About Tax Cuts

There is a strong debate in progress about whether to let the Bush-era tax cuts expire or whether to renew some or all of them. At the heart of this debate is the question of whether lower taxes stimulate the economy or not, an issue that divides even professional economists.

A few things are clear, however:

1. We have a frighteningly high Federal debt, and a truly monumental Federal deficit not only this year, but for the foreseeable future under current policy.

2. Taxes alone can’t close the deficit or pay off the Federal debt. It will take massive cuts (probably 30-40% or so) in Federal spending to make a dent in the problem.

3. While it may not be clear if tax cuts help the economy, it is pretty clear that tax increases don’t help it. Higher taxes mean higher costs for businesses, and hence a less competitive position in the market. Higher taxes mean less disposable income for individuals, and hence less purchases.

Nonetheless, cutting taxes at a time when we are running such a high deficit seems counterproductive, except for one more factor – what would Congress do with the extra revenues if we didn’t extend the Bush-era tax cuts? If they would use it to reduce the deficit or pay down the Federal debt, the tax increases would be sensible in the long run. But there is no evidence that Congress would do anything that sensible with the additional revenue. Historically, under both parties, Congress has never shown any sensible restraint in spending, and certainly the current Congress has shown no restrain at all.

What is needed are drastic cuts in the size of the Federal government, coupled with tax increases, coupled with some ironclad method of ensuring that Congress won’t just spend the additional tax revenues on popular new vote-getting programs.

But there seems to be no way to impose an ironclad agreement on Congress. Congress already has the PayGo rule (new program costs must be matched with new revenue sources), and they ignore it all the time. Congress already has a legal cap of the Federal debt, and they simply vote to increase it every few months. Congress already has a “lockbox” for Social Security funds, and they raid it anyway every year to pay for popular programs.

So the real debate ought not to be about tax cuts. The real debate ought to be about how to restrain a spendthrift Congress. If we can’t restrain Congressional spending, it hardly matters what we do about taxes.