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April 15, 2010

Why Obama should raise our taxes

Diane Rogers, the Economist Mom, explains it pretty well:

All of my readers know how I feel about the Bush tax cuts. I’ve never liked them–not from day one. They were too costly, too skewed to the rich, and did too little to make the tax system more efficient. I disliked them even more as a Democratically-controlled Congress during the Bush Administration couldn’t muster the courage to let them expire as scheduled when challenged by the Republican charge of “the largest tax increase in American history.” But the final kick in my stomach was when a new president who campaigned on the “change” we could believe in promised to continue the same tax cuts that he himself criticized as being fiscally irresponsible and yet not his fault.

So of course I want President Obama to break his stupid campaign promise to extend the Bush tax cuts for all households with incomes below $250,000. The tax cuts are still unaffordable (CBO shows that even the <$250K portion would cost $2.2 trillion over ten years–all but around $400 billion of the full complement of Bush tax cuts), would still go mostly to the rich (high income households “march” through all the lower tax brackets after all and hence get the highest dollar benefit of lower-bracket rate reductions, and they also benefit the most from the lower rates of taxation on capital income), and would still do nothing to broaden the tax base to make the system more efficient....

So when the President says he wants to get the deficit down to 3 percent of GDP by 2015, most of the heavy lifting will have to come from higher taxes–and I mean higher taxes other than the higher taxes on the rich that the President already proposes in his budget and that were already included in the health reform bill. And these additional higher taxes will have to come despite the President’s promise to not raise taxes on those households with incomes under $250,000....

I get back to my position that the easiest way to stick with current-law baseline revenue levels (which get us close to the 3 percent of GDP deficit goal) is to stick with current law, where all of the Bush tax cuts expire as scheduled at the end of this year. No taxes would need to be reformed, and in fact no tax legislation would need to be passed and signed! Of course, a better way would be to stick to current-law revenue levels by reforming the tax system–broadening the tax base to make it more efficient so that marginal tax rates would not even have to come up and we could still raise more revenue to achieve our deficit goal. But people (regular people and policymakers) seem to forget that if we let the Bush tax cuts expire, in the “worst” (or laziest) case we just go back to Clinton-era tax policy, which really isn’t so bad. In fact, if you go back to the “desperate” paper and Table 3, the first two columns on the left in the bottom bank show marginal tax rates if the Bush tax cuts expire (those Clinton-era tax rates of 15, 28, 31, 36, and 39.6 percent), and if those rates are raised proportionately (and just a little) to achieve the 3 percent of GDP deficit goal. The marginal rates in that “break tax promise, keep deficit promise” scenario are 15.5, 28.9, 32.0, 37.1, and 40.9. I would argue that this structure of tax rates would be much better for our economy as a whole than the “Obama dual promise” rates that go up to that Laffer-esque 77 percent at the top and yet are barely lower at the bottom and middle.

Posted by Mike at April 15, 2010 10:54 AM

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