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The Republicans' Offsetting Penalties

May 12, 2014

And now for today's quiz: When is $10 billion greater than $310 billion? When Republicans control the House of Representatives.
Yes, the American people got another lesson in GOP math this week when House Republicans refused to budge on a $10 billion, five-month extension of unemployment benefits for 1.3 million long-term jobless workers while the GOP-controlled Ways and Means Committee blessed $310 billion in business tax breaks. And while the bipartisan Senate proposal is fully paid for and, according to the nonpartisan CBO, would generate 200,000 more jobs if the Emergency Unemployment Compensation (EUC) was extended to the end of 2014, not one dime of the GOP's "tax extenders" bill is offset by new revenue or spending cuts. The result would be a torrent of red ink, wiping out over the next 10 years about 40 percent of the new revenue gained in last year's "fiscal cliff" deal.
As Forbes and USNews rightly pointed out, the Republicans' hypocrisy is double. After all, many of the same GOP deficit hawks who repeatedly threatened to block a debt ceiling increase are now casually planning to further drain the U.S. Treasury with their package of extensions to expiring business tax cuts. Just as shameful, conservatives are continuing their decades-old double standard that new federal spending must always be offset, while tax cuts never do. And no matter how they go about it, the result is always the same: less tax revenue, more debt, inevitable budget reductions and the gutting of badly needed programs that clearly improve the U.S. economy and Americans' incomes. That Republican death spiral may not generate rapid economic growth, but it does make it easier to drown government in a bathtub.

Fighting to extend the expiring Bush tax cuts in the summer of 2010, Republican leaders gave the game away. That July, Jon Kyl (R-AZ), the second-ranking Senate member, told Chris Wallace of Fox News, "You should never have to offset cost of a deliberate decision to reduce tax rates on Americans." Aborted Obama Commerce nominee Judd Gregg (R-NH) soon chimed in, declaring, "I tend to think that tax cuts should not have to be offset." For his part, Oklahoma's Tom Coburn argued his math will work in the future if you ignore the past: "Continuing the [Bush] tax cuts isn't a cost, if you added new taxes, new tax cuts, I would agree that's a cost." Ultimately, Senate Minority Leader Mitch McConnell explained how tax cuts magically turn red ink black:

"There's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject."

That may be the view of virtually every Republican on that subject, but that doesn't make it correct.

Arthur Laffer's supply side snake oil--that "tax cuts pay for themselves" because the additional economic activity they incentivize will produce revenues higher than they otherwise would have been--is as rotten now as it was when Jude Wanniski first sketched Laffer's Curve on a cocktail napkin for Ronald Reagan.
In January 2001, the nonpartisan Congressional Budget Office (CBO) forecast that George W. Bush had inherited a projected $5.6 trillion surplus over the ensuing decade from Bill Clinton. But by the time he ambled out of the Oval Office on January 20, 2009, President Bush had nearly doubled the national debt. And it was tax cuts that were responsible for the biggest share of the new deficits. As the Center on Budget and Policy Priorities (CBPP) previously explained in 2008 and 2011, the Bush tax cuts accounted for about half the deficits during his tenure and, if made permanent (as most ultimately were by President Obama), would produce more red ink than Iraq, Afghanistan, TARP and the recession combined.

There is no mystery as to why. Thanks in large part to the Bush tax cuts of 2001 ($1.4 trillion) and 2003 ($550 billion), revenue measured in constant 2005 dollars did not return to its 2000 peak of $2.3 trillion until 2006. With the onset of the Great Recession in late 2007, Uncle Sam's take as a share of the U.S. economy plunged to 15 percent, the lowest since 1950. Measured in real 2005 dollars, tax collections did not return again to its previous high until fiscal year 2013.

These results should have surprised no one. After all, in 1981 Ronald Reagan introduced the same black magic, promising to cut taxes, raise defense spending and balance the budget. Instead, during his eight years in the White House, the Gipper tripled the national debt by 1989.
As most analysts predicted, Reagan's massive $749 billion supply-side tax cuts in 1981 quickly produced even more massive annual budget deficits. Combined with his rapid increase in defense spending, Reagan delivered not the balanced budgets he promised, but record-setting deficits. Even his OMB alchemist David Stockman could not obscure the disaster with his famous "rosy scenarios." As Stockman himself lamented in 2010:

"[The] debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party's embrace, about three decades ago, of the insidious doctrine that deficits don't matter if they result from tax cuts."

Despite its uninterrupted record of failure at converting bullshit into gold, the Republicans' tax cut orthodoxy hasn't changed since. In 1996, Bob Dole, like Mitt Romney 16 years later, promised a 20 percent across-the-board income tax cut. While Democrats predicted a massive run-up in the national debt, Dole's supporters instead claimed a "large part of the cost of the plan would be covered by what economists call feedback, or the amount of increased tax revenue created by the tax cut. In this case, the figure is about 27 percent, or $145 billion." Mercifully, Dole was defeated and that release of red ink was avoided.
Unfortunately, George W. Bush was not defeated. And throughout Bush's presidency he boasted, as he did in 2006, "You cut taxes and the tax revenues increase." His allies like Arizona Senator John McCain ("Tax cuts, starting with Kennedy, as we all know, increase revenues") and Kay Bailey Hutchison ("Every major tax cut we've had in history has created more revenue") agreed. Future House Speaker John Boehner was on board, too, defending the Bush tax cuts this way in 2010:

"It's not the marginal tax rates ... that's not what led to the budget deficit. The revenue problem we have today is a result of what happened in the economic collapse some 18 months ago."
"We've seen over the last 30 years that lower marginal tax rates have led to a growing economy, more employment and more people paying taxes."

As David Leonhardt explained in the New York Times in 2009, "The economic growth under George W. Bush did not generate nearly enough tax revenue to pay for his agenda, which included tax cuts, the Iraq war, and Medicare prescription drug coverage." That same year, Utah Republican Senator Orrin Hatch looked back at the GOP's budget performance during the Bush years and admitted, "It was standard practice not to pay for things."
But John Boehner wasn't just wrong about tax cuts not having to be offset in the past. As Ezra Klein explained in the Washington Post in 2012, President Bush's red ink would continue to wash over America in the years to come:

What's also important, but not evident, on this chart is that Obama's major expenses were temporary -- the stimulus is over now -- while Bush's were, effectively, recurring. The Bush tax cuts didn't just lower revenue for 10 years. It's clear now that they lowered it indefinitely, which means this chart is understating their true cost. Similarly, the Medicare drug benefit is costing money on perpetuity, not just for two or three years. And Boehner, Ryan and others voted for these laws and, in some cases, helped to craft and pass them.

(And, it should be pointed out, voted for all of President Bush's seven debt ceiling increases required to pay the bills for them.)
Which is exactly what came to pass with the passage of the American Taxpayer Relief Act (ATRA), which ended the fiscal cliff stand-off in January 2013. The deal, which raised income and capital gains taxes on households earning over $450,000 a year, will generate an estimated $770 billion over a decade. But the rest of the Bush tax cuts--over $3 trillion worth--were made permanent. And they most certainly were not "offset." If they had been, the long-term U.S. national debt would plummet. As the Washington Post documented in September 2013, the Bush tax cuts are still driving up the national debt.

Despite multiple deficit-reduction deals during the past three years, the national debt is projected to swell to 100 percent of the economy by 2038, due primarily to the enormous cost of caring for an aging society. Making matters worse: tax cuts for the vast majority of Americans made permanent during last year's fiscal cliff showdown. If the tax cuts had been allowed to expire, projections showed the debt dropping to 52 percent of GDP during the next 25 years.

Interestingly, Republicans haven't always argued that tax cuts never need to be offset due to the magic of Arthur Laffer's voodoo economics. As then-Gov. George W. Bush put it in October 2000:

"The surplus is the people's money. It's your money."

That tax cuts would reduce the projected surplus doesn't seem to square with the conservative mantra that they pay for themselves. On January 25, 2001--just five days after Bush took the oath of office--Federal Reserve Chairman Alan Greenspan appeared before Congress to make that very point that tax cuts were needed to prevent excessive budget surpluses.

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... And should current economic weakness spread beyond what now appears likely, having a tax cut in place may, in fact, do noticeable good.

But as the economy continued to slow down, the surplus talking point disappeared. By late February 2001, President Bush was revising history, declaring, "I said during the course of my campaign and I believe strongly that tax relief is part of the prescription for any economic ill that are nation may have." Stephen Moore, a former Club for Growth honcho who branded federal deficits "fiscal child abuse," agreed with President Bush that tax cuts were both a dessert topping and a floor wax:

"It was about putting more money into people's pockets and returning the surplus to the people. Now, it's about putting some juice in this economy that really needs it right now."

And so "tax cuts pay for themselves" was reborn.
Despite the fact that the national debt ballooned as a result of Bush's faith-based tax cuts, his GOP heirs have steadfastly refused to raise federal taxes. During the 2012 GOP primaries, not a single Republican debate contender would accept a debt reduction deal including $1 of new tax revenue for every $10 in spending cuts. And for four straight years, the very serious House Budget Chairman Paul Ryan proposed a revenue neutral budget that would lower rates and "broaden the base." But over those four years in which he has annually called for a $5 trillion tax cut overwhelming benefitting the wealthy, Ryan has yet to name single tax break he would close to fill the yawning revenue gap his blueprint would produce. (To minimize the inevitable emptying of the United States Treasury resulting from his tax cuts, Ryan like many of his GOP predecessors has called for the CBO to use "dynamic scoring" to show extra revenue gained from the additional economic growth they promise.) His 2012 running mate Mitt Romney played the same trick.
In contrast, outgoing House Ways and Means Committee Chairman Dave Camp (R-MI) did not. In his short-lived tax reform proposal released in February, Camp did the hard and politically treacherous work of laying out which of the $1.3 trillion in annual tax expenditures he would close or curb in order to pay for lower rates. His plan, rejected by Democrats and abandoned by Republicans, would limit the mortgage interest deduction, end the deduction for state and local taxes and do away with the notorious "carried interest exemption" among others to offset the cost of lower rates for individuals and businesses. But as CBPP lamented, Rep. Camp has had a change of heart over the R & D tax credit and other of the budget-busting "tax extenders" that expired at the end of 2013:

Making the extenders permanent now would tilt tax reform further against deficit reduction by redefining "revenue neutrality." The Camp plan paid for the temporary tax provisions it chose to make permanent (such as the research and experimentation credit), a fiscally responsible approach. But if policymakers make the extenders permanent in advance of tax reform, a future tax reform plan would no longer have to offset the extenders' cost -- $560 billion over ten years -- in order to achieve revenue neutrality. Policymakers could instead use this money to lower the top tax rate further, at the cost of higher deficits and additional pressure to reduce only spending programs to address the nation's long-term fiscal challenges.

As Lori Montgomery summed it up, "Camp, who is retiring in January, confirmed in an interview that making tax extenders permanent would make it easier for his successor (presumably Rep. Paul Ryan (R-Wis.)) to push rates down further."
In contrast, Senate Finance Committee Chairman Ron Wyden (D-OR) has called for a temporary two-year extension of the 50-plus expired provisions at a cost of $85 billion in order to provide time to decide which to make permanent. Now Camp has joined with Eric Cantor (R-VA) and the House GOP leadership team to make six of the measures permanent now. As Tax News reported last week:

While Camp professed that the "permanent polices are an important first step to put us on a path towards comprehensive reform that lowers rates and makes the code simpler and fairer," he also elected not to consider their future funding.

Funding, that is, for business tax cuts that will cost Uncle Sam $310 billion. But that's just fine with Congressional Republicans because, as former Senator Kyl put it in July 2010, "You should never have to offset cost of a deliberate decision to reduce tax rates on Americans." That left Ezra Klein shaking his head:

Imagine if some Democrat--and a member of the Senate Democratic leadership, no less--said that as a matter of principle, spending should never be offset. He'd be laughed out of the room.

Which is why the unemployment insurance extension bill backed by Senate Democrats--all $10 billion of it--is fully paid for. And last time I checked, $10 billion was a lot less than $310 billion.
EPILOGUE: In June 2012, not a single economist surveyed by the University of Chicago Booth School of Business agreed with this statement: "A cut in federal income tax rates in the US right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut." In his comments, David Autor of MIT pointed out, "Not aware of any evidence in recent history where tax cuts actually raise revenue. Sorry, Laffer." Former Obama administration economist and current University of Chicago professor Austan Goolsbee put it this way:

"Moon landing was real. Evolution exists. Tax cuts lose revenue. The research has shown this a thousand times. Enough already."

Alas, it was not enough for GOP Gov. Sam Brownback in Kansas and Republican Gov. Chris Christie in New Jersey. They are learning now what Republicans in Oklahoma and Missouri soon will: The Laffer Curve will bring red ink to red states.
(This piece first appeared at Dailykos.)


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Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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