“The Facts Aren’t On Mitch McConnell’s Side”: Sorry, GOP, Tax Cuts Don’t Pay For Themselves
As they prepare to take control of Congress, Republicans are looking to change the rules of the game. To lend budget-busting tax cuts the illusion of fiscal responsibility, conservatives would codify the notion that these cuts pay for themselves into congressional accounting rules.
Democrats should not allow this to happen. But if conservatives insist on fudging the numbers, liberals shouldn’t shy away from making creative budgetary arguments of their own.
The accounting device promoted by the right is known as “dynamic scoring,” and it’s politically significant because of the basic policy positions of the two parties. Conservatives tend to favor tax cuts, which come at the expense of social services. Liberals tend to support increasing social services, which come at the cost of higher taxation.
But conservatives have an end-run around this dynamic. They point to the Laffer curve, an economic theory proposing that we can cut tax rates without sacrificing tax revenue, thus avoiding cuts to social services. This is because tax policy has dynamic effects on the macro-economy — that is, cutting tax rates incentivizes people (and particularly high-earners, who gain the most from tax cuts) to work harder, invest more, and generate more economic growth. As the economic pie grows larger, tax revenue can remain constant even as tax rates fall.
Though logical in theory, this idea hasn’t really been borne out in practice. The Bush administration repeatedly predicted that tax cuts would boost overall revenue, but they assuredly did not. And they still don’t, as Kansans have learned during Gov. Sam Brownback’s “real live experiment” in conservative economics, which has only blown a hole in the state budget.
This is because any potential dynamic effects of tax cuts take a long time to materialize, which makes these future benefits extremely difficult to quantify today. And as Congress’ authoritative accountant, the CBO is in the business of attaching hard numbers to would-be laws.
Understandably, the CBO has resisted the uncertain and speculative math of dynamic scoring. But the underlying argument still infuses and skews our political debate. Republicans feel less constrained when proposing tax cuts, while Democrats struggle to shore up revenue sources for government service proposals.
Ostensible fiscal conservatives like Sens. Mitch McConnell (Ky.) and John Kyl (Ariz.) argue that tax cuts need not be paid for at all because they are inherently good for the economy. “[T]here’s no evidence whatsoever that the Bush tax cuts actually diminished revenue,” McConnell contends, in spite of overwhelming evidence that these cuts diminished revenue at historic rates.
Yet these same Republican leaders still insist that spending on unemployment benefits be accounted for by cuts or tax increases elsewhere, even though there’s little compelling economic reason to treat tax cuts and social insurance transfers like unemployment benefits differently. Both policies promote economic growth by increasing disposable income and thereby boosting consumption.
Liberals have largely failed to point this out and haven’t effectively countered conservative attacks on these transfer programs. Contrary to what Speaker John Boehner (Ohio) says, there’s no evidence that unemployment benefits reduce work ethic. And other transfer programs can be carefully structured to minimize any potential work disincentives.
Liberals can do more than play defense in these debates. They, too, can conjure creative arguments for how targeted spending programs can “pay for themselves.”
Take liberal proposals for new or expanded transfer programs like refundable tax credits, child allowances, and other income subsidies. These relieve some of the strain on the budgets of low-income and middle-class Americans. More disposable income means more consumption, which generates higher economic growth and higher overall income, producing more tax revenue. By this logic, transfer programs could pay for themselves, too.
In fact, targeted transfers to the poor and middle class would likely give a stronger immediate jolt to the economy than would tax cuts for the wealthy. Compared with the wealthy, the poor spend a much higher share of each additional dollar of disposable income that they receive, providing greater stimulus to the economy. Policy measures that alleviate inequality are thus a boon for economic growth.
This isn’t to say that liberals should sit back and let dynamic effects fund their policy priorities. Any responsible party must provide revenue sources for new tax or spending programs. But drawing on this rhetoric would level the playing field of our skewed politics. The parameters of our current debate — where liberal proposals must be paid for while conservative ones don’t — are stacked against the interests of average Americans in favor of the wealthy.
Conservatives want to muddy the numbers for our lawmaking process. For the sake of a fair debate, liberals can and must show that two can play at that game.
By: Joel Dodge, The Week, December 19, 2014
“Voodoo Economics, The Next Generation”: The True Believers Show No Sign Of Wavering
Even if Republicans take the Senate this year, gaining control of both houses of Congress, they won’t gain much in conventional terms: They’re already able to block legislation, and they still won’t be able to pass anything over the president’s veto. One thing they will be able to do, however, is impose their will on the Congressional Budget Office, heretofore a nonpartisan referee on policy proposals.
As a result, we may soon find ourselves in deep voodoo.
During his failed bid for the 1980 Republican presidential nomination George H. W. Bush famously described Ronald Reagan’s “supply side” doctrine — the claim that cutting taxes on high incomes would lead to spectacular economic growth, so that tax cuts would pay for themselves — as “voodoo economic policy.” Bush was right. Even the rapid recovery from the 1981-82 recession was driven by interest-rate cuts, not tax cuts. Still, for a time the voodoo faithful claimed vindication.
The 1990s, however, were bad news for voodoo. Conservatives confidently predicted economic disaster after Bill Clinton’s 1993 tax hike. What happened instead was a boom that surpassed the Reagan expansion in every dimension: G.D.P., jobs, wages and family incomes.
And while there was never any admission by the usual suspects that their god had failed, it’s noteworthy that the Bush II administration — never shy about selling its policies on false pretenses — didn’t try to justify its tax cuts with extravagant claims about their economic payoff. George W. Bush’s economists didn’t believe in supply-side hype, and more important, his political handlers believed that such hype would play badly with the public. And we should also note that the Bush-era Congressional Budget Office behaved well, sticking to its nonpartisan mandate.
But now it looks as if voodoo is making a comeback. At the state level, Republican governors — and Gov. Sam Brownback of Kansas, in particular — have been going all in on tax cuts despite troubled budgets, with confident assertions that growth will solve all problems. It’s not happening, and in Kansas a rebellion by moderates may deliver the state to Democrats. But the true believers show no sign of wavering.
Meanwhile, in Congress Paul Ryan, the chairman of the House Budget Committee, is dropping broad hints that after the election he and his colleagues will do what the Bushies never did, try to push the budget office into adopting “dynamic scoring,” that is, assuming a big economic payoff from tax cuts.
So why is this happening now? It’s not because voodoo economics has become any more credible. True, recovery from the 2007-9 recession has been sluggish, but it has actually been a bit faster than the typical recovery from financial crisis, despite unprecedented cuts in government spending and employment. In fact, the recovery in private-sector employment has been faster than it was during the “Bush boom” last decade. At the same time, researchers at the International Monetary Fund, surveying cross-country evidence, have found that redistribution of income from the affluent to the poor, which conservatives insist kills growth, actually seems to boost economies.
But facts won’t stop the voodoo comeback, for two main reasons.
First, voodoo economics has dominated the conservative movement for so long that it has become an inward-looking cult, whose members know what they know and are impervious to contrary evidence. Fifteen years ago leading Republicans may have been aware that the Clinton boom posed a problem for their ideology. Today someone like Senator Rand Paul can say: “When is the last time in our country we created millions of jobs? It was under Ronald Reagan.” Clinton who?
Second, the nature of the budget debate means that Republican leaders need to believe in the ways of magic. For years people like Mr. Ryan have posed as champions of fiscal discipline even while advocating huge tax cuts for wealthy individuals and corporations. They have also called for savage cuts in aid to the poor, but these have never been big enough to offset the revenue loss. So how can they make things add up?
Well, for years they have relied on magic asterisks — claims that they will make up for lost revenue by closing loopholes and slashing spending, details to follow. But this dodge has been losing effectiveness as the years go by and the specifics keep not coming. Inevitably, then, they’re feeling the pull of that old black magic — and if they take the Senate, they’ll be able to infuse voodoo into supposedly neutral analysis.
Would they actually do it? It would destroy the credibility of a very important institution, one that has served the country well. But have you seen any evidence that the modern conservative movement cares about such things?
By: Paul Krugman, Op-Ed Columnist, The New York Times, October 5, 2014
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