The Real Threat Behind Obama’s Tax-cut Giveaway

As you have heard, the tax-cut compromise was enacted last night, and will become law as soon as President Obama signs it. I’d been on the radio all over the country explaining why it’s bad, but I guess Congress didn’t listen to me!

     I just want to make two points today, so I’ll keep this short. First, the House Democrats were really disappointing. Everyone expected them to add an amendment to increase the estate tax on estates over $3.5 million, giving them some chance to negotiate a better deal from the Senate. They were supposed to have the votes for that, but they didn’t do it.

      By the way, I keep hearing conservatives call it the “death tax,” as if that’s supposed to be bad. Why? In the UK, “death duties” were introduced by the Labour government of the 1940s, specifically to break up the hold of the old aristocracy on the countryside. It was wildly popular under that name! Maybe we should be more straightforward here.

     But on to my second point. Today’s Washington Post reports that:

Key lawmakers in both parties have embraced a deficit-reduction plan produced by Obama’s fiscal commission, which includes a tax overhaul that would lower rates across the board but raise additional revenue by closing dozens of long-standing loopholes, such as the mortgage-interest deduction claimed by many homeowners. Meanwhile, the relative ease with which Obama and the GOP were able to strike a deal over the Bush cuts has raised hopes on both sides for productive talks in the future.

     In other words, now that they’ve warmed up by preserving the Bush tax cuts and undermining Social Security with the “payroll tax holiday,” Obama, the Republicans, and the Democratic leaders in Congress are going to go on to pursue the wholesale attack on Social Security called for by the deficit-reduction commission. That may be the worst part of the whole deal.

     What do you think? And what do you think those opposed to the deal should do now?

What’s wrong with Obama’s tax-bill compromise

There are four basic issues with the tax deal President Obama announced Monday: economic stimulus, fairness, the federal deficit, and (surprise! It has nothing to do with the basic issues) social security. Let me take them in order.

1. Economic stimulus. In times of recession, government is supposed to put more money into the economy than it takes out — i.e., run a deficit. It can do this in two ways: spend more, or tax less. Spending more provides a more direct link to jobs, since jobs are created directly by the spending; it also allows government, through democratic processes, to determine what the public priorities are. We could spend a lot on a high-speed train network, renewable energy, education, and other things everyone agrees are desirable. Tax cuts for working people also lead pretty directly to jobs, since people are likely to use the money to increase consumption. Tax cuts for the rich are another matter — the rich can consume as much as they want already (that’s what “rich” means), so they will invest the money. In the 1980s, Reagan argued that there wasn’t enough investment money around to get the economy moving, so he turned to tax cuts as a “supply-side” stimulus. Whether or not that was right then, it is certainly not right now. The problem is just the opposite — because most available investments are risky, investors are sitting on their money. So tax cuts from the rich are not likely to lead to jobs at all.

2. Fairness. Ever since the Reagan administration, the capitalist class has been continuously increasing its proportional share of the national income. There are many parts to this: lower taxes for the rich, higher taxes for the poor; eliminating the estate tax, so that the children of the rich can be rich without having to work; limiting the power of labor unions, the major institutional force for greater equality, by weakening the labor laws (see Michael Goldfield’s book The Decline of Organized Labor in the United States); and now, the Citizens United decision permitting corporations to spend unlimited money to influence elections. This involves more than fairness – it’s also a matter of power. Money buys power, so as the rich get richer it becomes harder and harder for the rest of us to bring fairness back into the system. The progressive alternative was to give everyone a tax cut (that is, extend the existing tax cuts) on income less than $250,000 per year. The compromise accepts the Republican alternative to give those with higher incomes an additional, larger tax cut. This is contrary to fairness, and should be rejected. (The package does contain one progressive component, extension of the Earned Income Tax Credit. This is the only part of the tax package that gives more to the poor than to the rich.)

The Federal Deficit. As I said in the stimulus portion above, a deficit is a good thing right now, but it should be the kind of deficit that goes away with prosperity. Spending more on unemployment compensation is a good example; with prosperity, unemployment goes down and so does spending. But extra tax cuts for the rich are a permanent hole in the government’s ability to do positive things.

Social security. The most outrageous part of the deal is the “temporary” cut in payroll taxes. For years the establishment has been howling that the social security trust fund is going broke. It isn’t, but that’s the topic for another essay. However, it will go broke if we cut the flow of revenue into the fund. All the conservatives complaining about social security should be complaining about this – they are not, only because they understand that this payroll tax cut will achieve their real objective: destroying social security. As Jed Lewison has been pointing out on Daily Kos, there will be just as much pressure to extend the “temporary” payroll tax cuts when they expire as there is to extend the “temporary” Bush tax cuts today. Labor Notes has a good article with further analysis of this point.
Obama’s tax deal gets some temporary good things by making some bigger bad things permanent. I hope it is defeated.

Tax Cuts and the Deficit

It looks like the next big political debate will be about tax cuts. Why the Democrats didn’t want to have this debate before the election is beyond me — it would certainly have helped to make the point that they care about ordinary people. But for whatever reason, they let it go, and now have to try to get a vote in the House of Representatives structured the way they want it.

To put the whole case in a nutshell, what the Democrats want is what the country needs – tax cuts to put more money in the hands of those who 1) need the money, and 2) will spend it. That’s not the rich – they will invest it, and since we are still in the aftermath of a recession, with low consumer demand, it won’t make sense for them to invest it in something productive, making stuff that won’t be bought – so they will invest it in speculation, the stuff that brought on the recession in the first place.

Working people, on the other hand, will use the money to but things, like food, clothing, and housing. Since, again, we are in a period of low demand, that is just what is needed. For once, the Democrats are proposing more or less the right thing.

What what about the deficit? Won’t any tax cut at all make it harder to balance the budget? Yes, but – and this cannot be said too strongly — that is not a problem right now! Ronald Reagan, of all people, used to argue (following the work of economist Arthur Laffer) that cutting taxes would reduce the deficit because it would encourage growth. That didn’t work for Reagan, because he didn’t focus the tax cuts on people who would spend the money. But from the Keynesian point of view, cutting taxes is one way of running a deficit, and it’s really that deficit that is needed to create demand and get the economy growing. We should return to the concept of the”full employment budget” – tax and spending levels that would produce a balanced budget if we had full employment. In times of recession, tax revenues go down and spending (e.g., for unemployment compensation) goes up, while in times of prosperity revenues go up and spending goes down – so a full employment budget will produce deficits in times of recession and surpluses in times of growth, just what we want in the way of fiscal policy.

There are two complicating factors, however. One is that fiscal policy has to be supported by monetary policy. If the Federal Reserve is trying to fight inflation by reducing the money supply, fiscal deficits won’t work — they will put money into the economy through spending, but take it back out by borrowing to cover the deficit. A deficit needs to be combined with what we’re now calling “quantitative easing” – i.e., action by the Fed to create money to finance the deficit. This would be inflationary in the long run — but for the moment that is not a problem, since we are in a period of deflation.

Second, we probably do not have a full employment budget right now due to the ridiculously high level of military spending. This should be cut about 25%, which would solve many problems. Needless to say, getting all US troops out of Afghanistan and Iraq would help a lot with that! But there are plenty of other ways to cut it, as well.

The other problem is that the Republicans control the agenda of the House of Representatives, and have enough votes to support a filibuster in the Senate, and they are insisting that they will only allow a vote on a bill that includes tax cuts for the rich as well as for working people. I have a simple suggestion: the Democrats should offer a series of amendments that would prove irresistibly popular. The first would be what they are proposing now – tax cuts only for those with incomes below $250,000 per year. That’s pretty popular already, but if that fails how about cuts for everyone under half a million a year? A million? Ten million? I’d love to see Congress having to vote on a tax cut only for people with annual incomes over ten million dollars!

They could also propose even higher rates for those at the upper levels. How about a 95% tax on all income over $10,000,000? We had that (with a much lower cutoff) through the early 1950s, and it did not stop growth!

Just a few suggestions — I just hope that Congress, or the progressives in it, find the courage to fight this issue for.