Friday, November 30, 2012

Tax hype and the fiscal curb

Reading yet another post on the fiscal curb and the deficit "problem" got me thinking about what both sides want. This whole issue is ridiculous. It was created by Republicans in the House to make Obama look bad and to get lower taxes. Up until now I've agreed with Obama's preference to raise marginal tax rates on income at 250k and up. The problem in these fiscal curb negotiations is that Republicans really, really don't want that. If there is one thing they are consistent about, it's that they want to lower taxes on the rich. So how do we get a deal given these constraints?

Obama wants to raise taxes on the rich in order to help lower the deficit. But I don't care about the deficit right now. So even though I'd like to raise taxes on the rich in principle, I'm willing to give that up. I'm not sure if Obama is willing to give that up for things like extension of unemployment benefits or extension of a payroll tax holiday. But I would. If he doesn't, though, I think the compromise would be to call the Republican bluff and try to reform the tax code while keeping or even lowering rates.

Part of the problem with that is Republicans haven't been clear at all as to what that would specifically entail. But I would preempt them with my own very liberal way of trying to get revenue without raising rates and declare that I've given away a huge concession for the sake of getting this deal done and cutting the deficit. I'm not sure if they would take actually accept this and concede on regressive spending cuts they are demanding. But at this point I don't think it makes a ton of sense to have tax increases on high incomes be your red line in negotiations.

A lot of liberals want this. But not doing it might help in the future. Republicans will still whine about taxes. But they wouldn't be able to scream bloody murder if we don't raise them. This would also allow us to keep the option on the table in the future, whereas if we get tax increases now, I think it would harder to get more in the future when we might need them more than we do now. Bottom line is that for the sake of the 2014 midterms and more importantly, human welfare, we need to keep the economy growing. That should take priority over deficit reduction. So whatever Obama can bargain away to get that he should, even higher taxes on the rich.

Update: Matt Yglesias and myself appear to be on the same page. Here he talks about what Republicans should do:

Tell him he can have his stimulus and he can even have higher tax revenue if he really wants it, but that the price is giving up his obsession with higher rates. Is he more interested in soaking the rich or in creating jobs? I don't think Obama says no to a deal like that, and if he does lots of sensible liberals (like this guy) will call him out on it. Then we can put this sorry episode behind us, proclaim the Grand Bargaining Era done for, and hopefully move on to other things.

Here he talks about the role of taxes in this negotiation:

The reason a sensible person might want more revenue rather than less in a budget deal is that more revenue might allow you to minimize cuts in spending on worthwhile causes. But at the end of the day the budget of a sovereign state that borrows money in its own currency is all about spending levels. The proper goals of a budget negotiator are to maximize cuts to bad programs and minimize cuts to good ones. When higher taxes helps achieve the latter goal, that's great. When it doesn't, then who cares?

The trap you don't want to fall for is the one in which getting "the rich" to "pay their fair share" becomes a political plot to make you swallow a deal you'd otherwise reject. At some iterations of the Obama-Boehner deficit talks it's looked as if Obama's going to ask liberals to give up the store on Social Security and then sugarcoat it with higher taxes on the rich. What's great about the proposal Tim Geithner apparently formally made to the House GOP is that it rejects this formula and does a good job of avoiding cuts to valuable programs and in fact increases spending in some key areas.

If you can get that good stuff out of a deal—and it's a big if—then it'd be foolish not to give some ground on the tax side. If you can get a better spending mix with higher taxes, then higher taxes are great. But if you can get a better spending mix with lower taxes, then lower taxes are even better.

It's not surprising I'm on the same page with Matt given that he's taught me a lot about economics. Hopefully Obama and Democrats see this.

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