Political Cortex: Brain Food for the Body Politic

Keep in mind that Democrats (plus Olympia Snowe) have been fighting back against the House version's bill since February. Here's a link to an NPR discussionof the issue, if you're interested.

According to CBO projections, if the Bush tax cuts are extended in 2011, a deficit of $114 billion forecast for the year of their expiration will more than double, to $274 billion. A budget surplus of $67 billion, anticipated for 2016 if all the tax cuts expired, would turn into a $310 billion deficit.

And the red ink would only grow worse from there, as the baby-boom generation swells Medicare and Social Security costs, said Douglas Holtz-Eakin, a former Bush White House economist who recently retired as CBO director. <snip>

Both Bush and the Republican congressional leadership expressed no alarm yesterday. Speaker J. Dennis Hastert (R-Ill.) said sharp reductions in the tax rates on dividends and capital gains have boosted business investment, created jobs and buoyed the economy since their passage in 2003. That outcome, in turn, brought more revenue to the federal government, not less, he said.

Bush said the budget could be balanced by controlling spending while maintaining his tax cuts. "The best way to reduce our deficit is to keep pro-growth economic policies in place so the economy expands, which will yield more tax revenues, and be wise about how we spend your money," the president said.

Democrats attacked the agreement to extend the tax cuts for dividends and capital gains as another gift to the rich. Senate Minority Leader Harry M. Reid (Nev.) declared: "Bush's tax plan offers next to nothing to average Americans while giving away the store to multimillionaires." House Minority Whip Steny H. Hoyer (Md.) said Bush's comments on fiscal rectitude "read like a passage from 'Alice in Wonderland.' "

Even though Bush's previous tax cuts have been proven to be failures in stimulating the economy, he's still trying to make his case economically.

With the country still suffering from rising gas prices, the aftermath of Katrina, record deficits, and millions still without health care, billionaire tax cuts are a little, well, unseemly.  An additional detail of the agreement includes allowing small businesses to write off investments worth up to $100,000 for an additional two years, 2008 and 2009, while letting banking, securities and insurance companies defer income-tax payments on overseas trading profits for one additional year.  And we all know how much these people need as much help as the oil companies. What a deal!

Though some have small mention of this new agreement, Forbes at least quotes Harry Reid:

Republicans are worried about growing voter unhappiness over soaring pump prices in an election year and hope to show that the GOP-controlled Congress can address pocketbook issues. They want to pass long-stalled legislation to extend, through 2010, a 15 percent tax rate for dividends and capital gains.

Democrats said the idea would appease wealthy investors and do little for the middle-class.

"Bush's tax plan offers next to nothing to average Americans while giving away the store to multimillionaires," said Senate Democratic leader Harry Reid of Nevada.

Reid said that the 71 percent of taxpayers with an adjusted gross income of less than $50,000 saved on average just $10 each from the capital gains and dividend tax cuts, according to a study by the liberal-leaning Citizens for Tax Justice.

Need more evidence that this is a wrong-headed approach to our economic problems?

Try a few key points from the Brookings Institute:

The expiring tax cuts are regressive--they provide a larger percentage cut in after-tax income for high-income households than for low-income households. If the tax cuts were made permanent, filers with income above $1 million would see a 5.7 percent increase in their after-tax income, whereas filers with income below $50,000 would see just a 2.2 percent average increase in their after-tax income. (These figures do not include the estate tax repeal, which is also quite regressive.)

The percentage changes in after-tax income are the most theoretically preferred method of examining the progressivity of tax changes, but attention also naturally focuses on other measures. For example, the top 1 percent would receive 27 percent of the tax cuts provided by making the expiring provisions permanent, even though that group pays only 21 percent of federal taxes. As a second example, taxpayers with income above $1 million would receive average annual tax cuts of $107,000 (again, this does not include the estate tax). This is higher than the income of about 86 percent of tax filing units.

and

Is extension of the expiring provisions necessary to ensure economic prosperity? In the short run, the answer is clearly no. Reducing taxes in 2014 can actually hurt the economy today because financial markets are forward-looking; larger projected deficits in 2014 can therefore raise interest rates today. In the long run, the answer is also clearly no. The tax cuts themselves may have a modest positive effect on the economy, but they also increase the budget deficit, which has a negative effect on the economy. The net effect, according to a variety of estimates noted above, is likely to be negative, not positive, in the long run.

The Administration has also claimed that the tax cuts need to be made permanent to reduce the uncertainty that taxpayers face. This argument is misleading. Making the tax cuts permanent would not help resolve the fundamental uncertainty about future tax rates or future policy. The reason is that the true underlying source of uncertainty in fiscal policy is how the fiscal gap is going to be closed--what combination of revenue increases and spending cuts will be used. Enacting another fiscally unsustainable policy (making the tax cuts permanent) on top of the already unsustainable fiscal situation does not make the situation more stable, only less so.

I'm hoping Krugman will weigh in on this issue again soon.  Here's a snippet from a 2/10/06 TimesSelect piece:

Consider the case of the vanishing future.

The story begins in 2001, when President Bush was pushing his first tax cut through Congress. At the time, the administration insisted that its tax-cut plans wouldn't endanger the budget surplus bequeathed to Mr. Bush by Bill Clinton. But even some Republican senators were skeptical. So the Senate demanded a cap on the tax cut: it should not reduce revenue over the period from 2001 to 2011 by more than $1.35 trillion.

The administration met this requirement, but not by scaling back its tax-cutting ambitions. Instead, it created fictitious savings by "sunsetting" the tax cut, making the whole thing expire at the end of 2010

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Are we all clear on this?