Speaker of the House of Representatives John Boehner (R-OH) plans to address the Economic Club of Washington today to present his economic plan. Press reports indicate he is expected to offer familiar conservative proposals—cutting tax rates for high-income individuals and corporations. The address promises to bring conservative economic proposals in sharper contrast with those of President Barack Obama, who last week presented a plan focused on creating jobs and boosting demand, which economists estimate will create up to 2 million jobs over the next year.
Here are some questions Americans should expect Speaker Boehner to address in his speech:
Question No. 1: If the supply-side tax policies in effect now aren’t working, why will doubling down on them be any more effective?
Speaker Boehner should answer the question of why, if supply-side tax cuts are effective in creating economic growth, our economy isn’t booming right now. Not only have supply-side tax cuts not worked in the past but they aren’t working right now. Speaker Boehner’s speech probably won’t emphasize that while President Obama is in the White House, every one of President Bush’s supply-side tax policies is still in effect. Last December President Obama signed legislation extending the Bush tax cuts of 2001 and 2003 through 2012 in addition to other, even bigger tax cuts.
The result is that top-bracket marginal tax rates are historically low right now. Excepting for a brief period from 1988 to 1993, the current 35 percent top rate is the lowest since the 1920s. At 15 percent, capital gains tax rates are the lowest since the early 1930s and about half of what they were at the end of Ronald Reagan’s presidency. The tax rate on dividends, also at 15 percent, is the lowest it has ever been.
The overall tax burden on rich Americans is also extremely low by any measure, owing mainly to the low marginal rates and capital gains tax cuts. Millionaires are paying one-quarter less in federal income taxes than they were as recently as the mid-1990s. The top 1 percent is paying about 20 percent less. An extremely small number of estates—only one in seven hundred estates will pay any estate tax this year—compared to about one in every fifty in 2001.
Businesses now enjoy extraordinary incentives for investment. This year they can immediately deduct the entire cost of their investments. President Obama’s American Jobs Act proposes to extend that policy, called “full expensing,” for 2012 as well. Under full expensing, the marginal effective tax rate on new investment is zero.
What’s more, if a business is borrowing to invest, and claims interest deductions, then the marginal effective tax rate is negative. The fact is that rather than burdening business investment, the federal tax code is currently subsidizing it.
Looking solely at tax considerations, there has never been a better time for businesses to invest. This underscores what business owners are overwhelmingly saying: They are hesitant to invest not because of supply-side obstacles but because of a lack of demand in the economy.
Question No. 2: Does the plan address the real problem in the economy, the lack of demand?
The problem our economy faces right now is that businesses, sitting on mountains of profits, are not investing and hiring in sufficient amounts and numbers because they look at the marketplace and see customers strapped for cash and loaded with debt. Where, they wonder, is the demand for their products going to come from that would warrant making those investments and hiring up?
Employers say they are not hiring because they do not see enough customers coming through their doors. The National Federation of Independent Businesses, an organization representing small business owners, reported in August, as it has each month since mid-2009, that “weak sales” are small business owners’ biggest problem. In June they concluded:
It is simple: when sales pick up, owners will have a reason to hire more workers to take care of customers, to produce more output and will have a reason to invest in new equipment and expansion. The proximate cause of the collapse of spending in 2008 was reduced consumer spending.
As Jeffery Braverman, owner of Nutsonline, an e-commerce company in Cranford, New Jersey, that sells nuts and dried fruit put it, “Business demand is what drives hiring.”
Bill Gross, founder and co-chief investment officer of the investment management firm Pimco, the world’s largest bond fund, and a prominent Republican, says we need “to create a demand for labor. The private sector is not going to do it.” Even if the government must do it directly, “Putting a shovel in the hands of somebody can be productive,” he argues.
Overwhelmingly, that demand must come from the middle class. That’s why critical elements of the president’s proposal are cuts to middle-class wage taxes and extension of unemployment benefits for those who are out of work. For any proposal to be credible, it has to help the middle class and spur demand.
Equally important is that, assuming the plan is paid for in some way, the way we go about paying for it should not hit the middle class. Measures such as immediate cuts in benefits for Medicare recipients would be counterproductive—shifting costs to consumers we are counting on to boost demand.
As Martin Feldstein, a professor of economics at Harvard University and former chairman of the Council of Economic Advisers under President Ronald Reagan, said in July, “The high unemployment reflects the lack of demand rather than any fundamental problems with the US labor market.” And the key to this is the middle class. If Speaker Boehner’s plan doesn’t address this problem, then it’s, at best, missing what needs to be done at this critical time. And, at worse, it’s making matters worse.
Question No. 3: Who pays?
If, as expected, Speaker Boehner offers a plan to permanently cut tax rates, both for businesses and individuals, there will be a substantial cost and someone will have to pay for it. Already, under current tax policies, the federal debt is expected to soar to almost 90 percent of gross domestic product, the broadest measure of our economy. Cutting tax rates even further will easily push our debt burden past 100 percent of GDP, unless the cost of those tax cuts are offset somehow.
Will Speaker Boehner outline exactly how he intends to pay for those cuts? There is a time-honored tradition among self-styled “tax reformers” of calling for specific cuts in the tax rate but conveniently neglecting to detail the precise loopholes, deductions, and credits they would eliminate to pay for the rate reductions. If the speaker’s speech is just another in a long line of “proposals” calling for lower rates without discussing the specific ways he would reform tax expenditures, then he will have added nothing to the discussion.
If instead he does offer some actual offsets to his plan to cut taxes, then it will be crucial to analyze who bears the burden. Will middle-class families have to give up some of their tax deductions to pay for lower rates at the top of the income spectrum? Will senior citizens be asked to give up some of their Medicare or Social Security benefits? Will our country have to cut back on its investments in education, science, and infrastructure? Will we do even less to help the 46 million Americans living in poverty work their way out?
Tax cuts aren’t free. Without offsetting tax increases or spending cuts, they will add to the deficits and the national debt. Boehner’s proposals must detail exactly how he would avoid this outcome and who is going to pay for it.
Michael Ettlinger is Vice President of Economic Policy, Michael Linden is Director of Tax and Budget Policy, and Seth Hanlon is Director of Fiscal Reform at American Progress.
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Vice President, Economic Policy
Managing Director, Economic Policy