Reactions to the President’s press conference

I have three quick reactions to today’s Presidential press conference.

1.  The President upped his demands today.  He had been previously been demanding that income tax rates increase on “the rich.” Treasury says that doing so would raise $442 B of revenues over the next decade. Today the President said that “extending further a tax cut for folks who don’t need it, … would cost close to a trillion dollars.” That means his opening bid is assuming much more than just increasing the top two rates.

Using Treasury numbers, one could get to just shy of a trillion dollars by including the following Presidential proposals to “sunset tax cuts” that would affect “the rich” (in all cases, incomes > $200K for single filers, and > $250K for married filers):

  • Increase the top two income tax rates;
  • Phase out the personal exemption for upper-income taxpayers (aka “PEP”);
  • Limit itemized deductions for the rich (aka “Pease”);
  • Tax capital gains at 20% (the pre-2001 rates);
  • Tax dividends as ordinary income (the pre-2003 policy); and
  • Raise estate and gift taxes to 2009 levels.

We may not, however, be able to stop at $1 trillion.  I am told that in other contexts the President’s team (including Acting OMB Director Jeff Zients in public remarks today), are saying the President’s opening bid is not $1 trillion, but $1.5 trillion of new revenues, raised entirely on the individual side.  I am trying to confirm this, and I wish someone would ask Jay Carney what the President’s revenue number is for lame duck / fiscal cliff negotiations. In his press conference, the President used $1 trillion to describe one possible policy outcome, rather than as a description of his negotiating position. That is at least consistent with a higher $1.5 trillion number.

2.  Over the past five days the President and his team have not insisted that tax “rates” go up, but instead that tax “cuts” for the rich not be extended. Like many others I had at first been interpreting that as a sign of potential flexibility, that he might be open to Speaker Boehner’s idea of raising taxes on the rich by limiting or eliminating their tax preferences. I now have a different view, shaped principally by a new understanding of the size of the tax increase the President is requesting.

I think the Administration wants to raise a lot of revenue ($1T – $1.5T), and they know that it is infeasible to raise that much without raising tax rates.

I now think the ambiguity, the choice not to use the word “rates,” was not to allow for negotiating flexibility but instead to allow flexibility to demand more than just rate increases on the rich. By using “tax cuts” rather than “tax rates,” they can make their total opening bid $1 or even $1.5 trillion.

This is a significantly more pessimistic interpretation of the same language than I had previously, and it’s more pessimistic than most other observers.  If I’m right, not using “rates” is part of a strategy to set an absurdly high opening bid, one so high that makes it harder to close a deal during the lame duck session.

3. It seems like the President is thinking about the threat of tax increases (aka “going over the fiscal cliff”) in relative negotiating terms, and not as much in absolute policy terms. That is, his language suggests that he thinks no legislative deal would be worse policy and worse politically for Republicans than it would be for him. If he’s right, then that should give him leverage in the negotiations, because Republicans should be willing to “pay more” to avoid that stalemate outcome.

The problem is that he has a responsibility to think about a stalemate not just in relative terms (and especially not just in relative political/blame terms), but also as a matter of absolute policy.  No matter who gets blamed for it, a legislative stalemate leads to a terrible short-term macroeconomic consequence:  increased unemployment and a new recession, says the Congressional Budget Office. The President’s public posture treats this as if it’s not a big deal because it’s worse for Republicans.  Far more importantly, it would be a terrible outcome for the country.

(White House photo by Pete Souza)

I escaped Washington, DC and now teach at Stanford's Graduate School of Business.

Posted in budget, economy, taxes

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