Friday, July 22, 2011

Two Things to Know About the “Gang of Six” Tax Plan Mr. Obama Endorsed – Tax Cuts for the Wealthy and Tax Cuts for Corporations

Well, What Exactly Did You Expect

Senators Saxby Chambliss, Republican of Georgia, and Mark Warner, Democrat of Virginia, participate in a discussion on the federal budget, deficit reduction and the debt ceiling during a luncheon of the Economic Club in Washington, Wednesday, June 8, 2011.
Saxby Chambliss, left, Republican of Georgia, and Mark R. Warner, Democrat of Virginia, two leaders of the so-called Gang of Six, in June

Details are emerging about the deficit reduction plan developed by a group of six Senators and endorsed  by the President.  The Plan would decrease the deficit by cutting spending by $2.7 trillion over 10 years and raising (or lowering, we really don’t know which) taxes by $ 1 trillion over 10 years.

What we do know is that the top individual rate, currently 35% (and scheduled to go 39% if Mr. Obama makes good on his promise to not renew them for high income individuals) will be reduced to 23-29%.  Now the tax code is supposed to be reformed so that there will be a tax revenue increase which will offset the lower rates.  All those who believe that please raise your hands.  We didn’t think so.

On the corporate side the current 35% rate will go to 23-29% and be revenue neutral.  That is, changes will be made so that the lower rate will apply to a higher income base.  All those who believe that please raise your hands.  We didn’t think so.

No, at the end of the day if the plan is adopted as proposed, tax cuts will go to those who least need it and spending cuts will be imposed on those who can least bear them, and cost shifting in health care, education, and other middle class programs will  shift cost onto the middle class. 

The deficit reduction probably will not take place at any level close to that contemplated.  Here is a report on the last time a big tax change took place, in 2001.  See what the “experts” were forecasting then, and see what actually happened. 

History is likely to repeat itself for several reasons.  One is that the so-called reforms will be watered down by lobbying by special interest groups.  A second is that revenue estimates tend to be optimistic.  A third is that with high marginal rates, when the economy starts to grow tax revenues grow at a higher rate, sharply reducing the deficits.  With substantially lower marginal rates this "revenue bounce" will just not happen.

So in the end the dificit is largely unchanged, and high income individuals and corporations get the tax relief they so desperately crave.

The only bright side in all of this is that Republicans may feel the need to forego running a candidate against Mr. Obama in 2012.  After all, if it is this easy to get this much of the Conservative program adopted, think what they can get if they really try.  Why go to the effort and expense to elect a Republican when what they have will do just fine.

As for Mr. Obama himself, well The Dismal Political Economist is still waiting for him to make good on one major campaign promise on the budget and taxes, just one will do.

1 comment:

  1. Why not let Romney run to Obama's left? With GOP control of the White House and the Congress, a large stimulus bill could easily pass.