JONATHAN COHN JULY 21, 2011
One more reason to think we're headed to some sort of economic apocalypse: Supply-siders like the Gang of Six proposal. Jonathan Chait explains the problem here:
The weird thing is that I like the Gang of Six plan, too. If The Journal editorial page (and [Larry] Kudlow) and I both like the same fiscal program, chances are one of us is confused. I suspect, unsurprisingly, that the confused party is the supply-siders. The only way to get tax rates down to the levels they're talking about while raising the kind of revenue the Gang of Six is talking about is to eliminate the capital gains tax preference. I have a hard time seeing supply-siders go for that.
Jon offers two theories. The first is that the supply siders are simply confused: They don't understand what's in the proposal. The second is that they're making a calculation: If a deal like this doesn't pass, the Bush tax cuts are likely to expire after 2012. Rates on the wealthy would revert to what they were during the Clinton era and there would be no accompanying tax simplification.
I have no idea which, if either, of these explanations is right. But the second theory is an interesting one and highlights a key dilemma liberals face when evaluating the Gang of Six proposal, or anything like it.
The biggest virtue of the Gang's plan is the substantial new revenue it promises: More than $1 trillion, above and beyond the revenue from expiration of the Bush tax cuts on upper incomes. In other words, if you assume that the Bush tax on upper incomes are going to expire, then the Gang of Six proposal would produce an additional $1 trillion in revenue towards deficit reduction. According to the Center on Budget and Policy Priorities, that's about $700 billion more than the Grand Bargain that President Obama has been proposing.
But it's still less money than expiration of all the Bush tax cuts would generate. (I don't have the exact apples-to-apples figures, because everybody is using different baselines, but budget experts confirm this.) So whether you prefer the Gang of Six proposal depends in part on what the likely alternative is.
I'd been hoping, as Jon has, that doing nothing would produce a political stalemate on taxes, leading to expiration of all the Bush tax cuts after 2012. But the Obama administration has signaled pretty clearly it wants to extend, permanently, the Bush tax cuts that affect middle incomes. If so, the Gang of Six deal is probably preferable, depending on details the Gang itself has yet to provide.
Of course, exactly how much the Gang of Six proposal even matters right now is another question entirely. At least for the immediate future, the odds still favor a narrower deal, along the lines of the McConnell-Reid proposal, that would lift the debt ceiling in exchange for modest spending cuts, mostly in discretionary spending. And there's still no telling whether something like McConnell-Reid can even get through the House, absent a full market panic that brings the Republican caucus back to reality. In other words, an economic disaster of biblical proportions remains very much a possibility.