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Game-Planning the Proper Economic Response in the Lame Duck Session

With the three-stage grand bargain rocket in assembly, it’s worth stepping back and figuring out what the optimal policy would be as we head down the fiscal slope. In other words, what’s the counterpoint to slashing spending and the social safety net in exchange for a modicum of tax increases? And what’s the best way to that goal?

On taxes, I think Travis Waldron has it mostly right. With unemployment at 8.1%, I would like to see the payroll tax cut extended another year as a wage subsidy, but because it implicates the Social Security trust fund, it’s not going to happen. So let’s look at the above chart from the Tax Policy Center. The taxes set to expire are fairly progressive; the Bush tax cuts on the wealthy, increases in capital gains taxes, the estate tax, the increased Medicare tax on the rich snuck into the Affordable Care Act, even the AMT patch, all hit the upper income distributions. For those on the low end of the scale, the biggest measures are the series of stimulus-era tax breaks (expanded Earned Income Tax Credit, tuition tax credit and the child tax credit) and the Bush-era tax cuts on the first $250,000 of income. Therefore, this is correct:

The top-line tax number news outlets are taking from the TPC report is certainly ugly: raising taxes on the middle-class would have a negative economic impact at a time when the country is still recovering from the Great Recession. But that calamity should be easily avoidable, given that both sides agree that those cuts should be preserved. The vast majority of the tax increases that would result from going over the “cliff” would have little economic impact since they primarily affect the wealthy, and, as a Congressional Budget Office report made clear earlier this year, the biggest economic threat posed by the fiscal cliff comes not from the tax side, but from its massive spending cuts.

These are the battle lines, then, for those who want to see the poor and middle class protected: let the tax cuts expire above $250,000. The economic value of those tax cuts is extremely limited. Furthermore, it represents a pot of money that can be applied to cancel the sequester. Between that and savings from the war in Afghanistan’s end (especially if you end it early), you can pay for the sequester, AND an extension of the stimulus tax cuts for the poor and middle class, and even probably some of the “tax extenders” for businesses, particularly ones I’d like to see like an extension of the wind energy production tax credit. You could time the Bush-era cuts below $250,000 to expire when unemployment reaches a certain number, perhaps 5.5%. Let everything else expire on schedule (although realistically, the AMT always gets patched). This all sets a baseline level of revenue if you want to do tax simplification down the road. But for now:

1) let the tax cuts over $250K expire;
2) use that money (and war savings) to pay to cancel the sequester;
3) extend the stimulus-era tax cuts and Bush-era cuts under $250,000, and potentially sunset them based on an unemployment target

Everything else just plays at the margins.

This is the realistic best-case scenario, then, one that makes its determinations based on what’s best for the economy at this time, rather than meeting some actuarial projection for the budget 10 or 20 years down the road.

And by the way, that’s just what to do on the measures at hand. We should also recognize that the economy needs more stimulus, that people need jobs, and that we ought to pass the rest of the American Jobs Act – without offsets – to provide it.

UPDATE: I should add that you could get to a level of cuts on the defense side of the sequester, if not the across-the-board cuts mandated, without impacting national security or jobs in the defense sector.

CommunityThe Bullpen

Game-Planning the Proper Economic Response in the Lame Duck Session

With the three-stage grand bargain rocket in assembly, it’s worth stepping back and figuring out what the optimal policy would be as we head down the fiscal slope. In other words, what’s the counterpoint to slashing spending and the social safety net in exchange for a modicum of tax increases? And what’s the best way to that goal?

On taxes, I think Travis Waldron has it mostly right. With unemployment at 8.1%, I would like to see the payroll tax cut extended another year as a wage subsidy, but because it implicates the Social Security trust fund, it’s not going to happen. So let’s look at the above chart from the Tax Policy Center. The taxes set to expire are fairly progressive; the Bush tax cuts on the wealthy, increases in capital gains taxes, the estate tax, the increased Medicare tax on the rich snuck into the Affordable Care Act, even the AMT patch, all hit the upper income distributions. For those on the low end of the scale, the biggest measures are the series of stimulus-era tax breaks (expanded Earned Income Tax Credit, tuition tax credit and the child tax credit) and the Bush-era tax cuts on the first $250,000 of income. Therefore, this is correct:

The top-line tax number news outlets are taking from the TPC report is certainly ugly: raising taxes on the middle-class would have a negative economic impact at a time when the country is still recovering from the Great Recession. But that calamity should be easily avoidable, given that both sides agree that those cuts should be preserved. The vast majority of the tax increases that would result from going over the “cliff” would have little economic impact since they primarily affect the wealthy, and, as a Congressional Budget Office report made clear earlier this year, the biggest economic threat posed by the fiscal cliff comes not from the tax side, but from its massive spending cuts.

These are the battle lines, then, for those who want to see the poor and middle class protected: let the tax cuts expire above $250,000. The economic value of those tax cuts is extremely limited. Furthermore, it represents a pot of money that can be applied to cancel the sequester. Between that and savings from the war in Afghanistan’s end (especially if you end it early), you can pay for the sequester, AND an extension of the stimulus tax cuts for the poor and middle class, and even probably some of the “tax extenders” for businesses, particularly ones I’d like to see like an extension of the wind energy production tax credit. You could time the Bush-era cuts below $250,000 to expire when unemployment reaches a certain number, perhaps 5.5%. Let everything else expire on schedule (although realistically, the AMT always gets patched). This all sets a baseline level of revenue if you want to do tax simplification down the road. But for now:

1) let the tax cuts over $250K expire;
2) use that money (and war savings) to pay to cancel the sequester;
3) extend the stimulus-era tax cuts and Bush-era cuts under $250,000, and potentially sunset them based on an unemployment target

Everything else just plays at the margins.

This is the realistic best-case scenario, then, one that makes its determinations based on what’s best for the economy at this time, rather than meeting some actuarial projection for the budget 10 or 20 years down the road.

And by the way, that’s just what to do on the measures at hand. We should also recognize that the economy needs more stimulus, that people need jobs, and that we ought to pass the rest of the American Jobs Act – without offsets – to provide it.

UPDATE: I should add that you could get to a level of cuts on the defense side of the sequester, if not the across-the-board cuts mandated, without impacting national security or jobs in the defense sector.

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David Dayen

David Dayen