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Thursday, March 22, 2007

Want Tax Cuts? Then Pay for Them

Jared Bernstein looks at the differences between the president's budget proposal and the House Budget Committee's proposal for spending and revenue:

Show us the money, by Jared Bernstein, Comment is Free: Well, with both the Democratic House and Senate having weighed in on President Bush's 2008 federal budget, the battle lines are taking clear shape.

Today, the House Budget Committee released its mark-up of the budget resolution, a document that sets broad budgetary outlines and preferences - on spending and revenue targets... In this case, there are some clear lines of demarcation from the president's budget that are worth noticing.

First, on the so-called sunset clause under which the president's tax cuts are due to expire in 2011: they say, if you want to cut taxes, you've got to find the money. (This idea is called pay-as-you-go, or paygo). And second, in some key areas of domestic programmes, most notably healthcare for poor kids, where Bush cuts, the House and Senate Democrats spend.

The part of all this that is sure to get the most attention is the expiration of the Bush tax cuts enacted in 2001 and 2003. Though it's fair to say conservatives never intended for the sun to set, to sell the cuts they had to build in their demise by the end of the decade. Now they go around saying that allowing the cuts to expire would amount to a massive tax increase.

But since it would take new legislation to extend the cuts, Democrats legitimately make the case that to do so would be to enact yet another round of tax cuts. Which brings us to the second point: paygo. ... [P]ay-as-you-go ... mean[s] that any tax cut must be offset with either a tax increase or a cut in entitlement spending. ... But beyond that, it means the tax-cut zombies have a new, big problem.

For years, they have been able to ignore the fiscal implications of their massive tax cuts. They could wave hands and argue that the cuts would pay for themselves ... (even when their own agencies were submitting reports saying that wouldn't happen). Or they could simply ignore the fact that both current (the wars in Iraq and Afghanistan) and looming (healthcare) expenses were going to lead to large and damaging deficits.

In other words, as long as the grown-ups are away, you can have all the guns and butter you want. Well, paygo means the grown-ups are back in the room.

Bush and the Republican minority are starting to get really fired up about all this and are accusing the Democrats of massive tax increases. But ..., if Bush and the Republicans want to extend the cuts, they are going to need to find the money.

Which bring us to a final point. The president does go after entitlements, cutting them by $52bn over five years, and the Democrats are already taking flak for not joining him there. But here's why that is not fair: before this budget discussion even started, the White House ruled out any tax increases to pay for spending priorities.

Under these conditions, the Democrats have to fight their way out of a tight box. Even with the sunsets, vital public healthcare spending will ultimately have to fall. In fact, the president's budget threatens health coverage to more than 1 million children by 2012.

With this resolution, they are essentially saying they are going to take the revenue from the expiring cuts and spend it on their priorities, which include expanding the very child healthcare programme the president is cutting... You want to cut more taxes? Show us the money...

And, from the Center on Budget and Policy Priorities today, "Key Argument Against Applying Pay-As-You-Go To Tax Cuts Does Not Withstand Scrutiny" which will make it even harder for Republicans to argue against the need to pay for any further tax cuts.

I worry that deficit hawkishness will cause the deficit numbers themselves will take precedence over the programs they represent, i.e. that the desire to show progress on the budget deficit will lead to unwise cuts in necessary programs. The current deficit isn't a problem, it's the long-term outlook that we need to worry about, and focus on current deficit numbers is more for show than for real budgetary dough.

There are political gains to be made from deficit reduction in the short-run, and certainly a return of discipline is needed after the excesses of the last few years, but we need to be careful how we go about resolving projected budgetary imbalances and keep in mind that the long-run is the focus. I have much more confidence that Democrats will exercise sound judgment than I do for Republicans, e.g. not cutting taxes on the wealthy if it means giving up health care for children. On this point, Jared Bernstein notes:

True, [Democrats] are keeping mum on big forthcoming budgetary constraints. But when the powers that be are ready to entertain the possibility that there are other ways to deal with the challenge of entitlements - specifically healthcare - than cutting them, the Democrats will come back to the table.

    Posted by on Thursday, March 22, 2007 at 02:30 PM in Budget Deficit, Economics, Taxes | Permalink  TrackBack (0)  Comments (12)

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