Truth and tax cuts

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. Although there were some good elements to the tax cuts, such as the reduction in marginal tax rates, they were fatally undermined by their temporary nature.

The fact is that the massive tax increase Republicans claim the Democrats are proposing is entirely the result of the GOP’s penny-wise and pound-foolish policies. Rather than expend the effort to make their tax cuts permanent in the first place, they attached expiration dates to every major provision. Most will expire automatically at the end of 2010. The alleged tax increase that would result is simply a consequence of the tax system returning to what it was before 2001, when the first tax cuts were implemented.

In other words, no one is proposing new taxes -- so GOP activist Grover Norquist’s famous “no new taxes” pledge that virtually all Republicans have signed in blood wouldn’t even be violated. 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 had no choice; 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 have their cake and eat it too. They get 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. Businesses and individuals often make economic decisions that won’t pay off for many years. If they think the tax system will be more unfavorable when the payoff comes, they will act differently, favoring smaller, short-term gains and rejecting opportunities for higher profits in the future.

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.

The reality is that we are not going to see the biggest tax increase in history in 2011 because neither Congress nor the White House will allow it to happen, regardless of which party is in control. The choice is not between full extension of all the Bush tax cuts or a massive tax increase, but between extension of the Bush tax cuts and some other sort of tax cuts that would keep the tax burden from rising on the vast majority of taxpayers.

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.