Republican lawmakers continue to argue that tax cuts do not need to be "offset" and that they do not decrease revenue (which is another way of saying they do not add to the deficit). That's a fascinating insight and one that suggests we don't have much of a deficit at all anymore!
The aggregate amount of deficits from 2002-2010 was approximately $4.8 trillion. I list 2002 first because that was the first year following implementation of the first Bush tax cut.
The total impact on the deficit of the Bush tax cuts, according to a Citizens for Tax Justice analysis (PDF), is approximately $2.5 trillion from 2002-2010. That's a big number, but lucky for us we can subtract it from the $4.8 trillion deficit amount using Republican logic. It has no effect. Then, of course, you have the Obama tax cuts from the stimulus bill (which amounted to approximately $288 billion- a third of the cost of the stimulus). Those cuts are factored into the reported deficit amounts, so let's take those out too. All those tax cuts together add up to about $2.8 trillion. That still leaves a fairly sizable aggregate deficit from 2002-2010 of about $2 trillion.
But wait! We can do better than that, surely. If tax cuts don't add to the deficit, reductions in tax revenue from the economic recession ought not to be added to the deficit either, right? That's good news, because the CBPP has estimated that the recession is responsible for about a $900 billion reduction in taxes from 2009-2010. It shouldn't really matter if the government lowers your taxes, or if an external force lowers your taxes by reducing your income, should it? Either way, you are paying less in taxes and tax reductions don't add to the deficit. So that brings the aggregate 2002-2010 deficit down to a mere $1.1 trillion. That averages out to about a $122 billion deficit each year since 2002. Fantastic! That's pretty manageable.
Obviously, I'm being facetious and yes, I am distorting the Republican argument for emphasis. Republican leaders aren't actually saying tax cuts don't have an initial cost, they are saying (wrongly) that they pay for themselves through a multiplier effect (government lets you keep more money, you spend more money, that creates more jobs, more jobs means more income tax revenue, etc.). Admittedly there is SOME revenue generated by tax cuts, but it is nowhere near 100% of the tax cut amount. If it were, we could cut taxes to 0.1% and still bring in the same amount of revenue. Mark Zandi, the chief economist at Moody's, has estimated that for each dollar spent on the Bush tax cuts, GDP increases by about $0.32 the following year. That's an increase in GDP and not an increase in revenue, but as GDP rises a small percent of the GDP increase will return to the federal government in tax receipts. That's a bump, but not a significant bump.
What's lost in Republican rhetoric, however, is their implicit support for fiscal stimulus and their explicit dishonesty on the deficit. Spending money on tax cuts to generate more revenue, which is what Republican leaders argue they want, is... fiscal stimulus.
Functionally, tax cuts and spending operate similarly. In a tax cut, you identify a group of individuals who will get money (those earning under $250,000 a year who itemize their taxes, for example) and you cut their tax rates or issue a tax rebate to get them the desired amount of cash. In spending, you identify a smaller group of recipients (such as the unemployed for unemployment insurance), or even a particular industry (such as the construction industry for large infrastructure spending projects), and you pay money to those individuals or groups in the desired amount. Unsurprisingly, then, various forms of spending also have a "multiplier effect" akin to the one Republicans cite with tax cuts. Mark Zandi estimates that each dollar spent on infrastructure spending adds about $1.57 to GDP. Each dollar spent on unemployment benefits adds about $1.61 to GDP. Both infrastructure spending and unemployment benefits, then, are about 5 times more stimulative than the Bush tax cuts.
Given that spending and tax cuts operate in much the same manner, one may ask why the Bush tax cuts are so much less stimulative than infrastructure spending and unemployment benefit spending. The short answer is that the targeted recipient is very different. The overwhelming majority of the Bush tax cuts go to reduce the taxes of the wealthy. The wealthy, however, do not need to spend any extra money which lines their pockets. They can put it in a bank and be just as happy as they were before they received the tax cut. With infrastructure spending and unemployment insurance, however, most recipients will be the poor or the working class who are far more likely to spend those government dollars than they are to hoard them- thus the higher multiplier. This is the same reason that other forms of tax cuts, such as a payroll tax holiday, have a higher multiplier than the Bush tax cuts (about $1.24 increase to GDP, according to Zandi).
President Obama recognized the Republican support for fiscal stimulus when he lobbied for the stimulus bill. In part to gain Republican support, he pushed for almost $300 billion of the $814 billion legislation to be tax cut spending. Republicans then hit him on two fronts in a whirlwind of hypocrisy. First, despite Republican arguments that tax cuts don't add to the deficit, they not only added the $300 billion into the cost of the bill, but then they often rounded up to talk about the "$1 trillion spending bill passed by Obama." Second, they have consistently argued that the stimulus bill was an absolute failure and didn't stimulate any economic growth at all (even though 1/3 of the bill was tax cuts and despite significant evidence that the bill DID stimulate growth). Third, to the extent the stimulus bill wasn't as effective as it could have been, it is in large part due to the fact that a third of its spending was focused on tax cuts which have a lower multiplier effect than other forms of spending, such as unemployment insurance and infrastructure spending.
For whatever reason, most of the media establishment has bought into the Republican line of "reasoning." The deficits are Obama's fault. Democrats are involved in runaway spending. The stimulus didn't work. Government spending isn't stimulative. Obama is raising your taxes. The deficit is the most important issue facing the nation right now.
So what's the first item on the agenda after Republicans win the House? Extending the Bush tax cuts- and not just extending cuts for those under $250,000 in income. Extending the cuts for everyone (particularly the wealthy whom the tax cuts were designed to benefit the most). And what happens if Obama agrees to do exactly that? Republicans will hammer him when the deficit numbers increase dramatically next year over current projections and when Democrats ask to raise the deficit ceiling in order to have room to pay for the tax cut extension. An economically incoherent argument is becoming a brilliant political strategy.
I'm not suggesting, by the way, that tax cuts are a bad idea. Tax levels ought to be lower in a down economy than they are in a booming economy. The ideal tax level for each bracket isn't ever easy to identify, but maintaining current tax levels for income earners below $250,000 could be beneficial right now. It won't be as stimulative as other spending the government could do, but it's an arrow in the government's quiver to get the economy moving faster. But let's be honest about matters: it will increase the deficit with an absolute certainty. It's Keynsian economics. Both parties have adopted Keynesian economics. The biggest difference is that Republicans favor implementing it poorly while denying they are implementing it at all.
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