Different Opinions on the Tax Compromise
By Randall Holcombe • Tuesday December 14, 2010 9:32 AM PDT • 10 Comments
I’ve been watching the negotiations on extending the Bush tax cuts take shape, and in the compromise shaping up between President Obama and the Republicans in Congress, nobody will get exactly what they want.
But, I was surprised to read Fareed Zakaria’s assessment in the Washington Post, because I think of him as a smart guy, and his opinion on the compromise is exactly the opposite of mine. He says, “The only parts of the plan likely to have a significant effect in stimulating the economy are the extensions of unemployment insurance, cuts in payroll taxes and, perhaps, tax credits for businesses (“perhaps” because they are temporary and thus would only bring forward investments). To get these measures, worth about $250 billion, Obama agreed to an extension of the Bush tax cuts that will cost around $750 billion...”
So, Zakaria’s opinion is: Extending unemployment insurance: Good; Cuts in payroll taxes: Good; Extension of the Bush tax cuts: Bad.
My opinion is exactly the opposite: Extending unemployment insurance: Bad; Cuts in payroll taxes: Bad; Extension of the Bush tax cuts: Good.
I do have some sympathy for people who have a difficult time finding a job in a stagnant economy, but when you pay people to be unemployed, you are going to get more unemployed people. Extending the unemployment benefits will slow the recovery (it already has), and contribute to the very problem it is supposed to mitigate. Unemployment would be lower, and the economy would recover faster, if we did away with the extended benefits.
I am also amazed that President Obama and other Democrats want to extend them, because the sagging economy works against Democrats. Politically, it makes no sense for President Obama to bargain for a policy that will reduce his re-election chances in 2012. So, extending unemployment insurance is bad for the economy, it’s bad for the Democrats, but it’s good for the Republicans.
A one-year cut in payroll taxes makes no sense to me. I’m generally in favor of tax cuts, but with the (mythical) social security trust fund running down, why implement a tax cut that further compromises the program’s finances? Zakaria seems to think this will stimulate hiring, but would employers really want to hire more now just because they get a one-year discount on labor costs? Temporary tax cuts have a minimal stimulus effect, because everyone knows they will go away. Zakaria even seems to acknowledge this when he mentions temporary tax credits for businesses. Does the same argument not apply to a temporary payroll tax cut? No stimulus effect, plus further weakening social security: those are the reasons I put this in the bad column. But I would not call this “really bad,” because it is, after all, a tax cut.
Which brings us to the extension of the Bush tax cuts. Lowering marginal tax rates is the best way to use tax policy to boost economic activity. That’s what the Bush tax cuts did, and that’s why we should not only extend them, but make them “permanent” (of course, nothing in politics is really permanent).
President Obama seems to have no awareness that people who make high incomes make those incomes by (1) working hard, and (2) taking risks. When the government shares in your profits, but not in your losses, that creates a disincentive toward risk-taking (and working hard), which reduces entrepreneurial activity in the economy: activity that keeps the US economy moving ahead. For that reason, extending the Bush tax cuts for high-income people is more important to economic progress in the US than extending them to lower-income people.
I felt that my views on the tax compromise were straightforward enough that there was almost no point in mentioning them. But when I saw that Fareed Zakaria’s views were exactly the opposite of mine, that prompted me to speak up.
Tags: Budget and Tax Policy, Economics, Employment, Politics, Social Security, Taxation, Unemployment 
What’s wrong with payroll tax cuts? The program is a scam and workers should not be robbed to prop it up. Lower taxes is better.
I’m not surprised by Zakaria’s other views, though. I tend to disagree with him on about everything.
Anthony Gregory | Dec 14, 2010 | Reply
Zakaria’s wrong and you’re wrong. All three are bad. UI shouldn’t be extended, payroll taxes shouldn’t be cut, and the extension of ANY of the bush tax cuts is bad. It’s like the rightwing nuts say: Freedom isn’t free. Americans need to man up and pay their fair share of taxes.
Jeremy In Kansas | Dec 14, 2010 | Reply
Anthony, I did qualify my comment on payroll taxes by saying “But I would not call this ‘really bad,’ because it is, after all, a tax cut.” But (1) this is one federal program financed by an earmarked tax, where there is an attempt to finance spending from a dedicated tax source paid for by the program’s eventual beneficiaries. Sure, the program is flawed, but (here, we may disagree) a temporary tax cut makes it even more flawed. And, (2) the notion that this temporary tax cut will have any stimulus effect on the economy is absurd (and here, I disagree with Mr. Zaharia).
Jeremy, I agree with your sentiment that “freedom isn’t free,” but I also don’t think freedom should cost 25% of GDP, which is what the federal government is spending right now. I felt freer in 2000, when federal spending was 18.4% of GDP, a federal expenditure level that would be compatible with a permanent extension of the Bush tax cuts.
The federal government’s share of GDP has gone from 18.4% to 25% in a decade — a 36% increase! Do you feel you are getting 36% more freedom now than you were 10 years ago?
Randall Holcombe | Dec 14, 2010 | Reply
Jeremy, the rightwing nuts are wrong — they can have their militarism, and you can have your taxes, but it is unjust to inflict them on the rest of us.
Anthony Gregory | Dec 14, 2010 | Reply
The payroll tax cut reduces the employee-paid side of the SS tax burden. It doesn’t reduce employer labor costs, so there is no reason to believe that marginal hiring decisions would be affected.
D. F. Linton | Dec 14, 2010 | Reply
“Do you feel you are getting 36% more freedom now than you were 10 years ago?”
Randall Holcombe
No. I have less freedom than 10 years ago. If government spending needs to be cut, the only logical place to cut is military and intelligence spending.
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“they can have their militarism, and you can have your taxes, but it is unjust to inflict them on the rest of us.”
Anthony Gregory
I’m also against militarism, but SOMEBODY has to pay taxes, because corporations and the rich do everything they can to avoid them. Cutting taxes while fighting at least two “wars” is insanity. Either we have to raise taxes or we have to end george w. bush’s War Of Terror. I prefer the latter, but nobody (other than Bernie Sanders?) in Washington is suggesting that.
Jeremy In Kansas | Dec 14, 2010 | Reply
Until the spending side of the equation is tackled, talking about tax rates is a diversion. Deficits are deferred tax increases. The timing changes and you’re stuck with enormous interest payments to boot, but the bill comes due eventually.
As for Jeremy’s comment about paying our “fair share” (fair for whom?), according to the folks at ShadowStats.com, if the government were force to undergo an audit using GAAP standards, the government could tax the rich and everybody else at 100% (that’s right, every cent we earn), and we’d STILL run deficits when one accounts for the enormous off-budget Medicare and Social Security ponzi schemes.
Does that sound like our taxes are too low, Jeremy?
End the warfare/welfare state, abolish the Fed, and revert to the Constitutional principles our country abandoned long ago. We either do so on our own terms or have it forced on us via hyperinflation. Given the government’s track record for doing the wrong thing at every opportunity, I’ll go with hyperinflation.
Steve Hogan | Dec 14, 2010 | Reply
But one should also think of the human side of this issue and look at the extension of unemployment benefits as a means of support for the poor who have been most severely hit by this crisis.
Heather | Dec 16, 2010 | Reply
The war on terror has certainly terrorized the American people! The Bush administration got the nation foaming at the mouth with its Cheney concocted lies on terror and then went to town with the military budget. Let’s not kid ourselves as to where a LOT of military money is spent—right into the pockets of Bush/Cheney/Goldman Sachs cronies.
Crazee4Dogz | Dec 20, 2010 | Reply
No one saying to end the war but Bernie Sanders? WTF. Ever heard of Ron Paul? Ever heard of Dennis Kucinich? Another MI rep is on his way who will also join in that chorus – Justin Amash.
Ed Burley | Dec 21, 2010 | Reply