A fresh look at the then-Bush-soon-Obama tax cuts

I love the back-to-back columns on the Bush tax cuts and fiscal responsibility that Clive Crook of the Financial Times wrote earlier this month. He really tells it like it is: we simply can’t afford to permanently extend even the so-called “middle-class” portions of the Bush tax cuts–for several reasons.

His first column (“Obama must break his tax promise”) points out the hypocrisy of the Obama Administration in adopting the Bush tax cuts as the centerpiece of their own tax policy agenda (my emphasis added):

What a commentary on the US approach to tax policy. The tax cuts are due to expire in the first place only because the Bush administration was cooking the books. The idea was to disguise the cuts’ long-term cost, which is colossal. Making them permanent would cost nearly $4,000bn over 10 years. The Republicans always wanted the changes to be permanent. The sunset provision was just a feint to make them look affordable.

Democrats deplored the tax cuts as reckless – which they were – yet want mostly to preserve them. The middle-class part of the tax cuts, which they like, account for roughly three-quarters of the forgone revenue. Talk about having it both ways. Barack Obama organised his election campaign around this position. He complained of fiscal irresponsibility with one breath, then promised even lower taxes for most Americans – households making less than $250,000 a year, some 97 per cent of the total – with the next.

To the Republicans, fiscal responsibility is a fantasy sunset provision. To the Democrats, it is a tax increase confined to a sliver of the undeserving rich.

And he makes it clear that raising revenue to reduce the deficit doesn’t have to involve trading off economic efficiency and growth–but pursuing such fiscally-responsible but economically-wise tax policy does require the President to break his troublesome campaign promise:

So broken is the US tax system – especially the federal income tax – that raising more revenue without increasing rates of tax is technically, though not politically, easy. The income tax base has been whittled away since the last big reform in 1986. Rates are not low by international standards, and their structure is already quite progressive; yet because they are applied to a slender base, the US income tax raises barely 8 per cent of gross domestic product. A broader base with lower, flatter rates could easily raise more revenue.

In addition, new taxes such as a value added tax and/or a carbon tax would be needed to bridge the remaining fiscal gap. These would make sense in their own right as part of the mix, even if there were no revenue shortfall. But the politics is so poisonous that these can barely even be mentioned. Instead, the debate is stuck in the mud of class warfare. All anybody cares about is whether the rich are paying their share. More than their share, say conservatives. Not nearly their share, say liberals. It is like Britain in the 1970s – not a good model.

The leadership that Mr Obama could provide on this is desperately needed. No doubt he understands what ought to be done, but the promise he made in 2008 has tied his hands. He will have to break that promise, and the sooner he does it the better.

And then by the next week, apparently Clive had gotten harassed by readers with arguments that I am well-familiar with (”but why would we raise taxes while the economy’s still weak?”…”but the problem is spending is too high, not taxes are too low”), so that his next column clarified that “Obama has to cut–and raise taxes”:

Last week I argued that sooner or later Barack Obama will have to break his election promise and raise taxes on the US middle class. It would be better not to renege just yet, I said: a double-dip US recession remains a distinct possibility and fiscal policy needs to stay loose for the time being. However, before much longer, restoring fiscal control is going to require higher taxes – and not just for the rich.

Many readers took issue with the article and they often started the same way: “What about public spending? You didn’t say a word about spending.”

No, and I should have. To control borrowing without ever-rising rates of taxation, Congress will have to curb currently projected spending. But that will not be enough by itself. It is delusional to think the US can get from here to a sustainable fiscal balance with spending cuts alone.

The problem with plans to reduce the deficit by spending-side changes alone? Clive explains there’s just not enough spending to cut unless you really go after the big (dare-I-say) “entitlement” programs of Medicare and Social Security. The only plan out there that very clearly follows that strategy is Paul Ryan’s “Roadmap” plan. But no one is really willing to live with such large cuts to Medicare as implied by the Ryan plan, not even Ryan’s fellow Republicans:

What about Medicare? The recent healthcare reform includes some payment-system experiments intended to curb costs, though it would be rash to expect very much from these. Mr Ryan’s plan is far more radical. Again he calls for privatisation. He wants to replace the government-run insurance scheme with vouchers, which recipients would use to buy private insurance. The plan then imposes a far slower rate of increase in the vouchers’ value than in projected healthcare costs.

After many years, this wedge would drive Medicare spending way down – but unless costs fell commensurately, the vouchers would buy fewer treatments. No doubt, in this world, patients would force doctors and hospitals to supply services more economically. It is hard to believe that this could curb spending as sharply as Mr Ryan expects with no loss of healthcare quality.

In a way, Mr Ryan is right: dismantling Medicare and social security is what it takes if you rely on spending cuts alone. Can it be done? No. Republicans remember what happened to the Bush plan for social security and do not intend a rerun. During the healthcare debate, they furiously opposed cuts in Medicare. Do not trust Democrats to honour these government promises, the party says. So much for Mr Ryan’s plan.

And Clive concludes his second column with a simple reminder that the fiscal math is simple but the choices hard:

You cannot hold Medicare and social security unscathed, oppose all tax increases and close the fiscal gap. The big entitlements plus defence and interest amount to some 80 per cent of federal spending. With those off the table, there is not enough left to cut.

That ain’t no jive, Clive!

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