Three Cheers for Dysfunction?

It’s becoming conventional wisdom that the president “won” on the fiscal cliff (if you can call half his original revenue request a win) because doing nothing – Congress’s preferred response to any crisis – would have led to automatic tax increases as the lower Bush rates expired. By contrast, Obama “lost” on the sequester because leverage had shifted to the GOP; the default was spending cuts, not tax increases, and what Republican doesn’t love a spending cut? Obama severely overestimated the GOP’s desire to protect the Pentagon and just as radically underestimated its single-minded pursuit of smaller government. (The sequester didn’t touch entitlements, and thus did little to solve the debt “crisis,” but as Paul Krugman constantly reminds us, Republicans today don’t care about deficits. They care about lower taxes.) If you accept this version of history, Obama is in a bad position. The GOP has him over a barrel; inaction on the sequester gave conservatives their spending cuts, and they have little incentive to negotiate a deal on entitlements with a president unwilling to solve the problem solely through further cuts. Many Democrats feel that he should have pushed for more revenue prior to the fiscal cliff, even at the risk of letting tax rates go up on the middle class. “Thinking they’d have a second bite of the apple was a real mistake,” former CBO director Robert D. Reischauer told the New York Times. (The Times also notes, however, that other Democrats like Nancy Pelosi weren’t helping the administration’s bargaining stance by floating proposals to raise even less revenue by limiting tax increases to income over $1 million.)

At Washington Monthly, Ed Kilgore points to a possible silver lining in the president’s miscalculation. According to an article by David Kamin in the magazine’s March-April issue, inaction may once again save us. Just as doing nothing to forestall the fiscal cliff would have led to a massive influx in revenue that even the president acknowledged would hurt the economy, doing nothing to index tax brackets for inflation will also lead to greater revenues. Staying the course on the Affordable Care Act will do the same. Kilgore summarizes:

[T]here are two other ways in which revenues may well automatically increase in coming years if “nothing happens” to break the current partisan gridlock in D.C. One is the natural “bracket creep” that will be exacerbated if income equality continues to grow. The other is Obamacare’s tax on “Cadillac” health care plans, which will gradually act to reduce the tax subsidy on employer-based health insurance. Combine these two ingredients of current law and slowly simmer them over time, and you’ve got some serious deficit reduction.

He also quotes directly from Kamin’s piece, which is worth reading in full:

Taken together, this “automatic” revenue growth would reduce the long-term deficit, as projected by the CBO, by roughly one-third over the next seventy-five years. Again, that’s with no congressional action whatsoever. Moreover, it’s based on what’s probably too pessimistic a scenario that, among other things, assumes no ramp-down in the wars abroad, a return to higher historical levels of both defense and nondefense annual appropriations, and a partial repeal of Obamacare’s controls on health spending.

Of course, the downside here is that, as desirable as new revenues may be, achieving them in this manner relies on the continuing dysfunction of Congress – which isn’t exactly a plus for the country as a whole. The extent to which policy has been driven over the past year by politicians’ sheer refusal to act – to cast courageous votes that might earn them a primary challenge, to choose compromise over ideology – is amazing. Even the sequester – $1.2 trillion in cuts designed to be so repulsive to both sides that the “supercommittee” would be forced to come to an agreement – wasn’t enough to cure the Republican allergy to tax increases or convince the president to replace his “balanced” offer with a complete cave.

While it’s nice that Washington Monthly can find a bright side to the gridlock, and to know that the next time Congress can’t get it’s act together, the default path will favor Democrats and not Republicans, it’s also profoundly depressing. Just as the sequester-related cancellation of White House tours has taught groups of disappointed schoolchildren more about the realities of government — that it’s less the paragon of democracy envisioned by the Founders and more an institution led by very human, frequently bickering adults — than they ever would have learned in a stroll through the East Room, the sequester has taught the left something important about the merits of even small, dubiously secured achievements. Conservatives have openly rooted for gridlock for years out of the belief that the government which governs least governs best. To many Republican thinkers, more bills being passed by Congress simply means more regulations and greater federal power. Dysfunction throws a wrench in the gears of the leviathan state that they would rather see grind to a halt in the first place. Democrats, who generally favor a more activist government, are the ones who benefit from a functioning Congress able to pass bills and fund programs. For liberals, there is something almost distasteful in looking for a silver lining in the brokenness of our political system; we tend to see government as good, and thus want it to work well. Kamin’s insight suggests that perhaps that distaste can be overcome. We too can learn to love gridlock. Less certain, however, is whether we should.

CNN’s Expiring “Better Press Corps” Membership

With depressing regularity (and an inattentiveness to comma usage), economics blogger Brad DeLong asks, “Why oh why can’t we have a better press corps?”

Good question. Today’s prime offender is CNN, which has a post on its Political Ticker blog that mimics, whether deliberately or not, conservative propaganda about tax increases. This toxic mix of sloppy journalism and economic illiteracy reinforces the Republican narrative — epitomized by Sen. Jon Kyl’s assertion that the president has a “sort of fixation with raising taxes above anybody making more than $200,000 a year” — that President Obama wants to “soak the rich.” The supposedly centrist news network writes (with the problematic bits highlighted):

The president campaigned on a message that tax cuts should be allowed to expire on households making more than $250,000, while Republicans have pushed for all Americans to benefit from continued tax cuts. In the ongoing negotiations, Congress has yet to come up with a plan that firmly sets a threshold figure.

Wrong. All Americans would benefit from the continued tax cuts that Obama is proposing. Whatever the merits of maintaining Bush-level tax rates for household (married, filing jointly) income under $250,000, it’s not just the “middle class” that would reap the benefits. The first $250K earned by any couple, rich or poor, would be taxed in the Bush-era brackets, which range from 10% for income under $17,850 to 33% for income between $223,050 and $247,000. The new categories, for income above the thresholds of $247,000 and $398,350, would tax the applicable money at 36% (up from 33%) and 36.9% (up from 35%). Neither of these two brackets would affect income below the cutoff points, contradicting CNN’s assertion that all “households making more than $250,000” would see all their tax cuts expire. All Americans would benefit from the continuation of the lower-bracket rates. It’s impossible, after all, to make $1 million without first making $250,000.

Of course, Obama’s own standard phrasing doesn’t help the matter either. When he says that taxes would increase on the top 2 percent, he doesn’t specify that he’s talking about effective rates – the average rates paid by each household. Indeed, high-earning households would pay more if the top rates went up. But they would still benefit from the so-called “middle class” tax cuts, as their first $250K would still be taxed at the preserved Bush levels. It’s more accurate to say that the president thinks some tax cuts should be allowed to expire on households making more than $250K. Or CNN could say that tax cuts should be allowed to expire on income over $250K. But it’s not right to suggest, as Republicans often do, that anyone making a penny over $250K would be hit hard by the president’s proposal, or that those households would see no benefit. If you make a penny over $250K, only that penny is taxed at the higher rates. The rest of your income is taxed at just the same rate as if you’d only earned $249,999. You’re still seeing some perks here.

The Political Ticker post also contributes to the general economic ignorance that afflicts the nation as a whole. The press’ seeming inability to grasp the concept of marginal tax rates has been a bee in the bonnet of progressive bloggers for quite awhile; it most recently manifested itself in the pushback against a Times article in which the reporter failed to point out the inaccuracy of a business owner’s claims about tax increases. Even the Times public editor weighed in on that one. The offending passage, in case you’re interested:

Kristina Collins, a chiropractor in McLean, Va., said she and her husband planned to closely monitor the business income from their joint practice to avoid crossing the income threshold for higher taxes outlined by President Obama on earnings above $200,000 for individuals and $250,000 for couples.

Ms. Collins said she felt torn by being near the cutoff line and disappointed that federal tax policy was providing a disincentive to keep expanding a business she founded in 1998.

“If we’re really close and it’s near the end-year, maybe we’ll just close down for a while and go on vacation,” she said.

In a blog post, public editor Margaret Sullivan agreed that the business owner cited uncritically by the reporter “appeared to believe that if the income went over ‘the cutoff line,’ that all of their income would be taxed at a higher rate. That’s not the case. Only the amount over the limit is taxed at the higher rate.” Sullivan’s verdict? “When someone gets it wrong, The Times has an obligation to set the record straight, right then and there.”

Sadly, it took not a (relatively) well-paid Times reporter but bloggers at new media sites like The Atlantic and The Huffington Post to expose the fallacy. Under the headline “Rich People Who Don’t Understand Taxes Should Be Told So,” Atlantic’s Derek Thompson penned a clarification that the folks at CNN — or at least the CNN intern who crafted the Political Ticker blog post while her superiors were drinking holiday mai tais in Tahiti — would do well to read:

When President Obama says he’s going to raise the top marginal tax rate, the key words there are “top” and “marginal.” According to the president’s plan, every dollar under $250,000 of earned income will enjoy the same tax cut it has today. He’s only pledged to raise taxes on income above that level by about 5%. So, if you make $251,000 next year, your tax bill wouldn’t go up by $12,000. It would go up by $50. A steak dinner, not a small car.

Basically, Kristina Collins is making a miscalculation that’s probably worth tens of thousands of dollars. No wonder she doesn’t want to expand her company.

More broadly, writers at New York Magazine and MSNBC have voiced exasperation at the media’s repeated and constant parsing of Obama’s tax plan – which would impose higher rates on income above $250,000 – in simplistic terms that suggest people making more than $250K would see no benefits. As Thompson notes, even millionaires would be taxed at the same rate as paupers on the first $250K of income. No one – not Warren Buffet, not Warren Buffet’s secretary, not even Sheldon Adelson – would see higher rates on that money. The higher marginal rates apply only to income above the cutoff of $247,000.

Most Americans already don’t understand marginal rates; like the woman in the Times story whose grasp of basic TurboTax principles is frighteningly weak, they think a top rate of 35% means the feds collect 35% of Adelson’s entire multi-million-dollar income. This confusion of effective and marginal tax rates plays into Republican hands by painting Obama’s plan as starkly dividing the country between rich and poor, when in reality “keeping rates low for the middle class” benefits the upper crust as well. For sure, lower rates on the first $250K are worth less, as a percentage of income, for someone whose income is 99% above that level. But it doesn’t mean that the lower rates are worthless. And it doesn’t make CNN’s phrasing any more accurate.

CNN isn’t the only offender here. Politico, which is notoriously more interested in crafting “narratives” (often proved false after reality intrudes in the form of, say, an election that Mitt Romney loses) and pushing the same inside-the-Beltway false equivalence that motivates the billionaires behind Fix the Debt to advocate lower tax rates at the expense of Social Security, also makes the error:

Backed by Obama, Reid has insisted that the lower rates should be allowed to lapse for taxpayers earning more than $250,000 a year, though the president has floated a $400,000 cutoff as a compromise. If there’s no deal, Reid is prepared to push for a vote Monday to extend tax rates for those who earn less than $250,000.

The lower rates would still apply, of course, to taxpayers who earn more than $250,000. They just wouldn’t apply to those people’s income above $250,000. It’s a subtle but crucial difference, though it’s hardly a surprise that an outfit like Politico — which all too often hews to the counterfactual Pete Peterson line that going over the “fiscal cliff” would be bad for deficit reduction — would fail on basic math.

Less excusable is this post from Bloomberg’s opinion section. Coming from a news organization ostensibly dedicated to business journalism, this is particularly irritating. Paula Dwyer seems no less informed about marginal tax rates than the chiropractor in the Times story. Hint to Dwyer: Don’t finish Obama’s quotation for him if your paraphrase mischaracterizes his position:

“If all else fails,” Obama said, the first bill on the House and Senate floors, once a new Congress convenes on Jan. 3, would cut taxes for households earning less than $250,000.

The sloppy language at Bloomberg isn’t restricted to its opinion writers. A news article contains the following distortion:

Republicans and Democrats agree that George W. Bush-era income tax cuts should be extended for the vast majority of taxpayers. Obama and other Democrats want to let the tax cuts expire for the top 2 percent, or married couples earning more than $250,000 a year. Republicans oppose higher tax rates for any income level.

Actually, some of the tax cuts would be extended for all — not just the vast majority — of taxpayers. The top 2 percent would see some, but not all, of their tax cuts expire. The article’s phrasing is more a sin of omission; it’s not technically wrong to say tax cuts will lapse for couples earning over $250K, but it is incomplete.

Some news organizations, however, get it right. It seems silly to give props to the Washington Post and ABC News for the simple fact that they refer to income instead of households when writing about taxes, but on this issue bar is awfully low. Here’s ABC, from a blog similar to Political Ticker — proving, I suppose, that rapid-fire posting is not an excuse for inaccuracy:

Reid’s backup legislation would reflect the Democrats’ side in this quagmire, demanding a tax boost for household incomes greater than $250,000.

And here’s the Post:

Republicans were seeking tax increases only on income higher than $400,000 or $500,000 a year, while Obama wanted to set the threshold at $250,000 a year.

Despite the previous kerfuffle over marginal tax rates, the Times is also clear:

With the Bush-era tax cuts expiring, Mr. Obama and Democrats have said they want tax rates to rise on incomes over $250,000 a year; Republicans want a higher threshold, at perhaps $400,000.

Take note, CNN. That wasn’t so hard, now was it?