With just under 100 days until one of the largest tax hikes in American history, Democrats are holding off on extending any of the Bush tax cuts until a lame duck session after the mid-term election:
Only nine days ago Senate Majority Leader Harry Reid had told reporters that the Senate would vote before lawmakers head home at the end of this month for a last-minute campaign push, but that now looks extremely unlikely.
“I don’t know if it’s possible timing-wise now,” said Sen. John Kerry, D-Mass., told reporters before the meeting. “Given the amount of time that we have and where the votes are I’m not sure we can get it completed because the Republicans will filibuster one thing and you won’t have enough votes for the other, so you wind up not getting 60 votes. And where does that leave you?”
But it’s not merely a timing issue – it’s also a political one. Some Democrats prefer to delay the vote until the lame-duck session because Republicans have already started to accuse them of trying to raise taxes in the middle of a recession.
In addition to facing opposition from members of his own party who are embroiled in re-election battles, Reid also faces dissent from at least five Senate Democrats who agree with Republican plans to extend all the tax cuts – even for the wealthy – for at least a year or two as the economy recovers.
One of those Democrats – Senate Budget Committee chairman Kent Conrad, D-ND – told reporters that Senate action on the tax cuts can wait until later this year.
“It’s not imperative in the sense that anybody’s tax rate is going to change,” said Conrad.
The coming tax hike is getting more attention as we get closer to November. Democrats in swing districts, even ones not up for re-election this year, are nervous that President Barack Obama’s insistance that they expire during tough economic times is bad policy:
After tough votes for stimulus and health reform, Nebraska Dem Ben Nelson has voted against his party on a great number of issues.
Tax cuts will be no exception. Nelson issues a statement today breaking with the White House on the issue of extending Bush-era tax cuts. Nelson compares the tax cut extension with the stimulus bill.
“Just like the stimulus package in 2009, it is imperative that we take actions to help the economy. I hate deficit spending, but some matters are so urgent that they can’t wait. Such was the case with the stimulus package, which contained more than $300 billion in tax relief, and I believe the same holds true about the expiring Bush era tax cuts,” says Nelson in the paper statement.
He goes on to say the tax cuts should be offset if possible with spending cuts.
There are three Senate candidates who oppose President Obama’s Tax proposal – extending tax cuts only for those making less than $250,000 – Jack Conway in Kentucky, Robin Carnahan in Missouri, and sitting Sen. Blanche Lincoln in Arkansas.
Two more Senators who are not up for reelection have also said they oppose the President’s plan – Kent Conrad in North Dakota, the retiring Evan Bayh in Indiana, and Nelson in Nebraska.
Here is a list of other Democrats backing extension of the tax cuts from The Plum Line at the Washington Post:
Realizing that tax hikes will hinder an economic recovery, Peter Orzag, who until recently served as President Barack Obama’s budget director, is calling for a two year extention of the Bush tax cuts:
In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.
Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.
Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets don’t seem at the moment to view the budget deficit as a problem — take a look at the remarkably low 10-year Treasury bond yield — there is little reason not to extend the tax cuts temporarily.
The sentiment is shared by Christina Romer, another one of President Obama’s ex-economic advisers, who warned that tax hikes in a recession will only hinder economic growth while tax cuts “have very large and persistent positive output effects.”
No proposal currently exists in Congress to extend any of the tax cuts set to expire at the end of the year, either for the middle class or to extend all of them. President Obama has only offered tax credits and rebates, which are direct spending as noted by Zach yesterday and largely do nothing to spur economic growth.
Because the last year’s $827 billion in stimulus spending worked so well (yes, that’s sarcasm), President Barack Obama has announced a push for another $50 billion in spending on infrustructure projects:
Vowing to find new ways to stimulate the sputtering economy, President Barack Obama will call for long-term investments in the nation’s roads, railways and runways that would cost at least $50 billion.
The infrastructure investments are one part of a package of targeted proposals the White House is expected to announce in hopes of jump-starting the economy ahead of the November election. Obama will outline the infrastructure proposal Monday at a Labor Day event in Milwaukee.
While the proposal calls for investments over six years, the White House said spending would be front-loaded with an initial $50 billion to help create jobs in the near future.
The goals of the infrastructure plan include: rebuilding 150,000 miles of roads; constructing and maintaining 4,000 miles of railways, enough to go coast-to-coast; and rehabilitating or reconstructing 150 miles of airport runways, while also installing a new air navigation system designed to reduce travel times and delays.
Obama will also call for the creation of a permanent infrastructure bank that would focus on funding national and regional infrastructure projects.
We already have an “infrastructure bank.” It’s called the Federal Highway Trust Fund. But much like other trust funds run by the federal government, it’s broke.
This doesn’t count the other spending programs that Obama is pushing right now, including $100 billion for research and development tax credits, $12 billion in tax breaks for small businesses and $30 billion for lending.
There was bad news on the housing front yesterday as existing home sales dropped by almost 30%, this in an economy that we are constantly told is improving:
Sales of previously owned U.S. homes took a record plunge in July to their slowest pace in 15 years, underlining the housing market’s struggle to find its footing without government aid.
Tuesday’s report from the National Association of Realtors, which was much worse than market expectations, was the latest data that indicated economic activity continued to slacken into the third quarter.
“It is becoming abundantly clear that the housing market is undermining the already faltering wider economic recovery. With the increasingly inevitable double-dip in prices yet to come, things could yet get a lot worse,” said Paul Dales, a U.S. economist at Capital Economics in Toronto.
Existing home sales dropped a record 27.2 percent from June to an annual rate of 3.83 million units. June sales were revised down to a 5.26 million-unit pace from a previously reported 5.37 million.
Financial markets had expected sales to fall only 12 percent to a 4.70 million-unit rate last month. The end of a popular home-buyer tax credit, which had supported sales and home-building activity, continues to haunt the troubled housing market.
So much for an economic recovery.
H/T: Dan Mitchell
Yesterday, we noted that Democrats are going to use the “blame Bush” strategy in the 2010 mid-term elections. It has become obvious in recent days with comments from Speaker Nancy Pelosi (D-CA), who replied with this after being asked if she was nervous about November:
“I’m not nervous at all,” Pelosi said. “I never take anything for granted. And our agenda now is … we’re not going back to the failed policies of the Bush administration. We’re going forward,” she said.
Sen. Patty Murray (D-WA), who suddenly finds herself in a tough bid for re-election, is attempting to paint her likely opponent, Dino Rossi, as a follower of George W. Bush’s policies in this new ad entitled, “Best Friends”:
In case you’re wondering, Murray voted for the TARP bailout in October of 2008, putting her on the same side as George W. Bush, but I digress.
With the economy expected to continue its sluggish pace as we head into 2011, some economists believe that the expiration of the Bush tax cuts will hurt the economic recovery:
The nascent US economic recovery would be halted in 2011 if Congress fails to extend the Bush tax cuts for the wealthiest Americans, analysts at Deutsche Bank said.
The cuts were enacted in 2001 and 2003 under President George W. Bush and covered those earning more than $250,000, but they are set to expire at the end of this year.
Deutsche said the drag on gross domestic product should they lapse could be as much as 1.5 percent, with the more likely impact at 1.1 percent.
The impact would be worse, the analysts said, if Congress fails to fix the Alternative Minimum Tax, which was enacted in 1969 to make sure rich people pay taxes but was never indexed for inflation, and thus is now hitting middle-income workers.
“In a worst-case scenario, allowing the Bush tax cuts to expire and failing to fix the AMT could result in (1.5 percent) of fiscal drag in 2011 on top of the 1 percent fiscal drag we expect to occur as the Obama fiscal stimulus package unwinds,” Deutsche said in a note to clients. “If the recovery remains soft/tentative through early next year, this additional drag could be enough to push the economy to a stalling point.”
Deutsche compared the situation to Japan in the 1990s, when the government let tax cuts expire and cut stimulus, leading to another leg down in the recession and ensuring the nation’s “lost decade” of no economic growth.
Yesterday, I posted an article by Art Laffer about the chances of a double-dip recession due to the expiration of the Bush tax cuts in 2011. Before I go any further, it’s worth noting that Laffer, a Keynesian, tends to be more political in his work. He toes the party line at almost all costs.
Perry is referring to the recent model released by the Federal Reserve Bank of New York, which paints a rosy picture of the economy:
The Fed’s model (data here) shows that the recession probability peaked during the October 2007 to April 2008 period at around 35-40%, and has been declining since then in almost every month. For May 2010, the recession probability is only 0.17% (about 1/6 of 1%) and by a year from now in May of next year the recession probability is even lower, at only 0.12%.
According to the NY Fed Treasury Spread model, the recession ended sometime in middle of 2009, and the chances of a double-dip recession through May of 2011 are essentially zero.
Fair enough. Federal Reserve Chairman Ben Bernanke says the economy is recovering, just slowly. He was also blindsided by the recession that hit us in 2008.