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Hullabaloo


Saturday, July 09, 2011

 
Feel the centrist magic

by digby

In case you were wondering what the White House's optimistic scenario for the Grand Bargain (within the debt ceiling fight or cumulatively in the ongoing various budget negotiations), I think this from Alice Rivlin last March probably captures it:

First, a bipartisan group of senators crafts a long-run budget plan that slows the future growth of Medicare and Medicaid, puts Social Security on sound fiscal basis, simplifies the tax code to raise more revenue from broader base with lower rates, and caps discretionary spending (defense and domestic). This step doesn't take long, because the bipartisan group is already working and has the Simpson-Bowles and Domenici-Rivlin plans to build on. Next, the president and the House leadership join the negotiations. Political perceptions begin to shift. After the sharp world-market reaction to the brief battle over the debt-ceiling increase, all participants are scared of not acting. Fear of taking the first step to slow entitlement growth or raise additional revenue is replaced by fear of being blamed for blowing up the deal and throwing the economy into a new tailspin. The deal no one thought possible is signed in the Rose Garden in the October sunshine, markets react positively, business steps up hiring and economic growth accelerates.


Voila, Le Grand Bargain.

I'm just guessing, but that certainly sounds like the recipe we're currently seeing being cooked up.

Make note of one thing in there: "simplifies the tax code to raise more revenue from broader base with lower rates."

I'm sure there are models that can show that could work. There are models for everything. But why does it sound so much like the same feel-good bullshit that brought us "Supply Side Economics"? Let's lower taxes and bring in more money!

It assumes that those who will actually be paying more in taxes than they are today either won't notice or won't care, thus making the anti-tax forces and Big Money Boyz all calm and docile about this whole thing. Is that logical? After all, somebody will have to be paying more under this scenario or it will be revenue neutral --- and thus completely useless in terms of closing the deficit. So what's the point of doing it in that context? However, it sounds as though Rivlin and the others are convinced that this is another one of those supernatural economic theories which posits that just the act of reform alone will stimulate such a surge of optimism and business activity that it will create more revenues because of the explosion of economic growth.

Now, maybe this is different. Just because it seems to be promising new revenue while lowering rates (or behaving as if no one's going to notice that they are paying more in taxes)it doesn't mean that it's magical thinking designed to make people accede to a one-sided deal. But the usual "flatten and broaden the base" theory really says nothing about raising revenue unless you include some psychological mumbo jumbo about how much better everyone's going to feel about themselves now that the tax code has been cleaned up. And maybe they will. But let's just say that all this talk about "tax reform" in exchange for huge cuts in spending at a time of economic crisis and GOP lunacy just doesn't give me a lot of confidence that the revenue side of this so-called deal is going to materialize. The magical thinking portion of the program always tends to make one a little bit suspicious.

See how the Wall Street Journal crew frames it:
Gigot: All right. Joining me now with reaction, Wall Street Journal columnist Dan Henninger and Wall Street Journal columnist Mary Anastasia O'Grady.

So Dan, you think that Congressman Ryan is on to something here with his thinking that tax reform is actually possible--lower the rates, broaden the base?

Henninger: Absolutely. I mean, as you mention, Paul, this fellow is going to be chairman of the House Budget Committee.

Gigot: Right.

Henninger: That's likes a miracle, OK? House Ways and Means writes the tax laws. It's been run for a long time by Charlie Rangel, who has been in the news lately. The new chairman is Congressman Dave Camp of Michigan, cut from the same cloth as Paul Ryan, gave a strong speech this week in favor of lowering taxes, broadening the base. He's in charge of writing these laws.

And the centrists in Washington, including this commission and another one, the Bipartisan Policy Center run by Pete Domenici and Alice Rivlin, released a report calling for lower taxes and flattening the base. There is a consensus building for doing this. I don't think it's going to happen during the Obama administration, but I would definitely point it towards 2012.

Gigot: Well, that's the issue--I think one of the lessons of the 1980s, Mary is to do something like this--and it did get done in 1986, with a Democratic Congress and a Republican president, Ronald Reagan--but the lesson is it has to be bipartisan, at least in some respect.

O'Grady: Yeah, and I think, you know, Dan's point about how the environment is really ready--I mean, Obama may be very much of a class warrior, as Paul Ryan said. I think that's true. But at some point, you know, the people on his side have to recognize the fact that if you don't have growth, you don't have any revenues, you know.

Gigot: Right.

O'Grady: And you have a capital strike right now. And they have to do something to get money--to get the economy growing again.

Gigot: When you say capital strike, you mean people holding back, businesses in particular.

O'Grady: In particular--

Gigot: Not investing because of the environment.

O'Grady: Yes. And in particular, people who pay the higher marginal rate. And that's the key point here, I think, that you have to start bringing those rates down for people who have money. And if you employ a tax increase after the first of the year, I mean, that is just going to kill growth.

Gigot: Tax reform is the--maybe breaks the Gordian knot here. Because everybody's talking about the Bush tax increases, and then--you can't do it--the Bush tax cuts, rather. You can't just solve the budget problems with budget cuts alone.

Henninger: Well, you know, I was so fascinated, Paul, by this Domenici-Rivlin group, whose report came out this week. And they say in there, they're doing this to create incentives to work, save and invest. Ronald Reagan said that.

Gigot: Yeah, we remember those words.



Yeah, and Reagan also proved deficits don't matter. To Republican presidents.

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