And once more into the breach:
Can you tell me the difference between these alternative proposals to increase federal revenue?
1) Allow all Bush tax cuts to expire bringing back Clinton era rates for everyone.
2) Extend all the Bush tax cuts for people making under $400k, and make up the difference by closing the carried interest loophole, eliminating the cap on social security contributions, create new tax brackets with higher rates for the wealthy, completely rewrite the corporate tax code to better tax profits, and pass a carbon tax.
Well, I can see a few differences. In terms of policy, options 2 would be much, much better. It would better address income inequality, it would place the burden of new taxes largely on the wealthy. Rewriting the corporate tax code to generate more revenue while lowering rates is actually quite plausible and would eliminate a lot of problematic incentives for perverse behavior (hoarding cash off shore, for instance).
But until Dec. 31, option 1 had one amazing advantage. It was actually, you know, doable. It was, furthermore, doable by doing nothing. And had we done nothing and allowed everything to lapse, then it might have been possible to pass a lot of the items under option 2 because you could pass them with tradeoffs against Clinton era rates.
In other words, if you are living under Clinton era rates, with a decent federal government revenue stream, you can pass a lot of option 2 items in ways that are revenue neutral. Once the Bush tax cuts are permanent, everything under option 2 has to be a be revenue generator, an explicit tax increase.
So, even if the idea is a whole slew of tax reforms to increase progressivity, it would still have been easier to get there from a Clinton-era baseline rather than a Bush-era one.
I have a lot of sympathy for all of the vigorous criticisms leveled at my last couple of posts, but I can’t help but feel that a lot of the comments reflect what we wish would happen rather than what is actually politically feasible. Again, the huge, incredible advantage of letting the Bush cuts lapse was that it was actually something that could have been done to raise revenue even in the face of absolute GOP obstruction.
Finally, I want to address another theme that came up repeatedly, that is the notion that all argument based on percentage of GDP are flawed because GDP is, essentially, malleable if we pursue wise policies. In other words, some folks seem to feel my focus on increasing revenue is misguided, and that it would be wiser to focus on such things as education and infrastructure and income inequality because if we fix those, the economy will grow faster, making all our current programs affordable even if revenue as a percentage of GDP stays low.
Um…maybe, but I have to admit it feels like magical thinking to me. It’s a liberal version of “dynamic scoring.” As a practical matter, economic growth over the medium term is largely constrained by population profiles and productivity increases. I don’t doubt that you might be able able to squeeze some fraction of a percent of additional growth from the economy through infrastructure and other spending, but I have to admit, I’m highly skeptical that you could generate enough growth to not only cover the costs of these new initiatives, but also close a 3-7% of GDP sized structural deficit.
So I’ll come back to my main argument. I think we need more tax revenue. I think we missed an opportunity to lock in higher tax revenue. And I just don’t see a plausible political path to pass new measures that even come close to making up for the cost of a permanent extension of the vast majority of the Bush cuts.
Now again, you might feel we it was the right thing to do, that the economy is too fragile, and too many people living close to the edge to risk it, and I won’t argue with you strongly.
Regardless, what’s done is done. But the new reality is that the next decade is likely to be dominated by repeated cuts to programs as a result because revenue is just too low right now. That’s the structure of the game, so to speak.