President Obama and Speaker Boehner are, apparently, approaching an agreement on the “fiscal cliff”:

WASHINGTON — President Obama delivered to Speaker John A. Boehner a new offer on Monday to resolve the pending fiscal crisis, a deal that would raise revenues by $1.2 trillion over the next decade but keep in place the Bush-era tax rates for any household with earnings below $400,000.

The offer is close to a plan proposed by the speaker on Friday, and both sides expressed confidence that they were closing in on a major deficit-reduction plan that could be passed well before January, when more than a half-trillion dollars in automatic tax increases and spending cuts would kick in.

There’s an example I’ve given before of the shortcomings in mechanical compromise, the sort where one side stakes out a position, the other stakes out a position, and they agree on a middle point that makes no sense whatever from either point of view—they agree for the sake of agreeing. Let’s say one group wants to build a bridge across the river while the other group doesn’t. The mechanical compromise is building the bridge halfway across the river. It’s an agreement; it’s in the middle; it’s nuts.

Whether you’re a fiscal hawk concerned about balancing the budget or a folk Keynesian interested in more stimulus spending (or, at the very least, not reducing present spending), the agreement described in the article cited above doesn’t cut it. It’s an agreement; it’s in the middle; it’s nuts.

I don’t understand the obsession with nominal tax rates. Increasing the marginal tax rate won’t necessarily raise more revenue. If you want to raise revenue, we should be increasing the effective tax rates rather than the nominal ones. Increasing the marginal rate on the top 1% of income earners may raise revenue little or not at all.

The present effective tax rate on people in the top 1% of income earners is estimated as 27.5%. The estimated effective tax rate in 1960, the halcyon days of 90% marginal tax rates for the upper crust, was 31.2%.

Another thing to take into account: it doesn’t matter what the marginal rate is. What matters is how you calculate income.

And, of course, if your concern is stimulating the economy, the proposed agreement will, if anything, slow growth farther.

The proposed antonym of synergy, the condition in which the whole is greater than the sum of its parts, is dysergy. The proposed agreement sounds very much like dysergy to me.

It sounds even more like my favorite Soviet era wisecrack. Seen in a sign in a factory: we pretend to work, they pretend to pay us.

10 comments… add one
  • jan Link

    “And, of course, if your concern is stimulating the economy, the proposed agreement will, if anything, slow growth farther.”

    But, how much has the Obama administration pushed for ‘growth,’ versus his mantra to raise taxes on the rich so they can pay their ‘fair share?’ His array of economic policies has far less to do with cultivating solid jobs with good pay than it has to do with rhetorically dividing the classes by hammering social justice all the time. His focus is germinated thru his ideology, not by any grasp of economics.

    It was the other guy, in the recent election, who constantly talked about increasing the participatory pie, growing the economy to achieve more revenues, thru tax reform, less inhibiting regulations, fine-tooth-combing government waste and shrinking and/or consolidating government departments, entitlement reforms, promoting our own energy independence, and so on. But, this was one big yawn for voters, in lieu of the psych-ops campaign run by the dems denoting everything but economical growth or Obama’s previous 4-year record of leadership.

  • Take it up with the crackers who backed Romney, jan.

  • steve Link

    You increase marginal rates because you can. The deductions that would garner real money; mortgage, charity and health care, are popular. If you saw Summers’ piece, it would make sense to not allow so much income to be excluded from taxation, but the special interests seem to have those nailed down. The job creators wont create jobs for us if they have to pay taxes, or something.

    But taxes are pretty easy compared with spending cuts. If the mortgage deduction is popular, then Social Security and Medicare are even more so. Making cuts in Medicare cost the Dems the 2010 election. Note that the party of small government will not commit to any cuts in those programs. While I believe the GOP really does want to cut those programs, I also think it clear they dont want to take the political hit for doing so. I really expect both sides to just play chicken on Medicare until they have to do something. (Setting aside the IPAB which might have some effect but I think Congress will try to undercut it.)


  • jan Link

    While I believe the GOP really does want to cut those programs, I also think it clear they dont want to take the political hit for doing so.


    I agree. The problem lies in the numbers of people who are invested in these entitlement programs. One party, the republicans, kind of whispers about the must in doing entitlement reform, while the other party condemns those whispers as being ‘mean and vile’ for focusing on them rather than the contemptuous rich. And, the masses believe the latter, and does a thumbs-down on the former’s weak attempts to at least verbalize about our increasing deficit problems.

    In the meantime the really rich, like Buffet, Google, facebook & Microsoft, all Obama supporters and for more taxation, have a string of lawyers who seek out tax shelters for them so they don’t have to participate in what they are preaching for others to do.

    Consequently, the republicans are donned with the ‘bad’ guy tag, and limp away defeated, unable to make even small inroads in entitlement reform. The dems, in the meantime, continue to spend, superficially supporting the ‘masses’ as they victoriously drive the economy into future oblivion.

    It’s one big political con game!

  • sam Link

    But aren’t you missing the politics, Dave? How much hope would you hold out for reforming entitlements, especially Medicare, in the absence of raising the rates on upper-income folks? Even if, arguendo, the plan under discussion would be ineffective in raising revenue? I can hear the screams now.

  • But aren’t you missing the politics, Dave?

    I see a distinct difference between politics being a critical factor and it being the only factor. The latter is where I think we are now or darned near to it. That’s just another way of saying “the system is going to collapse”.

    That’s why I believe in things like term limits, no pensions for elected officials, anti-gerrymandering rules, and so on. There needs to be an “up or out” rule for politicians. There must be no tomorrow.

  • sam Link

    “I see a distinct difference between politics being a critical factor and it being the only factor.”

    I didn’t say it was the only factor, but it certainly is a critical factor. I was talking about a (politically) necessary condition, not a sufficient one.

  • steve Link

    Term limits increase govt spending. Add eliminating the filibuster to your list.



  • PD Shaw Link

    I’ve not followed the issue closely (can’t make me a hostage), but I think part of what Dave is getting at here is the apparent lack of any preparation / negotiation on this issue prior to the election.

    Last fall, Dick Durbin said on local radio that he had been working for several months to put together a coalition in the Senate to pass Simpson-Bowles and predicted he would have one if Obama was re-elected. The caveat on the Presidential election was odd, but I can’t find what I heard on the tubes.

    Basically, it doesn’t appear that the necessary prep work was done for a grand bargain; everybody held their powder until after the election. And the Republicans might be fine with a temporary fix and wait until they retake the Senate in two years.

  • This may shock some, but I’m not a fan of term limits. The reason is simple. Suppose we limit a politician to N terms. Now on the Nth term the politician has an incentive to disregard completely the “will of the voter” such as it is. Voters my very well realize this and vote the politician out in term N-1. Rinse and repeat and you could get a situation with more turn over and as steve notes, more spending, or less reasonable/rational policy.

    Of course there are reasons the above might not work so perfectly such as party affiliation, seeking even higher office, or simply just building up a more extensive “rolodex” for later lobbying efforts. These could completely offset the type of problem I outlined above…or not. My guess is that these other factors partially offset the problem noted above.

Leave a Comment