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Unclear Message on Taxes   January 25th, 2009
Obama administration talks about increasing taxes... or not       


More observations...

It seems like Obama's economic team is getting a little schizophrenic when it comes to what they want to do going forward.

Previously they had made it pretty clear that they were going to let the Bush tax cuts simply expire (at the end of next year) rather than increase taxes on anyone during a recession. President Obama had also said that we couldn't worry about the deficit for a few years. Now, however, there seems to be a confusing message from Obama's top economic adviser, Lawrence Summers, that the Bush tax cuts may be repealed before then due to concern about the deficit.


While Obama has pledged tax reductions for 95% of households, Summers said Bush's tax cuts must be repealed because the country is facing a severe budget gap and a massive longer-term entitlement spending burden.

"I don't think there's any question they have to be repealed," Summers said. "The country can't afford them for the long run. They have to be allowed to expire. What the timing will be, that's something that's got to get worked out through the legislative process."

There is a case to be made for schizophrenia in the above two paragraphs, specifically as it relates to repealing the tax cuts (which would mean eliminating them before they're scheduled to expire) or letting the tax cuts expire (which happens automatically at the end of next year).

First Summers is reported as saying that the tax cuts must be repealed--which implies that they be eliminated before they expire automatically at the end of next year--because of a "severe budget gap." However, Obama has previously said that we shouldn't worry about deficits for a few years. And increasing taxes during a recession is dangerous.

Then Summers says they have to be repealed because we can't afford them in the long-run--even though the "long-run" for the tax cuts is only until the end of next year since that's when they expire automatically.

Then he says, instead, that they must be allowed to expire--which means they wouldn't be repealed prematurely... they'd just expire automatically at the end of next year.

Then he says the timing is something that has to get worked out in the legislative process--which means he's talking about when they should be repealed because if they are to be allowed to expire then there's nothing that has to be worked out in the legislature: They'll automatically expire at the end of 2010.

I really don't know what to make of the above statements by Summers. If anyone can read the above report--or find the raw transcript of the interview--and make any definite conclusion as to whether he's suggesting that the administration will seek to repeal the tax cuts or simply let them expire, please let me know. Because, to me, what I get out of the above report is that I have no idea what the administration's intentions are regarding taxes.

I'd also comment that, based on the above report, it's not entirely clear that they're talking only about eliminating the Bush tax cuts for the rich. Summers talked about repealing or (letting expire) the "Bush tax cuts." The Bush tax cuts also included significant tax cuts for the middle class and poor. Given Summers' rather unclear statements it's entirely possible he meant only eliminating the Bush tax cuts for the rich. But he didn't say it. So the door was left open to everyone getting a tax increase rather than the tax cut promised to 95% of the taxpayers.

Regardless of what was meant, it would be amazing to watch the administration raise taxes on anyone during a recession. That would amount to a plan consisting of massive spending and raising taxes. That's exactly what President Hoover did during the beginning of the Great Depression and things only got worse . And many liberals believe that the recession of 1937 was caused by Roosevelt suddenly becoming worried about all his deficit spending . Obama may be considering a plan that repeats the alleged mistakes of both Hoover and Roosevelt.

Pretty much all economists on both ends of the political spectrum recognize that raising taxes during a recession is a bad idea. Could President Obama really be considering doing exactly that?

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