James Pethokoukis

Politics and policy from inside Washington

Ideology helps make Obama stubborn on taxes

Sep 8, 2010 22:01 UTC

President Barack Obama’s just-departed budget chief, Peter Orszag, thinks all the Bush-era tax cuts should be temporarily extended to bolster the weak U.S. economy. So does Mark Zandi, the go-to private economist of congressional Democrats. But Obama still vows to let high-end rates go higher again ASAP. His thinking is as much politics as economics.

The White House position, reiterated by the president in a speech on Wednesday in Ohio, is that while the 2001 and 2003 tax cuts for the middle class should be permanently extended, the ones for rich taxpayers, a group that includes some small businesses, should expire at year-end. Even a two-year extension of the upper-end tax cuts, as now advocated by House Republican leader John Boehner, is too much for Obama’s team.

Administration officials argue that the extra tax revenue, expected to reduce America’s deficit by $80 billion over two years, will help persuade markets of the country’s fiscal rectitude. But that’s hardly enough to win over even a fence-sitter. Obama’s budget would still add $2.3 trillion to the national debt over 2011 and 2012. That also assumes higher taxes would have no adverse impact on already sluggish economic growth, an assumption that neither Orszag nor Zandi seems willing to make.

But Obama’s motivations go beyond economics. Insisting that the wealthy should pay more in tax is, as midterm elections approach, a handy rhetorical way to tar Republicans who want to preserve the tax cuts as representatives of the rich. The tactic also pleases a demoralized liberal base.

Obama also has never been a big believer in the power of tax cuts. In his book “The Audacity of Hope” he argued that the high tax rates in effect when Ronald Reagan took office in 1981 — the top marginal rate was 70 percent — had little impact on incentives to work and invest.  And during his presidential campaign, Obama blamed the Bush tax cuts for worsening income inequality. Keeping all of them in place, even temporarily, might personally be a bridge too far.

Even so, he might have to consider crossing it. Republicans for once seem ready to deal. So, too, do many Democrats. Failure to reach any agreement would mean all the tax cuts expire — and almost everyone seems to agree the economy can ill afford that.

Goldman Sachs on Stimulus 2.0

Sep 8, 2010 13:58 UTC

The Goldman Sachs econ team gives a rousing “meh” to the new Obama economic plan:

The White House has announced three new measures to stimulate growth: 100% up-front depreciation of capital investments; a permanent and slightly expanded research and experimentation (R&E) tax credit; and $50bn in infrastructure spending. While potentially helpful, we do not expect these proposals to have a large effect on growth for three reasons:

(1) we are skeptical that temporary expensing of capital investments will alter corporate behavior, particularly in 2010 or early 2011; (2) the expanded R&E tax credit, while positive, is too small to have much effect on growth; and (3) additional infrastructure spending, which could have a more significant growth effect, seems the least likely to become law. To the extent that these proposals become law and do have an effect on growth, we would expect the effect to be concentrated later in 2011.

GOP to Obama: Freeze taxes for two years

Sep 8, 2010 13:49 UTC

The Republican reply to the POTUS tax plan:

Speaking ahead of an economic address set for later in the day by President Barack Obama, Boehner also proposed that the U.S. government cut spending for next year to 2008 levels — before federal corporate bailouts and Obama’s $814 billion economic stimulus plan.

Boehner’s call for a freeze on tax rates amounts to a compromise with Obama in advance of November 2 congressional elections, which are expected to result in big Republican gains in the Democratic-controlled House and Senate.

Boehner made his pitch for the two-year freeze on all rates in an appearance on ABC’s “Good Morning America,” just hours before Obama was to speak in the lawmaker’s home state of Ohio.

Me: This would be a cagey compromise, one I am in favor of. Keep rates where they are for two years and during that time push hard for sweeping, pro-growth  tax reform