« The Fed's Monetary Policy Meeting: Policy Stays on Hold | Main | links for 2011-06-22 »

Wednesday, June 22, 2011

Un-Spin the Budget

Earlier today, Paul Krugman took on the false claim that the Reagan tax cuts paid for themselves. But, of course, that's not the only time the claim was made. Here's Krugman in July of 2005 taking on a similar claim with regard to the Bush tax cuts:

Un-Spin the Budget, by  Paul Krugman, Commentary, NY Times: ...The Congressional Budget Office suggests in its latest monthly budget review that the deficit in fiscal 2005 will be "significantly less than $350 billion, perhaps below $325 billion." Last year the deficit was $412 billion.
The usual suspects on the right are already declaring victory over the deficit, and proclaiming vindication for the Laffer Curve - the claim that tax cuts pay for themselves, because they have such a miraculous effect on the economy that revenue actually goes up.
But the fact is that revenue remains far lower than anyone would have predicted before the tax cuts began. In January 2001 the budget office forecast revenues of $2.57 trillion in fiscal 2005. Even with the recent increase in receipts, the actual number will be at least $400 billion less.
And nonpartisan budget experts, such as Ed McKelvey of Goldman Sachs, believe that even the limited good news on the budget is a temporary blip, not a turning point. Douglas Holtz-Eakin, the director of the Congressional Budget Office, warns us to take the new revenue figures with a "grain of salt," and declares that "if you take yourself to 2008, 2009 or 2010, that vision is the same today as it was two months ago."
A close look at the tax data explains why these experts believe that we're seeing a temporary uptick in revenues, not a sustained change in the trend. Taxes that are closely tied to the number of jobs and the average wage, such as payroll taxes and income taxes automatically withheld from paychecks, aren't showing any big pickup. This confirms other data showing that the economy as a whole is, if anything, doing worse than one would expect at this stage of an economic recovery.
It turns out that all of the upside surprise in tax receipts is coming from two sources. One is tax payments from corporations, up both because last year corporate profits grew much more rapidly than the rest of the economy and because the effective tax rate on corporations went up when a temporary tax break, introduced in 2002, expired. Both are one-time events.
The other source of increased revenue is nonwithheld income taxes - taxes that aren't deducted from paychecks but are instead paid by people receiving additional, nonsalary income. The bounce in nonwithheld taxes probably reflects mainly capital gains on stocks and real estate, together with bonuses paid in the finance and real estate industries. Again, this revenue boost looks like a temporary blip driven by rising stocks and the housing bubble.
In other words, we're still deep in the fiscal quagmire, with federal revenues far below what's needed to pay for federal programs. And we won't get out of that quagmire until a future president admits that the Bush tax cuts were a mistake, and must be reversed.

I wonder if the "usual subjects" who proclaimed "vindication for the Laffer Curve" would admit now that they were wrong. Doubtful, even though it's abundantly clear they were. Krugman is right that the revenue boost was "a temporary blip driven by rising stocks and the housing bubble."

As for getting out of the "quagmire" when "a future president admits that the Bush tax cuts were a mistake," it turns out admitting it isn't quite enough. Obama has admitted it, but hasn't done anything about it.

We're at the point where courage from the president means finding a definition of tax increases that Republicans can argue aren't really tax increases, and then asking what else Democrats need to give up to strike a deal on immediate job-killing deficit reduction. Instead of taking a chance of killing the recovery and the jobs that come with it, what we need is short-term stimulus and a plan to address long-run budget problems. Short-run stimulus is not going to happen, and about the best we can hope for is that Congress makes immediate cuts that are mostly accounting tricks rather than actual reductions in spending. Given their propensity to do this, perhaps there's some hope along these lines.

As for the longer-run, why not end the Bush tax cuts two years from today (or at some point in the future) for anyone with incomes above a particular threshold? Put it up for a vote tomorrow to see who is actually for deficit reduction. You'd hear the objection that the expectation of future taxes will kill innovation and economic growth today, but if there's evidence for this at all, the effects are relatively minor (and all taxes have costs associated with them, so the question is really which taxes are the most equitable and impose the least burden). That these objections find an audience shows the degree to which the ideas embedded in the Laffer Curve have taken hold.

    Posted by on Wednesday, June 22, 2011 at 02:34 PM in Budget Deficit, Economics, Fiscal Policy, Taxes | Permalink  Comments (29)


    Comments

    Feed You can follow this conversation by subscribing to the comment feed for this post.