Tuesday, September 14, 2010

Boehner v. McConnell on Taxes

By Mike Dorf

With House minority leader John Boehner having indicated that, if push comes to shove, he would support extending the Bush tax cuts even without including extension for families earning over $250,000, and with Senate minority leader Mitch McConnell standing firm in opposing any extension that does not include the whole package, it's easy to get sucked into calculating political costs and benefits.  One imagines that Rahm Emanuel et al are breathing a sigh of relief upon witnessing McConnell salvaging their political strategy for November.  Boehner's capitulation had threatened to rob Dems of their best argument against Repubs--that the latter are quite willing to sacrifice the welfare of the middle class and the working poor to protect the wealthy.

Here I want to note three other aspects to this story:

1) The debate is, in a fundamental sense, over something quite arbitrary.  The Bush tax cuts made a number of changes, but here I'll focus on just one: lowering the top tax bracket from 39.6% to 35%.  Which of these numbers is the "right" percentage?  That's a loaded question.  Clearly, there is a marginal tax rate that is too high. As the top marginal rate approaches 100%, the incentive to work (or, for those inclined towards cheating, the incentive to report income) approaches zero.  Likewise, as the top marginal tax rate declines, the revenue available for generally popular government programs (e.g., military spending, entitlements, aid to states) declines in proportion--at least in the range in which a difference in tax rates does not promote radically different behavior.  I think it's safe to assume that the difference between 39.6% to 35% is not so great as to affect incentives to earn an additional marginal dollar.  Indeed, it's not even obvious that "raising" the top rate from 35% to 39.6% would have a negative effect on work: Some earners with the ability to do so will work more, in an effort to keep their after-tax income more or less constant; others, with the prospect of keeping less, will work less; and many others still will likely be unaffected.  Because neither 39.6% nor 35% is obviously the "correct" rate in any deep sense, the public debate has focused, and likely will continue to focus, on the change from one regime to the other.

2) That brings me to the sunset provision.  When the Bush tax cuts were enacted in 2001 (and to some extent in 2003), many people thought that the sunset provision was a gimmick designed to limit the accounting damage from deeming the cuts permanent (at least in the sense that any legislation can be permanent, which is to say that it remains in effect until repealed).  But it's turning out that the sunset provision has real bite.  Dems are able to frame the debate as about whether to "extend" the Bush tax cuts rather than about whether to "raise" taxes.  To be sure, Repubs (and some others) resist that framing, but given the reality that the cuts will expire absent new legislation, the "extension" frame seems to be winning, at least for now.

3) The sunset provision also changes the dynamic on Capitol Hill rather dramatically.  It is highly doubtful that the Dems could break a filibuster if affirmative legislation were needed to repeal the Bush tax cuts.  But because they expire if not renewed, we have a game of chicken: a) Dems and Repubs alike want to extend the tax cuts for those earning under $250,000; b) Repubs alone want to extend the cuts for everyone.  Each side can thus hold the cuts for the lower earners hostage to their agenda, with the result that the least favored outcome occurs: Letting the cuts expire for everyone.

Although occupying an overall weak political position right now, the Dems have the stronger hand here.  In the event that no compromise is brokered, they can say that the Repubs stood by and watched the taxes of working Americans increase simply because they wanted to preserve lower taxes for the wealthy.  That's a good hand--arguably a better hand than actually getting Repubs to go along, a la Boehner.  And for that reason, I don't see Dems as taking the chance of bringing these issues to a full Congressional vote before the election, for fear that they might win the issue (with some Republican capitualtion a la Boehner) and accordingly sacrifice one of their few good campaign issues.


egarber said...

A few things:

1. In 1993, the top rate was 31%. Clinton added two new brackets: 36 and 39.6%. There is no evidence this diminished the incentive to earn; on the contrary, the 90's were a time of strong and stable growth, while incomes went up across the board.

[Conservatives love to say that growth didn't take hold until capital gains taxes were lowered in '97, but that's plainly wrong. There was steady growth from the point rates were hiked to that phase. From there, we saw an unhealthy stock market bubble. I’ll leave it to Neil as to whether low tax rates can cause bubbles.]

2. Republicans keep saying that current rates are nothing more than "existing tax policy." But nothing could be more wrong. In truth, existing policy -- i.e., doing nothing -- includes the sunset provision. In other words, existing policy means *everybody's* taxes go up.

3. The game of chicken is an interesting case of the prisoner's dilemma (and all that John Nash game theory stuff): there's clearly an optimal solution that's best for everybody, but it might not come to be, at least in the short term.

Paul Scott said...

I would normally agree about an optimal outcome, but here I don't think so. As Mike suggests, this looks entirely for political gain (and for once, if they manage to not blow it, the Dems have the upper hand in the BS speak). This is, in other words, a binary zero-sum game. There will be one winner and one loser here (well, as with all politics these days, there is always a third player and they always lose).

egarber said...

Mike said: I don't see Dems as taking the chance of bringing these issues to a full Congressional vote before the election, for fear that they might win the issue (with some Republican capitualtion a la Boehner) and accordingly sacrifice one of their few good campaign issues.


I sort of see it the opposite way. By forcing a vote, Dems will either 1) be able to use opposition to it as a weapon, or 2) be able to claim a legislative victory. Even if it passses with some Republican support, surely a large number will oppose it -- which could play well for Dems district by district.

The key might be to not extend the sunset for the top rates. If it is extended, the overall bill won't carry the same punch; it'll look like Dems caved and kicked the fiscal can down the road for somebody else to handle.

AF said...

I don't understand how the Democracts benefit by not bringing the issue to a vote.

If the Democrats don't bring the middle-class extension to a vote, won't they be legitimately accused of (1) failing to cut middle class taxes (2) being dishonest about their desire to do so and (3) being ineffectual? And how can they accuse the Republicans of supporting tax cuts on the rich and opposing tax cutes for the middle class if they don't force a vote?

These aren't rhetorical questions -- I've heard others say that the Dems don't want to force a vote and I'm genuinely bewildered about the political calculus.