ECONOMY FEBRUARY 3, 2010
One way to judge the health of our political system is to divide the president’s agenda into three categories. First are the items that seem like they’d be hard to accomplish and actually are hard—health care reform and cap-and-trade come to mind. Then come the items that sound easy to the uninitiated but turn out to be pretty hard—like eliminating wasteful farm subsidies or obsolete weapons systems. Lots of presidents have taken on these programs only to find that they have powerful, well-organized defenders. Finally, there are some legislative goals that sound easy to accomplish, and normally are easy, until some unique brand of dysfunction intervenes—say, some senator takes a special interest in an obscure appointment.
A healthy political system will have a fair amount of the first type of issue, whose difficulty arises from its fundamental complexity and genuine ideological disagreement. A healthy system could even have a decent amount of the second issue—it’s tough to have a democracy if interest groups can’t weigh in. But if you start noticing too many entries in the third category, then it’s time to fear for the republic, because it means the country is becoming ungovernable.
Unfortunately, this year’s budget fight includes a whopper of an example here—the effort to phase out tax cuts for the wealthy. These are the tax cuts George W. Bush passed in 2001 and 2003, of course. The first round reduced income taxes for people at all levels. But it dumped gobs of money on the very affluent. This group saw the rate it pays on every dollar above about 300,000 drop from nearly 40 percent to 35. If, for example, you happened to be a banker who makes $10 million per year, this rate cut saved you nearly $450,000 last year—far more than most people’s entire salaries. (Insanely, a hedge fund manager making the same salary owes even less in taxes—far less, actually—but that’s another story.)
Then in 2003 Bush was at it again, sheering back taxes on capital gains and dividend income. Once again, the benefits were overwhelmingly skewed toward the very wealthy, who own vastly more financial assets than the average worker. As Warren Buffett warned at the time, the practical effect of such cuts would be to lower the tax rate paid by his income demographic to a tiny fraction of the rate most Americans face. Which was the way it shook out in practice. According to calculations by Citizens for Tax Justice, the two rounds of Bush tax cuts showered 38 percent of their benefits on the top 1 percent of income earners, and over 52 percent of their benefits on the top 5 percent.
Most congressional Democrats understood this at the time and were deeply skeptical of the tax cuts. That forced the GOP to enact them through reconciliation—the Senate rule allowing passage of budget-related measures with a simple majority rather than a filibuster-proof 60 votes. Bush did manage to win over several moderate and conservative Democrats—people like Ben Nelson, Blanche Lincoln, and Mary Landrieu. But many signed on once it became clear the bill would pass anyway. It’s unlikely Bush would have found enough Democratic takers to break a filibuster had it come to that.
In any case, Democrats only became more united in their opposition to the tax cuts as time went by. Every major candidate in the 2004 Democratic presidential primaries vowed to repeal the portion benefiting the very affluent. (Two of them—Howard Dean and Dick Gephardt—proposed repealing all the Bush tax cuts.) Ditto for 2008. Support for this idea was so uncontroversial that it produced almost no back-and-forth across several dozen primary debates and candidate forums.
Of course, there’s a big difference between promising to repeal a tax cut and having the courage to follow through. No one wants to be labeled a tax-raiser. And rich people tend to get a lot of face time with senators and congressmen, with whom they can wax philosophical about the vast economic benefits of their additional Bentley purchases. But the beauty of the Bush tax cuts is that reversing them doesn’t require anyone to lift a finger. The strictures of the reconciliation process forced Bush to phase them out in 2011. That means the tax cuts just disappear—poof!—unless someone intervenes to save them.
And yet, in the run-up to Obama’s 2011 budget, a handful of Democrats had begun to lose their nerve. The New York Times reported Sunday that “some centrist Democrats are urging Mr. Obama to spare wealthy taxpayers as well, to avoid raising their taxes before the economy is fully recovered.” Congressional Quarterly had a similar report the following day (not online). But this argument makes no sense. The rich save the overwhelming majority of their income in both good economic times and bad. Preserving their tax cuts would do almost nothing to boost the economy by eliciting more spending—not even on those Bentleys (which the rich can afford with or without tax cuts). For the most part, it would simply pad their bank accounts.
But don’t take my word for it. Last month, the Congressional Budget Office—Washington’s most scrupulously neutral arbiter of tax and spending initiatives—ranked eleven ideas in circulation for stimulating economic growth. Extending the Bush tax cuts finished at the very bottom in potential effectiveness. Worse, extending the upper-income portions would cost about $700 billion dollars over the next 10 years (and that’s before you factor in the effect of higher interest payments on U.S. debt). As Robert Greenstein of the Center on Budget and Policy Priorities puts it, even if we had an extra $700 billion to spend on more stimulus, there are massively more cost-effective ways to spend it.
In fairness, eliminating the upper-income portion of the Bush tax cuts isn’t quite as straight-forward in practice as simply allowing them to expire. Because most Democrats (including Obama) want to preserve the middle-class portion of the cuts, they’ll have to pass new legislation authorizing that extension for people making $250,000 or less (about 98 percent of workers). And since Republicans would filibuster the new bill if didn’t include the upper-income tax cuts, Democrats will have to use reconciliation themselves—something that makes moderates queasy.
On the other hand, as budget expert Stan Collender notes, Republicans are unlikely to be satisfied with merely extending the old Bush tax cuts. They’ll surely demand even more goodies, which will force Democrats to use reconciliation anyway. So there’s really no practical way around it. (In any case, it would be bizarre for these moderates to insist that tax cuts which only required a simple majority to pass under Bush now require a 60-vote majority to phase out.)
For what it’s worth, I don’t think many centrist Dems are pining to lavish another $700 billion on the rich. Nor do I think most of them buy the idea that these tax cuts are critical for sustaining the recovery. Or that this is a particularly good use of $700 billion at a time of unprecedented deficits. Their real concern is getting hammered for raising taxes while running for re-election in a Republican state.
But that’s really the point. If we can’t retire a giveaway that makes no economic or budgetary sense, for which there’s no organized interest-group to speak of (at least none that has influence over Democrats), and which only affects the top 2 percent of income earners at a time when the bottom 98 percent believes the system is rigged for the wealthy, what on earth is the system capable of accomplishing? Unless conservative Democrats can pull it together, I’m afraid the answer is very little.
Noam Scheiber is a senior editor of The New Republic.