Advice to the GOP: In the Spirit of the Holidays, Accept the Gift

The fiscal cliff debates seem to be at a standstill as we approach the end of the year.  On the spending side, the proposal to change the indexing for Social Security seems to be quite positive. The use of the CPI-W has fueled growth in the real value of benefits and the substitution of a more realistic measure of inflation (or some kind of progressive indexing) is a change that could make a significant difference over time.  Republicans are likely correct in their dissatisfaction with tax increases today in exchange for significant cuts in the future since no Congress can effectively bind the hands of a future Congress.

The tax side is particularly interesting, and I wonder if the GOP understands what a victory any agreement would be that made the Bush tax cuts permanent for the vast majority of the population. Regardless of whether the taxes increase for households making $250k, $400k or some other number, the overwhelming fact is that the significant tax cuts introduced under George W. Bush are likely to become permanent. For the GOP, this is no less a victory than the 1996 elimination of AFDC, which essentially consolidated many of the reform efforts of the past 15 years.

Zachary Goldfarb (Washington Post) has an interesting article reinforcing this position. A few excerpts:

R. Glenn Hubbard, dean of the Columbia Business School and an architect of the Bush tax cuts, said it is “deeply ironic” for Democrats to favor extending most of them, given what he called their “visceral” opposition a decade ago. Keeping the lower rates even for income under $250,000 “would enshrine the vast bulk of the Bush tax cuts,” he said.

And, due to the progressivity of the US tax system, even the wealthy would continue to reap benefits when compared with the expiration of the tax cuts when taken as a whole.

The first $250,000 earned by even the wealthiest families is subject to lower rates. For this reason, Obama noted last month that under his proposal, “every American, including the wealthiest Americans, gets a tax cut.”

For instance, an individual taxpayer earning between $200,000 and $500,000 a year would pay an average of $515 more in taxes next year if the Bush tax cuts for the wealthy expire, according to the nonpartisan Tax Policy Center. But if all the Bush tax cuts were to vanish and the rich had to pay higher rates on all their income, their tax bills would shoot up by an average of $6,000. The very richest — the top 1 percent of earners — would pay much higher taxes if solely the upper-income tax cuts expire, because the savings from extending the rest of the rates would be relatively negligible.

Bottom line: regardless of where you draw the line on taxes for upper income earners, the proposed deal on the fiscal cliff locks in the Bush tax cuts—a clear victory for the GOP, particularly given the poor Republican performance in the 2012 elections, candidate Obama’s commitment to reversing the Bush tax cuts,  and the fact that the Democrats are firmly in control of the White House and the Senate.

Of course, I would not argue that a victory for the GOP is a victory for the nation given the long-term fiscal imbalances. In my view, we need higher taxes (let’s begin with the elimination of all tax expenditures, beginning with those that lavish subsidies on the top two quintiles). We also need significant reductions in expenditures, particularly in our largest entitlements, the defense budget, and various forms of corporate welfare (including agricultural subsidies).

But there is little question that the Obama administration is willing to hand the GOP a significant victory. It only has to accept the gift.

One thought on “Advice to the GOP: In the Spirit of the Holidays, Accept the Gift

  1. Any and every victory on lowering taxes or keeping them as they are is a political victory, not a fiscal one. I, for one, would like to see tax rates set and then left alone. Perhaps then we could have a “conversation” about the proper level of spending – which given current budget deficits needs serious adjustment.

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