Cleveland: Keeping Christmas at Home
Ramona: The War on Happy Holidays
I really think that we should forbid the government from passing temporary laws, especially tax cuts with sunset provisions. By enacting tax cuts that would eventually expire, George W. Bush was able to win the long-term "budget scoring" game, while also setting a trap for whoever occupied the White House after him.
The Treasury and the Congressional Budget Office think about the economy in very different ways than the average American does. They use a baseline, which is generally the current law, and then they judge proposals against that. If the baseline is that the Bush Tax Cuts, as extended by Obama, will expire in January 2012, then that's the baseline. If you extend them, then you shrink the government's coffers against the baseline. So, to the budget people, extending them is actually a tax cut, since it lowers rate compared to what the law currently asks for.
In practice, this doesn't work. People get used to tax rates over time. If my effective rate gets cut from 20% to 17%, I'm happy that first year. If it stays at 17% for another five years, I'm now complaining that 17% is too high. That's just how humans are. Even if you tell me, you paid 20% this year, you'll pay 17% for the next five but we're going back to 20% in year six, I'm still aghast in year six because I've internalized the notion that 17% is more than enough, thank you. The mind's baseline does not match the CBO baseline.
I'm very sympathetic to the argument that Obama should let the Bush tax cuts expire and then start a new conversation about who should be paying what and how much and when. The only way out of the "all or nothing" expiration of the Bush tax cuts is to swallow it and move on.
Obama has now tried for years to push the idea that it doesn't have to be all or nothing and that rates can remain unchanged for everybody making under $250,000. Republicans have repeatedly argued that this is unacceptable to them. They care deeply about the highest tax brackets.
There's another tax cut that's set to expire next year, one that hits many, many more Americans. For two years, President Obama has held the employee portion of the payroll tax down near 4%, from just over 6% (which is its baseline going forward under current law.) Payroll taxes are more regressive, since everybody pays the same amount of tax, up to an income limit of about $120,000. For every dollar you make over $120,000 a year, the percentage of your income that goes to the payroll tax drops. If you make millions, it drops to total insignificance. If you make billions, it approaches zero. But, if you make the median income ($50,000) the percentage of your income that goes to the tax is at the highest level the law demands.
Any "grand bargain" on the debt is going to move the employee portion of the payroll tax back to the 6% level. I wonder if we've crossed into the "new normal," where most people will react to that as a tax increase on the middle class, rather than the expiration of a temporary benefit. We'll soon find out. I'm not actually bringing this up to argue the merits or demerits of the current payroll tax rate. Given that Social Security is always under scrutiny and attack, the payroll tax holiday might have been a very bad idea from the start. But I see why Obama did it. It's a tax that everybody pays, so cutting it injects money into the economy from the bottom up.
What I'm more interested in is this -- the Bush tax cuts disproportionately benefits the wealthy. They had a set expiration date, which Obama extended, but only temporarily. They are now once again up for renewal and this is a major issue.
Obama's payroll tax cut disproportionately benefits people who make less than $120,000 a year. It had a set expiration date, which Obama extended, but only temporarily. It is now once again up for renewal and this is not a major issue at all. There's no fight at all. Yes, Republicans will go into the midterm elections accusing Democrats of having "raised taxes on the middle class," but they seem quite comfortable, in the main, with letting the payroll tax cut expire (and so do most Democrats, and all of the centrists).
Why do you all think it is that the Bush tax cuts are sacred and must be either kept forever or replaced with even lower rates while we accept the expiration of the payroll tax cut with no more concern than we accept the expiration of a carton of milk?