Perpetual Economic Motion from the Tax Cut Machine?

Bloomberg's John M. Berry wonders when the administration will adopt a reality based view of tax policy and the budget deficit:

Bush, Congress Make a Farce of the Debt Ceiling, by John M. Berry, Bloomberg: The scary, totally unfunny debt ceiling farce is playing once again in Washington. With the federal government debt about to hit the $8.18 trillion legal limit, the Treasury Department last week suspended sales of special securities bought by state and local governments so that regular auctions of Treasury bills and notes could continue. More such steps undoubtedly will have to be taken in coming weeks until Congress screws up the courage to increase the debt limit. At some point next month, Treasury will run out of such stop-gap measures and regular securities auctions may have to be postponed. ...

The problem, of course, is that voting to increase the debt ceiling is approving profligate behavior, even though they have little choice because of earlier tax and spending decisions. The reality is that taxes and spending are badly out of whack, and hardly anyone -- certainly neither President George W. Bush nor Vice President Richard Cheney -- wants to admit it. ... Instead, Bush continues to push Congress to extend earlier tax cuts that lowered the maximum personal income tax rate on dividends and long-term capital gains to 15 percent. Those cuts are set to expire at year-end.

Meanwhile, Cheney ... called for extending not just that pair of rate cuts, but all of the Bush-era cuts that under current law would expire in 2010... "...tax relief is set to expire in the next several years. So if we do nothing, Americans will face a massive tax increase. That would be counterproductive, it would be irresponsible, it would be bad for the economy. Congress needs to make the Bush tax cuts permanent,'' he said.

Irresponsible? Bad for the economy? Not nearly as irresponsible as Cheney's claim in the speech that "despite forecasts to the contrary, the tax cuts have translated into higher federal revenues.'' ... In fact, total federal receipts in fiscal year 2005 were higher than in each of the prior two years. On the other hand, receipts as a share of gross domestic product were only 17.5 percent last year. Except for fiscal 2003 and 2004, that was the lowest share at any time since 1992. And since most of the cuts involved personal income taxes, the more telling comparison is in those receipts as a share of GDP. In fiscal 2005, individual income tax receipts were equal to just 7.5 percent of GDP. Again, except for the prior two years, that was the lowest share in 29 years. ...

Nevertheless, the administration is greatly enamored with the notion that tax cuts can more or less pay for themselves. For instance, the fiscal 2007 Bush budget would create a new Dynamic Analysis Division within the Treasury Department, at a cost of more than a half-million dollars, to analyze major tax proposals along those lines. Analyze? Why waste the money? ...

What if you don't want to increase growth because the economy might be nearing full employment? That's more than a passing concern at the Federal Reserve right now ... If tax cuts were a good way to stimulate the economy after the 2001 recession hit, might raising taxes be a good way to help restrain it when needed? Certainly the tight fiscal policies and budget surpluses of the late 1990s helped the Fed keep interest rates lower than they otherwise would have been.

And then there is the fundamental issue of balancing revenues and spending. At the moment, investors and analysts seem largely unperturbed by large continuing deficits, presumably because other forces are helping keep interest rates low. That's not likely to be the case indefinitely, and Federal Reserve Chairman Ben S. Bernanke gave this warning in his congressional testimony on Feb. 15.

"I am concerned about the prospective path of deficits,'' Bernanke said. "I believe that that does reduce national savings and therefore imperils, to some extent, the future prosperity of our country and increases the burden that'll be faced by our children and grandchildren.'' Bush and Cheney should keep it in mind.