10 Things Republicans Don't Want You to Know About the "Fiscal Cliff"
This week, former President Bill Clinton urged calm in the face of Washington's stand-off over the so-called fiscal cliff. "They are moving toward a deal," Clinton assured Americans, suggesting that the current posturing by both parties is "just a Kabuki dance."
Unfortunately, Republicans have called President Obama's $4 trillion debt reduction plan something else: a joke. While Senate Minority Leader Mitch McConnell boasted that he "burst into laughter," House Speaker John Boehner claimed he was "flabbergasted" at the President's "non-serious proposal."
As it turns out, that choice of language is more than a little ironic. After all, Boehner's counter-offer isn't merely devoid of specifics when it comes to his proposed spending cuts and revenue-raising loophole closing. Like Mitt Romney before him, Speaker Boehner's math doesn't--and cannot--work. More pathetic still, it is the GOP which is trying to dupe the American people by continuing to peddle its long-debunked myths about taxes and the debt.
Here, then, are 10 things Republicans don't want you to know about the fiscal cliff.
For years, Republicans have warned that President Obama's proposal to let the Bush tax cuts expire for the top two percent of taxpayers would crush "job creators." As Speaker Boehner cautioned last month:
"Going over part of the fiscal cliff and raising taxes on job creators is no solution at all."
Unfortunately, recent history and nonpartisan analyses alike show that President Obama's proposed $1.6 trillion in new revenue from upper-income taxpayers will have little impact on American job creation. After all, as these charts from the Center for American Progress show, the U.S. economy produced far more jobs and grew at a much faster rate when top-tier tax rates were higher (even much higher) than today:
In October, the nonpartisan Congressional Research Service reached the same conclusion, much to the consternation of Capitol Hill Republicans who sought to bury the report. What the yanked CRS report had to say on the history of tax cuts, productivity, investment, economic growth and job creation was indisputably true:
Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The real GDP growth rate averaged 4.2% and real per capita GDP increased annually by 2.4% in the 1950s. In the 2000s, the average real GDP growth rate was 1.7% and real per capita GDP increased annually by less than 1%.
There is not conclusive evidence, however, to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth. Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth.
For confirmation, you only have to travel back to the Bush presidency, one which produced the worst-eight year job creation record in modern American history. The paltry one million jobs yielded during that period (compared to 23 million under Bill Clinton) prompted New York Times economics reporter David Leonhardt to ask with good reason, "Why should we believe that extending the Bush tax cuts will provide a big lift to growth?"
Last year, columnist Mark Shields posed a similar question in a different way. "Do tax cuts," he asked, "help 'job creators' or 'robber barons'?" To put it another way, if tax cuts for the rich don't drive overall economic growth, then there's no point in continuing to drain the U.S. Treasury in order to pad the bank accounts of the wealthy.
And that, in a nutshell, is exactly what the nonpartisan Congressional Budget Office found last month.
In its report ("Economic Effects of Policies Contributing to Fiscal Tightening in 2013"), the CBO warned that the deficit-slashing effects of allowing the Bush tax cuts expire, ending the two-year payroll tax holiday and letting last year's budget sequestration deal proceed on January 1, 2013 could return the United States to recession. But as Dylan Matthews explained in the Washington Post, letting upper-income tax rates return to their slightly higher Clinton-era rates (as President Obama has proposed) will play no part in that austerity. While extending the Bush rates for all Americans carries a $330 billion overall price tag for Uncle Sam next year, the CBO calculated that $42 billion goes to the top taxpayers. But as the chart above shows, eliminating that Treasury-draining windfall for the wealthy (by raising rates for the top-two tax brackets, indexing the AMT and raising capital gains, dividend and estate taxes), would slice only 0.1% from economic growth next year.
Reviewing a recent study by Stanford's Nir Jaimovich and Northwestern's Sergio Rebelo, Matthews concluded, "There's definitely a point at which high tax rates for the rich hurt growth. But we're nowhere near there yet." (It is worth noting, as CBPP does and Republicans do not, that "a recent Treasury analysis finds that only 2.5 percent of small business owners fall into the top two income tax brackets and that these owners receive less than one-third of small business income.") All of which is why Republican strategist, Weekly Standard editor and Fox News regular Bill Kristol acknowledged last month:
"It won't kill the country if we raise taxes a little bit on millionaires," he said on "Fox News Sunday." "It really won't, I don't think. I don't really understand why Republicans don't take Obama's offer."
In his fiscal cliff proposal, President Obama has also called for letting capital gains tax rates return from 15 percent to their Clinton-era level of 20 percent. Dividends, currently taxed at the capital gains rate, would be treated as regular income. Conservative have opposed that step because, they claim, lower tax rates for capital gains than income earned through labor spur investment, catalyze economic growth and fuel job creation.
But if that Republican theology isn't true, then the United States has for decades done nothing more thandeliver a massive windfall to the wealthiest Americans needing it least. Unfortunately, that's precisely what the data show. As it turns out, lower capital gains taxes increase income inequality - and not investment - in America.
As Paul Krugman recounted, the historically low capital gains rate enjoyed by the likes of Mitt Romney hasn't always been 15 percent. In the not-too-distant past, it reached 39.9 percent and before the Reagan tax reform of 1986 was the same as the top tax rate on income. But successive presidents of both parties lowered the capital gains rate on investment income because they believed, as the Washington Post recounted, "it spurs more investment in the U.S. economy, benefiting all Americans."
But as Jared Bernstein demonstrated with the chart below, there's no evidence to support that claim.
Bernstein found that that the business cycle, not acts of Congress, drive investment in the U.S.
Hard to see anything in the picture supporting the view that either the level or changes in cap gains taxes play a determinant role in investment decisions.
Remember, the ostensible reason for the favoritism in tax treatment here is to incentivize more investment and faster productivity growth. But that's not in the data and the reason it's not in the data is because investors aren't nearly as elastic to cap gains rates as their lobbyists say they are (more precisely, they'll carefully time their realizations to maximize their gains around rate changes, but that's not real economic activity-that's tax planning).
Reviewing other analyses, Brad Plummer of the Washington Post concurred with that assessment that low capital gains taxes don't necessarily jump-start investment in the economy:
The top tax rate on investment income has bounced up and down over the past 80 years -- from as high as 39.9 percent in 1977 to just 15 percent today -- yet investment just appears to grow with the cycle, seemingly unaffected...
Meanwhile, Troy Kravitz and Len Burman of the Urban Institute have shown that, over the past 50 years, there's no correlation between the top capital gains tax rate and U.S. economic growth -- even if you allow for a lag of up to five years.
But if lower capital gains tax rates have had little impact on investment, they have had an outsized impact on income inequality in the United States.
Last year, an analysis by the Washington Post concluded that "capital gains tax rates benefiting wealthy feed [the] growing gap between rich and poor." As the Post explained, for the very richest Americans the successive capital gains tax cuts from Presidents Clinton (from 28 to 20 percent) and Bush (from 20 to 15 percent) have been "better than any Christmas gift":
While it's true that many middle-class Americans own stocks or bonds, they tend to stash them in tax-sheltered retirement accounts, where the capital gains rate does not apply. By contrast, the richest Americans reap huge benefits. Over the past 20 years, more than 80 percent of the capital gains income realized in the United States has gone to 5 percent of the people; about half of all the capital gains have gone to the wealthiest 0.1 percent.
This convenient chart tells the tale:
As the New York Times uncovered in 2006, the 2003 Bush dividend and capital gains tax cuts offered almost nothing to taxpayers earning below $100,000 a year. Instead, those windfalls reduced taxes "on incomes of more than $10 million by an average of about $500,000." As the Times explained, "The top 2 percent of taxpayers, those making more than $200,000, received more than 70% of the increased tax savings from those cuts in investment income." It's no wonder that between 2001 and 2007- a period during which poverty was rising and average household income had fallen - the 400 richest taxpayers saw their incomes double to an average of $345 million even as their effective tax rate was virtually halved. As the Washington Post noted, "The 400 richest taxpayers in 2008 counted 60 percent of their income in the form of capital gains and 8 percent from salary and wages. The rest of the country reported 5 percent in capital gains and 72 percent in salary."
As the Congressional Research Service concluded in a December 2011 analysis:
Capital gains and dividends were a larger share of total income in 2006 than in 1996 (especially for high-income taxpayers) and were more unequally distributed in 2006 than in 1996. Changes in capital gains and dividends were the largest contributor to the increase in the overall income inequality. Taxes were less progressive in 2006 than in 1996, and consequently, tax policy also contributed to the increase in income inequality between 1996 and 2006.
CRS echoed that finding in October when it found that lower tax rates for the rich spur inequality, not economic growth. "The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie," the agency wrote, "but there may be a relationship to how the economic pie is sliced."
Reviewing the dismal history of the Bush tax cuts of 2001 and 2003, the Times' David Leonhardt lamented the Aughts as "the decade with the slowest average annual growth since World War II." But what the conservative cornucopia for the gilded-class does reliably produce is unprecedented income inequality.
The Center on Budget and Policy Priorities (CBPP) found a financial Grand Canyon separating the very rich from everyone else. Over the three decades ending in 2007, the top 1 percent's share of the nation's total after-tax household income more than doubled, from 7.5 percent to 17.1 percent. During that time, the share of the middle 60% of Americans dropped from 51.1 percent to 43.5 percent; the bottom four-fifths declined from 58 percent to 48 percent. As for the poor, they fell further and further behind, with the lowest quintile's income share sliding to just 4.9%. Expressed in dollar terms, the income gap is staggering:
Between 1979 and 2007, average after-tax incomes for the top 1 percent rose by 281 percent after adjusting for inflation -- an increase in income of $973,100 per household -- compared to increases of 25 percent ($11,200 per household) for the middle fifth of households and 16 percent ($2,400 per household) for the bottom fifth.
As economists Emmanuel Saez and Thomas Piketty documented, income inequality isn't just as it highest level since the Great Depression. The rich, it turns out, have already more than recovered from the impact of the Bush recession which began in late 2007:
They have found that the trends have mostly continued. From 2000 to 2007, incomes for the bottom 90 percent of earners rose only about 4 percent, once adjusted for inflation. For the top 0.1 percent, incomes climbed about 94 percent.
The recession interrupted the trend, with the sharp decline in stock prices hitting the pocketbooks of the rich. But the income share of 1 percent has since rebounded. Data that the two economists released in March showed that the top 1 percent of earners got nearly every dollar of the income gains eked out in the first full year of the recovery. In 2010, the top 10 percent of earners took about half of overall income.
As it turns out, the richest one percent of Americans snared 93 percent of the total income gains in 2010. Ezra Klein summed it up this way:
After the Great Depression, inequality fell and didn't recover until 2007. That's about 80 years. After the Great Recession, inequality fell and didn't recover until ... 2009? That's one year.
Last week, the New York Times documented how the combined bite of federal, state and local taxes for most Americans is lower now than in 1980. As Michael Ettinger of the Center for American Progress put it two years ago:
"The idea that taxes are high right now is pretty much nuts."
As it turns out, a percentage of the U.S. economy, the total federal tax bite hasn't been this low in 60 years.
As the chart representing President Obama's 2012 budget proposal above reflects, the American tax burden hasn't been this low in generations. Thanks to the combination of the Bush Recession and the latest Obama tax cuts, the AP reported, "as a share of the nation's economy, Uncle Sam's take this year will be the lowest since 1950, when the Korean War was just getting under way." In January, the Congressional Budget Office (CBO) explained that "revenues would be just under 15 percent of GDP; levels that low have not been seen since 1950." That finding echoed an earlier analysis from the Bureau of Economic Analysis. Last April, the Center on Budget and Policy Priorities concluded, "Middle-income Americans are now paying federal taxes at or near historically low levels, according to the latest available data."
Or as former Reagan Treasury official Bruce Bartlett explained it in the New York Times:
In short, by the broadest measure of the tax rate, the current level is unusually low and has been for some time. Revenues were 14.9 percent of G.D.P. in both 2009 and 2010. Yet if one listens to Republicans, one would think that taxes have never been higher, that an excessive tax burden is the most important constraint holding back economic growth and that a big tax cut is exactly what the economy needs to get growing again.
For their part, Republicans remain unencumbered by the truth. During the height of the 2011 debt ceiling crisis, Speaker Boehner insisted "Medicare, Medicaid - everything should be on the table, except raising taxes." Now with the approaching fiscal cliff, as ABC News reported, Boehner and his GOP allies want upper-income tax rates to come down:
The GOP deal would create $800 billion in new revenue through tax reform, but Boehner insisted that tax rates should not go up on the top 2 percent of taxpayers. Instead, the GOP wants lower tax rates after closing loopholes, limiting tax credits and capping deductions.
Of course, Boehner's plan won't work. One reason why is simple. Despite decades of Republican supply-side snake oil to the contrary, tax cuts don't generate enough economic growth to offset the loss of revenue the previously higher rates would have produced.
In his version of the Republican myth that "tax cuts pay for themselves," President Bush confidently proclaimed, "You cut taxes and the tax revenues increase." As it turned out, not so much.
This chart shows just how dire the tax revenue drought has become. For those Republicans who claim "tax cuts pay themselves," it's worth noting that federal revenue did not return to its pre-Bush tax cut level until 2006. (While this graph shows current dollars, the dynamic is unchanged measured in inflation-adjusted, constant 2005 dollars.)
As a share of American GDP, tax revenues peaked in 2000; that is, before the Bush tax cuts of 2001 and 2003. As the Center on Budget and Policy Priorities concluded, the Bush tax cuts accounted for half of the deficitsduring his tenure, and if made permanent, over the next decade would cost the U.S. Treasury more than Iraq, Afghanistan, the recession, TARP and the stimulus--combined.
As the Washington Post summed up the CBO's conclusions regarding the causes of the nation's mounting debt, "The biggest culprit, by far, has been an erosion of tax revenue triggered largely by two recessions and multiple rounds of tax cuts." An analysis by the New York Times echoed that finding:
With President Obama and Republican leaders calling for cutting the budget by trillions over the next 10 years, it is worth asking how we got here -- from healthy surpluses at the end of the Clinton era, and the promise of future surpluses, to nine straight years of deficits, including the $1.3 trillion shortfall in 2010. The answer is largely the Bush-era tax cuts, war spending in Iraq and Afghanistan, and recessions.
But as Ezra Klein explained, the revealing charts above don't tell the full story of the impact of Bush-era policies on future debt facing Barack Obama:
What's also important, but not evident, on this chart is that Obama's major expenses were temporary -- the stimulus is over now -- while Bush's were, effectively, recurring. The Bush tax cuts didn't just lower revenue for 10 years. It's clear now that they lowered it indefinitely, which means this chart is understating their true cost. Similarly, the Medicare drug benefit is costing money on perpetuity, not just for two or three years. And Boehner, Ryan and others voted for these laws and, in some cases, helped to craft and pass them.
Nevertheless, as the Republican Party first waged its all-out attack in 2010 to preserve the Bush tax cuts for the wealthy, the GOP's number two man in the Senate provided the talking point to help sell the $70 billion annual giveaway to America's rich. "You should never," Arizona's Jon Kyl declared, "have to offset the cost of a deliberate decision to reduce tax rates on Americans." For his part, Senate Minority Leader Mitch McConnell rushed to defend Kyl's fuzzy math:
"There's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject."
That may have been a view universally shared by virtually every Republican, but it happens to be wrong.
In a recent interview with Chris Wallace of Fox News, Speaker Boehner articulated the second fantasy of Republican tax proposals:
We have laid it all out for them, a dozen different ways you can raise the revenue from the richest Americans, as the president would describe them, without raising tax rates...
You can eliminate certain deductions for those -- the wealthiest in our country. You could do all of that.
But as Americans learned during the 2012 campaign when Mitt Romney offered the same basic formula, you simply can't get there from here. Of the $1.1 trillion Uncle Sam gives up in tax breaks, deductions, loopholes and credits each year, there simply aren't enough that impact the wealthy alone. As Greg Sargent laid out theRepublicans' magic thinking:
The problem, though, is that you'd have to eliminate virtually every significant loophole and deduction that benefits the wealthy to make this possible, according to Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center. Worse, if you also want to lower tax rates, as Republicans say they do, it would become even harder...
Williams added that to come within the ballpark of raising $800 billion in new revenues in this fashion, you'd probably have to pare back substantially or eliminate an enormous range of deductions, from the write-offs for employee provided health insurance, interest from municipal bonds, and money invested in retirement plans, to itemized deductions for charitable contributions, state and local taxes, and mortgage interest payments.
Thus far, Boehner like Paul Ryan and Mitt Romney has refused to name a single loophole he'd close. Pressed by Wallace on the point, Boehner responded:
Listen, there are lots of ways to get out there. Now, I'm not going to debate his or negotiate with you. But if you can sign the bill into law, I'd be happy to.
As Paul Krugman said of Ryan's "Pink Slime Economics":
So which specific loopholes has Mr. Ryan, who issued a 98-page manifesto on behalf of his budget, said he would close? None. Not one. He has, however, categorically ruled out any move to close the major loophole that benefits the rich, namely the ultra-low tax rates on income from capital. (That's the loophole that lets Mitt Romney pay only 14 percent of his income in taxes, a lower tax rate than that faced by many middle-class families.)
In April, the New York Times put Krugman's question into a handy chart of "Who Gains Most from Tax Breaks":
As part of his proposal to raise $1.6 trillion in new revenue over the next decade, President Obama has called for returning the estate tax to its 2009 level of 45 percent on individual fortunes above $3.5 million. Needless to say, Republicans want to get rid of it altogether.
Of course, the Republican scam over the so-called "death tax" is as bogus now as it was when President Bush first perpetrated it during the 2000 election. As former Nevada Senator John Ensign griped when Congress last wrestled with the issue, "It destroys a lot of small businesses and a lot of family farms and ranches in America." Then House Minority Leader John Boehner (R-OH) similarly groused:
"People who aren't wealthy, who may have built up value in land over generations and many family farms find themselves in situations where they've got to sell the farm in order the pay the taxes."
Sadly for conservative myth-makers, that claim, too, is completely false.
In 2990, that tax was paid by less than a quarter of one percent of American estates each year. Despite Republican mythology to the contrary, the Tax Policy Center reported that fewer than 2,700 family farms and businesses owed the tax to Uncle Sam three years ago. But thanks to successful Republican brinksmanship, the December 2010 tax cut compromise lowered the rate from 45 percent to 35 percent while boosting the estate tax exemption to $10 million per couple, dropping the number of families impacted to just 40 a year.
In 2002, Vice President Dick Cheney famously declared, "Reagan proved deficits don't matter." At least, not if a Republican is in the White House. After all, while Ronald Reagan tripled the national debt during his eight years in office, George W. Bush nearly doubled it again. Nevertheless, Speaker Boehner hasn't merely claimed "We have a debt burden that's crushing us," but once again promised to hold the debt ceiling hostage unless the GOP budget blackmail succeeds.
Like its stonewalling of President Obama's judicial nominations and record-setting use of the filibuster, the GOP's debt ceiling brinksmanship was unprecedented. After all, that small government icon Ronald Reagan tripled the national debt and signed 17 debt ceiling increases into law. That might explain why the Gipper repeatedly demanded Congress boost his borrowing authority and called the oceans of red ink he bequeathed to America his greatest regret. As it turns out, Republican majorities voted seven times to raise the debt ceiling under President Bush and the current GOP leadership team voted a combined 19 times to bump the debt limit $4 trillion during his tenure. (That vote tally included a "clean" debt ceiling increase in 2004, backed by 98 current House Republicans and 31 sitting GOP Senators.)
Of course, they had to. After all, the two unfunded wars in Afghanistan and Iraq, the budget-busting Bush tax cuts of 2001 and 2003 (the first war-time tax cut in modern U.S. history) and the Medicare prescription drug program drained the U.S. Treasury and doubled the national debt by 2009. And Mitch McConnell, John Boehner and Eric Cantor voted for all of it. As these helpful charts from the New York Times and the Washington Postshow, they built that debt:
On January 1, 2013, the U.S. economy will theoretically be hit by a triple whammy of the expiring Bush tax cuts, the end of the two-year payroll tax deduction and the first year of $1.2 trillion in spending cuts Congressed blessed in the 2011. Over time, the pain would be very real: the CBO estimates that the combination of spending cuts and tax increases could reduce gross domestic product by 2.9 percent and drive the unemployment rate from 7.9 percent today to 9.1 percent by the end of next year. (That Uncle Sam'sannual budget deficits would be dramatically reduced has largely escaped the notice of the press and the public.)
But the "fiscal cliff" analogy itself is doubly-inappropriate. After all, Congress and the Obama administration can take action any time before or after December 31, 2012 to avoid the new recession inaction would likely produce. (That's an important reason why, as the Washington Post reported Wednesday, "'Fiscal cliff' warnings yet to faze Wall Street.") And while former Fed vice chairman Alan Blinder and others warn about the economic disruption the uncertainty of a resolution alone could produce, this year-end budget showdown pales in comparison to the real cliff that was 2011's debt-ceiling crisis. That summer, the unprecedented GOP threatto default on the full faith and credit of the United States stalled job growth and undermined consumer confidence for months.
For all those reasons, Sarah Kliff of the Washington Post suggested the United States is facing not a "fiscal cliff," but "an austerity crisis." If you have any doubt on that point, just ask UK Treasury chief George Osborne, whose Tory austerity program of draconian spending cuts and tax hikes has helped drive his country back into recession.
All of which is why the fiscal cliff debate is such a misguided and counterproductive one. The biggest challenge the United States faces now is not its national debt, but slow economic expansion and lagging job growth. As David Leonhardt explained two years ago ("One Way to Trim Deficit: Cultivate Growth"), more than anything else rapid economic growth was responsible for eliminating the budget deficits of the 1990's. And looking ahead?
If the economy grew one half of a percentage point faster than forecast each year over the next two decades -- no easy feat, to be fair -- the country would have to do roughly 40 to 50 percent less deficit-cutting than it now appears...
So arguably the single best way to cut the deficit is to make sure that any deficit-cutting plan does not also cut economic growth. Ideally, it will lift growth.
As January 1 approaches, President Obama is clearly heading that message. As for the Republicans, not so much.