“This estate tax proposal is emblematic of the limitless greed of the wealthy, but also that Republicans are so beholden to the wealthiest Americans that they would demand it.”—Rep. Jan Schakowsky
“IT’S POPULAR TO SAY THAT SPENDING IS THE PROBLEM. But one can’t help noticing the irony of extending the ’01-’03 tax cuts one day with an impact of $3 trillion to $4 trillion on revenues, and the next day proposing a 65-page report to eliminate $3 trillion to $4 trillion of deficits and debt.”
In one equation folded into two sentences, South Carolina Democratic Rep. John Spratt described the evident contradiction in President Obama’s capitulation to the Republicans on the Bush tax cuts that were set to expire at the end of this year.
Spratt — who after 28 years in Congress lost to a teabagger in November — wasn’t directly criticizing the president. He had put in a year on the “Bowles-Simpson” National Commission on Fiscal Responsibility and Reform and was struggling to rationalize his vote for the committee’s recommendations, just as they were being undermined by Barack Obama’s extension of tax policies devised by George W. Bush’s supply-side ideologues 10 years earlier.
Obama had ordered Bowles-Simpson to come up with policy recommendations that would rescue the republic from fiscal disaster (publicly held debt is projected to reach 185 percent of gross domestic product by 2035). The committee delivered its “Moment of Truth” report and the president rendered it moot, agreeing to extend all the Bush tax cuts for two years. Obama even sweetened the deal with estate-tax provisions so generous over the next two years that it would be selfish and imprudent for any elderly American of means to live beyond December 31, 2012.
WHAT OBAMA BOUGHT—Because Bush’s tax policy has been on the books for a decade (the second round of cuts for seven years), the public seems to have forgotten how extreme that policy is.
Taxes were at a historical low as a percentage of G.D.P. when newly elected President George W. Bush proposed tax cuts that would cost the country $1.6 trillion over 10 years. To justify revenue losses of that magnitude required the programmatic dishonesty that would become the signature mark of the Bush-Cheney administration.
In a word, the architects of George W. Bush’s radical tax reform lied.
They used Congressional Budget Office projections of a $5.6 trillion budget surplus to justify the huge tax cut, but neglected to deduct the Social Security and Medicare surpluses which reduced the surplus to $2.1 trillion.
They created tax cuts that would be phased in slowly to keep costs down until the “out years” when the entire package would kick in. (Note: the “out years” are now.)
They engineered estate-tax reductions that would be phased in over 10 years at a cost of $250 million. The tax was programmed to disappear for the duration of 2010, then, like the Phoenix, rise from its ashes, to be fully restored in 2011. If Congress killed the estate tax in 2010, as Bush and Congressional Republicans believed they would, it would cost $750 billion in lost revenue in the subsequent decade.
Even the small means that the Bush tax-cutters used to achieve their end were brilliantly dishonest. Consider this one, recently pointed out by blogger and author James Kwak, writing at The Baseline Scenario. Bush’s tax-cut legislation includes a provision that allowed wealthy taxpayers to convert their traditional IRAs to Roth IRAs in 2010.
The result of that one-year adjustment is a long-term decline in revenue. “But it artificially juices tax revenues in 2010,” Kwak wrote, “because when you convert you have to pay tax on the conversion amount now.” The additional “revenue” allowed them to cut taxes elsewhere.
And while selling “a tax cut for all Americans,” the authors of the Bush tax bill picked the real winners. The top 1 percent of taxpayers received approximately 37 percent of total tax cuts; the bottom 60 percent got only 15 percent.
Congress reduced Bush’s $1.6 trillion request to $1.35 trillion. But even at $1.35 trillion, the tax cut Bush signed into law in 2001 was more than four times larger than Ronald Reagan’s tax cuts.
Two years later in 2003, Bush was back with an “economic growth package” (read: tax cuts) priced out at an additional $674 billion over 10 years.
By this time, the surplus was gone and the country was at war. So a “fiscally responsible” Congress drew the line at $320 billion, mostly in measures that further skewed national tax policy toward the wealthiest Americans.
If a second round of tax cuts — with a $175 billion budget deficit, a war funded by supplemental appropriations, and the Republicans’ $500 billion Medicare prescription drug bill moving through Congress — seemed reasonable to most American journalists, it completely unhinged the Brits.
“The lunatics are now in charge of the asylum,” wrote the normally constrained writers at Financial Times. The “more extreme Republicans” according to FT, wanted a train wreck, which would allow them to reduce the size of government.
The “lunatics” — more politely, the “more extreme Republicans” — will control the House in January. And they will be better positioned to block legislation in the Senate. They know now, as they knew in 2001, that once a tax cut is enacted, unenacting it is unlikely.
Tennessee Senator Lamar Alexander made that clear in an interview with NPR’s Melissa Block, after President Obama agreed to extend all the Bush tax cuts for two years.
BLOCK: Would you want, Senator Alexander, the tax cuts on the wealthiest earners extended permanently, not just for the two years that you’ve agreed to now?Sen. ALEXANDER: Keep in mind, these aren’t tax cuts. These are the tax rates that have been in place for 10 years.
BLOCK: But they’re set to expire and they would be extended. And I’m wondering if you would want them to extend permanently.
Sen. ALEXANDER: That means they’re set to go up. So they’re not cuts, they’re tax increases. It’s the largest tax increase in history that’s automatically set to go up January 1st. I believe that those tax rates ought to stay the same permanently. Our taxes aren’t too low, our spending is too high. That’s another debate we’re going to be having. But right now, our whole goal is to make it easier and cheaper to create private sector jobs. Raising taxes on anybody doesn’t do that.
Get it? We’ve begun a brand new debate, not about the Bush tax cuts, but the Democrats’ tax hike.
The day after Alexander’s NPR interview, Obama used the same news outlet to double down on an already bad draw. He announced his intention to revise the entire tax code during the next session of Congress.
WINNERS AND LOSERS—As the tax deal becomes law, at a total cost of $900 billion over the next two years, it will be President Obama’s largest single initiative. Larger than the bank bailout (which was initiated by Bush and largely repaid). Larger than Obama’s stimulus package. Larger than the rescue of GM. Larger than health care reform. And all $900 billion will be borrowed.
The compromise plan will provide more than 25% of its tax cuts to the wealthiest 1 percent of all Americans, according to Citizens for Tax Justice. That’s an average of $77,000 for the highest earning Americans in 2011.
To provide some perspective, $77,000 is more income than most American households earned in 2009. (Median household income in 2009 was just under $50,000.) And the $77,000 average tends to obscure the magnitude of the tax breaks for the nation’s top earners.
The nonprofit U.S. Chamber Watch looked at the bank executives whose tax privileges were ferociously defended by U.S. Chamber of Commerce lobbyists over the past two years. Here’s the annual compensation and tax savings of the too-big-to-fail boys who were bailed out by the American taxpayer two years ago:
|Wells Fargo CEO John Stumpf||$15,050,697||$813,000|
|Citigroup CEO Vikram Pandit||$12,843,503||$775,000|
|Bank of America (ex) CEO Ken Lewis||$12,571,281||$713,000|
|JPMorgan CEO Jamie Dimon||$21,991,394||$1,179,000|
|State Street CEO Jay Hooley||$19,826,044||$1,071,000|
|BofNY Mellon CEO Robert Kelley||$17,677,391||$995,000|
|Morgan Stanley CEO John Mack||$17,152,174||$926,000|
That adds up to $6.5 million in tax breaks for seven bank execs. But Chamber Watch was looking only at bankers, not hedge fund executives who measure their annual compensation in billions. Appaloosa Management CEO David Tepper, for example, made $4 billion on one trade in 2010. Guys like him could buy a Jamie Dimon or Vikram Pandit.
YOU CAN’T TAKE IT WITH YOU—President Obama’s estate-tax concession, the terms of which Illinois Democratic Rep. Jan Schakowsky described as “obscene,” opened with Republicans getting a good deal, which only got better.
After expiring for all of 2010, estate taxes were to revert to pre-Bush-era reform rates of 55 percent on estates valued above $1 million. House Democrats (many of whom lost elections for backing Obama’s health care reform) coalesced around a compromise of 45 percent on estates above $3.5 million. The president agreed to a $5 million exemption and 35 percent on anything above that.
Obama did get a 13-month extension of unemployment benefits for as many as seven million workers displaced by the economic recession created by the bank execs who got such a sweet deal. At a total cost of $56 billion, which Republicans initially refused to support unless Democrats came up with budget cuts to pay for it, unemployment insurance is the most stimulative piece of the compromise package, according to most economists.
Obama also got a 2 percent payroll-tax cut for all employed workers, which is roughly a $1,000 tax break for a family bringing in $50,000. Republicans also agreed to an extension of the college-tuition and earned income credits.
But it’s hard to see how the deal the president cut is anything other than a big win for Grover Norquist’s “no new taxes ever” lobby. It’s this crowd that the president will be negotiating with in 2012.
A BETTER PLAN—If it does no more than start the conversation on deficit reduction, the report released by the bipartisan Commission on Fiscal Responsibility and Reform is a bad beginning.
Its proposed random cap on tax revenue at 21 percent of gross domestic product is genuinely bad economic policy. (Tax rates were at 22 percent during the Reagan years, when retiring baby boomers were on the distant horizon.)
A recommendation that would require a non-amendable vote by the House and 60 votes in the Senate in order to exceed spending caps that would be imposed until 2020, reads like a roadmap of California’s dysfunctional budgetary system.
Social Security recipients would face benefit reductions and a higher retirement age.
Revenue that the plan would capture by eliminating efficiencies in the tax code would be used to reduce personal and corporate income tax rates, rather than reduce the deficit.
A report published by Citizens for Tax Justice describes committee chairs Alan Simpson and Erskine Bowles as “taxaphobic.” The Bowles-Simpson report, CTJ director Bob McIntyre said in an interview, relies far too much on saving by cutting public services. The U.S., according to the CTJ’s analysis, is “one of the least-taxed countries in the industrialized world.” Yet the Bowles-Simpson deficit-reduction plan sets out to reduce taxes.
A far more progressive plan was released by Rep. Jan Schakowsky, one of the Bowles-Simpson commission members who did not vote to support the commission’s plan. Schakowsky’s plan would reduce the deficit by $441 billion in 2015. But it takes a different route to deficit reduction than Bowles-Simpson.
“We took the numbers and pieces from various plans that were on the table, including Simpson-Bowles,” Schakowsky said. “But my proposals are quite different. To put the public option back on the table. To negotiate with Medicare for lower drug prices. And I go at it in an entirely different way, putting the burden on the insurance companies and the pharmaceutical companies as opposed to the elderly.”
Unlike Bowles-Simpson, Schakowsky would address Social Security outside of deficit reform, because, she said, “Social Security has nothing to do with the deficit.”
It has its own source of revenue, the Social Security payroll tax; is running a $2 billion surplus that will grow to $4 billion; and can fulfill 100 percent of its obligations through 2037. To cover shortages beyond 2037, Schakowsky’s plan would tax higher wages that are currently not taxed, and would also add a small “legacy tax” to the highest levels of income, which remain exempt from the payroll tax. It would tax capital gains like other income, raising $81.1 billion in revenue.
The plan also recommends large spending cuts in farm subsidies, and in defense spending where it would save $110.7 billion. Schakowsky said her defense cuts were based on the work of the Sustainable Defense Task Force, which Barney Frank (D-MA) and Ron Paul (R-TX) used in a defense-spending bill they sponsored.
CTJ’s Bob McIntyre said that he has not studied the Schakowsky plan in detail, but agrees with its recommendation on capital gains and the estate tax.
“Under George Herbert Walker Bush,” he said, “the capital-gains tax rate was 29 percent. … In 2003, George W. Bush lowered the rate to 15 percent and also lowered the tax rate on dividends to 15 percent.”
Schakowsky’s estate-tax policy is based on a Senate bill sponsored by Senators Bernie Sanders (I-VT), Tom Harkin (D-IA), and Sheldon Whitehouse (D-RI). It would exempt the first $3.5 million per individual and progressively increase the tax rate based on the size of the estate. Estates up to $10 million would be taxed at 45 percent, estates over 50 million would be taxed at 50 percent, and estates over $100 million would be taxed at 65 percent.
The Republican plan the president accepted would cost $68 billion over the next two years. Schakowsky’s proposal would raise $4.5 billion in new tax revenue.
What are the prospects for such tax reform making it through the Congress that convenes in January?
“I’d say between 0 and 0.1 percent,” McIntyre said. “Every Republican member of the House has signed Grover Norquist’s pledge to never raise income taxes. Congress would have to pull Norquist down off of his pedestal, like what was done to Saddam Hussein.”
“But you have to start the discussion somewhere,” McIntyre said.