As equity markets continue their wild swings while the credit markets signal distress, Congress will make another run at the financial sector bailout this evening.
This time the Senate will try. The new package retains the core of the bailout — authority for Treasury to purchase hundreds of billions of dollars worth of troubled mortgages and other assets — while adding an increase in FDIC insurance levels from $100,000 to $250,000, hurricane relief, and the Senate-passed tax extender package.
The goal is for the Senate to pass this package with a strong vote and put new pressure on House members of both parties to support the bailout. The House needs at least 12 members to change their vote and support the package.
We are hearing that a significant number of House Republicans are prepared to support the bailout this time around. Those votes will be needed. The Senate extender package that passed the Senate 93-2 has focused opposition on the House side, including the caucus of moderate Democrats known as the “Blue Dog” coalition.
Blue Dogs oppose passing tax provisions without offsets, but they voted 26-21 for the failed bailout on Monday. How many of those 26 will switch and vote against this expanded package? Will increased Republican support be sufficient to offset Blue Dog defections?
House Leadership thinks it will, but then, House Leadership thought they had the votes on Monday too.
Effective Tax Rates
The Tax Policy Center has a new study comparing the effective tax rates under the Obama and McCain tax plans. According to the Center, the effective tax rate for taxpayers making more than $1 million stays the same under McCain (34 percent) but rises dramatically under Obama (45 percent if you include his payroll tax proposal).
We have pointed out in the past that fully one-third of all business income in this country is subject to the top two individual tax rates. Raising the effective tax rate on that income from 34 to 45 percent is going to harm small business creation and growth.
As Economist Greg Mankiw points out in his blog, higher tax rates also mean more dead weight loss to the economy, even if lower income taxpayers see their effective tax burden decline.
The deadweight loss of taxation rises roughly with the square of the tax rate. As a result, if one person sees the marginal tax rate fall from 20 to 15, while another sees it rise from 30 to 35, the average marginal tax rate is unchanged, but the deadweight loss increases.
In non-economist speak, that means a revenue neutral plan to balance tax cuts and higher government payments for low-income families with rate hikes on upper income families will result in less economic activity overall. That means less capital for investment and fewer jobs for workers.
Signs of recession are every where right now. The last thing Congress should consider is a hike in tax rates.