You can have low taxes, or you can have an economic recovery, but you can’t have both. That’s the message the administration is hammering this summer.
Democrats argue in particular that extending President George W. Bush’s rate cuts on people in the top tax brackets will damage the budget to such an extent that our economy will suffer.
Treasury Secretary Timothy Geithner, for example, said that sustaining the Bush tax cuts for the wealthiest Americans would “hurt economic recovery by undermining confidence that we are prepared to make a commitment today to bring down our future deficits.”
Some centrists, and even a few conservatives, are talking a similar line. Former Federal Reserve Chairman Alan Greenspan said all the Bush tax cuts, even those for lower earners, should expire as scheduled at year’s end since it is wrong to live “on borrowed money.”
The argument that we have to choose between keeping the Bush rates on the one hand and achieve an economic recovery on the other is hypocritical.
The tax cuts Geithner would like to see expire cost taxpayers by his own estimate $700 billion over 10 years. Plenty of other items in the federal budget cost $700 billion over 10 years, or a much shorter period. Yet you don’t hear the administration positing apocalyptically that those outlays will darken the future.
When politicians first announced the entitlement of prescription drugs for seniors, they said it would cost $700 billion over 10 years, for example. President Obama’s stimulus package prices out at about $819 billion. The Democrats’ health care legislation is supposed to cost $940 billion.
In the 1980s, 1990s and the early part of this decade, the supply-siders who advised President Reagan made the case that tax cuts would be partially or completely offset by growth. That turned out to be true.
The Reagan tax cuts may have contributed to the deficits of the period, but they more than compensated by speeding growth overall and restoring U.S. competitiveness around the world.
Democrats are willfully overlooking a general record that shows that tax cuts can increase revenue. The last two times the U.S. trimmed the capital gains rate, in the late 1990s and under Bush in the early 2000s, the lower rate generated extra activity and the Treasury Department saw more cash flow in than predicted.
Unfortunately, Republicans liked their tax cuts too much. They failed to use their political capital to control spending and push through entitlement reform.
Even Greenspan played a role. Back in the late 1970s and early 1980s, it was already clear that Social Security was out of balance. Congress appointed several commissions to fix the program. One of them, headed by Greenspan, was charged with focusing on short-term fixes.
Greenspan’s Social Security commission recommended that higher tax rates kick in sooner and called for postponing the retirement age and other revenue-saving measures. With the commission’s blessing, the so-called FICA tax rose to 7.65 percent for employees in 1990 from 6.7 percent in 1983. The retirement age also went up. This shored up the budget temporarily. But neither step addressed the long-term shortfall caused by the country’s demographics.
In other words, the Greenspan fix was a poison pill of its own. It didn’t prevent huge cash deficits in the long run. To use Greenspan’s own phrase, the commission itself and the politicians who implemented its short-term fixes borrowed from the future. Those are the deficits that are in the news in 2010, the first year Social Security will pay out more than Americans paid into it.
Had the Greenspan commission come up with a long-term reform, and had other reformers come up with better formats for our other entitlements, Greenspan wouldn’t need to talk about “borrowed money” as a rationale for preventing tax cuts today.
The nation’s real ailment comes from having swallowed those entitlement poison pills, not annual budgeting or even financial crises. Yet lawmakers and commentators are not talking about fundamental entitlement reform. Democrats are scolding tax cutters in the hope of diminishing Republican chances in the next election. What a shame. Taxes aren’t the economy’s big problem.
I would also throw in that out of control spending under both the Bush and Obama administrations created the economic crisis by saddling us with a massive deficit. It's a simple concept really; you can't spend money that you don't have. Obama is gonna find out the hard that spending us out of an economic crisis is not the way to go, and he's going to find it out the hard way.
But really, low taxes and low spending really do work. Just look at my home state of Virginia. We had been shouldered with a $1.8 billion deficit, one of the worst we've had, so I've heard. Then Bob McDonnell was elected on a fical conservative platform, and six months later that deficit turned into a $220 million surplus by cutting back spending.
I think more than a few folks in Washington can take a lesson from him.