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Because I’m Lazy

February 12, 2010

Yesterday, my father objected to a particular comment from this post.  I said, “A Republican Party that wants to increase the deficit with permanent tax cuts needs to come up with a way to compensate for the losses with spending cuts.”   We then had a nice back-and-forth, which I’ll post instead of actually posting.  If you don’t like it, you can giiiiiiiiiit out.  (EDITOR’S NOTE: I added later the stuff in brackets.  I also cleaned up some things and added some links.  Sue me.)

POPS: Generally, tax cuts decrease the deficit in the long run by increasing federal tax receipts by stimulating business activity.  Of course, this assumes that spending does not increase.  You can, indeed, grow out of the deficit, but nobody has ever had the discipline to not increase spending.

NOOT: Well, that’s not empirically true because of several things, most notably that the tax code is very complex.  The Laffer curve, for example, propounds that there is an optimal tax rate between zero and 100% at which tax revenue is maximized (that’s, of course, not the same thing as tax cuts–they’re tax-rate cuts–and certainly not the same thing as those ridiculous tax credits).  Unfortunately, the tax code is not that simple.  Also, the curve takes different shapes under different economic conditions, and, as these are the most volatile of conditions, the actual shape of the curve is pretty fuzzy.  Notice that the majority of the curve falls into the zone where tax revenue is not being optimized–the margin for error is very small.

Moreover, the prevailing wisdom in the economic world right now is that tax cuts don’t pay for themselves, thanks in large part to Bush-era conservatives who failed to make it happen.  Federal revenue dropped the first four years after the Bush tax cuts, and then three years later the financial crisis happened [which led many to rail against an era of “precarious economic expansion” and, by extension, tax cuts].  This lends zero credibility to the theory that tax cuts pay for themselves [or that they are in fact desirable], as does the fact that neither Reagan nor Bush I ever did anything to reduce the deficit.  I don’t think it’s demonstrably untrue that tax cuts don’t pay for themselves, but the past three Republican presidents have failed to prove that it can work.

The idea that tax cuts invariably increase the deficit is a tenet central to the Democratic method of governing, which is part of the reason for the lack of discussion on this front nowadays.  Unfortunately, guys like Rove and Dennis Hastert have ruined the party for the rest of us by failing to curtail spending in the past to show that this actually can work.  Either way, it’s still irresponsible of Karl Rove and Newt Gingrich to rail against cutting Medicare, because the fact is that the tax-cuts-pay-for-themselves theory is still just a theory, not a fact.  [I sort of insinuated here that these guys have postulated that tax cuts can pay for Medicare, which to my knowledge they haven’t done.  That would indeed be a dumb thing to say.]

POPS: The point of the NRO piece is that tax (OK) RATE cuts do, indeed, pay for themselves, and then some.  The central tenet of the Democratic method of governance is irrelevant.  Federal tax receipts almost tripled during the Reagan years–unfortunately, spending inceased even more.  Yes, some Republicans are disingenuous on Medicare, but Paul Ryan (Ryan Paul?) ain’t.  I sorta like his idea (as superficially as I’ve read about it).

High taxes are immoral.  That’s why Democrats love ’em.  They use taxes to punish their enemies and reward their friends.  Republicans may suck, but Democrats suck waaaaay more.

NOOT: The point of the NRO piece was to show that tax-rate cuts can pay for themselves, not that they do.  Nugent’s point was that the tax code can be structured so that they do, despite the objections of Democrats who think it’s impossible.  I don’t object to this assertion, but I do object to the statement of this as fact.

During the Reagan years, federal tax receipts actually held steady.  In 1981, receipts were $1,077.4 billion, and in 1989, they were $1,298.9 billion (that’s in FY2000 dollars).  As a percentage of GDP, receipts were 19.6 in 1981 and 18.4 in 1989.  They were, of course, much higher than they were in the 1970s, but that’s because the economy was much more productive overall in the 1980s.  It’s obvious to everyone who’s not a Holocaust denier that Reagan’s supply-side tax-rate cuts were the reason the economy came to life in the 80s, but that doesn’t mean that low taxes increase federal receipts in general. It means that a booming economy increases federal receipts.  And the idea that low taxes=economic growth is a hotly contested subject in today’s economic world.

Our current recession, for example, is not really anything like the one of the late 1970s.  While that one was characterized by stagflation (which was only invigorated by federal pump-priming), our current debacle is still dominated by the fear of deflation–a phenomenon widely considered to be worse than inflation (just ask Japan).  Thus, the best method for growing the economy is certainly not a settled issue.  I’m all for low taxes, but the correlation between low taxes and high revenues remains an assertion rather than a proven fact.

I don’t think he’s wrong.  But I do think people look at the issue too simplistically, i.e. Democrats think extremely high tax rates produce more tax revenue while (some) conservatives think extremely low tax rates produce more.  And we don’t have to settle for whatever Karl Rove thinks about it.

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