cross-posted from Working America's Main Street blog where I am a featured guest blogger
Mark Zandi goes all Newt Gingrichy in an Op-Ed piece in the Sunday New York Times on the issue of what to do about the scheduled expiration of the Bush-era tax cuts.
In light of the fact that Zandi, the chief economist at Moody's Analytics, has produced a good deal of work that has been very supportive of the economic benefits of fiscal stimulus, including expanded unemployment insurance, it's a curious piece of writing based on an even more curious perspective.
(In what follows, I steal a page, so to speak, from the FJM-style now kept alive by Ed at the blog ginandtacos)
Zandi begins by reminding us that all the Bush-era tax cuts are set to expire at the beginning of 2011. President Obama wants to let the tax cuts expire for individuals making more than $200,000 and for households making more than $250,000 a year, thus allowing the current 36% rate for those with the highest incomes to return to the pre-2001 rate of 39.6%. And the president wants to extend the current tax cuts for everyone else. Congressional Republicans, on the other hand, say they want to extend all the Bush-era tax cuts, including the tax cuts for those with the highest incomes.
For his part, Zandi says:
The prudent middle ground would be to forestall any tax increases in 2011 and to phase in higher rates on upper-income households in 2012, when the economy will be on firmer ground.
Never mind that there's nothing inherently prudent about the middle ground, the assumption is that in 2012 "the economy will be on firmer ground." Really? For who? Without major new public jobs stimulus efforts, there will still be millions upon millions of unemployed workers. I know they say that time heals a broken heart, but time alone does not heal a sick economy.
The president’s plan would be taking an unnecessary gamble with the struggling recovery.
The real unnecessary gamble would be to not implement a new, large-scale jobs program to re-employ millions of Americans, like a 21st-century 'WPA'. But we digress.
Businesses have only recently begun to add jobs, and they appear to be a long way from hiring fast enough to reduce unemployment. Even under the best of circumstances, the unemployment rate will remain near 10 percent well into next year. The high rate of joblessness has cast a shadow on the collective psyche that will only worsen with higher taxes, raising the already uncomfortably high odds that the economy will suffer a double-dip recession.
Yes, we know that private sector hiring has been anemic, and Zandi himself expects massive unemployment "well into next year" (what happened to that "firmer ground" by 2012 thing?). But the real danger is that the "shadow on the collective psyche" caused by high unemployment "will only worsen" if there are even slightly higher taxes on the rich. Never mind actually addressing the unemployment crisis; if those with plenty of money have to pay a fairer share in taxes, that itself will cause an ever darker and deeper shadow on the collective psyche, which in turn could cause a double-dip recession. Yeah, and don't forget our precious bodily fluids!
In most times, raising taxes on the wealthy by such a modest amount has had little impact on the economy. But these aren’t most times. The well-to-do appear unusually sensitive to changes in their finances, probably because their nest eggs are significantly smaller with the drop in stock and housing prices. Only the top 3 percent of households would have to pay higher taxes if the president got his way, but this rarefied group currently accounts for a fourth of consumer spending. If they pull back, even a bit, the recovery could be derailed.
Oh my. The well-to-do are "unusually sensitive to changes in their finances." It would be nice if they were unusually sensitive to the plight of the unemployed, of low-income families and of the struggling working class. But that would be too much to ask, seeing as many of the well-to-do kept their jobs while throwing millions of workers out of theirs. And while the well-to-do would still make out better than everyone else under the President's tax plan, the additional $40 billion a year in revenues could help pay for major new jobs programs to bring down unemployment.
Successful small-business owners, who power the nation’s job-creation machinery, make up one-third of these high-income taxpayers. They have set up their businesses so that their profits are taxed at personal rates. Raising marginal tax rates, even a little, on those who have suffered during the past several years would be a mistake.
Double oh my. Not only are they unusually sensitive, but oh how they've suffered. So much so that they are among the wealthiest 3 percent. And speaking of 3 percent, only 3 percent of all small business owners are in these top income brackets. Many of them have actually set up their businesses so that their profits are not taxed at personal rates, but at the much-lower 15% capital gains rate. But, at any rate, can't you hear that great job-creation machinery humming right along?
Some people make a more nuanced argument that higher taxes on the wealthy could pay for additional economic stimulus — like a bigger job tax credit or resurrected 1930s-style work programs.
Yes. That's right. I just did.
This view has theoretical merit — some of my own analysis has been used to support it — but it is asking too much of our political system now to get it just right. I’m skeptical that a politicized Congress would be able to pull it off, and failure to do so would leave us next year with higher taxes and a hobbled recovery.
Heavens no! We can't possibly ask our political system to do what needs to be done in this historic economic crisis. That's crazy talk. Especially if it means the rich would pay a fairer share in taxes. I'm just pleased as punch simply knowing that Mark Zandi thinks my view has at least theoretical merit.
On the other hand, the Republican proposal to keep the current tax rates permanently in place even for the wealthy takes an unnecessary gamble with our long-term fiscal outlook. Tax cuts do not pay for themselves. Even when President Ronald Reagan slashed much higher tax rates in half, this argument failed; in the current tax debate, it is unsupportable. By definition, high-income households are where the money is; higher rates would raise substantial revenue for long-term deficit reduction.
Yee-haa! Substantial revenue! Come on, boys, let's get to it!
What? Not yet?
Once the recovery is off and running, and stock and housing prices are consistently rising, allowing the Bush tax cuts for high-income households to expire — over, say, a three-year period — would not harm the economy. The overwhelming fear among high earners that their lifestyles will be forever diminished should have faded, and the tax increases would be small enough not to materially alter wealthy people’s decisions about spending, working or investing.
Baby steps, people, baby steps. You know how unusually sensitive the rich are. And not just sensitive. Why, they're virtually traumatized by overwhelming fear. And if we aren't sensitive enough to be concerned about their overwhelming fear, well they might just turn around and wreck the economy -- again.
Keep in mind that the economy performed admirably in the 1990s when high-income households paid the same higher tax rates. And the wealthy would benefit as much as anyone from reducing the federal deficit, because that would keep interest rates low, spurring investment and job creation.
Thank goodness, Mark Zandi reappears, briefly, as Mark Zandi.
Whatever policymakers decide regarding the tax code, they should take action, or agree not to, quickly. Not knowing what tax rates will be just a few months from now is adding to the collective nervousness, already high after the epic policy debates on health care, financial regulation, energy and immigration. All this anxiety is most likely affecting whether businesses hire.
Pay no attention to the previous portions of the Op-Ed, just do something, anything, and get it over with already. All the anxiety, the sensitivity, the collective nervousness, the shadow on the collective psyche, the Jungians coming out of the woodwork.... Stop! It's killing me!
None of this means the tax code should be off the table when President Obama’s fiscal commission addresses how to fix our long-term problems. Past experience with fiscal austerity at home and overseas strongly suggests that it is best for the economy’s long-run performance to restrain government spending rather than raise taxes, but taxes must also be part of our national debate.
Ah, austerity, how sweet the sound. Like a can of cat food being opened.
In this recession, the government has necessarily made a string of momentous economic policy decisions. Some have worked well; others have been a disaster. We can’t afford any more mistakes.
Specificity be damned! Hit the word count max and ran out of room. Here's the plan in a nutshell: fear the fears of the fearful rich; enrich them still, or else; and let it all trickle down.
The author is the winner of the 2010 CREDO Mobile/Netroots Nation award for Blog Activist of the Year.