I read an editorial this morning by the Robertses (Cokie & Steve). I usually enjoy their commentary despite their center-left orientation. One statement in today's column, though, drove me nuts, given a vast body of emperical experience that contradicts it. they said the "Republicans' . . . 'Pledge to America' . . . promises to to cut taxes and reduce the deficit at the same time - a total impossibility." (my emphasis). Why categorically ("total") advance the notion that simultaneous tax and deficit reduction are mutually incompatible? Because there is nothing besides the statement to support the statement.
This notion has been proven false by Republican and Democratic administrations alike, and by Democratic and Repblican congresses alike. Lowering tax rates increases tax revenue. Increases in revenue decreases the deficit if spending does not increase. Logic and experience show this. When rates are lowered economic activity increases, resulting in more revenue. When projecting budgets and revenue "static scoring" assumes taxpayer behavior will remain unchanged as rates go up or down. "Dynamic scoring" takes into account behavioral changes that accompany tax (rate) increases and decreases. The Robertses would be correct if static scoring is borne out by experience. Experience shows that with every tax decrease, there has been a revenue increase. Kennedy deliberately calculated that behavior would change and revenues would increase when tax rates were lowered at his urging. He was proved right. the Reagan cuts made for a sharp U-turn and lasting recovery in the recession of the early 80s. After 9-11, there was no stimulus to keep the economy from tanking, but there was a 2001 tax cut, followed by another in 2003. These not only avoided disaster (think "jobs saved"), they helped fuel decent growth through mid-2008. And the "rich" (liberal term) or "employers and investors" (conservative terms) respond better to the swings in their rates than those who are employees and not investors. So cutting taxes of the "rich" generates more revenue than cutting taxes of the "middle class," especially since with progressive tax rates the "rich" are soaked (nicked? touched?) much heavier in the first place.
Maybe the Robertses are relying on what I call "extreme logic" to make their point. Of course if, on the one extreme, the government is taxing at a 5% rate and lowers it to zero, revenue will go down. But on the other end, do they really believe people will keep working and investing if their marginal rates are raised to 100%?
The Bush tax cuts are set to expire on January 1, 2011. The Obama administration (and Democrat congressional leadership) are in no hurry to avert that disaster. My question is whether their inaction can be explained by something other than incompetence or cynicism.
Your turn.
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3 comments:
Welcome to the Chris-Devin echo chamber.
Loved the post. I think that for most liberals, cutting spending is simply out of the question and off the table. On that premise, it is understandable why they feel that simultaneously lowering taxes and reducing the deficit is impossible, and why Obama claims that an extension of the Bush tax cuts would "cost" 700 billion over the next decade. Even assuming that spending levels remain the same (unrealistic with this administration and congress, I know, but humor me), lowering taxes and the resulting revenues can only get you so far. To make significant strides in deficit reduction, congress must couple an extension of the Bush tax cuts with aggressive cuts in spending.
For a case study on the results of such a policy, one need only look at what Governor Chris Christie has done to the New Jersey budget in the last year.
Great point, Echo Buddy! You're right that the Pledge to America had more points than just the two (reduce deficits, lower taxes). So why didn't the Robertses consider the other parts (like reducing spending) part of the reason why the deficit might go down, under the Pledge? Maybe the Robertses aren't all that fair-minded to start with.
http://online.wsj.com/article/SB10001424052702303828304575180270979668714.html
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