How to handle the Bush tax cuts

[cubsneedmiracle]

I'm gonna tempt a few things.. Since the other politics related thread was civil.
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1. Extending the tax cuts would be a good way to stimulate the economy.

As a stimulus measure, a one- or two-year extension has one thing going for it -- it would be a big intervention and would provide at least some boost to the economy. But a good stimulus policy can't just be big; it should also offer a lot of bang for the buck. That is, each dollar of government spending or tax cuts should have the largest possible effect on the economy. According to the Congressional Budget Office and other authorities, extending all of the Bush tax cuts would have a small bang for the buck, the equivalent of a 10- to 40-cent increase in GDP for every dollar spent.

Why? As the CBO notes, most Bush tax cut dollars go to higher-income households, and these top earners don't spend as much of their income as lower earners. In fact, of 11 potential stimulus policies the CBO recently examined, an extension of all of the Bush tax cuts ties for lowest bang for the buck. (The CBO did not examine the high-income tax cuts separately, but the logic it used suggests that extending those cuts alone would have even less value.) The government could more effectively stimulate the economy by letting the high-income tax cuts expire and using the money for aid to the states, extensions of unemployment insurance benefits and tax credits favoring job creation. Dollar for dollar, each of these measures would have about three times the impact on GDP as continuing the Bush tax cuts.

2. Allowing the high-income tax cuts to expire would hurt small businesses.

One of the most common objections to letting the cuts expire for those in the highest tax brackets is that it would hurt small businesses. As Sen. Orrin Hatch (R-Utah) recently put it, allowing the cuts to lapse would amount to "a job-killing tax hike on small business during tough economic times."

This claim is misleading. If, as proposed, the Bush tax cuts are allowed to expire for the highest earners, the vast majority of small businesses will be unaffected. Less than 2 percent of tax returns reporting small-business income are filed by taxpayers in the top two income brackets -- individuals earning more than about $170,000 a year and families earning more than about $210,000 a year.

And just as most small businesses aren't owned by people in the top income brackets, most people in the top income brackets don't rely mainly on small-business income: According to the Tax Policy Center, such proceeds make up a majority of income for about 40 percent of households in the top income bracket and a third of households in the second-highest bracket. If the objective is to help small businesses, continuing the Bush tax cuts on high-income taxpayers isn't the way to go -- it would miss more than 98 percent of small-business owners and would primarily help people who don't make most of their money off those businesses.

3. Making the tax cuts permanent will lead to long-term growth.

A main selling point for the cuts was that, by offering lower marginal tax rates on wages, dividends and capital gains, they would encourage investment and therefore boost economic growth. But when it comes to fostering growth, this isn't the whole story. The tax cuts also raised government debt -- and higher government debt leads to higher interest rates. If estimates of this relationship -- by former Bush Council of Economic Advisers chair Glenn Hubbard and Federal Reserve economist Eric Engen, and byoutgoing Office of Management and Budget Director Peter Orszag and myself -- are accurate, then the tax cuts have raised the cost of making new investments. As the economy recovers and private borrowing rises, the upward pressure on interest rates is likely to grow even stronger.

I have used standard growth and investment formulas to calculate that the overall effect of the Bush tax cuts on economic growth has therefore been negative -- and it will continue to be negative if the cuts are extended.

4. The Bush tax cuts are the main cause of the budget deficit.

Although the cuts were large and drove revenue down sharply, they are not the main cause of the sizable deficit that exists today. In 2007, well after the tax cuts took effect, the budget deficit stood at 1.2 percent of GDP. By 2009, it had increased to 9.9 percent of the economy. The Bush tax cuts didn't change between 2007 and 2009, so clearly something else is to blame.

The main culprit was the recession -- and the responses it inspired. As the economy shrank, tax revenue plummeted. The cost of the bank bailouts and stimulus packages further added to the deficit. In fact, an analysis by the Center on Budget and Policy Priorities indicates that the Bush tax cuts account for only about 25 percent of the deficit this year.

5. Continuing the tax cuts won't doom the long-term fiscal picture; entitlements are the real problem.

One theory holds that the country's long-term budget shortfall is "just" an entitlements problem, the result of rising costs associated with growing Social Security rolls and increased health-care spending (via Medicare and Medicaid). Republicans like this idea because it plays down tax increases as a potential solution. Democrats like it because it makes the recent health-care package seem like even more of a triumph.

But it just isn't true. The deficits we face over the next decade reflect a fundamental imbalance between spending and revenue, one that goes beyond entitlements. Based on projections by the CBO, Alan Auerbach of the University of California at Berkeley and myself, among others, even if the economy returns to full employment by 2014 and stays there for the rest of the decade, the continuation of current fiscal policies, including the Bush tax cuts, would lead to a national debt in the range of 90 percent of GDP by 2020. That's already the highest rate since just after World War II -- and Medicare, Medicaid and Social Security aren't expected to hit their steepest spending increases until after 2020.

According to these same projections, the yearly deficit would rise to 6 to 7 percent of GDP by 2020. The Bush tax cuts would account for a significant chunk of this, considering that in each year they are in effect, the revenue lost because of them amounts to nearly 2 percent of GDP.

Compounding the problem: By increasing the government's debt, the tax cuts have already led to higher interest payments on that debt. So even if all of the cuts expire on Dec. 31, we will still be paying for them for years to come.

Five myths about the Bush tax cuts

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HOW dramatically the pendulum of fear has swung in the past year—from worries about the fragile recovery, to panic about the level of the national debt, and back to anxiety about growth again. Swinging along with it has been the fate of George Bush’s tax cuts, which are due to expire at the end of this year. Democratic Party leaders had hoped to make political capital, just before the mid-term elections in November, from the extension of the cuts for households earning less than $250,000 ($200,000 for single earners). At the same time, they hoped to paint the Republicans as hypocrites for moaning about the deficit while fighting to keep low taxes for the very rich. But these hopes, like the recovery, have withered away.

The tax cuts, which were supposed to last for only ten years, had their genesis in the 2000 presidential campaign, when both Mr Bush and Al Gore, the Democratic candidate, proposed to return a portion of the then budget surplus to voters. As the economy tipped into recession in 2001, stimulus became the rationale for the cuts, and for the 2003 law that phased them in more rapidly than originally planned. By then, reduced tax revenues were contributing to a steady increase in the deficit. The Congressional Budget Office has estimated the cost of the cuts over the ten years to 2011 at $1.7 trillion.

Their approaching end might therefore have pleased deficit hawks. The CBO’s “baseline” budget forecast, which assumes that the cuts do indeed expire as planned, sees the deficit falling from 9.1% of GDP in 2010 to 2.5% in 2014. A full extension of the Bush tax cuts would increase the shortfall in 2014 to 4.1% of GDP (see chart) and would produce a total budgetary cost of $3.3 trillion over the next decade. That seems completely unaffordable.
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But red ink is no longer the main concern in Washington. In July Barack Obama proposed the renewal of cuts for all but the wealthy—an exception that would save perhaps $700 billion over the next ten years compared with a full extension. But disappointing economic numbers have altered the political terrain. A growing number of Democrats have warmed to a full extension, fearful of campaign ads accusing them of raising taxes when the economy is weak.

Some form of extension of the cuts for most households does seem prudent. America’s economy can ill afford a big fiscal blow. A return to recession is still unlikely, but the odds of one have recently increased. Tax changes aside, fiscal policy will in effect tighten substantially anyway next year, with the end of the two-year stimulus program and continued belt-tightening at the state and local-government levels. If legislative deadlock adds to this an unintended tax hike, the impact could be dire.

But another ten-year extension is too mighty a weapon to wield against recession, just as no extension at all is a dangerous way to attack the deficit at present. America can, in fact, afford to provide more fiscal support for its economy. But in order to reduce the risk of a debt crisis, Congress should at the same time lay out a credible path back to sustainable budgets, and this it is failing to do. It might have used the opportunity provided by the end of the Bush tax cuts to embark on a long-overdue reform of the tax code, broadening the tax base and making the system simpler and more efficient. Instead, the wrangling is only providing more evidence of Washington’s political sclerosis as the economy continues to weaken.

The Bush tax cuts: A slight reprieve? | The Economist


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Economists are getting more pessimistic about the strength of the U.S. recovery, but they don't think policy makers should do anything more to support it, according to the latest Wall Street Journal forecasting survey.

The 53 surveyed economists, not all of whom answered every question, offered a bleak picture of tepid growth and high unemployment. On average, they still don't see the unemployment rate dropping below 9% through at least June 2011. They expect the economy to add just 136,000 jobs a month over the next 12 months, down from a forecast of 157,000 in the July survey. At that rate, job creation will barely keep up with new entrants to the labor force.

Another increase in initial claims for unemployment benefits reported Thursday by the Labor Department underlined the troubles facing the labor market. Initial jobless claims climbed by 2,000 to 484,000 for the week ended Aug. 7, the highest level since February. The four-week moving average, which aims to smooth out weekly volatility, increased 14,250 to 473,500.

The claims data come on the heels of a disappointing July employment report that showed just a small increase in jobs, excluding the effect of layoffs related to the decennial census.

"If claims remain at their current level, then even the modest recent gains in private payrolls will not be sustained," said Ian Shepherdson of High Frequency Economics.

When asked about the biggest risk facing the economy, "too few jobs, too little wage income and too little consumer spending" was the most popular choice. Issues such as inflation, deflation, state- and local-government cutbacks and another downturn in housing garnered just a handful of responses each.

Meanwhile, they forecast annualized, inflation-adjusted growth of 2.5% for the third quarter and 2.9% for 2011, down from 3.1% for both periods only three months ago.
Click this bar to view the full image.

Despite the continued challenging conditions, 30 out of 48 economists who answered the question said the economy didn't need any more fiscal or monetary stimulus. Six economists said more fiscal stimulus was necessary, while five want more monetary stimulus from the Federal Reserve and seven said that the economy could use both.

The survey was conducted before the central bank's announcement Tuesday that it would reinvest proceeds from its mortgage-backed securities and agency debt portfolio into Treasurys, essentially boosting monetary stimulus.

"The economy needs government to get out of the way," said Stephen Stanley of Pierpont Securities.

The economists, though, generally didn't support the idea of ending Bush-era tax cuts, which will expire at the end of this year unless Congress acts. Just three respondents said that the tax cuts on individual income should be allowed to expire for everyone. Thirty-two economists said they should all be extended, while 11 said they should be extended for people making less than $250,000 a year—the policy option backed by the Obama administration.

Many of the economists said any extension should be temporary while the recovery still is struggling to gain traction. But amid concerns about the deficit, 23 respondents said the extension should be offset with spending cuts or other taxes.

"It is irresponsible nonsense to claim that tax cuts 'pay for themselves,' " said Nicholas Perna of Perna Associates.

Although concerns about the deficit persist, more than half of the respondents—28 economists—don't think the U.S. will adopt a value-added, or consumption, tax over the next decade. "Political pressure against is too strong," said David Wyss of Standard & Poor's Corp.

But some economists see a VAT as one of the few ways to bring down long-term deficits. "It is not politically feasible to slow federal spending growth enough to bring the debt accumulation to a sustainable pace. A VAT is a clever way to increase tax revenues paid by middle- and lower-income households without increasing their marginal income-tax rates," said Paul Kasriel of Northern Trust.

Economists Want Policy Makers to Back Off - WSJ.com

 

[cubsneedmiracle]

So..

What should we do?

(lets keep it civil)

 

[RamiTheBullsFan]

I'm not a macroeconomic expert.

But, in principle, I believe we should let the Bush tax cuts expire.

 

[Scoot26]

I'm not a macroeconomic expert.

But, in principle, I believe we should let the Bush tax cuts expire.

Me either, but I believe we should let the Bush tax cuts expire on only the Top 2% of taxpayers. which will raise the rate on the top 1% from 35% it's currently at to 39%.

When you look at tax rates historically...39% is alot less than what it was from 1932-1981.

1932-1935 the top rate was 70%
1935-1941 the top rate was 79%
1941-1945 the top rate was 81%, 84%, 88%, and 94% [WWII]
1946-1963 the top rate was 91% (This is known as one of the biggest economic booms in our history as well)
1963-1981 the top rate was 70% (In the 1970's we had stagflation)

Through the 80's the top rate fell from 70% to 50% and eventually to 28% by 1987 known as Reaganomics (Or as George Bush the first called the policy...Voodoo Economics). A recession then kicked in and lingered for years. Budget deficits grew...then George Bush the first passed a tax increase that created two new tax brackets for people who made over $100,000 that had the highest rate at 39.6%.

My source: The Tax Foundation - U.S. Federal Individual Income Tax Rates History, 1913-2010

 

[Crystallas]

You can analyze the tax cuts to kingdom come, but all the stats and figures will point to the main problem: overspending. There is no way to plausible fiscal accountability based on history, because every measure has a counter measure, whether it comes from government or the special interest groups and media in power. Other than that, everything will be spin/slants on economic practices, which gets us nowhere and creates gridlock in congress or gridlock by all forms of business.

The Bush Tax cuts were a bandaid solution, and taken to far from Keynes theories which have never worked in any form, debating that any macro stimulus has always been too much or too little. We need a long term solution, or we will see more sectors bubble, with little stabilization in sight. Just a plan to fix today's problems for a few months at a heavy price, but ignore tomorrows big picture.

Wow, I'm sounding like a politician. But I can't help it, I have put decades of thought and research in every which angle at the issue, and that's just what I believe.

 

[cubsneedmiracle]

Me either, but I believe we should let the Bush tax cuts expire on only the Top 2% of taxpayers. which will raise the rate on the top 1% from 35% it's currently at to 39%.

When you look at tax rates historically...39% is alot less than what it was from 1932-1981.

1932-1935 the top rate was 70%
1935-1941 the top rate was 79%
1941-1945 the top rate was 81%, 84%, 88%, and 94% [WWII]
1946-1963 the top rate was 91% (This is known as one of the biggest economic booms in our history as well)
1963-1981 the top rate was 70% (In the 1970's we had stagflation)

Through the 80's the top rate fell from 70% to 50% and eventually to 28% by 1987 known as Reaganomics (Or as George Bush the first called the policy...Voodoo Economics). A recession then kicked in and lingered for years. Budget deficits grew...then George Bush the first passed a tax increase that created two new tax brackets for people who made over $100,000 that had the highest rate at 39.6%.

My source: The Tax Foundation - U.S. Federal Individual Income Tax Rates History, 1913-2010

Ive been looking for something that goes into detail with the tax levels in our history.

I knew it was a TON higher for quite awhile.

 

[cubsneedmiracle]

You can analyze the tax cuts to kingdom come, but all the stats and figures will point to the main problem: overspending. There is no way to plausible fiscal accountability based on history, because every measure has a counter measure, whether it comes from government or the special interest groups and media in power. Other than that, everything will be spin/slants on economic practices, which gets us nowhere and creates gridlock in congress or gridlock by all forms of business.

The Bush Tax cuts were a bandaid solution, and taken to far from Keynes theories which have never worked in any form, debating that any macro stimulus has always been too much or too little. We need a long term solution, or we will see more sectors bubble, with little stabilization in sight. Just a plan to fix today's problems for a few months at a heavy price, but ignore tomorrows big picture.

Wow, I'm sounding like a politician. But I can't help it, I have put decades of thought and research in every which angle at the issue, and that's just what I believe.

I don't think we'll get one. Pretty sure it's just gonna be short fixes all the way down the line.

It's okay.. Every once and awhile.. It works.

 

[Gustavus Adolphus]

You can analyze the tax cuts to kingdom come, but all the stats and figures will point to the main problem: overspending. There is no way to plausible fiscal accountability based on history, because every measure has a counter measure, whether it comes from government or the special interest groups and media in power. Other than that, everything will be spin/slants on economic practices, which gets us nowhere and creates gridlock in congress or gridlock by all forms of business.

The Bush Tax cuts were a bandaid solution, and taken to far from Keynes theories which have never worked in any form, debating that any macro stimulus has always been too much or too little. We need a long term solution, or we will see more sectors bubble, with little stabilization in sight. Just a plan to fix today's problems for a few months at a heavy price, but ignore tomorrows big picture.

Wow, I'm sounding like a politician. But I can't help it, I have put decades of thought and research in every which angle at the issue, and that's just what I believe.

I really hate to say this, but......a tax increase and a spending freeze might be what this country really needs.

Probably can say the same about interest rates as well, but only after I refinance my house.

 

[Crystallas]

I really hate to say this, but......a tax increase and a spending freeze might be what this country really needs.

Probably can say the same about interest rates as well, but only after I refinance my house.

Ultimately, some sort of stable tax increase with controlled spending is the best for us to balance debts and budgets. Our problem now, is that we're juggling the 3 viscous forms of taxation without representation. Regulatory Fines/Penalties, Inflation, and Deflation... all at the same time. The weird thing about all of it, the organizations and individuals that get hurt the most through inflation, are the ones having inflation issues. The organizations and individuals who get hurt the most by deflation are getting hurt most by deflation. Usually in these times, someone still can weave their way through and make out okay, but right now, that is a rare exception to businesses with special treatment, who have made great decisions to prevent as much harm as possible.

I really hate to agree with having a spending freeze, but it might be realistic with the heads that we have in congress right now. Although I have a decent plan that I think would work for everyone without having as much shock to the nation.
To sum up a 30 page plan, I basically would like to see the government get rid of raises based on inflation and cost of living, and go to a pay scale with incentive based bonuses. In order to do this, we would have to apply it to departments one at a time and make sure that the incentives aren't just the team and persons who can pencil-whip the most. I know it's not possible when you have so many Congressional leaders, the President, and VP all tied with the modern day Jimmy Hoffas, but in reality, this type of cutbacks will benefit far more than any flat plans.

 

[CBPtOSU]

I'm an econ major, and I am pretty liberal. I think the cuts should expire. I'm a believer that cutting taxes at the top to stimulate growth won't work anymore. Let them expire on the top 2% and then use that money to help balance the budget and put people into work. The key to balancing the budget isn't cutting spending or increasing taxes, it's putting people to work and then tying up the loose ends. If people are working, they are paying taxes and spending. And because they are spending, businesses make more profits, and thus have to pay more taxes also. Put people to work, and you increase your tax base.

 

[Crystallas]

I'm an econ major, and I am pretty liberal. I think the cuts should expire.

Welcome to the political side of CCS then!
What kind of Liberal are you, Universal Liberalist, State Liberalist, Social Liberalist, or one of the modern mass-media defining Liberal as larger government to protect us in their eyes.