It is expected that the Democrats are going to propose increased spending. Frankly, the Democratic fiscal agenda has never sat well with me, but lately I've been growing concerned about the Republican plan.
Tax cuts have become a litmus test within the Republican party. If you want to run, you have to pledge yourself to never raising taxes. Tax cuts aren't a bad thing, nor am I attempting to imply that they are; however, the arguments that Republicans have continually used to justify their pursuit of endless tax cuts are not sound.
For instance, often times you will hear that tax cuts pay for themselves. President Bush has even said: "You cut taxes and the tax revenues increase." This is simply not true, nor close to being true. Nominal revenue declined for three consecutive years (2001, '02, and '03) after the first round of the Bush cuts: this is the first time that has happened since WWII. Furthermore, the Joint Committee on Taxation estimated that the 2001 tax cuts reduced government revenue by $552.5 billion from 2001-2006. The 2003 cuts also added to that reduction.
The macroeconomic effect of any tax cut will not produce enough growth to pay for the revenue lost. Douglas Holtz-Eakin, who is currently McCain's lead economic adviser, was really the first CBO director to do dynamic scoring of tax cuts. He reported that a 10 percent cut in income tax rates would:
... offset between 1 percent and 22 percent of the revenue loss from the tax cut over the first five years and add as much as 5 percent to that loss or offset as much as 32 percent of it over the second five years.
Different tax cuts have different reactions and not all tax cuts are created equal. Some provide more bang for the buck. For instance, a cut in the capital gains rate will spark an increase in short-term revenue because people can choose when they take their gain realizations. Over the long-term though, such a cut does not produce any increased revenue. It is just a short-term spike.
A second popular argument is that tax cuts are needed to "starve the beast." By cutting revenue and producing larger deficits, the government will be forced to lower its spending. Doesn't this sound great in theory? History does not support this idea. If anything, the tax cuts are simply followed by tax increases, and government's hand is not forced to cut spending. Even further proving the point is the recent fiscal track record of Republicans. They enacted Medicare Part D (a significant entitlement increase) and huge increases in both domestic and defense discretionary spending. One thing Congressional Republicans have gotten very wrong is their argument that tax cuts should not have to be paid for with pay-as-you-go rules ("PAYGO"). If Republicans truly believe in "starving the beast," they would fight for these tax cuts to be paid for because PAYGO forces a budget neutral offset--a spending cut. This would be a good thing.
Instead of make the difficult spending choices, tax cuts have been presented as a way to have it all. They have become political handouts for reelection. Using them as political tools instead of strategic economic tools has caused the Republicans to grow fiscally irresponsible.
Targeted taxes cuts can certainly have an economic growth in the short-term. That is not what is being disputed: selling tax cuts as a cure all is. As this blog has noted before, the size of government should and can decrease. By decreasing the size of the government, it is possible to produce an environment where permanent tax relief can exist because there is simply less to pay for. Instead of running large deficits which detrimentally effect our economic future, the government needs to get its house in order. Being fiscally conservative is no easy task, but it will pay in the long run.
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