Why Morning’s Minion Should Favor Extending All of the Bush Tax Cuts

My former co-blogger Morning’s Minion recently attacked the idea of extending the so-called Bush tax cuts to individuals earning more than $250,000 a year:

It would cost $680 billion dollars over 10 year. This is far greater than the cost of extending unemployment benefits to those out of work, something the Republicans opposed vigorously (the unemployed do not fill their coffers). It gets worse. Nearly all of the benefit goes to the richest 1 percent, those making more than $500,000 a year. Even more than this, 55 percent of the benefit goes to a mere 120,000 people – the top one-tenth of 1 percent of all taxpayers. Doing the math, that comes to an average $3 million tax reduction to those lucky enough to sit at the helm of the income distribution. It is indeed the preferential option for the super rich. This would be troublesome at the best of times, but in the current economic climate when so many struggle to get by, it’s simply immoral.

I can see where Minion is coming from on this, but it seems to me that his position here (aside from being contrary to the views of most economists) is contrary to other things he’s written on the desirability of fiscal stimulus.

Minion has repeatedly advocated the necessity of a large fiscal stimulus to prevent economic catastrophe, and has warned about the dangers of adopting a contractionary fiscal policy before we’ve achieved full recovery (indeed, I believe it’s his view that the initial stimulus should have been larger, and that a second stimulus now would also be desirable, assuming it was politically feasible).

Ending the the Bush tax cuts for high wage earners, however, *is* a contractionary fiscal move. Granted, in theory one could offset the contractionary effects of the tax increase by increasing spending or cutting taxes on lower wage earners. In practice, however, that’s not an option: the Evil Republicans won’t let you. So in reality the only way to avoid a fiscal contraction is to extend the Bush tax cuts for all earners. You don’t have to like it. You can think that enacting the tax cuts in the first place was horrible policy, and you can curse the Republicans to high heaven for putting you in this situation. But if you really believe in the importance of continued Keynesian fiscal stimulus, then it seems to me you have to support extending the tax cuts for everyone.

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12 Responses to Why Morning’s Minion Should Favor Extending All of the Bush Tax Cuts

  1. Donald R. McClarey says:

    I predict a 100+ comment thread and at least 10% will be from Morning’s Minion.

    It is only a stimulus in his world view if it involves government doling it out. People keeping more of their own money and spending it violates Catholic Social Teaching as proclaimed by Pope Paul Krugman I.

  2. Tito Edwards says:

    …in the Sancrasantum Redistributum encyclical.

  3. You can make this argument, but it’s pretty lousy stimulus in terms of bang per buck – first, it’s on the tax side, and second, it’s tilted to those with a higher propensity to save and who are less credit constrained.

    It’s also permanent, while the whole idea of stimulus is temporary. And while I think the short run fiscal problems facing the US are ridiculously exagerrated (hint: bond yields are at an all-time low), there is a longer-term fiscal sustainability problem. I saw a nice analysis the other day that showed the cost of “fixing” social security is almost exactly equal to the cost of extending the Bush tax cuts to the super rich. It’s a question of priorities, and shows once again that Republicans are utter hypocrites on the deficit, and have been since the time of Reagan.

  4. I’ve going to have to disappoint you here, Donald. As much as I love this kind of debate, I’m just too busy tomorow to get into it. Admit it, deep down you know I’m right!!

    And Tito, the Church most certainly supports redistribution. Little issues like solidarity and the preferential option for the poor are not confined to the domain of private charity.

  5. Teresa says:

    … in the Gospel of Wealth Redistribution

    and Government knows best….

  6. Tito Edwards says:

    MM,

    I think you might be confusing redistribution for distributism.

  7. Blackadder says:

    You can make this argument, but it’s pretty lousy stimulus in terms of bang per buck

    The question isn’t whether this form of stimulus is ideal. It’s whether it is better than the alternative, which is nothing.

    It’s also permanent, while the whole idea of stimulus is temporary.

    Extending the Bush tax cuts doesn’t mean extending them forever. Extending them to 2013 (or whatever) wouldn’t make them permanent.

  8. T. Shaw says:

    BA:

    Why the need to entice MM to “rise to the bait”?

  9. R.C. says:

    MM says:

    “…it’s pretty lousy stimulus in terms of bang per buck – first, it’s on the tax side, and second, it’s tilted to those with a higher propensity to save and who are less credit constrained.”

    Does it make any sense to criticize stimulus on the basis that it might be thrown towards [i]saving[/i]?

    Where, after all, do high-income earners “save” their money? By tucking it into a mattress?

    Is it not in fact largely invested? And under normal circumstances, is that investment not usually in the form of stock and bond purchases from private firms, who use the accumulated capital to expand operations…which normally, in its later stages, involves hiring?

    Now these, sadly, are not “normal circumstances.” The uncertainty caused by the current direction of D.C.’s economic and tax and benefits-related policies causes a the decision makers in any private business to be unable to determine the cost of hiring a new worker, or the likely profitability of expanding operations, with any precision.

    A $50,000 salaried worker might cost a total of $90,000 to bring in…or as much as $150,000. The expansion, which requires five additional workers, might bring in an additional $400,000 per year, or it might bring in only an additional $300,000. Normally the estimates-swing might be 10% either way; in the current climate, maintaining a 90% confidence interval requires a swing of 50% either way, which is a business statistician’s way of saying “beats me, go ask your Magic 8-Ball.”

    So in a way, MM is right. The high-income earners, at the moment, are predisposed to “save” rather than invest in companies which might expand and hire: That is, they’re predisposed to invest in friendlier countries, or even in precious metals.

    But all that indicates is that current policy is not merely one part of the problem, but two parts of the problem. A climate friendly to business-expansion is needed, along with tax rates low enough to give the investor class (that is to say: the top 50% of wage earners) money to invest in expanding businesses. Otherwise there won’t be enough domestic expansions in search of capital, and alternative savings/investment vehicles will become preferable.

    In short, the opportunity cost, for both businesses and investors, of contributing to higher domestic employment has increased by recent policy changes in D.C.; this has led to behavior changes at the margins in both categories. Policy must be corrected in both categories to produce a more employment-friendly environment. Otherwise, unemployment will tend to remain [i]above[/i] the 4-6% range we all enjoyed in the Bush and Clinton years.

    Had policies somewhat to the economic right of G.W.Bush’s centrism been followed — if the leftward half of the Democrats in Congress were all replaced with clones who were identical to the originals except that they took Ron Paul-esque stances on economic and budgetary matters — we’d likely be in measurable recovery by now.

    But since the Congress has instead taken things in the opposite, counterproductive, direction, we’re likely to see little or no recovery for the foreseeable future.

  10. R.C. says:

    Doggone it. I still can’t stop myself using the wrong kind of italics tags here; I’m so used to the method at InsideCatholic.

  11. anthony rowe says:

    I just can’t get past this first line…
    “It would cost $680 billion dollars over 10 year.”

    shouldn’t that be save instead of cost?

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