Will Republicans Really Block Tax Cuts Because They Go Only to Earners Below $250K?

President Obama proposes allowing the Bush tax cuts to expire next year — as they are scheduled to do if nothing is changed — for those earning more than $250,000, but changing the law so as to extend the tax cuts for those earning less than that amount.   Republican politicians are opposing the proposal.    I don’t understand what they are thinking.  Their position doesn’t make sense to me, regardless whether they are thinking about short-term stimulus, long-term fiscal conservatism, good economics, or even pure politics.   

Start with the pure politics.   What is the end-game?   Are congressional Republicans prepared to block the Obama proposal extending the tax cuts for those making less than $250,000 and to let them expire as in the original legislation proposed by President Bush and passed by the Congress in 2001-03?   More than 95 % of Americans make less than $250,000.   Their taxes will go up on January 1 as a direct result if Republicans block the Obama proposal.  How are they going to explain their position to the voters when the current law takes effect?    Will it be: “To address budget deficits we need to let taxes go up on most Americans”?   That doesn’t sound like them.   Or: “Minimizing taxes for the rich is so important that we are willing to let taxes go up on everyone else”?     When it comes down to the wire, surely they would have to back down.  So why aren’t they thinking ahead?  

The same goes for the estate tax, which under the original Bush legislation is scheduled in January 2011 to bounce back from oblivion (beneficiaries of any rich people who die in 2010 don’t have to pay a dime of tax) to the old system of taxing estates worth over a million dollars at 45%.  The White House proposal is to exempt in future years all estates under $ 3 ½ million, $7 million for couples, and to tax only the largest estates.  If the Republicans are going to continue to oppose Obama, how are they going to explain this to the electorate?   That the only benefits that matter are those for the tiny minority of super-rich?

Now let’s move to economics.  If you were going after stimulus because the recovery is still weak, and if you believed that only tax cuts created stimulus, the priority should be in other areas like extending the Making Work Pay provisions for low-income workers, which are also set to expire.   This proposition holds regardless whether
(i) your idea of stimulus is Keynesian demand expansion (the lower-income workers have a higher marginal propensity to consume), OR even if
(ii) your idea of stimulus is purely enhanced incentives to work.  (Lower income workers face overall effective marginal tax rates that are often higher than the rich face, when one factors in payroll taxes, etc.)    Alec Phillips of GS US Global ECS Research points out that the amount of revenue (and stimulus) that is at stake in the expiration of Making Work Pay is greater than in the expiration of tax cuts for those over $250,000, and yet the latter question is getting all the attention and the former question is getting no attention.

Fixing the Alternative Minimum Tax is another sensible policy that qualifies as a tax cut relative to existing legislation, and should be part of any fiscal package.

If we want to achieve short-term fiscal stimulus from the viewpoint of good economics, then we should realize that well-chosen spending programs give far more bang-for-the-buck than most tax cuts.   (“Bang for the buck” means a high ratio of short-term fiscal stimulus to long-term damage to the national debt.  It’s the opposite of how the Bush fiscal program was designed in 2001-03.)    Examples of well-chosen spending programs include aid to the states (which Republican congressmen have been voting down) so that the hard-pressed states don’t have to lay off firemen, policemen, bus drivers, teachers and road workers.     Examples of tax cuts with much less bang for the buck include not just those for the rich (e.g., the abolition of the estate tax), but even garden-variety income tax cuts, because they are partly saved.    Don’t take my word for it.   Martin Feldstein (whose work on taxes and incentives led to the supply side revolution, and who was the Chairman of Reagan’s Council of Economic Advisers) argues that almost all of the income tax cut that was passed n response to the recession in 2008 was saved by households rather than spent, and predictably so, and that government spending would bring more short-term stimulus.

Of course good economics would mean not just short-term fiscal stimulus, but equal emphasis on measures to bring the budget deficit under control in the long run.   The best proposals are the least popular, as so often.   Fixing social security would be a huge step toward long-term fiscal responsibility, without endangering the current recovery.   A good package would combine all these measures.