The Great Debate© – To Extend or Not to Extend

The Great Debate© is presented by to expand our understanding of various topics of interest.  Robert J. Samuelson has an Op-Ed in The Washington Post that argues for an extension of all the Bush tax cuts.  Seven economists respond in The New York Times.  There was a survey of economists by CNN a week ago that we also include in the debate.  Highlights of the positions follow.  Direct quotes are in italics and positions restated or summarized by this author are in normal type face.

Robert J. Samuelson:

  • Obama’s proposal to increase taxes on personal incomes exceeding $250,000 ($200,000 for singles) is the latest example of his delusional approach. It satisfies the liberal itch to “get the rich.”
  • Raising taxes in a weak economy doesn’t make sense.
  • These affluent households represent almost a quarter of all consumer spending, according to Zandi. Increasing their taxes, he estimates, would cost 770,000 jobs by mid-2012. Richard Curtin, director of the University of Michigan’s Survey of Consumers, says his data suggest that uncertainty about the extension of the Bush tax cuts has already caused affluent buyers to cut their spending.
  • Some small businesses would also be affected, because many (sole proprietorships, partnerships and subchapter S corporations) file their taxes on personal returns. Higher taxes would discourage hiring and expansion. No one knows by how much, but the Tax Policy Center estimates that higher business taxes would affect 725,000 returns with about $400 billion of business income. Some of these are partnerships of doctors, lawyers and accountants. Others are contractors, restaurant owners, florists and plumbers. 
  • The implication of Samuelson’s conclusion is that, as long as political posturing prevents development of real solutions for our fiscal imbalances, no tax changes should be made.

Mark Zandi:

  • Raising taxes on anyone anytime soon is taking too big a gamble with the economy.
  • Policymakers should extend the tax cuts for everyone, including the wealthy, in 2011 when the economic recovery is so fragile. Once the economy is on firmer ground, say in 2012, the well-to-do will have no problem paying a bit more in taxes, and it would address our daunting long-term fiscal challenges.

 Laura Tyson:

  • Moreover, the trickle-down theory about the relationship between tax rates and economic activity, even though it has superficial appeal, is not supported by the evidence.
  • The economy grew faster and created more jobs in the 1990s when tax rates on top earners were considerably higher than it did after the Bush tax cuts. And both before and after those cuts, the after-tax income gains for the top two tax brackets dwarfed those for all other income groups. In other words, the income growth at the top did not trickle down into income growth for everybody else.
  • Letting these tax cuts expire would also send a strong signal to investors that the U.S. is serious about reducing its deficit and this would help keep interest rates low, further stimulating demand and jobs.

Richard Curtin

  • The continuing debate about the extension of the Bush tax cuts has already negatively affected the economic expectations and buying plans among households with incomes over $250,000.
  • More importantly, the current Congressional stalemate over the extension of tax cuts for the highest income households has prompted rising concerns among other consumers — particularly the upper middle class — about the continuation of their own tax cuts. Spending cutbacks among this broader group of households could threaten the already enfeebled recovery.
  • Curtin’s implication is that the uncertainty about the tax rates for 2011 is more damaging in the short run than any of the likely resolutions.

 James K. Galbraith:

  • But if the top-tier tax cuts should be extended to support consumption, then the economic case for a payroll tax holiday, for a temporary reduction in the full-benefits retirement age under Social Security, and for a permanent reduction in the eligibility age for Medicare is just as good. And the social case is better, because working families have been hit harder.
  • But let’s also ask: Is supporting the private consumption of a wealthy minority really a national goal? Is this the motor we wish to drive the economy forward? Should we go on expanding the frontiers of high living, while teachers and police face layoffs and parks and libraries close?  If not, then the tax code should properly deflate that sector and promote something else. Infrastructure, energy conservation, local public services, jobs, business investment and middle-class security — just for instance.

 William Gale:

  • Economic research over the past decade can explain why extending the original Bush tax cuts is not good stimulus policy. After the tax rebates in 2001, 2003, and 2008, households appear to have spent in relatively short order somewhere between 25 and 67 cents more for each dollar of tax cut. This makes tax cuts in general – even the parts of those tax bills that were intended to stimulate – a relatively weak way to help the economy compared to increases in government purchases, for which each dollar of increased deficit turns into an additional dollar of spending.

Matthew C. Weinzierl:

  • Official estimates are that the president’s policy would reduce the federal deficit by about $700 billion over the next 10 years relative to a policy that extends the tax cuts for all Americans. Deficit hawks should welcome this signal of the president’s commitment to fiscal responsibility. After all, renewing all of the tax cuts would surely have been the easier path politically.
  • As important, these tax increases will not threaten the recovery. The taxpayers fortunate enough to qualify for them are unlikely to reduce spending substantially in response. In normal times, these households save a greater share of their incomes than Americans who earn less, so changes in their incomes translate into smaller changes in spending. Today, when the government has built up a large debt, these households rationally expect much of that debt to be repaid through increased taxes on them at some point. If they are not asked to pay higher tax rates now, they will simply save much of the excess for the day when they are. 
  • Critics of the policy correctly argue that raising taxes reduces the rewards from work, and they worry that this policy will thereby threaten long-term growth. This argument must be weighed against the fact that income inequality is at exceptionally high levels, so the pre-tax rewards from innovation and effort have rarely been higher.

 Linda Beale:

  • Since savings of the rich often end up in offshore investments, they don’t do much to help the United States economy. Estimates of jobs lost because the rich have slightly less cash are highly speculative and frequently disregard the offsetting stimulus impact of government revenues in financing infrastructure jobs.  
  • The effect on owners of “small” businesses (likely to be mostly law firms, doctor groups and other high-income service providers) will be negligible — only 2 percent to 3 percent of them will be affected, and business reasons, not those additional taxes, will determine whether they hire needed workers.
  • The idea that tax cuts for those at the very top of the wealth and income distribution will trickle down to create jobs for all is part of the policies that got us into this mess. We’ve tried that approach for four decades: U.S. workers have contributed to significant productivity gains, but the owners and managers have kept those gains for themselves. Workers’ wages have stagnated while the rich have gotten richer. Permitting the Bush cuts for the wealthy to expire as slated is the right thing to do.

CNN Survey:

  • A majority of a panel of leading economists surveyed by said that the tax cuts should be renewed for everyone.
  • Of the 31 economists surveyed, 18 said extending the Bush tax cuts was the best thing that Congress could do for the economy.
  • Some experts, such as former Federal Reserve chairman Alan Greenspan, argue that with the size of U.S. budget deficit, the government can’t afford to extend anyone’s tax break.
  • But economists surveyed were in broad agreement that the recovery is still too fragile to allow taxes to go up for the 97% of taxpayers not in the top brackets.

If we only count Mark Zandi once, there are a total of 18 for full extension from CNN plus Robert J. Samuelson and 13 from CNN against plus 5 from the NYT plus Greenspan who wants no tax cuts extended.  That is 19 to 19 for the total “vote”.  There is no concensus about the top 2-3%, at least from the 38 individuals in this collection.  Should we look for hanging chads? 

Read the original Op-Ed pieces, CNN survey article and survey results  to get the full context of the arguments.  Samuelson is in The Washington Post and the other individual cited above are in The New York Times.