Why Obama is postponing the tax increases for the wealthy

[BzaDem]

Believe me, it is not because Obama suddenly has developed an affinity for the wealthy, or because someone "got to him." It is basic macroeconomics.

Short version:
Raising taxes in the middle of a recession is a bad thing for the economy.

Long version:

GDP = C + I + G + (X-M)

where

C = Consumption
I = Investment
G = Government spending
X = Exports
M = Imports

Obama's plan involves a massive government spending program. This is needed because in our bad economy, C and I are going to be lower (so we need to compensate with G). In addition, his program will lead to better roads, schools, etc -- which are investments in our future.

However, if he raises taxes, that lowers consumption (C). That would negate some of the benefits to our economy. This is exactly what happened in 1937, where Roosevelt tried to balance the budget, and the economy resumed its negative tailspin after several years of improvement.

This is basic Keynesian economics. Deficit spending can help get an economy back on track. If we raise G and lower taxes (increasing consumption), the GDP will rise. However, if we raise G and increase taxes, the tax increase partially negates the increase in government spending. The deficit actually needs to increase to get the job done.

Balancing the budget by increasing taxes comes later, when we are out of the major recession. First comes getting us out of said recession.

[Sarah Ibarruri]

1. ?

Sorry, I'm more confused now than ever.

[Jennicut]

3. Simplified, raising taxes when you are near a depression can be bad

It can take money out of the economy and make no one spend anything, making everything worse. I think that is what the poster meant.

[BzaDem]

7. Edited to clarify.

[w4rma]

17. How much less money are a few super-wealthy people going to spend in America

if their taxes are raised? Answer: A negligible amount. They have the money to continue their current lifestyle and they will still horde money at a slower rate.

So, instead of that money being horded, it will be put back into circulation through taxation on the ultra-wealthy.

[roguevalley]

29. seems counter intuitive that expecting rich bitches to spend their

bank accounts in the economy in taxes is a bad thing. Its just sitting in shelters. put it into the economy. Tom Friedman can give classes to the titans on how to live like the rest of us. It will be justice since
none of them actually contribute work to the economy anyway.

[Sarah Ibarruri]

30. Okay, that I understand. However, the rich just have their money idle. For example....

who would get the economy moving by spending the most, the middle class, who spend whatever they make, or the mega-rich, who just put it away in some offshore bank? I say don't tax the middle class, but tax the mega-rich at the same rates as BEFORE Reagan, and use that money to alleviate the problems of our economy.

[Jennicut]

2. Yup. The economy is so bad right now I want to cry.

Damn Shrub for giving all of us and our Prez-elect a shitty start to his first term. That is who we should all be angry at. Obama has to figure out the right thing to do on this.

[mrreowwr_kittty]

4. But I don't see how raising taxes on the wealthy

With a concomitant decrease on the taxes of the middle and lower classes (per his original plan) hurts consumption.

[BzaDem]

5. Because the wealthy pay much more in taxes.

You are right that the wealthy do have a lower marginal propensity to consume than the middle class. That's why I said that raising taxes would "partially" negate the increase in government spending. But it still lowers GDP (just by not as much). Taxes for the wealthy will eventually need to go up a lot (after all, we will be adding more and more to our national debt). It's just that the time to do this is later, not when we are trying to get out of a huge hole.

[meow2u3]

27. That's becaue the wealthy SHOULD pay more

They have the money to spare. Let them pay more. The superrich will still have a lot of money left over than the rest of us.

Contrary to conservo belief, the rich pay a smaller percentage of their total income and assets in taxes, if you include payroll, state income, and state and local property taxes, even though they pay more in absolute dollars.

[Tuesday Afternoon]

6. question has been answered.

[BzaDem]

8. They won't "quit" consuming, but consumption will be lowered

But no one is talking about letting the rich off the hook. This is just delaying their tax hike until econoimc conditions improve.

[Tuesday Afternoon]

10. sounds like more of the same...

[Raineyb]

24. It's these tax cuts which is part of the reason we're in the shitter now

I see no reason why letting Bill Gates keep more of his billions benefits me who has to pay taxes on her unemployment check.

Regards

[marybourg]

9. Do the wealthy really spend every last one of their dollars?

I don't think so. In fact I think that their excessive, disproportionate, wealth caused them to search for ever more exotic investment vehicles (I mean like how much can you keep putting into Vanguard Total Stock Market and Money Market Prime)and hence the infamous complex derivatives. If this excess wealth were distributed downward to the middle classes and the working poor, they really *would* spend most of it.

[BzaDem]

13. Not every one, but part of each dollar

The rich have a lower marginal proposensity to consume than the middle class, that is for sure. But Obama is still lowering taxes on the middle class. That tax cut, combined with huge government spending, will eventually require that taxes for the rich to go up (to pay back the debt caused by the spending and middle class tax cuts). The only question is when -- now, when it will reduce consumption somewhat, or later, when it won't make a bad recession worse?

[kwenu]

11. Great economic explanation but I beleive the campaign pledge was to let them expire.

I don't believe this is a reneging or even a change of Obama's plan.

[ben_meyers]

12. So if keeping taxes low or even cutting them stimulates the

economy and creates wealth does raising taxes slow down the economy and destroy wealth?

I'm really confused now.

[BzaDem]

15. It depends on what the government does with the revenue.

If the government raises taxes and does nothing with the new revenues (other than pay down the debt), that will hurt the economy (C will go down, G will stay the same). This is necessary in better times though, because eventually we have to pay down the debt. If the government raises taxes and then spends all the new revenue, not much changes: consumption is reduced, but this is offset by higher government spending (C goes down, but G goes up).

But right now, we are in extraordinarly bad times. We need C to go up, AND G to go up. By as much as possible. So we need to run a deficit (increasing G and lowering taxes on the middle class) to accomplish this.

[gravity]

18. Raising taxes doesn't destroy wealth

(with the exception of capital gains) It just slows the creation of wealth by the private sector.

[liberalmuse]

14. Also, if people remember, he really hasn't changed his position on this.

He's been saying for awhile now that he would simply let them expire in 2010, and begin the increases in 2011. Google is great at picking up where memory fails.

[coalition_unwilling]

16. I agree with the general tenor of your

pnst. But a small clarification is in order, I believe.

Obama has not called for "increasing" the marginal tax rate on the hyper-wealthy, nor is he "postponing" something he never called for.

The Bush tax cuts on the hyper-wealthy are due to expire in 2010. Obama has simply said that the Bush tax cuts should expire in 2010 as scheduled and not sooner (which would require new legislation).

Will this expiration of the Burh tax cuts feel like an "increase" to the hyper-wealthy when it happens in 2010? Maybe so, even though rates will be merely returning to Clinton-era levels (generous to the wealthy by historical standards).

[RoyGBiv]

19. K&R

[rockymountaindem]

20. As much as I wish those ridiculous tax cuts would go away...

allowing them to expire will rather than reversing them will avoid a nasty legislative fight in which the Republicans will loudly decry "raising taxes in the middle of a recession" to the detriment of the overall agenda. You can be sure that the media will put people like McConnell front and center in that debate. Ultimately, I guess it's a distraction that we don't need and that would probably hurt the Obama administration more than it would help anything else.

But when they do expire, I won't shed any tears.

[w4rma]

21. Except the tax rates need to be reset to before Reagan, not just Bush Jr. (nt)

[Raineyb]

25. Exactly!

Although for all the talk about Reagan cutting the tax rate he raised taxes on working people. (FICA, elimination of the write off of sales tax and credit card interest)

Regards

[paulk]

28. I agree - one of the things that hurt the Clinton admin early on

was the rollback of the Reagan era tax cuts, which resulted in a nasty legislative fight that the pukes used very effectively in regaining Congress in '94. Obama isn't going to make the same mistake and give them that ammo for 2010...

There was an interesting story on NPR a few weeks ago that the Bush admin changed the focus of the IRS away from auditing the top 5% and focused on (of all things) people claiming the earned income tax credit. It was claimed that refocusing on tax fraud of that 5% could raise 200 billion in additional taxes... That would be one way of raising taxes on those folks without really raising taxes - just enforcing the current code.

[anonymous171]

22. I thought he might have to do this.

[unblock]

23. when discussing tax rates, it is always facile to focus on direction and ignore level

it's a truism to say that there's a negative effect of raising taxes, but it's not at all true that that's the only effect. the net effect may in fact be positive, and it depends on the LEVEL of taxes, the tax rates relative to other tax rates (e.g., dividends or capital gains), the expectations of future tax rates, and so on.

if shrub had cut the top tax rate to 1%, obama would have to be an idiot not to reverse most, if not all, of that tax cut. yes, he'd be raising taxes, but there's a right LEVEL for tax rates and 1% is too low.


basic keynesian economics does not call for a repeal of income taxes during a recession. therefore, arguing for "lower" tax rates ignores the possibility that tax rates might always be set accurately for a recession, or indeed might already be too low. it also ignores other tax rates. in particular, lowering tax rates is not going to help as long as investors have an incentive (in the form of an even lower 15% dividend taxation rate) to liquidate companies.

[meow2u3]

26. AFAIC, Obama can postpone the hike in the tax rates for the wealthy

as long as he begins to plug up the tax loopholes for the wealthy--those big enough to drive an 18-wheeler through. He'll be able to raise revenue simply by forcing those corporate fat cats who use abusive tax shelters to evade taxes to fork over the dough!

[ddeclue]

31. Because your formula leaves out politics.

He's trying to get something passed in the lame duck Congress and will need Republicans to get it passed before he's sworn in.