Even as President Obama is savoring the temporary extension of the payroll tax cut through the end of the year, reporters already see blood in the water, warning us about the "perfect storm" that will occur at the end of this calendar year when that tax, along with the so-called "Bush tax cuts" that were originally enacted in 2001 (and extended at the end of 2010 for 2 years by the President and Congress) expire. A Washington Post headline on February 19, 2012 warns of a "Taxmageddon" that will hit working Americans on December 31, 2012, when things like the child tax credit, various income tax rates, the payroll tax and others revert to their "pre-cut" rates.
So how did we get here? Policy postmortems are as helpful as they are disfavored for shedding light on these types of questions. The media far prefer to focus on today's food fight instead of dissecting the problem, but in this case, it's particularly important not only to understand why this "Taxmageddon" looms, but also to see it as an opportunity for the President to frame, in terms far sharper than the simple, but ill-defined "Buffett Rule," why tax policy needs to be fundamentally changed.
Back in 2001, we were a nation awash in budget surpluses. The Fiscal Year 2001 budget surplus Bill Clinton left for George W. Bush was roughly $236 billion and projections indicated that our entire national debt would be paid off by 2014. Pretty sweet, right? In the name of the American people, Bush famously went to Congress "asking for a refund" - namely a massive tax cut that disproportionately favored the wealthy that had 2 quirks in it that were underreported at the time but would turn out to be highly relevant years later: (1) the legislation passed through a procedure called "reconciliation," which meant that in the Senate, it was immune from the filibuster (this same procedure would ultimately be used to pass the Affordable Care Act, with the same Republicans who advocated its use for the tax cuts bemoaning its use for health care. Go figure.); and (2) the bill included a "sunset" provision - that is, it automatically expired on December 31, 2010. The sunset provision allowed the bill to avoid two thorny problems: the "Byrd" rule, that allowed legislation to be blocked if it substantially increased the deficit after 10 years and it lowered the "sticker shock" of the tax cut to roughly $1.6 trillion, something that, at a time of massive surpluses, avoided making the cuts look reckless.
Two years later, an additional round of tax cuts were passed that accelerated certain parts of the 2001 bill and also utilized reconciliation without changing the sunset provision of the initial legislation. Of course, these acts of Republican political sleight of hand (or perhaps the more accurate term is "bait and switch") were ticking time bombs that landed in the laps of the President and Congress in late 2010, in the middle of a deep recession and hot on the heels of a Republican blowout in the mid-term elections. Republicans successfully leveraged Democratic weakness into a 2 year extension of all the Bush tax cuts, now set to expire at the end of this year and although the bill only provided a one year payroll tax cut, the President turned the tables on Republicans and, between some brinksmanship in December and earlier this month, got that cut extended until the end of this year as well.
Whether or not to extend none, some or all of the Bush tax cuts will be a big discussion both at the Presidential level and in other national races this year; however, the issue also highlights three basic contradictions in Republican rhetoric: First, Republicans claim that tax increases on the wealthy will stunt growth; Second, they claim job creation is stunted so long as "job creators" (a wonderfully slick, if misleading label) don't have certainty in the tax system; and finally, that fiscal responsibility is needed because of our rapidly increasing national debt.
Let's consider these arguments in turn. The one thing rich people always "do," regardless of the tax rates, is "well." Tax rates were level from 2001-present, yet growth was anemic for everyone but the very wealthy throughout the Bush Administration, which ended with, oh, the closest we have come to a Great Depression Part II. George H.W. Bush and Bill Clinton raised taxes on the very wealthy and Clinton presided over the largest peacetime expansion since World War II, an expansion that was broad and deep and reached the middle class. Which is all to say that conflating tax and economic policy is sketchy at best.
Ok, but what about those vaunted "job creators." Surely we cannot have this type of uncertainty in our tax policy and expect to grow, right? Well, not so much. Private sector job growth over the past two years has been robust, with more than 3.5 million jobs created, at precisely the time of greatest "uncertainty" about tax policy. The Bush years? Not so much. After the Great Recession hit, almost the entire net private sector growth that had taken place under President Bush (which was not that significant in the first place) was washed away. Of course, it goes without saying that during the Clinton Era, when taxes were raised on the very wealthy, more than 22 million new net jobs were created.
So if tax policy and economic growth are not correlated, and the uncertainty of tax policy has nothing to do with whether jobs are created, we do have that $15 trillion debt to pay down, some amorphous Social Security deficit way out in 2036 and a Medicare problem later this decade. We need austerity, right? On this point, both parties are being disingenuous. Most Republicans have come out for a complete, permanent extension of the Bush tax cuts at a 10 year cost of $4 trillion. President Obama wants an extension for everyone but those married couples earning more than $250,000 and single people earning more than $200,000 at a cost of about $3.3 trillion. Of course, because President Bush did away with "pay as you go" rules, no rational politician wants to pony up a dollar for dollar cut in government spending to pay for all of this.
And here is where the rubber meets the road and where the President (or some forward thinking Republican for that matter) has a golden opportunity to frame the way tax policy will look on January 1, 2013. For the President, it has not been for a lack of trying that taxes on the "rich" have not been raised; however, even in that debate, the knee jerk nervousness Democrats have to the idea of higher taxes has shown its head - first, when the President agreed to extend the Bush tax cuts and second, when prominent Democrats in Congress started moving the bar up on the income level at which income taxes should be raised (Senator Schumer ultimately landed on $1 million and up).
The majority of Americans favor taxing "the rich" (which at the $250,000 mark accounts for about 2 percent of wage earners in our country) and I include myself in that group. The wealthy have gorged on easy credit, corporate profits and the decades long run up in the stock market. Wealth inequality is at its highest point since 1928 and the wealthiest 1 percent of Americans own 40 percent of our nation's wealth. The President should rightly insist on higher rates for those in the $250,000 to $1 million range; however, I would suggest that he go further and look at several other ideas: (1) add tax brackets at the "super wealthy" levels, say of $1 million, $5 million and/or $10 million, $20 million, etc.; (2) take a page from Mitt Romney and exempt people earning less than $100,000 (Romney has a $200,000 floor) from capital gains taxes; (3) raise taxes on carried interest and on capital gains among those earning more than $500,000 from income, interest or dividends; and (4) raise the maximum taxable earnings ceiling on Social Security (currently at $110,100) paid by employees to $250,000 (allow employers to retain the ceiling as currently constructed).
I know, I must sound like some wild-eyed hippie who just defrosted with a McGovern '72 button on his bead jacket, but the reality is that we will not pay down our debt, or reduce our long-term deficit, without generating more revenue and yes, by revenue I mean "tax increases." If you are feeling bad for the 1%, don't, like I said, they do well regardless of what tax policy is, it may just be they are not dirty, filthy rich, just filthy rich. After all, in addition to 40 percent of the nation's wealth, that 1 percent receives 24 percent of our income, owns 50 percent of all stocks, bonds and mutual fund investments and hold only 5 percent of our nation's personal debt. In other words, they won't go broke by having to dig a little deeper into their wallets, especially when, as noted before, income inequality is at its highest point since just before the Great Depression.
The other thing rich people like being is rich. So the idea that somehow raising taxes will stop them from working, hiring others to work for them, or, laughably, moving out of the country, is pure political non-sense. At one point in our not too distant past, people at the top of the income ladder were taxes at 91% - trust me, there was no massive outflow of people to third world tax havens or Europe. Indeed, Republicans constantly beat the drum for American exceptionalism - the idea that our most successful people would pack up and leave for parts unknown runs counter to this thought. Moreover, our current tax system is regressive - it taxes things like capital gains (which the wealthy earn in spades) much lower than ordinary income (which the middle class and poor rely on). This is the genesis of Obama's so-called "Buffett Rule," and it makes sense. Taxes should be more progressive so that the more you earn, the more you pay.
Unfortunately for President Obama, he has his own credibility deficit when it comes to fiscal prudence because the extension of Bush tax cuts for the rest of us will cost more than $3 trillion over 10 years. Of course, suggesting that taxes be raised on the "bottom 98%" will not sit well, and would probably not be prudent in an election year, but the reality is that any compromise that asks the wealthy to pay significantly more in taxes will require some concessions on the other end of the spectrum. One possibility would be the insertion of a new tax bracket within what is currently the 28 percent bracket ($85,651-$178,650) at say, $150,000 and another within what is currently the 33 percent ($178,651-$388,350)(figures are for married couples filing jointly) at $250,000. These increases would hit very few households relative to the population but would spread the pain a little more broadly.
Another suggestion would be to examine the option of allowing people under the age of 65 to buy into Medicare for a premium that they would continue to pay after they reached 65 - basically, the opposite of how Social Security works by lowering your pay out if you retire early and apply for benefits. Medicare delivers quality coverage at far lower overhead or administrative costs and would also benefit private insurers who are less eager to carry older, but non-Medicare eligible Americans on their plans because of increased costs.
But what about that bloated federal budget? You know the one Republicans are railing against as littered with waste, pork barrel spending and foreign aid. Again, a brief primer is instructive. Only 35 percent (roughly $1.3 trillion) of our budget is "discretionary" - that roughly one-third of the budget pays for all of our defense spending and the other cabinet agencies, Congress, and the courts. The other 65 percent ($2.5 trillion)? About 59 percent of that is for "mandatory" spending (e.g., Social Security, Medicare, Medicaid, Food Stamps, Unemployment Insurance, etc.) and the other roughly 6 percent is payment on the national debt. In other words, if we eliminated the federal government (settle down, Ron Paul), we would run a small budget surplus, but would not have a military, environmental protection, national parks, federal law enforcement, a way to pay for transportation costs, or about 1000 other things that the federal government funds through our tax receipts.
So what is there to do? How can the President show that he's not just about raising taxes and pay some lip service to the need for budget cutting (even though the federal government is pretty lean as it is?). If the President wanted to offer some concessions, he could cap agency growth (including defense), or even call for across the board reductions. Some modest tweaks to things like backfilling of retired employees or modest increases to pension contributions will not make a big difference in the big scheme of things, but could show negotiating good faith. The President has also called for tax incentives for "insourcing" by companies willing to bring jobs back to our shores and even a modest reduction in the corporate tax rate should be considered since the 35% rate is one many corporations avoid as it is. Moreover, were the ceiling raised on wages subject to Social Security, depending on how high the ceiling was raised (or eliminated altogether), the actuarial deficit in Social Security would be eliminated for 75 years (although this would require the employer match to go up, something I do not advocate). Cool!
Ok, now that I've shown myself to be the right wing fantasy of a "tax and spend" liberal, let me ask what the alternative Republicans have offered is? If history is any guide, it's something far more fiscally reckless - "borrow and spend." We hear a lot about this $15 trillion debt, but we hear less about how it was accumulated. For example, President Bush cut taxes, passed into law a prescription drug benefit for seniors under Medicare and launched 2 wars on the government's credit card - those policies, which cost (literally) trillions of dollars were all implemented by borrowing money which has to be paid back. In fact, nearly 43 percent of our accumulated national debt is attributable to President Gentleman's "C" with another roughly 24 percent still being paid off from our first flirtation with supply side economics under Ronald Reagan and George H.W. Bush. President Obama's contribution? About 16 percent. Bill Clinton? A little less than 10 percent (with the balance being debt prior to 1981). So the next time a Republican goes off about our debt problem, remind them that roughly two-thirds of it was rung up by Reagan and the Bush family.
In terms of actual plans, Congressman PX-90, I mean Ryan, put forward a budget plan last year. What did Congressman Ryan propose? First, a permanent extension of the Bush tax cuts (we've seen how fiscally reckless that is). Second, repeal of "Obamacare" (at a cost of $1.4 trillion over 10 years and no plan for helping to cover the 32 million who will be covered under the Affordable Care Act). Third, a 4 percent unemployment rate in 2015. Evidence? None. Just magical budget mumbo jumbo to help him justify his numbers. Finally, and most controversially, eliminating Medicare as a guaranteed, government provided medical plan and replacing it in 2022 with vouchers that seniors would use to buy private insurance in the marketplace. The cost to seniors? Double what they pay under Medicare with no cap on the rate of inflation in health care, resulting in an even greater imbalance between the voucher provided and the coverage offered over time. All in all, Ryan would tack on $6 trillion to the national debt over 10 years while doing away with a hugely successful (and popular) health care program for the elderly while redistributing even more wealth to the already wealthy. Kind of speaks for itself, no?
The perfect tax policy storm that will occur at the end of this year offers the President a great opportunity to reframe the broader debate about fairness and equity as it relates to our tax policy. If Republicans attempt another "hostage taking" of the 98 percent to get tax extensions raised for the 2 percent, I would encourage him to call their bluff. One of two things will happen - either the Republicans will cave and taxes will actually go up on the wealthy or all the tax cuts will expire, which will allow the President to blame Republicans for raising taxes while also putting him in a strong position to advocate for a more progressive reform in 2013.
Fun facts about rich people: http://thinkprogress.org/economy/2011/10/03/334156/top-five-wealthiest-one-percent/
For more on the debt accumulated by under recent Presidents: http://www.ritholtz.com/blog/2011/10/us-debt-accumulation-by-president/
For more on tax rates: http://en.wikipedia.org/wiki Income_tax_in_the_United_States#Year_2012_income_brackets_and_tax_rates
For more on the annual budget: http://www.americanprogress.org/issues/2010/03/discretionary_spending_interactive.html and http://useconomy.about.com/od/fiscalpolicy/p/Mandatory.htm
For more on the Social Security Trust Fund & the effect of raising the ceiling on taxes subject to taxation: http://www.ssa.gov/policy/docs/policybriefs/pb2009-01.html
For more on Ryan's Budget: http://www.washingtonpost.com/blogs/fact-checker/post/fact-checking-the-ryan-budget-plan/2011/04/05/AFIaZpnC_blog.html, http://www.americanprogress.org/issues/2011/04/ryan_medicare.html and http://capitalgainsandgames.com/blog/stan-collender/2222/ryan-republican-plan-requires-debt-ceiling-be-raised-6-trillion