Two simple steps Congress can take to slow the deficit and spur our economy

December 8, 2010 | John Burbank

From the Everett Herald:

John Burbank, Executive Director

It’s not pretty watching President Obama and the Republican minority collude in giving away billions to the wealthy, under the guise of the deceptively named “middle class tax cuts.”

The president has pretty much deep-sixed the effort by a majority of Democrats to keep lower tax rates in place for most Americans, except the very wealthy. Even that effort, by itself, would have given the wealthy five times more money than actual middle class taxpayers would receive, simply because a tax cut on the first $250,000 of income applies to everyone, including every single rich multimillionaire.

The president has shown that he is willing not just to compromise, but to sell the whole store, to get anything resembling a tax cut, regardless of who benefits, how much it accelerates the nation’s wealth gap, and the overall impact on our economy. It is a lousy deal, with the edge going to the wealthy and cutting into the middle class.

But the fight is not yet over, and some Democrats look like they might have a backbone. With two simple steps, Congress could help solve our short-term deficit issues and get our economy moving again.

Step one: Do nothing, and let all the Bush tax cuts expire as now scheduled, so that tax rates return to what they were in 2001. After all, we were told by President Bush that these tax cuts would bring us prosperity, economic growth and jobs. They haven’t delivered any of these — quite the opposite, in fact.

Think back to 1999, before Bush pushed through all these tax cuts. We had a prosperous economy, tremendous job growth and very low unemployment. The middle class was doing OK, while the wealthy were raking in profits. The Bush tax cuts haven’t taken us anywhere but down.

If we end those tax cuts on earned income, capital gains and wealthy estates, we will gain about $4 trillion in revenue over the next 10 years. That will enable us to create jobs in our local schools and community colleges, fund a jobs program for energy-efficient retrofits, and create even more jobs building transit systems that can get you to work on time — regardless of the weather and car traffic. It will also significantly reduce our short-term deficit.

That is one side of the equation. On the other side is the need for immediate economic activity. We need to encourage people to buy again. Consumption accounts for 70 percent of overall economic activity. And as consumers buy more, businesses hire and invest to produce enough to meet increased demand.

Now, we can’t count on the wealthy to consume more, at least in our state or country. They may buy some stuff, but they also may take a vacation in France — which helps the French economy, but not ours. Or they may decide to invest in a Fortune 500 company, which takes that investment overseas to build another factory in China. That doesn’t help much either.

What does help is when people buy things right here in their own neighborhood — which brings us to step two: Congress should immediately send every household now paying payroll taxes a check for $2,000. Doing so will push $250 billion into the United States economy, both directly via the checks and indirectly via the economic ripple effects of increased consumption nationwide.

Do the math. For the vast majority of Washington residents, a $2,000 check from the federal government minus the $1,000 they lose from an increase in tax rates means they pay less in taxes overall. Plus they get an immediate check in the mail — something large enough to actually notice and big enough to actually benefit them.

Could it happen? Well, Washington state is far from the D.C. beltway — but we have Sen. Maria Cantwell and newly re-elected Sen. Patty Murray, and Reps. Rick Larsen, Jay Inslee, Jim McDermott, Norm Dicks and Adam Smith. They represent us, and between them they have a lot of power to wield in this lame duck session.

It is time to ask them to work for us — not for the Republican minority, not for the Democrats who have no spine, not for Wall Street, not for President Obama, not for the wealthy, and definitely not for those who brought on this recession.

Our elected representatives owe their allegiance to a difference set of constituents, namely: the great — and lately, disrespected — middle class. Let’s make them do something about it before this Congress closes its doors on history.

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Posted in Column, State Economy

Comments

  1. Winslow P. Kelpfroth says:

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    John, I don’t follow your reasoning here. The tax compromise doesn’t give billions to the wealthy, it refrains from taking billions from the wealthy who, after all, are the ones who earn it. There is a difference.

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    John, I’ve been to Cuba, where the wealth gap has been completely eliminated. There are two wage levels there: the equivalent of $17 per month for the non-professionals and $34 per month for the professionals. Wealth distribution is shown to work; I just don’t like the outcome.
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    You’re postulating cause and effect, ignoring the tech-bubble economy of 1999. Naturally, when the tech bubble burst the illusory paper profits of business-plan-free tech companies disappeared with the companies themselves and federal revenues disappeared with them. This revenue reduction would have happened no matter what the tax rates were.

    I read your article on the Laffer curve. Take a look at the Wikipedia article on it. You’ll see that Art Laffer didn’t invent it. The antecedents go back to Andrew Mellon, to Adam Smith, and to some Shia Imam in the 7th century. They just may have something.

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      Winslow, the only reason the wealthy are able to earn billions is because we have a government. They have benefited most from the existence of our government, and it is quite reasonable and fair for them to pay taxes proportionate to their earnings, so that future generations may have the same opportunities as previous generations have had.
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      Winslow, have you been to Somalia? There’s no government at all there, to speak of, and not many people getting wealthy there either — except perhaps for a few pirates.
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      I’ll refer to you this page: http://delong.typepad.com/sdj/2008/09/notes-to-self-f.html – scroll down to get an idea of GDP growth, change in surplus/deficit, stock market performance, etc. under Bush 41 vs. others.
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      You know, if you go back far enough, you’ll find a whole bunch of people who also theorized the world was flat. Turns out, they were wrong. That’s because the age of a theory has nothing to do with how well it approximates reality.

  2. Stan Sorscher says:

    John has a point here – that individual consumption easily leaks out of the domestic economy, and individuals will not be strategic in terms of investment for the future.

    Government spending as a strategic investment will pay off in the long run.

    The tragedy of the Bush tax cuts, is the reverse of that. Our spending on consumption brought us a nice big pile of DVD players made in low-wage countries, while we neglected our roads and electric transmission lines. We raised tuition and made other policy choices that widened the gap between rich and poor.

    Other countries invested strategically in high-speed internet, mass transit, and manufacturing technology for renewable energy.

    Government must be part of the solution. Free markets will not solve all our problems.

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