Paul Krugman has questions for the editors of the Wall Street Journal:
Krugman's Money Talks: Tax Cuts Without Representation, Commentary, NY Times: Readers respond to Paul Krugman's Feb. 10 column, "The Vanishing Future" ...
B. Moss, New York: Here are two excerpts from recent Wall Street Journal edit pages that go to the heart of Bush supporters' thinking:
“The latest chapter of this story the Reagan Revolution is the 2003 income and investment tax cuts enacted by the current President Bush. As in 1981, opponents insisted those tax cuts would harm the economy by increasing the deficit and driving up interest rates. But in the two and a half years since those tax cuts passed, the economy and tax revenues have both surged.”
[In a separate editorial]
“… since the investment tax cuts of 2003 were one of the triggers for the surge in asset values, business investment, and job growth, extending the 15 capital gains and dividend tax rates should be Congress's first order of business. Opponents of those lower rates will moan about the deficit, but the truth is that those tax rates corresponded with a record $284 billion increase in tax revenues in Fiscal Year 2005 and a $100 billion decline in the budget deficit.”
What is your answer to this line of reasoning?
Paul Krugman: I thought it might be worth saying something about the Wall Street Journal-type argument that, since the economy grew after the 2003 tax cut, tax cuts are vindicated, and should be made permanent.
First point: if we give tax cuts credit for whatever happens to the economy in the next two years, what can we say about the 2001 tax cut? Employment actually dropped over the two years following that cut. So I guess we should say that the 2001 cut was bad for the economy, and should be allowed to expire — maybe even cancelled ahead of time. Right? Hello, WSJ, where are you?
Bear in mind that the 2001 cut was the big one; most of the extra cost from extending the cuts comes from the 2001 legislation, not the 2003 legislation. So using growth after 2003 to argue for making the tax cuts permanent, when most of the cost of doing that comes from a tax cut that clearly did little for the economy, is a form of bait-and-switch.
But seriously: yes, the economy grew after 2003. The overwhelming source of that growth was the housing boom — which had nothing to do with either the 2001 tax cut or the 2003 tax cut.
More generally, sometimes it may make sense to cut taxes to boost the economy when it's depressed. But you have to pay for that by raising taxes or cutting spending when the economy is doing well. Otherwise, you're perpetually running up government debt, and eventually there will be a fiscal crisis. And the Bushies have apparently calculated that as long as that crisis is on someone else's watch, they don't care. [Column here.]