Nancy Pelosi's Moment of Clarity
by Charles Lemos, Thu Jan 08, 2009 at 06:38:32 PM EST
"The opportunity calls for us in this country to invest in our children and their health and their education, and all of the -- to reduce the deficit, to reduce the deficit if we had those resources." Speaker of the House Nancy Pelosi
Well, well, well, will wonders never cease? After being in a fog, and not the San Francisco kind, for the past two years, the Speaker of the House has a moment of clarity:
Pelosi told reporters today that she "couldn't be more clear" in opposing some Obama advisers' wish to wait for the tax cuts on the highest income earners to expire in two years, as they are set to do under current law. "Put me down as clearly as you possibly can as one who wants to have those tax cuts for the wealthiest in America repealed," she said.
Pelosi said the income tax cuts to the highest earning Americans -- which were decreased from 39.6 to 35 percent as part of the 2001 Bush tax plan -- have been "the biggest contributor to the budget deficit," which now stands at $1.2 trillion for fiscal year 2009. That deficit figure does not include the impact of the pending stimulus measure, which will cost around $800 billion, nor does it include estimates for supplemental spending bills that will come later this year to finance the wars in Iraq and Afghanistan.
Put me down as well as one who supports rescinding the Bush tax cuts. Now. Economic fairness, fiscal discipline and economic growth are sometimes conflicting goals. But not in this instance, not at this moment. Repealing the Bush tax cuts immediately is not just the fairest policy option but also the most fiscally responsible given the severity of the deficits we confront but also the most efficient in terms of a progressive tax scheme.
Here's Cornell University economist Robert Frank making the case for repealing the Bush Tax Cuts:
The U.S. government's first priority must of course be to stimulate spending as quickly as possible, deficits be damned. But it's important to get the biggest possible stimulus for any given deficit. To that end, it makes sense to stick with Obama's original timetable. Eliminating the Bush tax cuts right away would make it possible to generate a much larger immediate increase in total spending.
A robust finding in behavioral research is that people are extremely reluctant to accept cutbacks in their standard of living. With few exceptions, high-income taxpayers earn substantially more during their lifetimes than they spend, generally bequeathing the surplus to heirs or charities. If these taxpayers faced slightly higher rates, they would have ample resources to maintain their current lifestyle, so most of them would continue spending as before. The only consequence would be that they would leave smaller bequests.
The additional revenue from eliminating the Bush tax cuts would pay for larger temporary tax cuts for low- and middle-income families than the permanent tax cuts that are currently planned. And because these families spend most or all of their post-tax income, the immediate effect would be an increase in total spending roughly equal to the additional revenue from repealing the Bush tax cuts.
Or, the extra revenue could be used to raise benefits such as unemployment insurance and extend them more broadly. That would lift total spending by almost the full amount of the additional revenue.
Still another option would be to increase grants for city and state road maintenance crews. Here again, 100 percent of the distributions would be spent immediately.
But the additional stimulus would not stop there. When someone spends an extra dollar this way, others receive an extra dollar of income, some portion of which they spend, creating still more income for others. Appearing before the Senate Budget Committee last month, Mark Zandi, chief economist at Moody's Economy.com, testified that because of this multiplier effect, each dollar of new U.S. government spending would generate roughly $1.50 of additional demand.
In brief, there would be a lot more stimulus for any given budget deficit if the Bush tax cuts for top earners were scrapped immediately and the resulting revenue steered to people who would spend it.
The other aspect about Nancy's moment of clarity is that we are actually having policy debates. As much as this San Franciscan loves the fog, it is refreshing to see the fog over Washington lift.