Posts Tagged ‘Bush tax cuts’
If you want to take a break from hating Obama for the fiscal cliff deal—as Krugman put it, it’s not the compromise that’s so odious, but Obama’s “I’ll have to retreat if you don’t stop being so stubborn” style of getting there—you might want to take a few minutes to read over Marco Rubio’s reasons for voting against the compromise. (He was one of eight senators* to do so.)
Rubio’s principle claim is that the return to Clinton-era tax rates will hurt the economy (yes, you have to ignore the fact that we had rapidly growing economy during Clinton years and that the Bush-era tax cuts contributed mightily to the debt problem the Republicans currently claim to hate—or don’t!):
Thousands of small businesses, not just the wealthy, will now be forced to decide how they’ll pay this new tax…
I’m no big city economist, but Blake Goud is**, and I’m pretty sure he destroyed this whole “tax raises on small businesses” nonsense on this very blog a long time ago. Most of the revenue taken from small businesses under the higher tax rates will come from a tiny (.3%) number of “small” businesses that make most of the money of businesses classed under S corporations. Note Rubio draws a distinction between small businesses and wealthy in the above sentence; but there’s no real distinction in the case of the tax rates.
Here’s the rest of that sentence:
Thousands of small businesses, not just the wealthy, will now be forced to decide how they’ll pay this new tax and, chances are, they’ll do it by firing employees, cutting back their hours and benefits, or postponing the new hire they were looking to make.
This is a reprise of the past two years’ worth of arguments over austerity: cut rich people’s taxes, or else. It’s not based on any sort of economic theory or empirical data. It’s a temper tantrum, in which rich people get what they want or nobody gets an economy. This was roughly Mitt Romney’s raison d’etre as a candidate, and he lost decisively.
Furthermore, this deal just postpones the inevitable, the need to solve our growing debt crisis and help the 23 million Americans who can’t find the work they need.
Again, the debt crisis was partially created by the Bush tax cuts.
And my favorite part:
Rapid economic growth and spending reforms are the only way out of the real fiscal cliff our nation is facing.
This sentence makes no sense. Yes, economic growth over the long term helps eliminate deficits. But Rubio here seems to be proposing economic growth as both a cause and a consequence of this solution. It’s like if he said at the start of the Iraq War, “Winning is our only path to victory!” Come to think of it, somebody basically did just that, the same person who’s at the start of this whole tax cut mess in the first place.
* Go on, guess who one of the others was. Go on. Okay, it was Rand Paul.
** For the purposes of this post, Portland is a big city.
Obama partial extension of Bush tax cuts gives a tax cut to 95% of the top 1%, GOP cries “socialism!”
The types of people that Paul Krugman derides (rightly) as the Very Serious People are always bringing in ideas for deficit reduction and for “solving” the problem of the “fiscal cliff” that have one thing in common: they talk a big game about imposing shared sacrifice in the name of deficit reduction, but in fact call upon the wealthy for very little of the cuts. The LA Times’ Michael Hiltzik describes:
“Yet there’s still reason for most Americans to fear the deal-making aimed at avoiding the fiscal cliff. For one thing, the debate seems increasingly to be driven by the wealthy, who can be trusted to protect their own prerogatives while declaring everyone else’s to be wasteful. “
Hiltzik digs up the statistics I didn’t have time to find from the Tax Policy Center (run by the Urban Institute and the Brookings Institution) about the extension of the Bush tax cuts excluding the points which only affect the very wealthy. As I expected, even the “middle class” tax cut extensions primarily benefit those with the highest incomes because these tax cuts don’t apply only to those earning less than $250,000, they also benefit the wealthy’s first $250,000 in income. Here’s how the numbers break down (taken straight from the Tax Policy Center report):
The key numbers is that, even though Obama’s proposal is supposed to amount to a tax increase on the wealthiest Americans, it doesn’t do even that very well and amounts to a huge tax cut for the wealthiest. Only 4.3% of the top 1% face a tax cut that averages just above $11,000 while the rest of the 1% who get a tax cut see their average tax cut of over $16,000).
Moving up to the richest of the rich, the 0.1% (i.e. those people with more income than 99.9% of all Americans), more of them face a tax rise, but still only 1 in 8. The 7 out of the 8 highest one-tenth of one percent income earners get a massive tax cut, averaging nearly $68,000 per year.
This compares with a tax cut on the middle quintile (people around the middle of the income distribution, between the 40th and 60th percentile), who all get tax cuts, but only see $1,100 per year.
And yet even Obama’s proposal which is overwhelmingly tilted towards the wealthy is derided by Republicans as “Socialism!” as they cry out to protect the “job creators” (who apparently aren’t protected when 95% of the wealthiest 1% of Americans see a tax cut under Obama’s proposal, which gives you an idea of who the GOP sees as their natural base).
Now that the Democrats have passed by 51-48 an extension of the Bush tax cuts, there is a clearly defined line for politicking the differences between the two parties’ positions. Of course, the Senate bill is meaningless because it would have to be first introduced in and passed by the House, and if that ever happened,
hell would freeze over the Republicans would not hold their filibuster fire that they direct towards anything Obama supports.
The economics of the two plans are clear though: the Senate bill continues the tax cuts for the middle and upper-middle classes (all the way up to income levels of $250,000). The wealthy get the same tax cuts for the most part, but not the additional tax cuts that make the cost much higher with little economic benefit. To benefit the economy as a whole the money would have to get invested, which is unlikely since there is plenty of capital already around and insufficient demand to justify much more new investment, or be spent, and the wealthy spend a smaller proportion of their income than people with lower incomes. All it does is balloon the deficit further (which the Republicans sometimes like to pretend they care about, but actually don’t).
So, now we wait for the election to get any resolution on the automatic budget cuts in the sequester and the run up to the December 31st deadline for the entire Bush tax cuts to expire. And, from where we sit now, Obama refuses to let the high-end Bush tax cuts be extended (rightly, in my view) and the Republicans say they will hurt the economy by allowing the parts of the tax cuts expire that have the most impact on consumer spending, at a time when the economy is weak.
On the politics of the tax cut extension (outsourced to TPM):
Faced with this implicit filibuster threat, Reid’s challenge is to convince at least 50 members of his 53-member caucus to vote to extend middle-income tax cuts, and other tax benefits targeted at middle class voters. He’s already signaled he’s rounded them up. That won’t be enough to force a floor debate on the issue — but it gives Democrats a specific vote they can point voters to and validate their election-year argument that Republicans are so committed to preserving low marginal tax rates for wealthy Americans that they’d rather let everyone’s taxes go up instead.
So, just so we’re straight here, there are 50 votes (plus Joe Biden as tie breaker) ready to pass an extension of the Bush tax cuts, except for those on the wealthiest, in the 100 member Senate, and it can’t pass because (like on everything these days), the Republicans are abusing the filibuster to require a 60 vote majority to pass anything!
Maybe it’s time to get rid of democracy, and replace it with something invented by the private sector.
For actual commentary on the Bush tax cuts, check out a few earlier posts.
Bush’s former press secretary Ari Fleischer is out with an op-ed in the Wall Street Journal showing he has lost none of the skill at lying that he displayed while working for Bush. His op-ed concludes with the idea that:
[Obama]‘s right that the system isn’t fair, but not because the top 1% pay too little. It is because they pay too much.
His evidence? Congressional Budget Office data that he describes:
There’s also another way of looking at fairness, and that’s the tax burden. Here, consider the top 20% of income earners (over $74,000). They make 50% of the nation’s income but pay nearly 70% of all federal taxes.
The remaining 30% of the tax burden is borne by 80% of the taxpayers, those who make less than $74,000. In short, this group’s share of taxes paid, 30%, is lower than the share of income they earn, 50%.
This is a frequent conservative dodge to say that the rich pay too much in taxes and if the rest of America wants government programs, well, we should dig into our pockets to pay for it instead of asking the rich to bail us out (oh, yes, the irony with the response to the financial crisis is rich).
Let’s start with an easy bogey about who we are talking here. Let’s for a moment look at how much the top 1% of income earners make (they represent the area with the most outsized growth in income over the past 30 years). The chart below shows that the top 1% have more income than the bottom 50%.
Breaking this down by share of total income:
Top 1: 20%
2-20th percentiles: 30%
21-50th percentile: 37%
51-100th percentile: 13%
Even within the top 20% of income earners, the bulk of the income is at the top: the top 1% are even richer than the rest of the top quintile (top 20%). And it turns out that the growth of the 1% is the largest driver of inequality in the US over the past 30 years. The chart shows the share of income going to the top 1%, compared with the Gini index, which is a measure of inequality (where at 0 everyone’s income is equal and at 1, one person has all of the income). If anything this chart understates the rise in inequality since it only measures income, not wealth.
What does this have to do with the top 20% paying most of the the income taxes? The role of the system of progressive taxation we have is that it is supposed to reduce before-tax inequality by providing assistance to the poorest, funded by everyone, but with a higher marginal tax rates for higher incomes (higher tax rates on every dollar above a certain threshold). You can measure the progressivity of the tax code by looking at the percentage decrease in the Gini index from the before-tax income distribution to the after-tax income distribution. The higher the reduction, the more progressive the tax code is.
The tax system was pretty good at narrowing the income distribution in 1980 when it lowered the Gini index by 10%. The progressivity was decreased significantly from the application of supply side policies at the beginning of Reagan’s first term. It declined all the way to the tax reform in 1986 (signed by the Socialist Ronald Reagan), which reversed the trend. The Center for American Progress describes:
The 1986 reforms lowered the top marginal tax rate but also removed or reformed a host of provisions that allowed rich households to reduce their tax bills, and raised the tax rate on investment income. The combined effect was an increase in the effective tax rate for the richest 1 percent from 25.5 percent in 1986 to 31.2 percent in 1987, and small tax cuts for the bottom 60 percent of households.
Clinton added by raising taxes on the wealthy in his first term, but began the trend reversal by lowering the tax rate on capital gains (which mainly go to the wealthy) and the progressivity of the tax system began to suffer. This of course was continued under Bush, and the full extension of the tax cuts in 2010 until the end of 2012 continued to chip away at the progressivity of the tax system as many wealthy people had tax losses from 2008 that significantly reduced their tax burden in 2009 (and could be carried forward into 2010).
So now here we are, with a tax system that is at its least progressive since 1992, when the country had just gone through 12 years of Reagan and Bush and we are at a crossroads. Conservatives are complaining about the taxes on the rich (even as the 1% has its highest share of income; see this CAP report for further debunking of the “the rich are taxed too much”). We have a choice about whether a progressive tax system where people pay higher tax rates as their income increases, or an alternate reality where the rich see their tax burden go down as social programs that help those with the lowest incomes get slashed. I know which direction I want to go in.
When it comes to rhetoric about the high-end Bush tax cuts, the conservative rhetoric tends to focus on the impact on “small businesses” (that is when they are not using the shield of “job creators” instead of the more appropriate “stinkin’ rich folk”).
For example, you see things like this (from NPR):
But when you look at small businesses that actually hire sizable numbers of workers — 30, 50, or 100 people — many more of those businesses would see a tax increase.
The National Association of Manufacturers says 73 percent of its member companies file taxes as individuals. Their average profit is close to $600,000. So many of them would see their taxes go up. By another measure, about 50 percent of all small-business profits would be affected by the expiration of the tax cut.
At another factory outside Boston, Carl Pasciuto runs his family business called Custom Machine with his brother Michael. Their factory, which makes everything from fly-fishing reels to aerospace gear and medical devices, employs about 90 people.
Like many small businesses, Custom Machine files its taxes in a way that its profits are treated as the owner’s personal income and taxed at personal rates. So if the company shows $1 million in business profit next year and the Bush tax cuts are repealed, the business will get hit with a tax increase as if it were a person.
“There’s a big difference between a guy on Wall Street making a million dollars and a company like this making a million dollars,” says John Donnelly, the chief financial officer for Custom Machine.
The way this comes across is that a small business owner who runs their business (and pay their taxes) as if it were them alone, who happen to hire workers to help them (specifically, they have an S-Corp business). So if their business makes $600,000, they will be treated like an individual who makes $600,000, and tax rates on incomes above $600,000 will rise letting the Bush tax cuts expire. In 2010, the efforts to let the tax cuts expire failed in part because some Democrats asked for people with incomes up to $1 million be exempted from any Bush tax cut expiration (instead of $250,000 as Obama wanted). It appears that this will not be as much of an issue this time around, but it misses the big point: what the hell is a small business?
Using anecdotal examples like Joe Custom Machine and then saying that “about 50 percent of all small-business profits would be affected by the expiration of the tax cut” makes it sound like that most of the impact will be felt by companies who employ people to build stuff, but are taxed as if they were individuals. The Treasury counters with analysis expertly described by the Center on Budget & Policy Priorities showing that:
“only 2.5 percent of small business owners, and 7.9 percent of filers with any income from small businesses that employ people, face the top two tax rates”
What accounts for the big difference? The definition of what is a small business. The raw definition is that a small business is “any taxpayer who receives any income from any “pass-through” entity”. There are four problems with this definition:
- I can set up a pass-through entity that has nothing to do with a small business. If I have $100 million lying around to invest, I might want to invest $1 million into 100 properties, and want to keep each of them separate, so I will set up 100 “small businesses”, that is, corporate entities that pass all the rental income to me. Those would be counted as 100 small businesses, which is fine, but not something that we need to give tax breaks to (they are investment vehicles for one rich person). If each of them is generating 6% annually for their owner, then are confusing 100 small businesses earning $60,000 each with one multi-millionaire earning $6 million a year.
- A similar type of ‘small business’ that is not really a small business is if that $100 million were invested into 100 businesses. The income that gets passed through each of the 100 investment vehicles will still represent income for 1 wealthy individual, not 100 small businesses, so we should view an increase in their taxes as increasing taxes on a ‘small business’.
- Included in the definition of “small business owners” are people who earn anything from a small business. Suppose I am an executive at XYZ Corp, making a $3 million salary, and I also help small businesses by providing advice to them on how to increase sales. If I am not doing it on a charitable basis, but instead charging a nominal fee, it is most likely going to be a separate, pass-through entity, which would count as a small business (and I would be the owner of that small business). That $5,000 in income would make me a ‘small business owner’, even though I made $3,005,000 last year.
- The final issue is with how NPR described the impact of the expiration in terms of the share of total profits that would be affected. As CBPP describes: “In 2009, only 0.3 percent of S corporations had incomes exceeding $50 million, but they accounted for 35 percent of all S corporation income.”
So, while most small businesses who are S-corporations (itself only a portion of quote-unquote ‘small businesses’) are actually small businesses, a few very large ones (3 in every 1000) account for over one-third of profits. So, while 50% of the total profits would be affected by the Bush tax cut expiration, 2/3rd of this number would be from just 0.3% of ‘small businesses’, and only 2.5% of the total number of ‘small businesses’ would be affected at all. That’s doesn’t really square with the Republican argument that letting the high-end Bush tax cuts expire would decimate small businesses.
Robert Greenstein at the Center on Budget & Policy Priorities describes extremely succinctly (in less than 2 minutes) why the Democrats have to stand their ground on allowing sequestration (the defense cuts) and the full expiration of the Bush tax cuts at the beginning of 2012, making the point that only then, will the Republicans allow for a debate that includes both revenue and spending cuts, which this blog (and Obama) have argued is necessary for long-term deficit reduction (with the caveat that nothing except perhaps high-end Bush tax cuts being allowed to expire) until the economy has recovered.
Also, as Jared Bernstein has maintained for quite a while, it is not so much a fiscal cliff as it is a fiscal slide. The economy will not tank on Day 1, but over the first half of 2013 will be slowed by the fiscal tightening.
According to a blogger at the American Enterprise Institute, James Pethokoukis, Romney will focus his deficit reduction on cutting government spending without raising taxes, the standard plan for current conservative thinking, and cites an op-ed from Glenn Hubbard, an advisor to Romney saying that: “Hubbard suggests American-style austerity — cutting spending and debt without raising taxes — and the policy certainty it brings can lift growth both in the short and long term.”
This is standard conservative orthodoxy (with a nod to Grover Norquist’s inane pledge binding most Republicans to no new taxes ever). However, it is nonsense, particularly starting from the position the economy is currently in of a liquidity trap (pdf), where the private sector continues to deleverage. If the government joins in by cutting spending it will contribute to more slowing in the economy, lower employment, and further need for the private sector to deleverage instead of making investments in new capacity (since overall demand will fall).
As the total spending in the economy falls, GDP will either fall or continue to rise at an anemic rate, doing nothing to lower the deficit as a percentage of GDP. The ‘wonder’ of the conservative model comes from faulty economic assumptions that ‘certainty’ from government spending cuts will lead to economic growth (something which has almost never happened, particularly in an economy coming out of a deep recession).
There is some acknowledgement by Republicans that cuts to government spending will hurt the economy (but only cuts to the defense budget).
Then there is a problem with the logic of lowering the deficit only through spending cuts when taxes are low as a percentage of GDP, as they are currently.
The big drop in tax collections occurred in the early 2000s as the tech boom turned into a bust, and the Bush tax cuts were passed (which is why total tax receipts even immediately before the financial crisis were well below the level from the late 1990s).
The claim also that tax rates are high is clearly false as well: the highest marginal tax rate, as well as the tax rate on investment is at its lowest level in decades.
Source: Think Progress
The deficit cannot be entirely closed by undoing the Bush tax cuts, but it will have a big impact. The Center on Budget and Policy Priorities (CBPP) estimates that allowing the Bush tax cuts to expire would almost cut the deficit in half by 2021.
Any plans to cut the deficit should be implemented over many years, so that the spending cuts and tax increases do not derail the current recovery. These plans will have to include some spending cuts, but cannot be accomplished by cuts alone (and the counter argument about taxes being high is false: tax collections are well below near historical levels).
Right now, the focus should be on stimulating the economy (which will increase GDP, and lower the deficit as a share of the total economy), with some plan for longer-term deficit reduction. Given the political environment, it makes sense to start with the areas that have the most popular support, as well as those that will have the smallest negative impact on the economy as a whole (rhetoric about “job creators” be damned), which is why the Obama Administration’s plan to let the Bush tax cuts expire at the end of
2010 2012 makes the most sense.
Any plan to cut deficits over the next decade so they are smaller than the long-term growth rate in the economy (2-3%) to make them sustainable over the long-term will have to come from a mix of spending cuts and tax increases, including eliminating large tax cuts on the wealthiest. Letting the highest end Bush tax cuts expire is a good start until a more comprehensive plan takes shape (with or, more likely, without Republican help).