James Pethokoukis

Politics and policy from inside Washington

What’s wrong with the U.S. economy in one chart

Sep 27, 2010 14:14 UTC

Tax rates matter. You tend to get the stuff you tax lightly and don’t get what you tax heavily. Wonder why America had a housing boom and why we are wallowing in debt? Here is why:


Will Obamanomics slow the economy?

Sep 20, 2010 16:15 UTC

These two charts pretty well sum up one version of the economic impact of the White House tax plan — such as raising high-end tax rates — at least according to a computer model run by the conservative Heritage Foundation. You can disagree with the modelling, I suppose. But I am not sure any model would show higher taxes boosting the economy right now.




the destruction of the u.s. in the making , he is doing what no al qaida ever could .

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Uncle Sam has plenty of dough

Sep 16, 2010 18:15 UTC

Here is a point that has gotten lost in the Bush tax cut debate. Even with the tax cuts, Uncle Sam will have plenty of revenue. As I wrote earlier this week:

Now let’s say all the tax cuts were permanently extended — Orszag’s nightmare scenario. According to Orszag’s old pals at the Congressional Budget Office, federal tax revenue would be 18.6 percent of GDP in 2020, 19.2 percent in 2035, 19.8 percent in 2050 and 22 percent in 2080. In other words, even with all the tax cuts extended, government revenue would still rise well above its historical average of roughly 18 percent since World War Two.

And this chart also illustrates the point:


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

Obama’s Immaculate Concession?

Sep 2, 2010 17:25 UTC

The White House may be warming to the idea of using tax cuts to boost the U.S. economy. It’s a possible plan that could have scored loads of Republican votes had it been proposed in early 2009. But with the president’s popularity falling and congressional elections looming, support won’t be so easy to coalesce.

The Democrats must contend with a political crisis along with the possibility of another economic one. The November midterms could cost them losses on a scale of the 1994 defeats when Republicans took both the House and Senate. A Reuters-Ipsos survey shows more people now disapprove than approve of President Barack Obama’s job performance by 52 percent to 45 percent. And the GOP leads on issues such as the economy, spending and jobs in a new Gallup poll.

Not surprisingly, the administration would like to make a bold move on the economy. GDP growth has been decelerating, and unemployment seems stuck at close to 10 percent. But with Republicans blocking even a $30 billion small business lending proposal on Capitol Hill, more grandiose ideas seem like nonstarters.

On the surface, at least, tax breaks seem like potential logjam-breakers. Republicans already wants to extend all the 2001 and 2003 Bush cuts without paying for them. And cutting payroll taxes, an idea favored by many conservatives 18 months ago, may be one of the options the White House is examining. The approach makes some economic sense. The Congressional Budget Office ranks payroll tax cuts as one of the top ways to create jobs.

But the opposing philosophies haven’t yet gelled. The White House is still insisting on higher taxes for wealthier Americans, even though many Democrats are willing to extend those rate reductions. And Republicans are unlikely to go along with any plan that raises any taxes in 2010 – and they’re in position to just stall until 2011.

As it is, some critics are already calling Obama’s potential tax-cut embrace the “Immaculate Concession.” A really bad jobs report or a market plunge could help the two parties find common ground. But absent that, even tax cuts probably stand little chance in a hopelessly gridlocked Congress.

Obama’s September surprise?

Sep 1, 2010 14:12 UTC

A few initial thoughts on Obama considering tax cuts to boost economy (via WSJ story):

1) WH already has broad plans on drawing board for a $200-$300b stimulus plan, half tax cut, half infrastructure. I reported this a month ago.

2)  Payroll tax cut is not a bad idea for stimulus, but U.S. has longer-term job and growth problem that needs to be addressed.

3) Payroll tax cut for $400 billion in early 2009 would have been better than Obama’s $862 billion plan.

4) Any short-term tax cut should be coupled with long-term deficit reduction plan.

5) A really bad payroll number on Friday could change political dynamic on this.

6) How would this square with WH’s new focus on deficit reduction, the supposed reason why Bush tax cuts on rich should not be extended? Indeed, WH has doubled down on this with adviser Jason Furman making this point yesterday.

7) Here is how one smart Washington observer framed things for me:

If it’s a one-year extension of all expiring tax provisions (including extenders), it would be a very smart political move for him.  He would triangulate his base and appeal to swing indies.  It also undercuts one of the main GOP arguments.  The stock market would surge.  It’s a total no-brainer, unless you are just that ideologically-addled not to do it.

If it’s “tax relief” for non income taxpayers, or tax cuts that are so difficult to qualify for no one bothers (see: small business health insurance credit), it won’t go anywhere and he’ll get no bounce from proposing it. If he wants to use taxes to change the dynamic (or at least blunt the wave), it needs to be bold and he needs to piss off the Congressional leadership.

A one-year extension of all expiring tax relief would probably get 230 votes in the House and 55 in the Senate.  Ask a vulnerable House Dem off the record if he would vote for that, and see how quickly he says, “you bet.”

Update: This from the WH press office: “The President and his economic team are discussing several options to continue on the path to recovery, but any reporting on decisions made or timing is premature.”

An obvious tax cut

Aug 31, 2010 18:37 UTC

Josh Barro of the Manhattan Institute give a wonderful explanation of the wisdom of indexing capital gains taxes for inflation. Here is  a taste:

But 2011 would be a good time to revisit indexation. First, this could help offset the negative economic effects from the likely rise in the top capital gains rate from 15% to 20%: taxpayers would face higher capital gains tax rates, but they would know that they are protected from tax on inflationary gains. Also, low inflation makes this an opportune time to introduce indexation, as the revenue loss from indexation is linked to the inflation rate, and would therefore be lower than usual.

The fiscal impact of indexation could be reduced by applying it also to the deduction side of the tax code, notably including the mortgage interest deduction. This would mean that only the portion of home mortgage interest in excess of the inflation rate would be deductible. Again, low inflation rates make this a politically opportune time for such a reform, because the near-term effect on tax bills would be small.


STORYBURNthere: I suppose you want the 1970s economy too – high inflation, low growth, incompetent government (Ford / Carter), sky-high energy prices, disco music ad nauseum. I’ll take Reaganomics any time, thanks.

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Are tax cuts on the Obama autumn agenda?

Aug 31, 2010 18:27 UTC

I would love to think so. And I know some folks on Wall Street would love to believe. But there are few signs that Obama will change course on taxes.  Here is White House economic adviser Jason Furman:

Jason Furman, an economic adviser to President Barack Obama, told a meeting on Tuesday there was a concern that even a temporary extension of the Bush-era tax cuts for the wealthy would be a “foot in the door” to permanent extension.

Forecasting the Bush tax cuts

Aug 17, 2010 13:38 UTC

Wall Street’s conventional wisdom is that markets like political gridlock — but not if inaction means hitting a weak economy with a big tax hike. When Congress returns from vacation, it needs to deal with the expiring tax cuts signed by President George W. Bush. The Obama deficit panel, however, could limit any extension of them.

The Obama administration says it wants to extend only that portion of the 2001 and 2003 tax cuts affecting the middle-class. Doing so would cost $1.3 trillion over 10 years, according to the congressional Joint Committee on Taxation, not counting borrowing costs. Allowing upper-income rates to rise on investment and labor income, on the other hand, is predicted to generate about $678 billion over 10 years.

Few in Washington want to let all the cuts disappear at year-end. Doing so could potentially knock between 1 and 3 percentage points off GDP growth next year, according to various estimates. But that will be the undesired outcome if Congress can’t reach agreement. While most Republicans want to keep all the 2001 and 2003 Bush tax cuts, President Barack Obama and most congressional Democrats want to let the ones for the richest expire. Treasury Secretary Timothy Geithner says he’s confident the fledgling economic recovery could withstand the blow.

But news of decelerating U.S. growth is hardly helping his argument. And given voters’ anxiety about the economy, Congress – with the entire House and a third of the Senate up for reelection in less than three months – might not be quite as risk tolerant as Geithner. A new NBC News-Wall Street Journal survey finds 71 percent of respondents would accept extending all the tax cuts until the economy recovers.

The political calculus is complicated. Congressional Democrats trying to follow the Obama plan could hold a pre-election vote. But Republicans would likely reject a permanent middle-class extension if the upper-income tax cuts weren’t also included. If Democrats offered a full, temporary extension, the GOP would probably accept that compromise. Such a deal would run contrary to the White House’s intentions — but Obama hasn’t vowed a veto either.

Muddling matters further is the president’s deficit commission. One recommendation could be to cut future Social Security spending in exchange for expiry of Bush tax cuts for the richest. That means even an agreement on a one- or two-year extension could get partly overwritten soon after. The only thing for sure is that following the messy passage of stimulus, health care and financial reform, the battles aren’t getting easier. And the tax debate isn’t doing anything to help clarify America’s cloudy economic outlook.


Every thing we pick up says, Made in China. Soon our money will say made in China. A little on the light side, when you pick up a fortune cookie, it says Made in New York.
I agree with the top comment. I have suggested to my congress rep. that a national lottery would be the answer. People would much rather give money freely than be taxed. Bringing in more money should go hand and hand with cutting expenses. I think and always have that we should spend more time protecting our borders than going head first into a war for political reasons, (my opinion). We have lost respect around the world and it continues because we are so arrogant as to not wait on United Nations sanction. I believe we are in a war just like Vietnam. When we are fighting people who will never quit, as in Vietnam, how can we win. I am saddened over all the young men and women giving their lives every day. Remember several years ago when South Korea was burning our flag and saying, Yankee go Home. That has changed now. We can not and should not try and police the world. We went into Iraq supposedly over weapons of mass destruction and take out Saddam Hussein. We did and I think should have brought our troops home. We can not make every country a democracy, (actually we are a Republic).

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