Wondered why we seem on an inevitable course to go over the profoundly badly named “fiscal cliff”? It’s not all that hard to figure out:
Today, if the Republicans agree to a bill Obama will sign, it will mean, in the Washington description of things, that the Republicans have voted to let taxes rise (otherwise known as return to their pre-Bush “temporary” tax cut levels) on people who make more than some amount of money—say, $400,000 a year.
Four days from now, once the “temporary” Bush tax cuts expire and all rates have returned to their Clinton-era levels, the Republicans will claim that voting for THE EXACT SAME BILL THEY COULD VOTE FOR TODAY will mean they are voting to cut taxes for 99.9% of Americans (otherwise known as extending the Bush “temporary” tax cuts into the future for everyone making less than, say, $400,000 a year).
ON Jan. 1 of next year, the federal tax bill for a typical middle-class household — making in the neighborhood of $50,000 — is scheduled to rise by about $1,750. This increase, which would come from the expiration of both the Bush tax cuts and the Obama stimulus, would follow a decade of little to no income growth for many people. As a result, inflation-adjusted, after-tax income for the median household could fall next year to its 1998 level, in spite of the continuing economic recovery.
The middle-class tax increase is just the beginning of budget changes set to take effect at the start of 2013. Poor families would see their taxes rise somewhat, too. Total federal taxes for top-earning families would rise by tens or even hundreds of thousands of dollars a year. Spending cuts would also take effect, squeezing domestic programs — education, transportation, scientific research — and the military.
All in all, the end of 2012 will be unlike any other time in memory for the federal government.
The tax increases and spending cuts are the result of Washington’s having previously kicked the can down the road, to use a phrase that is popular here. Rather than pass a plan to cut the deficit, policy makers have put off tough decisions. With the Bush tax cuts, lawmakers deliberately made them temporary, to avoid running afoul of budget rules intended to hold down the deficit.
Not surprisingly, leaders of both parties now say they are opposed to letting the changes happen on Jan. 1. Economists are also frightened of what such a sharp shift in government policy might do to a still fragile economy. Ben S. Bernanke, the Federal Reserve chairman, has referred to the various expirations as “a massive fiscal cliff.” Congressional aides, quoted in The Washington Post,call it “taxmageddon.”
The problem, as always, is that the two parties cannot agree on what changes should take place. The combination — of political stalemate and potential economic cataclysm — will create an extraordinary period after this year’s election. A lame-duck Congress and Mr. Obama, either re-elected or defeated, will have less than two months to agree on an alternative plan, or the tax increases and spending cuts will take effect….
Optimists — yes, there are still some — say that the prospect of the tax hikes and cuts could finally nudge the two parties to the kind of deficit solution that many experts prefer. It involves sweeping tax reform that would close loopholes, reduce marginal rates, simplify the tax code and perhaps even lift long-term economic growth. Such tax reform has always been easy to put off, but the compromises it requires may end up being easier to accept than taxmageddon.
YET there is still a basic contradiction with which most politicians and voters have yet to grapple, the same contradiction that has helped create this strange situation in the first place. Talking in exasperated tones about the importance of fiscal responsibility is easy. Cutting the deficit is hard, because it involves unpopular tax increases or unpopular spending cuts — and huge cuts if the solution involves only spending, not taxes, as many Republicans urge.
Either way, the changes will affect the vast majority of Americans, given that the deficit reflects a basic disconnect between the government we have and the taxes we are willing to pay. Social Security, Medicaid and Medicare may become less generous. The Pentagon may no longer be able to get just about whatever it wants. Taxes may have to rise from their recent levels, which have been lower, as a share of the economy, than at any point in 60 years. That could mean higher rates. Or, if tax reform actually happens, it could mean smaller tax breaks for health care, housing and retirement savings.
The looming end of billions of dollars in popular government benefits may seem ridiculous. And the fact that Washington keeps delaying a serious deficit plan until another day may seem equally ridiculous. But they make perfect sense in a country where hypothetical solutions are a lot more popular than any actual ones.
Nothing highlights the paradox quite like tax reform.
"My understanding is that the Bush Tax Cuts were supposed to be Temporary, there was an end date, and that end Date was determined specifically by a actuarial prediction based upon a ratio projection: number of jobs possibly created/outside length of time the US could stay solvent with reduced tax revenues.
Now, if the Bush Economic Advisers themselves, planned this termination of the Tax Cuts with the Economy in mind, WTF is wrong with the Current Republican Leaders that they are overlooking the very necessity to have a tax-cut end-date?”
I think it is important to remember that the 10 year time limit on the Bush tax cuts was an entirely cynical political ploy, for at least three reasons.
First, the 10 year expiration date allowed Republicans to treat the tax cut plan as a matter of budget reconciliation—the exact tool that Republicans were outraged at the Democrats for using to make health care reform happen last year. Technically, budget reconciliation measures can only be in force for 10 years, unlike regular laws, which are permanent until overturned or amended. However, budget reconciliation acts are not subject to filibuster, and so only require a simple majority to pass. Republicans used this tool in 2001 to pass the tax cuts, just as Democrats used it to reform health care.
Second, the 10 year automatic expiration allowed the advocates of the tax cuts to claim that they would likely not have a profound effect on the long-term US deficit. This is because the long-term costs for the United States lie in entitlements like Social Security and Medicare, and it would not be until after 2011 that the Baby Boom generation would really be retiring in huge numbers. Hence we would only “need” the money that was forgone under the Bush tax cuts after 2011. Add that money back in after 2011, and the projected deficits would go down in the long term.
It didn’t work quite as expected, because the financial meltdown and Great Recession radically depressed the economy, and hence economic growth, suppressing tax collections. But it was the mathematical reason for the 10 year limit.
Third, it was perfectly clear 10 years ago that it would be very contentious, politically, to let the Bush tax cuts “expire.” It was perfectly clear that, in 2011 (or 2010, as it happened), Republicans would scream that failure to extend the Bush tax cuts would mean imposing the giantest most horrificest and business crushingest tax increases on “the American people” in US history. In 2001, Republicans hoped they would be able to extend the tax cuts going forward after 10 years; Democrats hoped that they would have enough to votes to let the cuts expire. Both parties kicked the can down the road 10 years. The Republicans were on the winning side of that decision.
So, in the end, I don’t think the Bush tax cuts were scheduled to expire in 10 years to help future Americans pay for things like their parents’ and grandparents’ retirements and health care. I think they were scheduled to expire in ten years in the cynical hope that they would keep being extended afterwards.
That’s what I thought 10 years ago, and I have seen nothing to the contrary to change my mind since.
Just set up a shell company in a 1700 square foot house in Wyoming that is home to more than 2000 companies. Seriously!
Thanks to NPR for posting this one. It is a consequence of federalism, and is akin to why your credit card company is probably incorporated in Delaware: Delaware has pro-credit card company laws (that Joe Biden, among others, protected). It’s also why states can use tax incentives (and anti-union organizing statutes) to entice businesses to move from one state to the other. Thank the Framers!
And, keep this in mind as the debate about taxes ensues!
I ran across a story today that made no sense—until it made perfect sense.
The Republicans in the House of Representatives have passed a bill to cut $600 million from the IRS. Should it pass, the IRS will have to fire a number of employees and curtail its enforcement efforts. As it happens, reports suggest that every $1 or so in IRS expenditures for tax collection leads to about $10 in tax receipts. Reducing enforcement will, accordingly, likely reduce the revenue the government collects—in the midst of staggering budget deficits.
Moreover, paying taxes is one’s legal obligation. In general, Republicans like to wrap themselves in the flag of “law and order.” Cutting enforcement is an invitation to cheat—something that Republicans usually claim to oppose in the name of “family values.” Except, apparently, when it comes to taxes.
This doesn’t actually make sense—until you realize it does.
I think this is easily explained if one remembers a profound comment made by the president of Americans for Tax Reform, Grover Norquist. Norquist is famous—or perhaps infamous, depending on one’s point of view—for saying, “I don’t want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.”
And so you have it: the Agenda. Cut taxes, and government will run out of money. Cut enforcement of what taxes you have left, and government will run out of money even faster. And since everyone opposes taxes prima facie—and hates tax increases even more—when government starts running massive deficits in the post-tax cut era, the only practical political options are to borrow money to fund government’s operations (an increasingly difficult thing to do in the tea party era), or cut services. Ta da!
Yet the right’s proposed cuts are not across-the-board. The pain is not to be shared equally. So far, Republicans have exempted defense, Social Security, Medicare, and interest on the debt from the budget axe. However, those four programs constitute 59.5% of US spending. Hence, their proposed budget cuts come out of everything else: social welfare programs, pension systems, consumer protection programs like food and drug safety, and things like roads, schools, parks, and support for education.
Neither tax cuts nor cuts to the IRS will either solve the deficit crisis or make the nation more stable and more secure. THEY’RE NOT INTENDED TO. Instead, they’re intended only as tools to build an America in which government no longer provides a social welfare system, a pension system, or a consumer protection system.
Recently, in response to a question about why oil prices fluctuate so much, I offered a side comment (as I am wont to do): “I’d bring one more thing up, though. A gallon of gas (in the US, at least), is still a lot cheaper than a gallon of water (if you buy it in bottles from vending machines), and a lot lower than a gallon of Starbuck’s coffee (or some other fancy brand). I do find it interesting that people complain about $3 a gallon gas with a $4 cup of coffee in their hands.”
In response, Kohenari, a poltical theorist at Nebraksa who runs the entirely enjoyable Running Chicken blog, commented: “to my mind, it raises all sorts of fascinating questions about people’s preferences and expectations.”
Being a political scientist, one thing I am interested in (at least professionally) is why people are upset by some taxes but not by others. That is, some people willingly give their money to the government for some purposes (or in some tax schemes) while resenting others. Why?
There is, for example, one tax lots of Americans pay without any complaint at all: the lottery tax. People fantasize that their pay off will eventually be more than their investment. But it can’t be: on average, if lotteries paid more than they took in, states wouldn’t run them. States run them because they make money on them. That’s a tax, just a voluntary one.
The question of voluntariness surely matters in why people don’t mind paying for their lottery chance. People choose to play, so they choose to pay. Likewise, there is some thrill in the game as well: people like to imagine winning, and give up their money in order to play.
But it’s not even vaguely rational.
Let me offer the following thought experiment. Imagine you have two choices about how government will take—tax—$20. You can give it directly to government operations, or you can give it to an agency that might give some of it to government for some future operations, while at the same time offering you a chance to win some of it back—or in a best case scenario, gain a windfall should you win. The first choice is, effectively, the same as paying an income tax; the second is playing the lottery.
If this choice were to be made on purely rational grounds, there’s no question what the better choice is. Pay the income tax. Most of that money will be reinvested in the community in the form of police officers and fire fighters and roads and schools and, yes, pensions for your neighbors. In other words, you will see real returns on that investment. By contrast, the lottery is a fantasy. Whatever the thrill of the game, it is infinitesimally possible that you will win, and so for the most part you are literally throwing your money away. And given that some of your money will simply be transferred to those who actually beat the odds and win the lottery, there will be less return on your investment than you would have from an income tax. It’s a no brainer.
Except, of course, I’d bet that most of the people who spend $20 a week on the lottery would go ballistic if their $20 was taken in income taxes instead.
Practically, people—at least many people—would prefer to choose to seek a thrill and get less return on their investment than they would to choose the rational option of getting a direct, if often unperceived, return on their money.
Welcome to the world of democratic politics. Want to run for office, any one?
So former Senator, former movie actor, former and sometime TV actor, and occasional infomercial huckster Fred Thompson is currently lending his sonorous voice and imposing visage to an ad campaign asking Americans to rally and demand the Bush tax cuts be extended past their 10 year deadline. Otherwise, he intones, we will have THE BIGGEST TAX INCREASE IN HISTORY!!!
Aside from the obvious—pretty much all tax cuts and all tax increases are THE BIGGEST IN HISTORY because economic growth expands the size of the pool; 10% of $100,000,000 is bigger than 10% of $1,000,000 even though the rates are identical—I have noticed that those demanding the tax cuts be extended always fail to answer one question: why, if tax cuts are so great, did they not make these cuts permanent when they had an overwhelming consensus in favor of these cuts—including substantial Democratic Party support?
There are, in fact, two answers to this question, both of which are profoundly cynical. The first has to do with legislative tactics. It turns out that it was easier in 2001 to pass a massive tax cut that had an expiration date than it was to pass a “permanent” one. (Of course, since laws can be changed, nothing is technically “permanent,” but you get the point.) Republicans found it easier to get what they wanted without compromise by manipulating legislative rules to desired ends. (What? The tactic wasn’t invented for health care reform? I’m shocked, shocked!) So that’s what they did.
The second answer had to do with projected budget deficits. When the 2001 tax cuts were “scored,” meaning their likely effects on future budget revenues/deficits were calculated, every analysis found the same thing: continuing the cuts past 10 years would ensure exploding deficits as far into the future as could be imagined. In other words, even assuming non-stop economic growth would result from the tax cuts (something that obviously did not happen), the deficit would get explosively out of control after 2011. Ending the tax cuts in 2011 provided the tax cutters with cover: they could claim that their tax cuts would not cause horrific budget deficits in the next decade.
Which is where the most cynical move of all came in: most everyone pushing tax cuts in 2001 essentially winked at each other when the notion of ending the cuts in 2011 was discussed. They all assumed, and indeed sometimes openly stated, that they figured that pressures of the moment would force the tax cuts to be extended in 2010. (It is an election year, after all.) Thus, while the 10 year cap provided them cover under which to hide from complaints that they were adding to the deficit, lots of those who voted for the 10 year plan expected the cuts would continue well past the 10 year time limit. They got to act like they cared about the deficit even while passing budget-busting, staggering tax cuts that disproportionately went to wealthy Americans.
And now the tax cutters are in nirvana because, blessings of blessings, they are not in power. They can scream about the BIGGEST TAX INCREASE IN HISTORY knowing that if the cuts are extended they can scream about the WORST BUDGET DEFICITS IN HISTORY. It is quite literally, money for nothing.
The sad thing is that there are probably some cuts in the Bush plan that deserve continuing. I’m not a tax guy, but there are issues of capital gains, and estate taxes, that need attention. No doubt there are others. But the politics of the moment make a conversation about such issues essentially impossible.
Which is, in fact, the real problem with American politics today.
27.8% is the number. The number that summarizes the average percentage of their earnings that Americans pay in total taxes each year—income, payroll, property, capital gains, sales, other. It’s actually staggeringly low compared to other industrial/post-industrial democracies, and is not in fact high enough to pay for the services we ask for, which is why we borrow so much money each year. But it’s been fairly stable for many years: Americans pay about 27.8% of their earnings in the form of taxes to all levels of government.
(Note that your effective percentage is higher if you acknowledge expenses you incur because government isn’t providing services, such as when you need an alignment or new tires when yours are destroyed by potholed roads, or the huge amount of money people borrow today to go to college since states no longer subsidize public higher ed like they once did. In Illinois in 1970, for example, the state provided $1 for every $1 of tuition; today, it’s one dollar for every $13 of student tuition, a massive transfer of costs to students.)
This is an important number because we have now spent about 30 years playing a game of taxation whack-a-mole in which we “reduce” taxes in one area—usually income and capital gains—but end up raising other taxes—especially property, sales and sin taxes—to make up the difference. That 27.8% number has barely changed in the 30 years since the Reagan Revolution began the process of cutting income and capital gains taxes. Instead, what has changed is the distribution of the tax burden: while the average is 27.8%, people in the bottom 80% of earners pay a higher percentage of their earnings to various taxing bodies today than they did 30 years ago, while the top 20% of earners pay substantially less.
The whack-a-mole nature of this taxation game has now caught up to us. As the federal government cut income taxes it pushed unfunded mandates to the states, requiring state governments to collect more revenues to pay for programs. This is why so many states created lotteries and added much higher alcohol and cigarette taxes: these are “popular” forms of taxation since people don’t have to drink, or smoke, or play the lottery and can avoid taxation by not doing those things. (This is also why hotel taxes are so high: they are paid by people who don’t vote in the community they pay the hotel tax in.) Then, when these gimmicks didn’t solve the states’ budget messes, they cut support to local communities, especially for schools, thereby pressuring local communities to raise property taxes. In the end, the sources of revenues changed even as the relative burden on taxpayers stayed roughly the same.
Now, in the midst of the great meltdown of the last two years, there are no more moles to whack. The federal government has borrowed so much money an incipient revolt is brewing in the form of the tea party movement, and state revenues have plummeted as people stop playing the lottery, get priced out of cigarettes and alcohol, and as people stop buying things in general as they lose their jobs. Meanwhile, local communities face the prospect of promoting massive property and sales tax increases, or of firing large numbers of employees (including teachers, fire fighters and police)—or both.
The simple fact is that we do not collect enough money to pay for the services government provides. There are three ways to deal with this fact: cut services, raise taxes, or borrow. (I guess there’s a fourth: some combination of them all.) Cutting services is hard: whatever conservatives claim, most Americans like the services they receive. Likewise, raising taxes is hard: while Americans like services, they don’t want to pay for them. And borrowing is becoming harder: whether because of the tea party movement, or the fact that when one borrows too much financial markets stop loaning you money (or increase the costs of lending it to you), we’re unlikely to be able to borrow forever.
So here’s a thought. Let’s actually have a conversation about the services we want. Then let’s total up the amount of money it would cost to provide these services. Then let’s figure what the average tax burden for all Americans should be—e.g., 33% of total earnings (which is still low by European standards). And then let’s create a rational system of taxation that gets us to that number without the farce of cutting taxes in one area while raising them in another. There is, after all, no free lunch. You’re going to pay one way or the other. It’s time to see one big bill rather than lots of little ones. Then and only then will we able to talk about “cutting” or “raising” taxes. Right now, it’s just a game of taxation whack-a-mole, and while whack-a-mole may be fun, the dirty secret of the game is, you just can’t win.