Friday, March 18, 2005

TKO In The Third Round

There are many issues one could raise in regard to the serial tax cuts enacted under the Bush administration, but to me the most valid criticism is that they show no relation to economic realities, or the changes and trends in our nation's economic condition over the past five years. Allow me to illustrate my point.

Round One: Upon entering office, President Bush began selling his tax cut, primarily aimed at the wealthiest Americans, based on a surging economy and the rare occurrence of budget surpluses. Although Bush defenders are quick to argue that an incipient recession had already began in the months preceding his swearing in, you would not have known that if you had listened to the sanguine economic appraisals issued forth from the White House while proposing these changes. Instead, we were told that surpluses were the new norm and gone were the days of deficits and financing costs. In fact, the hacktacular Alan Greenspan even suggested that cutting taxes was necessary to prevent the government from paying the debt down too quickly. Well, that fear has certainly been abated.

So, Bush went about selling his top-heavy tax cuts using the rosiest economic outlook that told of non-stop growth as far as the eye could see, and overflowing coffers in Treasury. Under this assessment, the argument for an upper bracket tax cut is probably the soundest. Since the economy of the 1990s was overheating, tax cuts targeting the top would not spur more consumer spending (which makes up two-thirds of our GDP) and thus would not pour fuel on to the fire so to speak. Of course, I could think of about a billion other things to do with the surpluses, but for the sake of argument I am willing to concede that if, ideologically, you believe in such cuts, this was the time to implement them.

Round Two: Here's where the story gets a little tricky for anyone trying to portray the Bush tax cut policy as consistent and responsive to economic factors. After the economy slowed down to a post-bubble grinding halt, surpluses reversed course and became deficits, consumer spending dwindled to a trickle, and rampant job losses plagued the nation, Bush proposed a solution: tax cuts aimed at the wealthiest Americans. The same folks that argued that a top heavy tax cut was appropriate in an era of surging growth and budget surpluses because it would slow down debt payment and consumption, were now arguing that the same style of tax cut would have a different effect: it would spur consumer spending, recharge the listing economy, create jobs, and actually increase revenues at Treasury and magically bring down the deficits. I recall Bush selling this additional round of tax cuts thusly: "If tax cuts create jobs, more tax cuts create more jobs." Apparently, tax cuts that accrue to the benefit of the wealthiest Americans can solve every problem our economy has. Makes me wonder how many jobs we would create if we just eliminated taxes altogether.

Round Three: The results of the first two tax cuts are familiar to us all, record surpluses have become record deficits, and the job promoting and consumer spending boons as promised have not materialized in any significant way. Yes, the economy is turning upward, but such is the cyclical nature of the system. This is where supply-siders employ some deft rhetorical jujitsu. When taxes are cut and the economy turns up, they point to this as empirical evidence of a causal relationship between the two events. But, if taxes are cut and the economy continues to lumber along, they fall back on the argument that if taxes weren't cut, the economy would be doing even worse. Their stranglehold on empirical evidence is impressive if not persuasive.

Which takes us to the present. As a nation, we are facing some very serious structural flaws in our economic model. Namely, our current account deficit is so high that it is becoming a liability along many fronts. The dollar is losing value, interest rates will need to be raised in order to encourage the financing of our debt, such a rate hike could spike bankruptcies and mortgage foreclosures (serendipitous timing for the passage of a backwards bankruptcy bill?), we are ceding power to foreign banks residing in tenuous allies like China that hold our debt, Social Security and other government programs are being starved of the needed funds, and in general a potential currency crisis looms on the horizon.

The solution? This might sound familiar: Make the prior two rounds of tax cuts primarily aimed at the wealthy permanent, and add on some additional tax cuts that, once again, primarily benefit the wealthiest taxpayers. In fact, as the
New York Times reported today, some Senate Republicans are going above and beyond the Bush credo.

In a surprise move, the Senate also voted to approve a total of $134 billion in tax cuts, $34 billion more than President Bush requested and $64 billion more than the Senate Republican leadership had initially proposed.

In addition to extending the cuts on capital gains taxes and dividend income, the move was intended to repeal an unpopular tax, enacted in 1993, on Social Security benefits for the wealthy.

"It provided a huge amount of tax cuts," said Senator Pete V. Domenici, Republican of New Mexico and one of five Republicans to vote against the provision. "We didn't know what we were doing."
It just doesn't add up that such a tax cutting scheme could be appropriate in all settings. This lack of consistency (or is it hyper-consistency?), betrays the fact that there is no coherence to the policy. Eventually, the justifications come into conflict, and the empirical evidence lines up in opposition. Our deficits are real. Middle Class Americans are really struggling. There are priorities that are being underfunded or abandoned. And in the midst of all this, the GOP says keep cutting taxes on the wealthy. More in fact.

It really just boils down to a rigid belief in shifting the taxpaying burden from wealth to labor. The next incarnation will be the dubiously titled "Tax Reform" program which has all the usual suspects in terms of preferences and champions.
This article lays out the case better than I, and the three part series appearing in the Los Angeles Times (via Kevin Drum) provides a glimpse at what this Brave New America might have in store for its working citizens.

As always, if you want to get an unvarnished look at Republicanism in action, cast your gaze south to the state of Texas. As
Kevin Drum points out, Texas just passed a bill that actually raised taxes on lower and middle income earners at the same time that it lowered taxes on the upper brackets - and this from a state that already has one of the least progressive tax codes in the nation. I guess Texans can look forward to increased growth if they need it, slowed growth if that is in order, reduced deficits if they are a problem, job creation that will be the envy of the nation, candy cane trees, lollipop forests, purple moons, green clovers, and a host of other benefits and goodies. You see, Texas lawmakers share Bush's vision that tax cuts for the wealthy can be all things to all people, a panacea for a nation's woes. Now that's what I call bold thinking.

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