America's Fiscal Choices: We Still Have Them (For Now)

A dear departed friend of mine, Alex, was know for saying "We all have choices." It was usually in the form of advice and/or a warning to a friend who was about to make a disastrous choice, with serious implications for his or her future. The not-so-thinly veiled implication was that our choices have consequences, and that we consider our choices carefully to avoid the worst consequences.

Sometimes, if someone particularly daft still wasn't getting the message, Alex would add a note of severity by saying, "But sometimes those choices get taken away."

I thought about Alex's warning today at the America's Fiscal Choices [1] conference. Well into an economic crisis, America still has fiscal choices, but if we don't make the right choices — and make them soon — those choices will almost certainly be taken away.

I didn't expect to laugh out loud at America's Fiscal Choices [1], especially given the subject matter and the line-up of panelists. But one panelist — unintentionally, I presume — caused me to laugh so loud that I raised my hand to my mouth to avoid too many people hearing me.

The accidental comedian this morning was Harvard University economics professor Martin Feldstein. [2] The reason I'm sure he wasn't joking is because he happened to be speaking in defense of his proposal to extend the Bush tax cuts for the wealth for two more years [3].

Given that he's also written that a double-dip recession is a price worth paying [4], I'm sure he wasn't kidding. But his defense of a two-year extension of the Bush tax cuts for the wealthy, during a panel on "Budget Policy, Short-Term Recovery & Long Term Growth," was laughable.

It's all about "psychological effects." Let me walk you through it. Basically, President Obama should support temporarily extending the Bush tax cuts for the wealthy, because people who make $250.000 a year and up don't like President Obama because they think he doesn't like them. If he extends Bush's tax cuts for the wealth, maybe they'll like him more. But the "psychological effect" of not extending tax cuts for the wealthy would cement their initial impression. So, Obama should be willing to compromise with the next Congress on extending those cuts.

On its face, this sounded a bit like a bribe to me. On the other hand, it never worked with my lunch money and the schoolyard bully.

To his credit, Paul Krugman — Feldstein's fellow panelist — managed to keep a straight face upon hearing this. Then he pointed out what he called "The Trap," which consists of two parts: (a) an administration whose responses to the crisis have been inadequate, failing to meet the administration's own high expectations, thus causing them to give up on taking bolder action; (b) an opposition party that has to date been disinclined to compromise, and is already threatening to shut down the government [5] should they win back Congress and reach an "impasse" with the president. (Meaning, if the president doesn't cave to their every tantrum.) Rep. Steven King, R-Iowa, has demanded a "blood-oath" from would be Speaker John Boehner to shut down government [6] over repealing health care reform. Rep. Lynn Westmoreland, R-Ga., said shutting down the government would be the right thing to do [7], even if it halts veterans benefits.

And they've already dug in their heels on Bush's tax cuts [8] for the wealthy.

Republican leaders in Congress on Monday backed away from a possible compromise with the Obama administration over expiring Bush-era tax cuts, committing both sides to an election-year battle with significant stakes for the economy.

Senator Minority Leader Mitch McConnell of Kentucky and the party's conservative activists distanced themselves from a statement in an interview Sunday by House Republican Leader John Boehner that he might agree to let tax relief for wealthy Americans expire if that was politically necessary to save middle-class tax cuts.

By the end of the day Monday, Boehner, of Ohio, issued a statement dropping his suggestion and saying he too would fight higher taxes affecting any bracket.

President Obama is pushing for a permanent middle-class tax cut, but only if Bush-era cuts for top earners are eliminated. Republicans, in turn, want permanent tax relief for all income levels.

There's another side to this coin. In past month, we've been listened to cries of the whining rich [9]. We've endured the threats of the angry rich [10].

Anger is sweeping America. True, this white-hot rage is a minority phenomenon, not something that characterizes most of our fellow citizens. But the angry minority is angry indeed, consisting of people who feel that things to which they are entitled are being taken away. And they’re out for revenge.

...And among the undeniably rich, a belligerent sense of entitlement has taken hold: it’s their money, and they have the right to keep it. “Taxes are what we pay for civilized society,” said Oliver Wendell Holmes — but that was a long time ago.

The spectacle of high-income Americans, the world’s luckiest people, wallowing in self-pity and self-righteousness would be funny, except for one thing: they may well get their way. Never mind the $700 billion price tag for extending the high-end tax breaks: virtually all Republicans and some Democrats are rushing to the aid of the oppressed affluent.

You see, the rich are different from you and me: they have more influence. It’s partly a matter of campaign contributions, but it’s also a matter of social pressure, since politicians spend a lot of time hanging out with the wealthy. So when the rich face the prospect of paying an extra 3 or 4 percent of their income in taxes, politicians feel their pain — feel it much more acutely, it’s clear, than they feel the pain of families who are losing their jobs, their houses, and their hopes.

Never mind what we already know about those tax cuts for the wealthy [11].

 

Uh-Oh! For 99% of us, it was a very taxing decade. From 2000 on conservatives preached the gospel of prosperity through tax cuts. Tax cuts for the very wealthy, that is. The idea was the tax cuts would put yet more money into the hands of the wealthiest Americans, who would then put that money back into the economy, and "spread the wealth" either by spending it on goods and services that create jobs or by investing it in ventures that would create jobs and benefit all Americans. The reality turned out to be something else.

• The Bush tax cuts mostly benefited the very wealthy [12]. Tax rates for families earning more than $1 million a year dropped more than any other group, and stayed low while rates for middle-income families crept back up.
• According to the GAO [13], two thirds of corporations in the U.S. avoided paying taxes [14] between 1998 and 2005, thus placing a greater tax burden on working families. Nonetheless, the Bush administration and conservatives campaigned to cut a corporate tax rate already among the lowest in the world.
• Thirteen banks among the 23 recipients of the $700 billion bailout also failed to pay more than $220 million in taxes [15].
• Congress passed up a chance to reign in coroprate tax evasion via offshore tax shelters [16].
• Foreign banks helped wealthy Americans avoid taxes [17], via secret offshore accounts, costing the federal government up to $100 billion in annual revenues. The United Bank of Switzerland, where former Republican senator Phil Gramm — who authored much of the deregulation legislation [18] blamed for the current meltdown — serves as a Vice Chairman of the Investment Bank division, admitted to having committed conspiracy and fraud and agreed to pay a $780 million fine.
• Not only did the Bush era tax cuts only benefit the wealthy, but the administration attempted to use policy to lay "tax traps" for seniors and middle-income Americans [19], thus increasing their tax burden.

Uh-Oh! We never got the "trickle down" of prosperity the tax cutters promised. Instead, we got a kind of Bizarro World [20] "trickle up" economy, where billionaire Warren Buffet has a lower tax rate than his secretary [21]. Of course it didn't work [22]. It couldn't work and we've known for years it wouldn't work [23]. This long, slow grift actually began decades ago, but really began to pay off in the past ten years — when conservatives had control of both the White House and Congress, and could finally do a lot of things their way.

• The average tax rate of the wealthiest 1% fell to its lowest level in 18 years [24].
• Capital gains tax cuts lowered the tax rates of the top 400 tax filers, while their incomes soared. The top marginal tax rate now stands at 15%, less than half the top tax rate on wages and salaries. The result: the super-wealthy — who derive a large fraction of their income from investments rather than wages and salaries — now pay tax at very low rates [25].
• In the last economic expansion, from 2000 - 2007, two thirds of income growth went to the top 1%, whose income grew 10.1% annually, compared to 2.7% annual growth for the other 99% (i.e. the rest of us). (Emmanuel Saez, University of California, Berkeley [26].)
• America's most affluent 1% now pay just 6.4% of their incomes in state and local taxes [27]. But they actually pay less — 5.2% — because they can deduct state and local taxes from their federal tax bill.
• Middle income families, who make up the middle fifth of the nation's income distribution, pay 9.4% of their incomes in state and local taxes. (Institute on Taxation and Economic Policy [28].)
• The poorest families, in the bottom 20%, pay 10.9% of their income in state and local taxes.(Institute on Taxation and Economic Policy [28].)

Never mind that the wealthy don't spend tax cuts [29], and thus tax cuts for the wealthy don't stimulate the economy [30].

Beneath the whining and threats of the rich, there's another story that doesn't get nearly as much attention: what's happening to the rest of us [31].

One in five American kids was living in poverty in 2009. Across the country, once solidly middle-class families are lining up at food pantries and soup kitchens for groceries or a hot meal. In New York City, a startling indicator of the continuing economic stress is the rise in the number of homes that don’t have kitchens.

Election Day is approaching, but neither party cares to focus on the nightmare facing millions of Americans who have been laid low by unemployment, home foreclosures, personal bankruptcies, and jobs that offer only part-time work, lousy pay and absolutely no benefits.

In an era of extreme economic inequality (which is another way of saying economic unfairness), Wall Street can be on a roll and corporate profits can streak toward the moon at the same time that ordinary American families are stuck in depressionlike conditions with precious little hope of relief.

Go ahead, given them your lunch money and they'll like you better. They might even be a bit nicer to you. And if they don't, well, they've already got what they wanted.

The reality is closer to what Krugman said. The danger is that the next Congress won't even do what was already done to deal with the economic crisis and its consequences. It will do even worse. Quite simply, reducing revenues by extending tax cuts [32] that don't deliver what's desperately needed in our shared crisis. The government will simply have no resources to help middle and working class Americans facing foreclosure and lining up at soup kitchens. Even the government aid Feldstein say is needed to prevent another housing market collapse [33] stand no chance if the government has no resources in the form of revenue.

Go ahead. Give them your lunch money. But don't expect to be better off. For all the talk of the need for "tough choices," the reality is that the consequences of those choices will be borne by those already having the toughest time.

As Carl Conetta of the Project on Defense Alternatives said of the deficit debate, during the national security panel, "We are in the process of allocating pain." The same must be said of taxes. We are allocating pain if we reduce resources that might be used to relieve what Krugman described as the "massive suffering" among the other 99% of us, for the "psychological effects" on the wealthiest 1% among us.

We all have choices. But in a crisis, the longer you wait the fewer choices you have. Eventually, you don't have any left—no good ones at least, and certainly none that aren't painful.