Megan McArdle (what do you call her when Jane links to Megan? And can they have an infinite regress?) and Brad DeLong seem to agree that the Bush tax cuts should not be made permanent. My take is the following: Taxes already were raised when the government spending occurred. In that sense the "tax cuts" never were permanent. But when do we wish to admit this? We could raise (nominal) tax rates sooner rather than later, and hope that the subsequent "financial calming" effect will improve the chances for better policy in the future. Alternatively, we could play "chicken" with the marginal tax rates, and hope that holding them lower, for longer, will increase the chance of the appropriate entitlement reforms. I don’t have any strong views as to which is the best way to proceed, at least assuming we cannot raise the gas tax instead.
But I do suspect that Megan favors a lower rate of government spending than does Brad. So does this mean she sees the first scenario, and he sees the second, and that they agree on the big question only because they disagree on the little one?
This always strikes me as a, ‘so what?’ question.
Congress can’t make anything permanent, because the Constitution says one congress can’t bind future congresses.
And, anyway, it doesn’t make much difference what the tax rates are (unless they’re near 0), the Federal government is going to take in between 17%-19% of GDP whether the top marginal rate is 90% or 28%. To pick two historical examples I’m familiar with.
In the last couple years of the 20th century it briefly hit above that range, and in the first couple years of the 21st dipped below it. Now it appears it’s going to be back over 17%.
Unless the government can find a way to run deficits of 10% of GDP, entitlements will have to be cut somehow. Probably by gradually raising the age of retirement to 72.
HSAs and the Roth IRA should help calm things.
And the screaming begins, via Bros. Judd:
President Bush’s proposal to expand tax-free health savings accounts would cost the U.S. Treasury $59 billion over five years, more than offsetting the savings he seeks from limiting the growth of Medicare. [...]
If this were a real problem, wouldn’t we expect long term bonds to be trading well above their current levels? In the last few days, the 2 years were trading at higher yields than the 10s.
I am not adverse to raising Federal revenues. But, I think that raising income tax rates is the wrong way to do it. The use of the income tax as the dominant vehicle for federal funding is unwise. The tax is a long way from perfect. One of its defects is that it is excessively leveraged to the economy. I favor enacting a VAT at about 15%-20% (perhaps with half the revenue rebated to states that repeal their own sales taxes). I also believe that we should tax gasoline at $2.50/gal, if we are at all serious about overcoming our oil addiction.
I’m going with sarcasm, in which case, you are not addressing my question which is asked in response to the posted idea that “We could raise (nominal) tax rates sooner rather than later, and hope that the subsequent “financial calming” effect will improve the chances for better policy in the future.” In other words, if you are being sarcastic, your statement does not address this.
I suppose this is obvious, but one of the problems with raising taxes is that those people who would pay the lion’s share of the increase are not necessarily the people who want what is being paid for, nor do they receive a proportional benefit. Even with the current tax structure that is the case. The fact that 50% of the population pays almost nothing in income taxes is a big part of the problem. What do they care if taxes are raised?
Thus, to Jane’s point #1, it may not be fair to consume now and make someone else pay later, but is it any more fair to allow one group to consume now and have different group pay for it now? Is this lesser of two evils thinking? I also think her point is overly simplistic. There are completely rational cases for borrowing money to fund certain programs and projects.
I’d like to see any evidence that raising taxes will put pressure on politicians to restrain spending! Sounds like wishful thinking.
I don’t think starve the beast has been given enough time. I think we really have to be hurting badly for it to have the desired effect. When the problems with Medicare and Social Security really hit the fan and there is no way out for the current politicians in office, then we will see what starve the beast does.
Barbar – are you denying any of the following: the current President, George W. Bush campaigned for President twice on the claim that he would lower taxes; he encouraged congressional leaders to pass particular bills cutting taxes in particular ways; very similar bills were in fact passed; President Bush signed these bills into law, agencies controlled by President Bush took credit for these tax cuts and purported to explain why the effects of these cuts would be/are beneficial?
If you don’t deny any of these things, what is your complaint about calling these the Bush tax cuts?
Also, your assertion that Social Security is unpopular (disliked by more than half of the populace) is false.
washerdreyer,
Turn on your sarcasm detector, and re-read Barbar’s post as responses to David Anderson’s previous posts.
My mistake.
Someone raised the concern on my blog that what is more of a problem is the structuring of the debt we have taken on to fund the deficits. For some reason we have been funding it with mostly short term 3 yr bills. That means that if we don’t pay it off soon, the interest rate will climb significantly. Looks like we bought a variable rate mortgage when interest rates were at record lows.
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