Wonkbook: The tax policies which could solve the austerity crisis

November 15, 2012

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Wonkbook's Number of the Day: "37 or 38 percent." That's the top marginal income tax rate President Obama would accept if Republicans offered additional increases in tax revenues, according to a story by Lori Montgomery and Zachary A. Goldfarb in The Washington Post. The President had previously suggested that he wanted the rate to return to 39.6 percent, where it was during the Clinton administration. Possible means to increase tax revenues without hiking rates beyond 37-38 percent include eliminating or shrinking tax deduction categories, capping the total amount of deductions, or replacing deductions with credits, as today's Wonkbook discusses.

Top story: The tax policies which could solve the austerity crisis

What's a 'nonrefundable credit,' and why it matters to the tax policy debate. "[T]here’s a big problem with [tax deduction single-cap] plans, in that they totally eliminate whatever incentive effects tax deductions have on the margin...However, there are cap-like proposals that don’t have this problem. Perhaps the most promising idea is replacing all deductions with credits...But if the charitable deduction were changed to a credit worth, say, 20 percent of all donations, then everyone would get the same benefit. That would reduce the effect of deductions on high earners, but increase it for lower-income people...That sort of system would also ensure that there was never a point where giving to charity didn’t reduce your tax burden on the margin. And because the change reduces the benefit for those who claim the most deductions, a conversion like this stands to raise a lot of revenue." Dylan Matthews in The Washington Post.

@petersuderman: Obama is not making a return to Clinton-era tax rates for top earners an absolute condition of a deal.

Obama says no ‘red lines’ on top tax rate, signaling some flexibility in debt talks. "President Obama cracked open the door to compromise with Republicans on tax rates for the nation’s wealthiest households Wednesday, saying he is 'open to new ideas' for increasing their tax bills without letting the top rate rise as scheduled in January to 39.6 percent...Democrats familiar with White House thinking said Obama is willing to set the top rate somewhat lower -- around 37 percent or 38 percent -- as long as the overall burden grows on families earning more than $250,000 a year." Lori Montgomery and Zachary A. Goldfarb in The Washington Post.

@jonathanweisman: If Bush had scaled back tax cuts in talks w Dems, could have been permanent. Chose to make as big as could

Simpson-Bowles style tax reform begins by ending the Bush tax cuts for the rich. "It’s common to hear both Republicans and Democrats yearn for President Obama to pursue 'Simpson-Bowles-style tax reform,' rather than fighting to let the Bush tax cuts for income over $250,000 expire. But letting the Bush tax cuts for income over $250,000 expire is Simpson-Bowles style tax reform...Simpson-Bowles begins by assuming the expiration of the Bush tax cuts for income over $250,000. It’s built into the 'plausible baseline,' which you can read about on page 62 of the proposal." Ezra Klein in The Washington Post.

@rortybomb: "I've long bought the gospel of base-broadening tax reform, but...there's a better alternative...just by letting the law take its course."

Wonkblog explains: Suzy Khimm's live-blog of the president's first press conference since reelection.

Read: The full transcript of President Obama’s news conference. Much of his commentary was directed towards tax reform plans.

Watch: Highlights of the conference (3 mins.).

The president also met with business leaders to discuss austerity options. "President Obama extended an olive branch to business leaders Wednesday, seeking their support as he prepared to negotiate with Congressional Republicans over the fiscal impasse in Washington...Mr. Obama has some fence-mending to do before he can count on any serious backing from the business community...One corporate official briefed on the meeting said that the chief executives came away with a sense that Mr. Obama was poised to present a more formal proposal in the next few days, but that he did not press them for support on particular policies." Helene Cooper and Nelson D. Schwartz in The New York Times.

@jonathanweisman: House has passed legislation to extend all Bush tax cuts. Senate passed bill to extend almost all. Idea: go to conference & negotiate.

KLEIN: The big question is how, not whether, to raise taxes. "Here’s the difference an election makes: The decisive question in American politics has moved from 'should we increase taxes?' to 'how will we increase taxes?'...The White House’s position, in other words, is that if Republicans want to raise revenue while holding down rates by reforming the tax code, they have to show how they’re going to do it, prove that they’re willing to take the heat, and let it get scored by the Joint Tax Committee. If not, then tax rates are going up, either because Congress agrees to decouple the tax cuts for income under $250,000 from the tax cuts for income over $250,000, or because we’ve hit the deadline without an agreement and all the tax cuts have expired, raising taxes on everybody." Ezra Klein in The Washington Post.

@ezraklein: The WH doesn't trust the GOP on tax reform: They think R's promise revenue but come back with tricks like dynamic scoring.

KLEIN: But tax reform won't save the world. "Washington loves its panaceas. A few years ago, it was Army General David Petraeus who could fix any problem -- up to and perhaps including the presidency. Then it was the Simpson-Bowles commission, or maybe the congressional supercommittee on deficit reduction. Today’s cure-all? Tax reform...That’s the Washington consensus on tax reform: It slices, it dices, it cleans up after itself. But that’s not the economic profession’s consensus...Which isn’t to say that tax reform isn’t worth the effort. Everyone agrees that it can help a bit, and most everyone agrees that raising taxes by reforming the code is probably better for the economy than raising taxes by increasing marginal rates." Ezra Klein in Bloomberg.

@ezraklein: It's an under appreciated fact that extending the Bush tax cuts on income up to $250,000 cuts taxes for rich people, too.

YGLESIAS: Save the payroll tax holiday. "The most important element of the 'fiscal cliff' is the one politicians seem least interested in doing anything about: the expiration of a payroll tax holiday that’s given a nice lift to the economy at no cost to anyone. A sensible Congress would be coming together on extending and even expanding the payroll tax holiday, even while continuing to argue about the other unrelated elements of the cliff. Instead, the ongoing controversy over high-end Bush tax cuts is crowding the agenda and may end up blocking what should be a no-brainer policy initiative." Matthew Yglesias in Slate.

PORTER: The limits to charity, and why its deduction shouldn't be off-limits. "The outpouring of support highlights how central a role charity plays in our social contract -- we Americans view ourselves as generous, yet we mistrust the government to help those in need. Our trust in charity is uniquely American. We pay less tax as a share of our income than citizens of virtually every other rich economy in the world. But we contribute more to charity than citizens of any other country...It is legitimate to ask whether a government pressed for money should be forgoing $40 billion a year in tax breaks mostly pocketed by the rich for their charitable donations...The nation’s philanthropists tend to prefer charity to taxes because they get to decide which cause is worthy. The flip side is that philanthropy is pretty much unaccountable to society. Unfettered by democratic controls and dictated by the preferences of donors, it doesn’t have a great track record of devoting itself to our most pressing social needs." Eduardo Porter in The New York Times.

Top op-eds

BARRO: Why the GOP lacks a compelling economic agenda. "[It] is not simply that Republicans lack the imagination to come up with ideas to get higher wages, more jobs and affordable health care to the middle class. It is that there is no set of policies that is both acceptable to conservatives and likely to achieve these goals." Josh Barro in Bloomberg.

LEVINE: The education gap matters. "The problem America faces, then, is that its urban school districts perform inadequately compared with their suburban counterparts, and its suburban districts generally perform inadequately compared with their international counterparts. The domestic achievement gap means that the floor for student performance in America is too low, and the international achievement gap signals that the same is true of the ceiling...Stanford economist Eric Hanushek has estimated that America would add $1 trillion annually to its economy if it performed at Canada's level in math." Arthur Levine in The Wall Street Journal.

DIONNE: 2012's inconvenient truths. "Human nature and politics being what they are, Republicans will underestimate the trouble they’re in and Democrats will be eager to overestimate the strength of their post-2012 position. Begin with the GOP: As Republicans dig out from a defeat that their poll-deniers said was impossible, they need to acknowledge many large failures...At the same time, there was a substantial middle- and upper-middle-class suburban component of the Democratic coalition that is moderate or liberal on social issues and sees the GOP as backward-looking. Many voters in this group bridle at sweeping anti-government bromides because they care about essential government functions, notably education. But they are certainly not classic New Deal or Great Society Democrats. Such voters are central to what has become known as the 'Colorado strategy.' It’s a view that the Democrats’ long-term future depends on moderate, younger and suburban voters, especially women, combined with the growing Latino electorate." E. J. Dionne in The Washington Post.

WILL: Will the Supreme Court answer monks' prayers? "Shortly before 123 million voters picked a president, 38 Louisiana monks moved the judiciary toward a decision that could change American governance more than most presidents do. The monks’ cypress caskets could catalyze a rebirth of judicial respect for Americans’ unenumerated rights, a.k.a. privileges or immunities." George F. Will in The Washington Post.

Top long reads

Ramesh Ponnuru explains why the Republican Party is weak:"Romney was not a drag on the Republican party. The Republican party was a drag on him...All these [GOP Senate] candidates lost not because of the idiosyncrasies of this or that candidate or the flaws of this or that faction of the Republican party. They lost not because of the particular vices of the Tea Party, or of social conservatives, or of the party establishment. The most logical explanation for the pattern is that something common to all Republicans brought them down, and the simplest explanation is that their party is weak -- and has been for a long time."

Fashion disaster interlude: A journalist sees what happens when he adopts all the trends prescribed by The New York Times' "Style" section.

Got tips, additions, or comments? E-mail me.

Economy

What's holding back the recovery? "The current economic recovery is among the worst of the post-World War II era largely due to slower growth of potential GDP and a severe shortfall in demand, a report from the Congressional Budget Office said. In the first three years since the economy turned around in mid-2009, the cumulative rate of gross domestic product growth has been nine percentage points below the average recovery since 1945, the CBO report released Wednesday said." Eric Morath in The Wall Street Journal.

New Fed minutes show monetary policymakers are planning recovery targets. "Federal Reserve leaders had a lively debate at their last meeting over whether and how to announce specific levels of inflation and unemployment that would lead them to hike interest rates, but couldn’t reach agreement as they got into the knotty details of what those thresholds would be and how exactly they would work." Neil Irwin in The Washington Post.

Wonkblog explains: How monetary policy is like driving a car.

The Fed also assessed its bond buys. "Policy makers largely deemed their September decision to begin buying $40 billion of mortgage-backed securities each month as effective in lowering long-term interest rates, and in turn helping to support spending and a recovering housing market, according to minutes of the Oct. 23-24 meeting, released with the customary three-week lag. Several Fed officials thought the benefits of the bond-buying were likely to grow over time." Kristina Peterson in The Wall Street Journal.

Read: Fed minutes from its October meeting.

Federal Housing Administration to run out of funds. "The Federal Housing Administration is expected to report this week it could exhaust its reserves because of rising mortgage delinquencies, according to people familiar with the agency's finances, a development that could result in the agency needing to draw on taxpayer funding for the first time in its 78-year history...Overall, the FHA insured nearly 739,000 loans that were 90 days or more past due or in foreclosure at the end of September, an increase of more than 100,000 loans from a year ago. That represents about 9.6% of its $1.08 trillion in mortgages guaranteed." Nick Timiraos in The Wall Street Journal.

Alternative measure sees higher poverty. "There were 46.2 million people living in poverty in America last year. Unless there were 49.7 million. Earlier this fall, the Census Bureau released its annual look at poverty in the U.S. According to that report, there were 46.2 million people in 2011 living below the poverty line of about $23,000 for a family of four. The official poverty rate was 15.0%. But on Wednesday, the Census put out another report showing that the official figures leave out some 3.5 million people whom many experts argue should properly be counted as 'poor.' If those people were included, the poverty rate would be 16.1%." Ben Casselman in The Wall Street Journal.

Read: The Census Bureau's "Income, Poverty and Health Insurance Coverage in the United States: 2011".

Is the economy stronger than it was in 2010? "The general economic outlook has, in fact, improved over the last two years: The unemployment rate in January 2010 was 9.7 percent, whereas now it stands at 7.9 percent. The housing market has finally begun to turn around, and retail sales have picked up. Businesses, however, have still held back from investing, and we’re still a considerable way off from full employment." Suzy Khimm in The Washington Post.

Calculations interlude: The monetary cost of raising a child. Break out your TI-89s for this one.

Health Care

Romney says Obama's 'gifts' of free health care helped him win. "Mitt Romney suggested Wednesday that President Obama won a second term largely because of policies in his healthcare law. In comments to a group of donors, Romney said he lost in part because of the 'gifts' Obama had given to certain demographic groups -- and a lot of the specific gifts he mentioned came in the form of healthcare benefits. 'You can imagine for somebody making $25,000 or $30,000 or $35,000 a year, being told you’re now going to get free health care, particularly if you don’t have it, getting free health care worth, what, $10,000 per family, in perpetuity, I mean, this is huge. Likewise with Hispanic voters, free health care was a big plus,' Romney said." Sam Baker in The Hill.

5, 4, 3, 2, 1...health exchange? Time is ticking away for the states. "With a federal deadline looming Friday, 10 states remain undecided about whether to build state-based online insurance markets designed to help millions of people buy health coverage starting next October. Still wrestling with the decision are Idaho, Arizona, Nebraska, Tennessee, Pennsylvania, Indiana, North Carolina, New Jersey, Oklahoma and Wisconsin." Phil Galewitz and Alvin Tran in Kaiser Health News.

Wonkblog explains: Four ways Blue Cross Blue Shield wants to change Obamacare.

Medicaid personal-care programs are targets for fraud, investigators say. "These personal-care services, which are available in all 50 states, are designed to help the sick, elderly and disabled remain in their homes and out of expensive nursing facilities...Lax requirements for both caregivers and patients, along with poor state and federal oversight, have made the rapidly growing Medicaid personal-care programs an increasingly lucrative target for fraud, according to a federal report scheduled for release Thursday." Joe Eaton in The Washington Post.

Music recommendations interlude: "Landed," Ben Folds, 2004.

Immigration

Obama promises swift action on immigration reform in second term. "Mr. Obama made clear he intends to push for broad-scope legislation that would include a program to give legal status to an estimated 11 million illegal immigrants in the country, including more than 1.2 million young immigrants brought here as children, who would be eligible under a separate bill known as the Dream Act. Mr. Obama said he also wanted to strengthen border security, punish employers who systematically hire unauthorized workers, and make visas available for farm workers and immigrants working in science and technology. In a clue to where the president might be ready to compromise, Mr. Obama said he would offer the larger group of illegal immigrants “a path to legal status,” without saying it would lead to citizenship...When Mr. Obama spoke of the young undocumented immigrants, however, he said, 'We should give them every opportunity to earn their citizenship.'" Julia Preston in The New York Times.

Energy

California begins cap-and-trade auction. "California on Wednesday opened the world's second-largest auction for permits to release greenhouse gases, the first test of a program that aims to reduce emissions while raising billions of dollars for the state...Wednesday's three-hour auction was the first phase of California's cap-and-trade program, the result of a 2006 act that then-Gov. Arnold Schwarzenegger signed to reduce the state's greenhouse-gas emissions to 1990 levels by 2020...California Air Resources Board saying it expects the auctions to generate $1 billion in the first year -- and $2.8 billion to $11 billion a year by 2015." Vauhini Vara and Cassandra Sweet in The Wall Street Journal.

Arguments from both sides about California emissions program. "Manufacturers worry that California-made products will become more expensive to produce, leading to higher prices for consumers. Silicon Valley’s clean technology industry sees cap-and-trade as a potential boon, requiring emissions cuts that will need new, innovative pollution reduction and energy efficiency technologies. Traditional technology companies such as Cisco, IBM and others are looking to invest in smart-grid and other innovations that will be needed to help fuel California’s cleaner economy." The Associated Press.

Coal is going into retirement. "Southern Co. (SO) and other U.S. utilities could retire as many as 353 coal-fired electricity units as the costs of installing pollution controls on those plants won’t let them compete with cheaper natural gas and wind power, an environmental group said. The Union of Concerned Scientists said in a report released today that an additional 59 gigawatts of electric generating capacity from coal plants could be shuttered, representing more than 6 percent of all U.S. electricity used. Those changes are warranted because many of those rarely used plants have already outlived their 30-year lifespan and generate the most emissions of harmful pollutants and greenhouse gases, the report said." Mark Drajem in Bloomberg.

Global carbon dioxide emissions rose 2.5 percent in 2011. "Global carbon dioxide (CO2) emissions in 2011 rose 2.5 percent to 34 billion tonnes, a new record, Germany's renewable energy institute said on Tuesday. The IWR, which advises German ministries, cited recovered industrial activity after the end of the global economic crisis of recent years." Reuters.

The new boom: Shale gas fueling an American industrial revival. "The shale gas revolution is firing up an old-fashioned American industrial revival, breathing life into businesses such as petrochemicals and glass, steel and toys...These companies all rely heavily on natural gas. And across the country, companies like them are crediting the sudden abundance of cheap natural gas for revving up their U.S. operations...Industrial companies are betting that the surge in the domestic production of natural gas is much more than a blip." Steven Mufson in The Washington Post.

What a terrorist attack on the energy grid would do. "Terrorists could black out large segments of the United States for weeks or months by attacking the power grid and damaging hard-to-replace components that are crucial to making it work, the National Academy of Sciences said in a report released Wednesday." Matthew L. Wald in The New York Times.

Wonkbook is produced with help from Michelle Williams.

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