Sink's stance on extending all of the Bush tax cuts demonstrates fissure within Democratic party

Recently economist Mark Zandi, one of the most respected economists quotes by both political parties, also came out in supporting of maintaining the tax cuts for a few more years.  In an op-ed in the New York Times last month, Zandi wrote:

The prudent middle ground would be to forestall any tax increases in 2011 and to phase in higher rates on upper-income households in 2012, when the economy will be on firmer ground.

However, another respected economist, Dean Baker from the Center for Economic and Policy Research, disagrees with Zandi, calling such compromise options "smoke and mirrors.  Baker is quoted in Talking Points Memo today:

"If you're going to give people money during hard economic times, he says, it should be because they're likely to spend it. In economic-speak, that's their marginal propensity to consume.

"The marginal propensity to consume does matter, but even if high income households have a low MPC (which they do), a small change in the MPC will have on outsized impact on consumer spending since this group accounts for such a large share of that spending," Zandi says.

"Essentially he is agreeing that their MPC is low, but saying that tax cuts will make them happy so they might spend a lot," Baker says. "That is not the way economists, including Zandi, ordinarily do economics."

Getting back to CFO Sink.  Her team is extremely concerned that Rick Scott will paint her as a tax and spend Obama liberal.  He's already done that and will continue to do so, but by coming out against repealing all the tax cuts this year, she effectively can tell voters that she doesn't support any new taxes.  And the fact is, there are other Democrats joining her nationally.  How far the President and his team will want to push this will be interesting, as they try to tackle to the political center as the midterms approach.

Florida Democratic gubernatorial candidate Alex Sink made news Tuesday when she said that she favors extending all of what are known as the "Bush tax cuts," a major issue heading into the fall elections, as currently those tax cuts are set to expire at the end of this year.

Sink joins most of the Republican party establishment in that view, but not the Obama administration or many other Democrats, who want the rates to go up - or actually back to where they were during the Clinton administration - for those individuals making more than $200,000 a year, or couples making $250,000 (the marginal rate would go from 33% to 36% for those making up to #373,000 annually, and from 35% to 39.6% for those making more than $373,000).

The momentum seems to be leaning Sink's way.  On Tuesday Peter Orszag, the recently departed director of the White House Office of Management and Budget, penned an op-ed in the New York Times (where he now will be a contributing editor) in which he also now is opposing his former boss, saying that the tax cuts for the richest 2% of the country should stay in affect until 2013.

Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets don’t seem at the moment to view the budget deficit as a problem — take a look at the remarkably low 10-year Treasury bond yield — there is little reason not to extend the tax cuts temporarily.

Oszag is extremely aware that there will be pressure to make those cuts permanent, which he acknowledges would be irresponsible, especially since we know that they would cost nearly $700 billion annually.

The beauty of extending the tax cuts for only two years is that canceling them doesn’t require an affirmative vote. It happens by default, so Congressional deadlock works in its favor. And it would essentially solve our medium-term deficit problem, reducing the deficit by $200 billion to $350 billion a year from 2015 to 2020.

Like all plans, this one isn’t perfect. Some may complain that higher marginal tax rates, even if deferred until 2013, will cripple small businesses and economic activity. It’s hard to believe, however, that effectively returning the tax code to its 1990s form would lead to economic catastrophe, especially when many leading Republican economists — including Alan Greenspan and Martin Feldstein — agree that we can’t afford to continue the tax cuts forever. More troubling, middle-class and lower-class families would be saddled with higher taxes. That’s a legitimate concern, but also a largely unavoidable one if we are to tackle the medium-term fiscal problem.

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