the holiday went on, the more difficult it would be too get rid of and the worse it would make the situation with Social Security/Medicare. I also thought it was wrong-headed from the beginning. From the employer side, it would have made hiring cheaper and eased unemployment. From the employee side, all it did was (maybe) goose consumption. And it did even more to narrow the wedge of people actually paying taxes in this country. The cut was temporary and it’s gone now. But it will be fun to watch the shocked reactions of people who think taxes are just going up on “the rich”.

The big thing — and the reason my reaction is kind of “meh” — is that two more important cliffs were put off. One is the sequester, which seems to have bipartisan opposition. Republicans don’t want military spending cut, despite spending currently being in excess of Vietnam War levels (although the number of soldiers is only slightly above post-Cold-War levels). And Democrats don’t want anything cut.

Obama has indicated that future spending cuts will have to be matched by tax increases, but I think he’s overplaying his hand here. The Republicans were forced to give in on taxes because the alternative was tax hikes for everyone. Obama is going to have to give in on spending cuts because the alternative is a 8-10% cut in everything else.

He’s also going to have to give in because of the third cliff: the debt ceiling. This could be the most interesting fight as Obama might try to fight this on legal/constitutional grounds. I’m not looking forward to this as it was almost an economic castastrophe last time. Hopefully, our leadership won’t be quite as stupid (yes, I know ….).

In the end, I think the most important thing to be pulled out of this unholy mess is the chained-CPI formulation of Social Security that was temporarily on the table and should be again. This seemingly small change would slow the growth of the program and save us trillions down the road. If we can get that, it will have a more lasting impact than the tax hikes, debt ceiling or sequester.

This isn’t over yet. We’ve got another two months of theater to go.

Boehner Flinches from the Abyss

So for all of the stress, the House GOP leadership (including Paul Ryan), a minority of Republican Congressmen, and a majority of Democrats
passed the tax deal they were offered by the Senate. The Rich (less than 1% of the population) got tagged with a 4.6% increase (horrors!) and caps were placed on deductions, among other meaningless items.

I suppose it is palatable since we have at least gotten the remainder of Bush’s tax cuts to remain permanent. Even Grover Norquist has twisted this and basically said that since the tax cuts had expired, those Republicans who voted for this deal were voting for a tax cut, not an increase. Interesting contortion.

But then there’s virtually no spending cut in this deal. The increased revenue is not going to make a dent in the deficit. For all the drama, we slapped a few million wealthy people with a small tax raise and refused to address the fact that spending is out of control. It’s a pathetic failure of the entire political establishment.

It is easy to blast Boehner today, but what choice did he have? Yes, I personally believed it would have been best to go over the cliff and let the chips fall where they may. However, I knew that Boehner wouldn’t do that. He didn’t want to take the blame for tax increases on the middle class (it’s going to happen eventually anyway) and it was too tempting to target the unpopular minority that is top earners. Also, he likes grand, useless compromises for some reason.

On the bright side, around 2/3 of the House GOP broke with Boehner on this deal and hence have political cover. Boehner has set himself up beautifully for the inevitable coup and primary challenge that he has coming.

I would say that he was courageous to do this IF I actually believed that the deal means anything. It doesn’t. It’s too little, too late, and still comes across as a major defeat for the GOP. We could have gotten a tax deal as useless as this one weeks ago and not had the brinksmanship that managed to make Obama look like a triumphant, responsible statesman.

Boehner must not be returned as the Speaker of the House, even if means leaving the post vacant. The real fight is going to be over the debt ceiling and Boehner cannot be counted on to do right either by his party or the nation.

Starving the Budget

With the fiscal cliff looming, Republicans are indicating some flexibility on taxes, at least for the higher income brackets. Naturally, this is generating some opposition:

To start with, Kristol misunderstands the opponents of the tax increases on the rich, whose main goal is not to ensure that the rich get to keep more of their money. Their main goal is to prevent the federal government from obtaining a new source of revenue. Why might that be?

Tax increases can be immediate, but spending cuts must be spread over many years. That provides politicians with plenty of opportunities for change their minds on spending (i.e.: vote for me and I will increase funding for your program). Contemporary Western Europe provides a perfect example of this phenomenon. In the wake of the 2008 crisis, Western European countries have introduced substantial tax increases that, in my humble opinion, are the primary reason for Europe’s double-dip recession.

There is a reasonable point in this, which is that promised spending cuts often don’t happen. But that’s not a fundamental law of the universe. After the tax hikes of the late 80’s and early 90’s, we did get spending restraint. And we got it from the same people who control the purse strings right now … a Republican House of Representatives. If the GOP wants spending cuts to happen, they can make those spending cuts happen, as they did in the 90’s.

Moreover, the Grand Bargain that has to happen is on entitlement spending with Medicare and Social Security. That will involve statutory changes, not budget changes and those are extremely hard to undo. If Congress raises the retirement age or changes the COLA formula or institutes Medicare vouchers, that will be almost impossible to undo (as we’re now seeing with Obamacare).

To be frank, the argument that we should not give the government new revenue cross me as a rehash of one the most fiscally destructive ideas in the last thirty years: the so-called “Starve the Beast” theory.

Starve the Beast was the theory that if we cut taxes, it would force the government to cut spending because the resulting deficit would be unsustainable (this was before people decided that the Laffer Curve was, in fact, the Laffer Line and that all tax cuts paid for themselves). Starve the Beast sounded tempting, especially to faux conservatives who were big on tax cuts and not so big on cutting spending. But it ran aground on several rocks:

First, spending cuts don’t just fall from the sky. You have to actually cut spending at some point. And the people who had to cut spending were the same people trying to force themselves to cut spending. It was like trying to lose weight by eating a box of doughnuts hoping that will force you to go the gym.

Second, the lesson Congress learned from Starve the Beast wasn’t that they couldn’t tolerate big deficits. The lesson they learned was that they could. As a result, we’re now enjoying our fourth straight year of trillion dollar deficits.

Third, and this is a point I keep harping on, Starve the Beast made spending painless for the taxpayer. This was especially true in the Bush years when we started two wars and put in a prescription drug program while removing millions from the tax rolls. The impression given to the taxpayers was that wars and drug programs were free, or at least were paid for by somebody else (somebody rich). It has continued in the Obama years, with spending and taxes being manipulated so that Obamacare appears to decrease the deficit when it, in fact, does not and tax hikes only acceptable if they hit the dreaded rich.

I keep saying this and I am going to keep saying it: the most important aspect of any government budget is that spending should hurt. Spending should hurt either in cutting other services or in raising taxes. If you aren’t doing either of those things, you are giving people government on the cheap. And they will have no incentive, none whatsover, to support spending cuts.

Would you turn down services that are discounted 40-100%?

One of the problems we face in balancing the budget is that spending cuts are popular in general and unpopular in detail. When you ask people what spending they support cutting, the only thing that even gets 50% is foreign aide. But a big reason for that is that, for most Americans, government spending doesn’t hurt them. They can support all these wonderful things confident that the money for it will come out of somebody else’s pocket.

And that leads in to my real point: if we’re going to raise taxes to close the budget deficit, we have to raise them on everyone, not just the evil rich. The obsession the Democrats have with only raising taxes on the rich is a product of class warfare, not fiscal sanity. To balance the budget with taxes — hell, to balance them with any sensible mix of taxes and spending cuts — is going to mean raising taxes on everyone. Alex’s post made this point very well. Look at the breakdown of where the fiscal cliff taxes are coming from: over 80% are from people who are not rich.

If we just raises taxes on the rich that will, once again, give the American people the impression that the budget deficit is something other richer people will cover. It will make it almost impossible to cut spending in the future because, really, how is all that spending hurting 98% of the voters? But if we raise taxes now, raise them on everyone, then the popular support for spending restraint will come roaring back.

That’s not just ivory tower theorizing. We have a historical precedent. From the early 80’s to the early 90’s, Reagan, Bush and Clinton raised taxes eight times. The resultant backlash brought the Republicans into power in 1994 on a platform of fiscal discipline. And they delivered. And as much as the press tried to whine and cry and tell sob stories about how the budget cuts were destroying our country, the Republicans (and Clinton) got re-elected. Because people didn’t want more spending and they saw that, in many cases, the country was better off without it.

The only way to make spending cuts happen and make them stick is to make sure the American public feel it when we spend too much. And they’re not going to feel it because we eliminated a tax break on corporate jets.

There’s another reason to stop kicking the can down the road. Bruce Bartlett:

At the time the tax cuts were enacted, I recall arguing with my longtime friend Grover Norquist that temporary tax cuts were a really bad idea. Supply-side theory has always held that permanent tax changes are vastly more powerful than temporary changes, I told him. He didn’t disagree, but said the Bush tax cuts were de facto permanent because Democrats would never have the guts to permit them to expire; they would be renewed forever. People and businesses will know that, Mr. Norquist said.

That was a foolish position for political and economic reasons. People and businesses don’t make the sorts of changes in their behavior that would give the economy a supply-side boost unless they have confidence that today’s tax regime will be in place when the payoff from increased work, saving or investment is realized.

You know all that stuff we’ve been saying about regulatory uncertainty and how businesses are afraid to invest because they don’t know what the future will bring? Well, these temporary tax cuts, renewed every couple of years, are part of that. Bartlett specifically gets into the R&D tax credit and how its temporary status has created wonderful lobbying opportunities but little economic benefit. He argues that higher but more certain taxes would be better for our economy than lower but more uncertain taxes. And given that Bartlett basically invented supply-side economics, I’m inclined to agree with him.

Obviously, the best scenario would be to burn the entire tax code down and rebuild it, a la Simpson-Bowles. But that would take months, if it happens at all. If you want to create certainty, putting together a long-term budget deal with higher taxes is the way to go. And then, if we do get a tax overhaul, that will be an unexpected shot in the economy’s arm.

Yeah, I know. This is the dreaded compromise. But the idea that we’re going to cut spending 40% is ridiculous, not just in terms of the politics of the possible but in real terms. Cutting spending 40% means we can pay for Medicare, Social Security, the military and veterans. Everything else — from Medicaid for poor seniors to law enforcement to disaster relief would go. Oh, and every state would suddenly find a 30-50% hole blown in their budget.

Moreover, I’ve been thinking of something Ed Morrissey said the other day, in the context of a compromise on immigration:

The insistence on demanding nothing but the hard-line approach creates big problems for the nation and the GOP itself. First, the issue of border security has been left in limbo for more than 11 years after 9/11, and more than seven years after the 9/11 Commission rightly demanded better security on both borders, and the broken visa program that offers no follow-up on expired entries. If we continue to punt rather than compromise, we will be left waiting for at least four more years to get any kind of solution.

In two years, there will be another election. In four years, we will have a new President. If the Republicans have exercised some serious budget restraint by then and our deficit is falling, then we can reopen the issue of returning to Bush tax rates. Until then, however, we have to deal with the situation we have in front of us. And the situation we have is a big deficit that can not be closed by spending cuts alone and Democratic control of the White House and the Senate.

Keep in mind something else: taxes are already programmed to go up. The price of doing nothing is a gigantic half-trillion dollar tax increase on January 1. If we insist on taxes not going up, the result will inevitably be that they will.

Look, I hate taxation. I’m one of those who will get hit pretty hard if we return to Clinton-era rates or something approaching them. But there is something I hate more than taxes and that is debt. And I don’t see any practical way, outside of Fever Swamp La-la Land, to balance the budget without raising taxes.

Yes, the GOP needs to drive a hard bargain. Tom Coburn has identified tens of billions in wasteful defense spending that we should cut. Agriculture subsidies and ethanol subsidies should be on the table. The Ex-Im Bank should have been killed last year. Hell, maybe we could even taken Obama up on his “Department of Business” idea if it means we kill off Commerce, SBA, Ex-Im and some other budget functions. The hardest bargain, of course, has to be driven on entitlements.

But we can not stick to anti-tax orthodoxy. It’s not realistic. It’s not responsible. And, in my opinion, it’s not conservative.

Let me elaborate on that last point: low taxes are not a conservative value; small government is. Low taxes do not create small government, they are the result of keeping government small. Raise taxes to cover the bloated government we have now, hack at it like hell for four years and then we can talk about cutting taxes back.

Update: If you think you balance the budget without raising taxes, there are various budget simulators that can get you there.

Ceiling Obama’s Fate

I don’t like Speaker Boehner or trust him.  Which just means I have a lot in common with your average conservative Republican congressman (that and skinny-dipping).  It bothers me that this is effectively the most powerful Republican in the federal government.  He’s going to compromise our best strengths away and we’re going to get screwed.   But I really have no idea what else the GOP in the House should do.

We’re talking about Obama’s legacy here.  A working and lasting deal on the debt and taxes would be the starting point for anything good or bad that happens after it.  Obama missed this chance last time through incompetence and opportunism.  He insisted on holding off on any long-term solution until after re-election and allowed the uncertainty  of the fiscal cliff and Taxmageddon  (as well as Obamacare, now not going away) to drag down the economy for another year and a half. 

This is why his first term must be considered to be a failure.  Obama roughly held unemployment in place–unless you want to get into the more complex argument about labor force participation–and that was the issue foremost on voter’s minds.  But Bill Clinton promised that nobody could have fixed the economy in four years and he wouldn’t lie to us, right?  So Obama gets his re-election and another shot at a grand bargain on the debt ceiling and taxes.

Frankly, I’d be more impressed if the federal government woud just pass a real budget in compliance with the law, but they are so fucked that this isn’t even on the table right now.   Whatever Big Fuckin’ Deal these damn fools come up with, it’s going to equally celebrated and meaningless.  They’re not doing what needs to happen, they’re postponing it.  They’re not really doing what they’re supposed to, but making it look like they are.  It’s theatre, but we had best know what the audience is expecting to see on stage: The Rich as the antagonist, who must lose at third act.

The GOP is going to lose plainly on taxes.  Incomes on those who make over $250,000 need to go up because we can’t keep defending these people for no clear reason.  Yeah, yeah, raising taxes now would throw us back into recession or worsen the one we’re already in, depending on your outlook.  The proposed tax increases won’t close the deficit either, I know.   But Obama must have that to show off.  It’s inescapable.  Don’t get me wrong, if we HAD to give Obama a trophy, I’d tell him to take Boehner’s testicles; but he doesn’t want them.  He wants to confiscate more wealth from the wealthy.

I say that the taxes on top earners have to go up because the American people don’t know dick about economics.  Let’s face it.  If they did, they would have shown a lot more curiosity about the lack of a federal budget for nearly four years now and possibly asked some questions about why the recovery was oh so weak.  Oh, yeah: They probably wouldn’t have re-elected Obama either.

My prediction is that the Democrats will get the tax increase on “the rich” while barely giving anything in return.  Don’t get mad about this though.  It’s a loser and the GOP will be better off with it resolved.  It will suck all the wind out of the “party of the rich” arguments if any other part of the deal falls through.

The GOP has the big gun in this argument.  They can always let all of the Bush tax cuts expire.   The demented extremist side of me who would like to collectively kick the electorate in the junk for last Tuesday LOVES the thought of doing this just for spite.  Shitty thing is that this would hurt my household too.  I’m a working schlub, married to a teacher, and we have two kids.   We are that middle class that everyone purports to care about so much and really doesn’t.  Hence, we hate everyone else.

Obama most assuredly does not want to be blamed for raising taxes on the middle class (except for Obamacare, because “kids with cancer” or something).   If the Democrats don’t agree to some spending cuts beyond reducing the military to menacing our enemies with rubberband-fired paper clips, then the GOP must announce that no agreement that realistically reduces the deficit could be reached and they have no choice but to allow the tax cuts to sunset.

The Democrats do not want this and will work hard to prevent it.  The problem is that even though we have the advantage in the form of the great tax increase gambit, we have the biggest disadvantage on the game board: Boehner himself.  This isn’t about him, it’s about Obama.  Both of them want to secure their own legacies and I think Boehner is the less committed of the two.   Worse, he still thinks that something can be worked out man-to-man with this president.  His greatest weapon is that which Obama most fears: tax increases on everybody.  Not beating Obama at golf.

If Boehner does not use the big gun, then he establishes Obama as a good-enough president for resolving the debt stalemate, passes an idiotic compromise that accomplishes nothing for the good of his country, and proves once again how ultimately meaningless it is to give the GOP control of any part of the federal government. 

Obama’s legacy is on the line but all eyes should be on Boehner now.

Administration Expectations

I’m more interested in what happens after Inauguration Day than what happens on Election Day. As much as I want Obama out of office, I wonder how much it would really matter if he loses. My own sense is that his election is all about who is going to be holding the bag of shit when it finally breaks.

As I’ve said in another thread, I think Romney is going to win on Tuesday (assuming that the ballots are all counted and there aren’t any court challenges to deal with). I like Romney and even favored him in 2008. Not that I had any special love for anti-gun, big capitalist, Mormon governors from liberal states. I simply thought he was the best qualified because of his executive experience. His positions are a bit (to put it mildly) flexible and I can easily see him being a Bush-style disappointment on the domestic policy front. But I’m not here to give reasons to vote for or against him. Hal has done an utterly thorough job of it already. Obama could win too, sure. Sometimes my foresight is blinded when I confuse what is happening with what I hope will happen. It’s why I try to stay emotionally unattached. Maybe enough people believed Bill Clinton when he said at the DNC that nobody could have reversed the damage in four years and Obama will pull it together if we just give him another term.

One of these two assholes is going to win, that’s all we know. If Romney wins, he comes into office with a Democratic Senate Majority (or Minority, not sure what to expect here) Leader who has already vowed not to work with him. He will also have a hostile press that will suddenly start noticing again how jacked up our economy and foreign policy are. The potential for a quagmire is limitless. What can he do?

Obama will suffer with an uncooperative House and maybe a Senate. Reid has been, at best, unhelpful to Obama so I have to wonder how much good it would do for Democrats to hold the Senate with an Obama win. Worse, if he wins, it will because of the angry, fearmongering campaign he ran. The divisiveness is not going to fade away just because he squeaks by in a narrow win. Bush made this mistake in 2004 and paid for it dearly the minute he tried to accomplish anything. He was right that something needed to be done, but the other side found that it was better and safer to reject compromise. They turned out to be right–for their own political gain.

Traditionally, presidents in their second terms face scandals and don’t seem to accomplish much. Reagan had Iran/Contra, Clinton had his privates made public, and Bush was simply ground down by Iraq and Katrina. Obama already has Benghazi percolating, even though most of the news media is helpfully keeping the story quiet and not asking a lot of pesky questions until the election is safely over. Obama will do what what he has been doing for the past two years: throwing up executive orders with zero permanence beyond 2016. I suspect that if he wins, he’ll leave a hollow legacy and ultimately destroy the Democratic brand for at least 12 years (to the extent he hasn’t already; we’ll know soon enough).

That’s not a reason to want him to win, but it just highlights the impossibility for either one to accomplish anything with his bag of shit. That bag contains the long-awaited double-dip recession, more credit downgrades, the possibility of inflation, rising threats overseas, and on and on and on. Gridlock is great when we want to avoid the kind of populist overspending that drives us further into debt, but when the government is so dysfunctional that it refuses to pass a budget for four years even as credit agencies continue to warn it about its recklessness, we should worry.

The questions I have are:

1. Are Americans just too divided and partisan to work with those on the other side of the aisle to solve major policy problems? If so, we are well and truly fucked.

2. What sacrifices does each side need to make to effect a Great Compromise to seriously address the economic and debt crisis? I say that the GOP needs to allow some of the Bush tax cuts to expire since they’re clearly not having any stimulative effect at this point while the Democrats need to give up some of their sacred cows.

3. What the hell is it going to take to get away from this 47% vs 47% nonsense where both parties favor their base and win elections by lying to independents? Are we really that divided or is there common ground somewhere?

Recently, Matthew Dowd wrote a fantastic article about the need for a “peace accord” after the election between divided Americans and I like his thinking. We are way too obsessed with seeing points scored against the other side while ignoring the fact that nobody is driving the bus. This isn’t going to change just because Romney or Obama wins and will only get worse if the outcome is seen as questionable. Somebody needs to win BIG and it just isn’t in the cards.

But how do we do this peace accord thing? Are there any people in government/media/anywhere who have the credibility and know-how to even negotiate this? We can’t seem to quit looking past getting our team into office to realize that the people we elect aren’t governing.

I’ll do my part and turn out to vote, but I’m keeping my expectations safely low until I see evidence that the electorate even wants leadership. Right now, I’m not seeing it and that’s why we’re going to be stuck with nothing but the fool who wins.

Rahm Emanuel was right about not letting crises “go to waste” and it’s obvious that nothing is going to happen until disaster is staring us in the face. In the end, I guess I’m only voting for Romney because I’m less afraid of what he’ll do with it. Anyway, sorry to fill your weekend with darkness!