Fiscal Keynesianism for the Upper Classes

Among the ever-so-flexible American columnists, one man has long stood out as a beacon of fiscal probity: Newsweek and Washington Post columnist Bob Samuelson.

As long as anyone can remember, this curmudgeonly man has acted as the Old Faithful of fiscal probity in the U.S. public policy debate, forever warning his fellow Americans (and the rest of the developed world, for that matter) that we cannot afford our profligate social spending.

Even — and he would say, especially — during economic boom times, Mr. Samuelson would not fail to be the party pooper, arguing that the financial bill, and a horrible one at that, would come soon, unless we immediately changed our ways.

So unperturbed by the usual ways of Washington back scratching and pleasing the powers that be was he that Mr. Samuelson earned the distinction of being considered an honorary Swabian or Scot (to highlight his inner sense of unwavering fiscal fortitude in German or UK terms, respectively).

Of course, to some, Mr. Samuelson’s constant calls to mend our ways — such as when he would argue, with quite a few others in this particular case, that U.S. Social Security was unsustainable — were but a thinly disguised form of fiscal alarmism.

Whatever others peoples’ concerns, however, it was clear that Mr. Samuelson would always err on the side of doing the fiscally prudent thing, even if it wasn’t politically or personally convenient or endearing.

So it came as a complete shock when he recently called for the Bush tax cuts to be extended for all income earners. People outside the United States may be surprised to hear it, but there is a big debate underway in Washington and all across the country about extending the tax cuts even for people with more than $250,000 in annual taxable family income.

Imagine you live in a country like Germany, where the top marginal tax rate kicks in at a miserly €55,000 a year. Mind you, Germany's economy is doing quite well amid the current economic troubles, including in terms of low unemployment levels.

People there, for sure, are concerned about the high levels of taxes they do pay. But they would find it hard to believe that, for a country whose finances are basically as much out of whack as those of the United States, people with incomes over $250,000 a year would put up such a fuss about paying more taxes.

At a maximum marginal tax rate of 35%, they are viewed as having little to complain about — and must be in a position to pay more into the public tiller to help balance the nation’s books.

But even quite a few Democrats, including in the House of Representatives which, in contrast to the U.S. Senate, was originally conceived as representing the economic interests of the less wealthy classes, feel the United States cannot afford to restore taxes on the wealthy to Clinton-era levels.

Given the current state of the economy, they argue, doing so would undermine the confidence levels of these crucial individuals, whose are supposedly already rattled by President Obama’s focus on more spending and regulation.

Worse, Mr. Samuelson claims, raising taxes on the rich would cost 770,000 jobs, something which the nation clearly cannot afford. And he points to the need to weigh more government revenues on one side against the need to preserve people’s confidence levels, finding the latter should have the upper hand in this case.

What is stunning about this turn in the debate is that it reveals several things. First among them is how important campaign finance is for the U.S. political process with regard to adopting specific policy positions in the public debate.

Clearly, individuals with incomes over $250,000 are a key source of campaign contributions for both parties.

But even if one wanted to argue that campaign finance were irrelevant, the argument still stands. After all, the other major developed economies, all of which have tax levels less lenient for well-to-do people than the United States, do manage to survive — and even thrive.

In none of them does anyone claim that the current period is a time to provide relief for all income groups equally. The widespread consensus is that there are some households who are in a better position to shoulder their share of fiscal contributions.

But what comes as much more of a surprise to non-Americans is the fact that Mr. Samuelson, as do so many other journalists (many of whom have a household income exceeding $250,000), claims that any tax increase at this stage would be counterproductive.

It appears as if the animal spirits of the upper-income echelons in other countries are built a bit more sturdily than in the United States, where perseverance and continued success seem to be dependent on favors paid out of the tax tiller.

What is so striking about this Keynesianism of the Upper Classes is that the higher income groups already benefit from many attractive features of the U.S. tax code, all of which ease their fiscal “pain” considerably.

For evidence, just consider two prominent policies — the mortgage interest deduction (which allows a U.S. taxpayer to claim tax relief for interest paid on mortgage debt of up to $1.1 million) and the ability to salt away a significant amount of pre-tax income for one’s retirement. While the economic benefits of these policies are available to all Americans, they are particularly beneficial for a rather small group of Americans.

Altogether, in 2009 the U.S. government spent nearly $400 billion, mostly through tax breaks, to promote home ownership, retirement savings and other activities that build wealth. More than half of this spending benefited the top 5% of taxpayers (according to a recent study sponsored by the Annie E. Casey Foundation and the Corporation for Enterprise Development).

What these numbers make plain is that, quite independent from arguing for continued tax breaks, the $250,000-plus club already benefits most handsomely from what can only be labeled as Keynesianism for the upper classes.

To extend this regime even further at this juncture is also politically dishonest, for the Democrats in Congress and columnists like Mr. Samuelson alike.

Or, in the most egregious case, for Peter Orszag, President Obama’s former budget director, who argued for an extension of the Bush tax cuts for all as soon as he left the White House. Here again, one can only assume that his pocketbook and financial needs and desires dictated his change of mind.

The erstwhile budget czar made professionally unrelated headlines while in high government office for his propensity to go woman-hopping, which resulted in a costly divorce on the one hand and hanging with well-endowed socialites on the other.

With so much confusion brewing inside this supposedly sober-minded man, it is little wonder that his policymaking positions evidently are a bit confused.

Whatever the near-term political future holds, nobody — not Mr. Orszag nor Mr. Samuelson — foresees an environment where the prospects for more rationality on fiscal policy in the U.S. Congress are going to improve after the November 2010 mid-term elections.

If anything, the odds are that, in a more divided government, fiscal gamesmanship and irresponsibility will become even more pronounced. Arguing for an extension of the tax cut for all earners would have some credence if it were likely that a more Republican Congress would vote for a return to previous, higher tax levels imposed on its core constituency.

Nobody believes that is possible. And a compromise, extending the cuts for now, but revoking them at least for upper-income earners at a date certain and binding in the future, is more than the U.S. political system can deliver.

In the meantime, we are left with the conclusion that Mr. Obama is increasingly being turned into a ready-made piñata by most Americans. Whatever happens to them, just blame the president.

While such a reaction is at least understandable on the part of those who are out of work, it becomes laughable to seek to prevent a return to more realistic ways of balancing U.S. books by claiming that the well-to-do cannot afford a return to previous tax rates.

The rest of the world must indeed wonder what kind of ninnies these people are, given that their counterparts almost everywhere else manage to have a fulfilled and professionally satisfying life even while paying much higher taxes than Americans.

In the end, they are left with a very unwelcome insight. Whatever the merits of the massive bouts of Keynesianism the United States has resorted to in the aftermath of the financial crisis, the way it works in the United States is to apply fiscal Keynesianism all along the income scale.

Under that regime, the extension of unemployment benefits and fiscal transfers to states and municipalities to keep teachers and the like employed is accomplished by returning the favor to those who are not suffering.

Making sure that those not affected by economic calamities receive extra fiscal consideration themselves, via a wholesale extension of the Bush-era tax cuts, may be a rational choice in terms of the domestic political economy. But it remains an irresponsible form of fiscal — and therefore public — policy.

It is one thing for the economic analysts on Wall Street to promote this form of fiscal responsibility. Everybody knows that they are paid to be relentless hypesters, albeit in the cloak of sober economic analysis.

But for people like Messrs. Samuelson and Orszag — both of whom have made a reputation based on being fiscal sourpusses — to choose to compete with Wall Street economists, while pretending that the choice for consolidation ought to be made later, is intellectually dishonest at best.

And one final note on the state of U.S. business and opinion journalism — and the inherent lack of transparency. It would seem to be fitting for editors to require reporters, columnists and TV “analysts” weighing in on the $250,000 debate from here on out to footnote their reports, analyses and columns with a declaration as to whether or not the writer’s combined annual household income exceeds $250,000.

If that came to pass, one would be surprised to find how many of these folks are doing little objective analysis — and are, to a disturbing degree, using their public platform to talk their pocketbook.