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Tuesday, April 22, 2008

Budgetary Bait and Switch

Bruce Bartlett and I disagree about the size of government. He would starve the beast, I would want it healthy and thriving, but I have no disagreement with his view of the general lack of character Republicans have displayed on the budget issue:

The GOP's bait-and-switch tax strategy, by Bruce Bartlett, Commentary, LA Times:  It is an article of faith among Republicans that tax cuts are the cure for every problem the economy faces, and that tax increases are the equivalent of economic poison. Any hint by Democrats that the current administration's tax cuts should be revisited in light of changing economic or fiscal conditions is met with charges that they are proposing the largest tax increase in history.

The truth is that President Bush's tax cuts didn't do much good for the economy; they were mostly giveaways to GOP political constituencies and were little different conceptually from pork-barrel spending...

The fact is that the massive tax increase Republicans claim the Democrats are proposing is entirely the result of the GOP's ... policies. Rather than expend the effort to make their tax cuts permanent in the first place, they attached expiration dates to every major provision. ... The alleged tax increase that would result is simply a consequence of the tax system returning to what it was before 2001...

In other words, no one is proposing new taxes... It is simply a matter of allowing the law that Republicans enacted to follow the course that they chose in the first place.

Republicans respond that they ... didn't have the votes to enact permanent tax cuts, so it was temporary cuts or nothing. This is not true. They could have made them permanent, but that would have required bipartisanship and more political capital than Republicans were willing to spend. So they took the easy way out, figuring that Democrats wouldn't dare oppose extending the tax cuts when the time came, lest they be accused of favoring a vast tax increase.

But this isn't even the worst of the Republican dishonesty. That goes to projections from the Congressional Budget Office showing a sharp reduction in budget deficits after 2010. But these lower deficits result largely from the expiration of the tax cuts and the higher revenues that would result. Thus, Republicans are trying to ... blame Democrats for advocating higher taxes while implicitly using those higher taxes to make future deficits smaller.

This sort of political game may be fun for Republicans who think that they have boxed Democrats into a corner. But this game has had real economic consequences. Because the tax cuts are not permanent, their economic impact has been severely diminished. All economists know that permanent tax changes have far more effect than temporary ones because people won't change their behavior significantly unless they have some assurance that the tax regime will be in effect for the long term. ...

There is little doubt that the economy would have been stronger with permanent tax cuts. But that would have meant fewer tax cuts and thus fewer opportunities to buy votes. It also would have forced Republicans to deal with the true budgetary consequences of their actions. ...

Tax policy is an important campaign issue, and it would be good to get agreement on the post-2010 tax code as soon as possible. Current law makes it impossible to plan for the future with regard to taxes. Whatever is done should be done permanently to the greatest extent possible.

He believes tax cuts promote economic growth to a much larger degree than I do, but there is some common ground. He wants taxes to be efficient, i.e. to promote maximum growth given the size of government that taxes must support, and I do too. Thus, to the extent that we can make the tax code more efficient through budget neutral tax changes without compromising equity, we shouldn't resist doing so. A budget neutral shift in taxes can promote economic growth in the same way that a tax cut does if the shift eliminates or substantially reduces economic distortions, though as I noted above tax changes are not the first place I would look if enhanced growth was the goal.

What this means is that instead of letting all the Bush tax cuts expire, there is the possibility of retaining some of the existing tax cuts while enacting new ones to replace them so that the revenue implications are the same, but the economic and equity properties are the same or better. However, given that this would be played as Democrats enacting new taxes, the politics that are involved make such a shift in taxes unlikely even though it would bring about the very thing Republicans claim they want, higher economic growth. I think Bruce Bartlett is honest in his belief that permanently lowering taxes has a significant effect on economic growth and that this belief corresponds to his small government philosophy, my difference on this issue is over the magnitude of the growth effect relative to what you must give up in terms of key government programs when taxes are cut. But for many Republicans, it seems as though the growth argument is merely an excuse to attain their real goal, smaller government, and their support of pretty much any tax cut that is proposed is evidence that growth is not the primary concern. Paul Krugman puts it this way:

Since the 1970's, conservatives have used two theories to justify cutting taxes. One theory, supply-side economics, has always been hokum for the yokels. Conservative insiders adopted the supply-siders as mascots because they were useful to the cause, but never took them seriously. The insiders' theory - what we might call the true tax-cut theory - was memorably described by David Stockman, Ronald Reagan's budget director, as "starving the beast." ... Starve-the-beasters believe that budget deficits will lead to spending cuts that will eventually achieve their true aim: shrinking the government's role back to what it was under Calvin Coolidge.

And when taxes have been cut recently, who has benefited most from what is "little different conceptually from pork-barrel spending" is worth thinking about as well.

    Posted by on Tuesday, April 22, 2008 at 02:34 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (35)


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