Monday, March 07, 2005

Uphill Both Ways - Pushing Permanent Tax Cuts

Buried deep within this Washington Post story is the point which answers the question of whether to make the Bush tax cuts permanent.

Nicolle Devenish, a top Bush adviser, said the tax cuts enacted in Bush's first term jump-started the economy and are ample to keep it humming, as long as Congress makes them permanent. "We cut taxes when the economy needs it," she said. "Recent [gross domestic product] figures and job stats show a healthy, growing economy. For that reason we strongly believe the tax cuts must be made permanent so we don't backslide."

This is no easy task for Bush, especially in the Senate. Several Republicans are voicing opposition to making permanent some or all of the first-term cuts, which include reductions in tax rates on income, dividends and capital gains. To hold down the cost of the cuts to $1.7 trillion, Republicans designed the tax cuts to expire no later than 2010. Extending the 2001 and 2003 cuts for five years beyond 2010 would cost more than $1 trillion, according to White House figures.
Bush made his tax cuts palatable by promising that they would expire on a specific timetable. Of course, no sooner did he sign them into law than he began pushing to make them permanent. Fine. This reveals that the various rationales for introducing the cuts in the first place were never more than that: rationales. For Bush, the tax cuts were never a means to a particular end. They were an end unto themselves. Ms. Devenish's contorted logic, assuming the quote conveys her meaning accurately, illustrates this point perfectly. "We cut taxes when the economy need it," she says, only to add that this is why the cuts must be made permanent. In other words, whether there be feast or famine, the economy always needs tax cuts. This is not surprising. Ideological conservatives believe the only time to stop cutting taxes is when there are no more taxes to cut.

When empiricism, rather than ideology, is your guide, there clearly are times when cutting taxes is foolhardy. When conducting a war, for example, responsible politicians should consider the need to fund the enterprise. Reducing government revenue during a war is questionable policy at best.

With tax cuts, as with the current debate over Social Security privatization, the president realizes that pure conservative ideology is a tough sell to the constituents of the institution in question. The constituents of Social Security are concerned about the loss of their insurance policy against poverty in old age. Therefore, privatization must be sold as a means of "saving" Social Security. He would not get very far by arguing the principled conservative position which is that the government-funded pension program should not exist in the first place.

During the initial tax cut debate, the constituency included lawmakers and the people who elected them. They had to be reassured that the tax cuts were necessary and that they would not interfere with the government's ability to provide the services that Americans citizens need and want.

The president's first tax cut rationale was the Clinton budget surplus. The existence of the surplus, he insisted, demonstrated that the American people had been overcharged. It wasn't the government's money, it was the people's money. Time to give it back.

Later, with the economy in recession and the deficit growing, Bush invoked supply-side theory to argue that tax cuts would spur business investment and increase government revenues, thereby helping to reduce the deficit if not restore the surplus.

To address lawmakers' obvious concerns about expanding the deficit by reducing revenue in the immediate term, the cuts were set to expire. This was a significant point. Consider the testimony of Alan Greenspan in January, 2001 as Bush made the case for using tax cuts to eliminate the surplus.

In general, as I have testified previously, if long-term fiscal stability is the criterion, it is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases.
If the listener accepts the idea that surpluses are bad and that government spending is bad, then Greenspan's comments make sense. However, the Fed chairman continued.

... history illustrates the difficulty of keeping spending in check, especially in programs that are open-ended commitments, which too often have led to much larger outlays than initially envisioned. It is important to recognize that government expenditures are claims against real resources and that, while those claims may be unlimited, our capacity to meet them is ultimately constrained by the growth in productivity. Moreover, the greater the drain of resources from the private sector, arguably, the lower the growth potential of the economy. In contrast to most spending programs, tax reductions have downside limits. They cannot be open-ended (emphasis added).
Certainly, the behavior of Bush and the Republican-led congress demonstrates the truth of Greenspan's analysis of "the difficulty of keeping spending in check."

Bush recently requested an additional $82 billion for the Iraq war. See the running total.

We know now that the cost of the administration's Medicare drug benefit will be at least $700 billion, rather than the original figure of $400 billion.

Bush signed into law a farm subsidy bill with a 10-year cost projection of $171 billion.

In fact, this president has not vetoed a single spending bill. Add to all this the multi-trillion dollar cost of transitioning Social Security to private accounts. In this light, any call for making the tax cuts permanent sounds insane.

The president, however, is pursuing the ideological goal of cutting taxes for the sake of cutting them. Never mind the promise that they would expire someday.

No wonder some Republicans who have to run for re-election, to say nothing of actually running the government, are adopting a more pragmatic stance toward tax policy. Standing on principle is one thing. Standing on political quicksand is something else entirely.