The Other 2%

One of the big issues before Congress right now is whether and how to extend the Bush tax cuts, enacted in 2001 and scheduled to expire at the end of this year.  Congressional Republicans want to make them permanent.  President Obama and many Democrats want to extend the Bush tax cuts for everyone except the very wealthy, i.e., those in the top tax bracket (which would go from 35% back to 39.6%, where it was in 2001).

Throughout this debate I had agreed with the Democratic position, for reasons of both equity and economics.  Over the past thirty years, incomes and wealth in this country have become much more skewed in favor of the rich, so as long as we have a progressive tax system why not use it to push back against that trend?  (I’m not saying let’s equalize incomes, just that trying to check the increase in inequality is a reasonable thing to do.) Only about 2-3% of households — those earning over $373,651 —  are in the top tax bracket, and even then their first $373,651 of income would be taxed at the same rate as before, so the pain associated with raising the top tax rate seems small.  On the economic side, cutting taxes for the wealthy provides a smaller boost to consumer spending than just about any other tax cut or benefit increase you can think of.  See, for example, the “stimulus bang for the buck” table on page 5 of this testimony by Mark Zandi, Chief Economist of Moody’s Analytics back in April.  In the case of making the Bush tax cuts permanent, a dollar of tax cuts would raise GDP by 32 cents, compared with, say $1.41 from an increase in aid to state and local governments or $1.61 for an extension of unemployment benefits.  (The logic is that wealthy taxpayers save much of their income, so small differences in their after-tax income won’t affect their spending much, at least not compared with other taxpayers.  And increases in government spending increase GDP directly and can, if the government starts jobs programs, employ people directly.) And then there are the tax revenues to consider — those top 2-3% of taxpayers have a huge amount of taxable income, so a 4.6% difference in that top tax rate makes a big difference in the government’s deficit and debt.

But equity and economics are unlikely to carry the day in Washington, D.C.  Today’s New York Times has a remarkable op-ed by the same Mark Zandi, titled “A Tax Cut We Can Afford,” in which he argues for extending the Bush tax cuts, sort of.  He says they should be extended for the wealthy, too. His reasoning is political:  Yes, it would be ideal to let the top rate go back to 39.6% and use the new revenue to pay for jobs programs or bigger jobs tax credits, but that option is not on the table.  Republicans and conservative Democrats would undoubtedly block it.  Another truly sizable spending stimulus is not on the table either.  What is feasible, besides minor measures like the jobs bill passed this month, is . . . extending the Bush tax cuts.

Although extending tax cuts on those making $374,000+ a year is not a great option, Zandi says, raising their taxes and (with effective stimuli off the table) doing nothing with it is a worse option.  Most of U.S. GDP is people’s consumption, and even though the rich consume less of their income than other people do, they still consume a lot, so much that their consumption may determine the fate of GDP over the next few years.  The Times recently reported that rich Americans have cut back on their spending.  The article quotes Zandi yet again: “One of the reasons that the recovery has lost momentum is that high-end consumers have become more jittery and more cautious.”  The top 5% of Americans account for one-third of consumer expenditures, according to the piece.

Generally speaking, you don’t raise taxes in a recession.  That’s one of the endlessly repeated lessons of the Great Depression (Hoover and Congress raised taxes in 1932, Roosevelt and Congress did so in 1936), and it still applies.  Again, if you could raise upper-income taxes and use them to pay for well-targeted stimulus programs, that would be fine, but to quote Zandi again, “it is asking too much of our political system now to get it just right. I’m skeptical that a politicized Congress would be able to pull it off, and failure to do so would leave us next year with higher taxes and a hobbled recovery.”

Zandi says the tax-cut extension for wealthy households should be temporary, to be removed when “the economy is off and running,” with the increase phased in perhaps over a three-year period.

I am pretty well convinced.  I’ve been arguing in this space that the severe slump we’re in makes this a terrible time for drastic spending cuts.  By the same token, this is not a good time to raise taxes on anyone.

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One Response to “The Other 2%”

  1. goswald hughes Says:

    I am buying it Ranjit but only for Political reasons. I think Zandi somehow started parroting the GOP line about uncertainty. We all know that Oprah will not quit if she were to be taxed higher, but why give the GOP a talking point for a very small fiscal gain. I think we get beyong the hump and offer investment tax credits for all and sundry. Want a tax cut? Create a few jobs. Thats the only way we guarentee that the tax cuts would be stimulative.

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