If we “do nothing” and let the taxes sunset our budget deficit profile will improve significantly. On the flip side, if we raise taxes across the board on Jan 1 the economy will hit a wall. We are damned if we do and we are damned if we don’t.
The Administration has said it wants all tax increases to be pushed into the future for at least two years. Congress (I thought) was of a similar mind. There is now some doubt as to what they are collectively thinking. I believe that in the end, our legislators will roll over and give Obama what he wants; two more years to kick the can down the road.
The Congressional Budget Office looks at the impact of any legislation. Doug Elmendorf, the boss at the “non-partisan” CBO gave a speech on Friday on the topic of what to do with taxes. It’s not a pretty picture. Consider this slide that attempts to define the consequences on employment of a variety of actions the government could take.
Two observations:
A) Reducing taxes in 2011 has the least ‘bang for the buck’ in terms of creating long-term full employment. Given that this is the least effective alternative you have to wonder why it is being considered.
B) Except for reducing taxes none of the other options are politically feasible for the foreseeable future. We have congressional gridlock. There will no stimulus package in 2011 from our new legislators. So extending the Bush tax cuts is the only option. And that is why it will become law.
Of course nothing is free. If we don’t get our house in order and eliminate what was promised to be temporary cuts by Bush, the deficit will go up. By how much? According to the CBO it will double:
In summary, look forward to a patch on taxes that accomplishes very little in terms of future growth, one that has the least efficacy in addressing the underlying unemployment problem and the one that will insure that a fiscal explosion is not so far off in our future. I think Elmendorf sums it up pretty well:
Just a question: When do we address the question of the “Fundamental disconnect”? We haven't done that at anytime in the past. We aren't going to do it in the present. We will only do it in the future if there is a crisis that forces us. The conclusion is that another crisis is inevitable because what we are doing is unsustainable. I wonder if our congressional leaders read the stuff from the CBO. If they are, they are ignoring it.
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On one hand you say, "we're damned if we do and damned if we don't" and speak of the "fundamental disconnect" that has been patently obvious for many years now...
ReplyDeleteThat all sounds awfully like "there's no sustainable fix to satisfy everyone", and you do state as much.
On the other hand, you oppose the extension of the Bush tax cuts. But opposing tax cuts - directed at ANYONE - can only kick the can down the road a year or two.
Business is already so inundated with regulation, with costs and taxes, with requirements to meet 'social mandates', and with forced contributions to employee benefit plans that small business start-ups are simply not occurring.
The CBO? Is focused SOLELY on number-crunching, on "balancing" accounts, on getting the correct numbers, on "A+B=C". It's about as useless and irrelevant as the BIS... They are not required to look at the situation in the light of the systemic problem it is.
Not only should the Bush tax cuts be extended, but extensive middle-class tax cuts should be enacted together with simultaneous entitlement cuts and downsizing of governments.
Which won't happen...and thus we drift toward unparalleled catastrophe...
K,
ReplyDeleteand thus we drift toward unparalleled catastrophe...
I like that. Might steal it....