By James Kwak
Peter Orszag wrote an article for the latest Democracy** about political dysfunction and the “looming fiscal showdown” at the end of this year. A lot of it is a warmed-over description of political polarization, although Orszag ignores one of its most important causes: the growing influence of money in politics and the resulting need for politicians to go chasing after contributions from extremist billionaires. (Orszag instead subscribes to the theory that political polarization results from public polarization, which has been pretty well debunked by Fiorina and Abrams.)
Orszag’s recommendation, however, is spot-on: First let the Bush tax cuts expire; then, assuming that economic stimulus is necessary, push for a big, across-the-board, temporary tax cut. (Orszag proposes a payroll tax cut and an increase in the standard deduction; I’ve previously proposed a payroll tax cut.)
There are two major reasons why President Obama should pursue this strategy. First, one more time: the Bush tax cuts were bad policy a decade ago and they are bad policy now. Even if you believe in a large permanent tax cut, giving the vast majority of it to high earners, the investor class, and heirs of multi-millionaires is the wrong way to do it. We need to get rid of them, once and for all.
Second, trying to negotiate a partial repeal of the Bush tax cuts (Obama’s current strategy) is bound to fail. Grover Norquist said it very clearly:
“If there were no vote in Congress and taxes rose automatically, then no politicians would have voted for higher taxes and no elected official would have broken his or her pledge.
“But that is different from supporting a plan by some Democrats that would end some or all of these lower tax rates, higher per-child tax credits and the A.M.T. patches.”
In other words, any bill that would extend some but not all of the Bush tax cuts would violate the Taxpayer Protection Pledge, get zero Republican votes, and fail. Why? Because. Despite the fact that no Republican has violated the pledge in any significant manner since, oh, 1990, the administration thinks it can get such a bill to pass.
Instead, if you let all the Bush tax cuts expire, the baseline gets reset (for Pledge purposes). In January 2013, taxes will be at 1997 levels (negotiated by Clinton and Gingrich), and anything the administration proposes will count as a tax cut—not just for the Pledge, but also for public opinion. Republicans being the party of tax cuts, it would be strange to see a major tax cut with 100% Democratic support and 0% Republican support.
Yes, the Republicans might block it out of spite and try to shift the blame to the Democrats (for letting the Bush tax cuts expire), and they will have the debt ceiling to give them leverage. But I find it hard to see how getting the Bush tax cuts out of the way would make things worse—either for President Obama or for the country.
* The greatest TV episode of all time, by the way.
** The issue also includes my review of Why Nations Fail and what it means for contemporary America.
The Baseline Scenario 
Honestly, f*ck Grover Norquist.. I can’t believe one man with one pledge is causing this kind of consternation in a mighty country like the USA. The decline and fall of western civilization…
The latest Fed’s Survey of Consumer Finance showed median net worth for the middle class is back to where it was in the early ’90s. All gains lost. The poor, not as apt to be among the homeowners, didn’t fall much, the top 10% barely, if at all. But among the middle class, the loss was nearly 50%!
So, tell me again about the “job creators” who have bought off the politicians to create cozy tax policy that favors them gives them an ever-increasing piece of the shrinking pie.
Sure, F anyone you want, the first paragraph makes complete and utter sense, unless of course, you would lose money. Face it, and get over it, it doesn’t pay to die anymore.
it is a very sad indictment on American politics that the Republican party seems basically at the beck and call of one man and presidential electoral politics revolves around nine “battleground” states.
The tyranny of the majority this is not.
Payroll tax cuts is a very bad policy choice, because it undermines, whether intentional or not, the SS Trust Fund, and makes it easier for the political class to chip away or remove SS benefits.
There are loads of Austrian and Chicago schools economists-austerians, who would love to see this happen, in my estimation.
Although I don’t believe Prof Kwak is an austerian, his supporting cuts to the payroll tax advances that agenda, that is, of austerity, and/or weakening of the New Deal legislation, laws which are among the most successful in the history of the modern state= the greatest good for the greatest number.
If anything, the wage base limitation on the OASDI portion of FICA should be removed, and this would have benefit of making the fund more solvent and robust, for the rest of us who RELY on it, to keep ourselves out of POVERTY.
“Instead, if you let all the Bush tax cuts expire, the baseline gets reset (for Pledge purposes).”
In other words, make sure Norquist gets a laurel wreathe on the way to getting fiscal policy closer to rationality? OK, if that’s what it takes, I’m for it. If, however, that isn’t what it takes, then I share the profane sentiments in earlier comments.
But it may not be necessary. Democrats have a long tradition of tying their own shoe-laces together when it comes to fiscal jousting. This time, though, they seem to have the advantage. If Obama wants to keep offering the Republicans the opportunity to vote for the sort of tax legislation that the majority of voters say they want, while Republicans keep turning him down, I think we ought to let Obama do it. Heck, if the eventual strategy is to let all the tax cuts expire and then pass smaller cuts for the non-rich, Obama has about half a year to make the GOP jump. Why do we want to stop him?
Once More, With Feeling from “Buffy the Vampire Slayer?”
Please say it isn’t so…
@Sandi – the damage done is PERMANENT, also. How can so many jobs disappear in a 6 month period!? Slammed, financially, below the Slave Lords, Drug Lords and War Lords who OUR ARMY WAS TO PROTECT US FROM! To fail THAT mission is the same as declaring WAR on us!
Since all we’ve done in the past decade, when guided by the self-proclaimed intellectuals with deeply impacted brown noses, is get real good at discussing how many angels can dance on the head of a pin, so let’s hear why it WASN’T genocide…
“….Also required is a campaign of vilification and dehumanization of the victims by the perpetrators,…”
Face to face, I’m punching the next person who tries a party line on me at a social event that they INFILTRATED….don’t give a crap anymore – it’s WAR.
WAR on the Middle Class, and you can’t punch out the campaigners promoting vilification – “…not everyone DESERVES to own a home…”….?!
I posted before:
TBTF = big enough to commit genocide:
cut and pasted from wiki:
For genocide to happen, there must be certain preconditions. Foremost among them is a national culture that does not place a high value on human life. A totalitarian society, with its assumed superior ideology, is also a precondition for genocidal acts.[82] In addition, members of the dominant society must perceive their potential victims as less than fully human: as “pagans,” “savages,” “uncouth barbarians,” “unbelievers,” “effete degenerates,” “ritual outlaws,” “racial inferiors,” “class antagonists,” “counterrevolutionaries,” and so on.[83] In themselves, these conditions are not enough for the perpetrators to commit genocide. To do that—that is, to commit genocide—the perpetrators need a strong, centralized authority and bureaucratic organization as well as pathological individuals and criminals. Also required is a campaign of vilification and dehumanization of the victims by the perpetrators, who are usually new states or new regimes attempting to impose conformity to a new ideology and its model of society.[82]
Buffy the Vampire Slayer reference in a fiscal policy post…..swoon….
The Bond Man:
Removing the wage cap, and keeping the price break points the same, means that for every dollar paid in tax, returns 15 cents in benefits.
That is getting very close to a welfare system, rather than a self-supporting system.
Isn’t that what you want – a self-supporting program, with little or no use of general revenues?
Don Levit
I found the links to Why Nations Fail: The Origins of Power, Prosperity and Poverty very helpful. If I understand Darren Acenoglu and Darren Robinson correctly … there are inclusive economic models and extractive economic models. Examples of the latter include: Russia with its aristocracy and serfs, plantation owners and slavery in the Americas, the economic model based on what the philosopher Michael Sandel calls “free market fundamentalism” and William Black calls “theo-classical economics”.
I’ve recently been introduced to a new “theory” called “open source economics”. It’s quite fascinating. The claim is that by “crowd-sourcing” economic problems, the world can find new solutions to overcome the current economic crisis.
reposting:
I found the links to Why Nations Fail: The Origins of Power, Prosperity and Poverty very helpful. If I understand Darren Acenoglu and Darren Robinson correctly … there are inclusive economic models and extractive economic models. Examples of the latter include: Russia with its aristocracy and serfs, plantation owners and slavery in the Americas, the economic model based on what the philosopher Michael Sandel calls “free market fundamentalism” and William Black calls “theo-classical economics”.
I’ve recently been introduced to a theory called “open source economics”. It’s quite fascinating. The claim is that by “crowd-sourcing” economic problems, the world can find new solutions to overcome the current economic crisis.
Hi Don Levitt, Where does the other .85 dollar go? The fund has a need for additional revenues, I guess where I come out on the issue, is those with the higher incomes need to pony up more, but I realize this is politically unpopular.
Whether its’ called self-sustaining or welfare, SS remains a welfare program for people like my 85 year old Mom, who uses the monthly check to cover her rent.
We provide as a nation for virtually every self-interested group, from drug pharma, to banking, and the list can go to sickening lengths.
But, providing for USA people when elderly or disabled, represents to me the highest good.
I’m not sure I understand the price break point idea, but, yes, I am favoring, obviously, a self sustaining system, and if higher taxation is how we do it, then so be it.
Thanks for the follow up, Don.
How can one have a democracy without an educated population ? Should education be affordable ? What are alternative models for delivering education ?
Apparently, in America the most popular TV channel is Fox News.
@ Tippy, I always enjoy reading your posts.
@Bond Man, Thanks :)
Planning a loOOOooog comment for this post :) when I make some time today
Some would argue a majority of Americans were convinced to vote against their own self-interest by rejecting universal health care and now they may do the same on taxation.
@tippy, kids tune out when you start teaching them to obey the authority of *isms* because no one on the planet can experience an *ism* in the way that they experience a hunger pain. No one needs to be told how to accept hunger because they were born into the wrong caste. They need to learn AGRICULTURE.
Every human being has the RIGHT to make their lives less miserable through honest work. Which monkey brain *ism* ACCEPTS that? NONE.
And crowd-sourcing is just another kind of tyranny – the tyranny of what’s popular. Excuse the generations on either side of Gen X for not TRUSTING anyone still in the SUV and on Prozac to remain “cool” when they find a lung on the sidewalk…not what the Queen had in mind when she says, “Be calm and carry on.”
That’s how we got into this dark and delusional hole – it was *popular*. Especially among the drunks…
Italy, Spain, and Greece have high tax, solid social welfare policies. Why are they failing?
The US is running $1.5 trillion deficits. Will a high-tax, continued solid social welfare policy make everything balance? Can you cite an analysis, rather than merely an opinion?
High taxes on high earners make moral sense if most high-earners are social parasites stealing income from the more moral lower and middle classes. Is that what you think?
Sweden: Slowly Shrinking Welfare State
Sweden is moving in the direction of smaller government, rejecting Keynesianism, lowering tax rates, and reducing the burden of the public sector. They learned from the dysfunction they experienced under a high-tax regime. Why should the US move in the direction which Sweden is abandoning?
Politicians cannot predict the results of their policies, and certainly not the costs. Why should we move toward more political control of larger percentages of resources and production?
@andrew.. Umm.. You forgot this part of Sweden “it is still a social-democratic welfare state, with the world’s second highest taxation (right behind Denmark)..” they may move right, but it definitely want come close to those right wing zealots in your house or senate.. Give me mine first, screw the less fortunate! Welcome to the grand ole’ US of A..
To Malingerer,
Sweden is at least recognizing that progressively higher taxation leads to failure. You think the US is under-taxed. Do you have an analysis which shows what “just the right amount” of tax is?
http://www.newgeography.com/content/001543-is-sweden-a-false-utopia
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The Swedish seem to be an admirable people, hard working and cooperative. “The 4.4 million Americans with Swedish origins are considerably richer than the average American. If Americans with Swedish ancestry would form their own country their per capita GDP would be $56,900, more than $10,000 above the earnings of the average American.”
The old Sweden, in contrast, has not done as well in economic terms. In 1960, taxation was 30% of GDP, roughly where the US is today. As taxes rose, economic growth decreased, with Sweden dropping from being the 4th richest country in 1970 to being the 12th richest in 2008. Swedish GDP per capita is now $36,600, far below the $45,500 of the US, and even further behind the $56,900 of Swedes in America.
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@Andrew_M: What say we re-do our monetary system, top to bottom? End the Fed, get out from under the control of the international banking cartel, just say no to fractional reserve banking, and spend money into circulation for bridges, roads, schools, healthcare, and all those kinda things that great countries have and everybody really needs?
We don’t have to be like Sweden. We could be like the United States of America.
The “Fiscal Cliff”? A Hoax….
The “Fiscal Cliff”? A Hoax….
The “Fiscal Cliff”? A Hoax….
Richard (RJ) Eskow
http://www.huffingtonpost.com/rj-eskow/the-fiscal-cliff-a-hoax-t_b_1588655.html?utm_source=Alert-blogger&utm_medium=email&utm_campaign=Email%2BNotifications
(Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America’s Future and the host of The Breakdown, broadcast Saturday nights from 7-9 pm on WeAct Radio, AM 1480 in Washington DC.)
@carla.. Well said.. Ain’t it so.. I’d chose that over the dystopian future the USA is facing right.. It doesn’t have to be the end of growth, just a new type of growth. What do we value more, our fellow man or the next piece of brand name sh*t in our driveway? The clock is ticking, we either do it right or it’ll get done to us.
@Andrew – Extremist billionaires without ANY government should have MORE control over resources and production? Do you know what % $56,900 is of 5 billion…? Sweden is a MUCH SMALLER COUNTRY in size than USA, that is one of the reasons it is losing wealth since the population of the world in 1960 was HALF of what it is now…so Sweden has done well to hang on to what it has – and yes, keeping that money amongst themselves is how they did it…
Mr. Kwak’s review of Why Nations Fail. Outstanding.
Nothing will fix the economy until consumer debt is addressed. WHY DOES HARDLY ANYBODY RECOGNIZE THIS? It is all about the debt that folks can’t pay. Reform bankruptcy laws, let the creditors take the hit, recognize that everybody’s investments will go down, let real estate prices reset without being propped up by TARP-like action, then the economy will start to come back. When the cream gets skimmed by financiers there can only be anemic demand. Creditors that loaned money to folks that can’t pay it back need to pay the price for the lack of proper vetting of creditworthiness. But only reforming the laws can allow this to happen.
James, when you say “… Even if you believe in a large permanent tax cut, giving the vast majority of it to high earners, the investor class, and heirs of multi-millionaires is the wrong way to do it. We need to get rid of them, once and for all.”, I presume you are referring to ridding us of the tax cuts, rather than the beneficiaries thereof? There being arguments either way. A touch of mens rea in that sentence, perhaps?
I am still struggling to understand why the OA did not pursue this course of action the first time the Bush Tax cuts were due to expire.
They had the Reps caught between a rock and a hard place.
So why should I think that the OA will take the obvious course suggested by Orszag now?
@Jeff Simpson, “…It is all about the debt that folks can’t pay….”.
All this time, and still no clue about fractional reserve banking. But blaming the “victim” still works – yay!
“…In jurisprudence, duress or coercion refers to a situation whereby a person performs an act as a result of violence, threat or other pressure against the person…”
Basically, economic conditions – 20 years of gains PERMANENTLY wiped out in 4 years and all means for re-building gone along with the gains – has sent up an extraordinary shift from a legitimate use of duress (regulations) to random acts committed under the new crushing, rapid, and wide-spread duress without an equalizing opposite force of legitimate duress. The very definition of all hell breaking loose….better living through math….
James, thanks for the thinking, which seems to be fairly airtight. Of course, I think that more thought should be given as to how to create the necessary leverage, with the year end opportunities coming full speed, to totally, or almost totally flush the current tax code. We haven’t really discovered, so far, just where the GOP stands on such a broad reform. Let’s face facts, something which has been reiterated by many for quite some time, the present code, as it exists is the greatest fraud presently perpetrated on the “real” tax payers. Let’s also fact the fact that not even half of all American companies even paid a penny in taxes for the past several years. The subsidies are so corruptive, that it is nearly impossible to have a meaningful discussion regarding any tax rates. As to “stimulus” I believe that any short term plan without a long term view is flawed, especially until and unless the code is totally overturned. The propounders of Modern Monetary Theory* (very much the far end of the spectrum from the Neo-Liberals – Friedman School purveyors) are spot on, and only a few mainstreamers, like sometimes you and Simon and Paul Krugman, are even mentioning its ideas at all. I am aware that all of this is subject to the vicissitudes of the present political environment, but I just believe that if anyone who is really interested in fiscal and economic progress grows some courage, the dynamics of the present environment would be laid to waste.
Time to stop making so many political calculations. Time for bold and definitive actions.
*For those interested in having a complete understanding of MMT, the best site on the web is New Economic Perspectives.
Kwak’s strategy is shrewd, Machiavellian, and quite likely would work — which is why the Obama White House will never adopt it. The reason being that the Vichy Democrats in the Millionaire’s Club (aka the U.S. Senate) would cut the administration off at the knees. These are THEIR tax cuts, too.
And not much left after repubs in the senate cut you off at the neck. What’s a poor boy too do?