Greenspan: Yes, There Is Such a Thing As An Unaffordable Tax Cut
September 13th, 2008 . by economistmomThis afternoon I got an email from the Obama campaign’s economic policy director, Jason Furman, tipping me off on this Bloomberg story about former Federal Reserve Chairman Alan Greenspan. Seems that Greenspan agrees with Concord’s position on the need to pay for tax cuts (emphasis added):
Sept. 12 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan said the country can’t afford $3.3 trillion of tax cuts proposed by Republican presidential nominee John McCain without corresponding spending reductions.
Greenspan, a lifelong Republican and longtime friend of McCain, said today on Bloomberg Television’s “Political Capital With Al Hunt” that “I’m not in favor of financing tax cuts with borrowed money.”
McCain has said he would balance the cost of most of his tax cuts with budget reductions, while providing few details beyond eliminating earmarks and other pork-barrel spending, which have totaled about $171 billion since 2001.
The funny thing is that the Bloomberg story refers to “$3.3 trillion” in McCain tax cuts, then quotes Greenspan referencing “borrowed money.” But according to the Tax Policy Center (TPC), that figure (which actually rounds to $3.4 trillion for 10 years worth of McCain tax cuts according to stump speeches) refers to the revenue loss relative to current policy extended–not relative to current law. Relative to current law, the cost is nearly $7.0 trillion in tax revenue. It’s this $7.0 trillion figure (plus associated interest costs) that represents the amount of additional “borrowed money” that would be required–not just the $3.3 trillion above what the extended Bush tax policies would cost.
So the other funny thing is that it’s the Obama campaign that pointed me to this story about Greenspan, with the subject of Jason’s email memo: “Obama Campaign Agrees with Greenspan that McCain should abandon his tax cuts.” Jason’s opening paragraph (emphasis added):
On Friday, September 12, Former Federal Reserve Chairman Alan Greenspan told Bloomberg News that John McCain should not move forward with his $3.4 trillion in new tax cuts unless he can show how to pay for them.[1] In answer to a question about whether the nation could “afford a tax cut of that magnitude” Greenspan said “unless we cut spending, no.” Greenspan went on to say “I’m not in favor of financing tax cuts with borrowed money.” We agree. –Jason Furman, memo to “interested parties” dated 9/13/08.
I suppose the Obama campaign got a gift from the Bloomberg writer’s reference to the cost of the McCain tax cuts relative to current policy instead of the figure relative to current law. Because it’s only in reference to the policy-extended baseline that Obama’s tax proposals look relatively fiscally responsible, raising between $600 billion and $1 trillion over ten years compared with Bush tax policy extended. But let’s remember: according to the TPC, relative to current law, Obama’s proposed tax cuts would reduce revenue by between $2.6 and $2.9 trillion over ten years, and with interest costs would add about $3 1/2 trillion to the ten-year deficit.
So as I see it, the Obama campaign is basically agreeing to disagree with their own deficit-financing of their own tax cuts–because it seems pretty strained to argue they disagree with only the larger extent of deficit financing they think is implicit in McCain’s plans. But I understand this notion of “relative fiscal responsibility” will continue to be pervasive in this campaign. I guess I think that’s ok as a means of comparing the candidates, but I don’t think it’s ok as a means of judging either candidate’s proposals relative to a more absolute standard of what would be best for our economy–and how we’d actually be changing our tax code.
And as far as Greenspan goes, well, it’s too bad he couldn’t have spoken up more back in 2001 before the first of the deficit-financed (then known as ”spending-the-surplus”) tax cuts were passed. The Bloomberg story reminds us…
“I always have tied tax cuts to spending,” Greenspan said. In 2001 testimony before Congress, Greenspan was widely interpreted to have endorsed Bush’s proposal to cut taxes by $1.6 trillion over 10 years. In the book, Greenspan characterized his testimony as politically careless and said his words were misinterpreted.
Sigh…
What irritates me is this terminology of affordable/unaffordable tax cuts. I mean, people saying things like how we should “pay for tax cuts”. To me, a tax cut is not something that needs to be “paid for”. The military needs to be “paid for”. Schools need to be “paid for”. Etc. When the government gives me a tax cut, it is not spending one thin dime. It is letting me keep more of what I earn. If what they mean by “how do we pay for” a tax cut, is that theyre worried about a resulting loss of revenue to the government, then thats what they should say. (and why dont the politicans ever ask how can we “pay for” actual spending increases or new spending of any kind. No, its only when tax cuts are proposed do they complain “how are we going to pay for this?”)
Gosh, in Susskind’s book on Paul O’Neill, he makes it clear that Greenspan both (1) knew exactly what he was doing and (2) had plenty of opportunity to say what he “really” meant before the bill was passed and didn’t.
Who are we to believe? The self-serving liar or the former WSJ reporter?
Mary wrote:
What irritates me is this terminology of affordable/unaffordable tax cuts. I mean, people saying things like how we should “pay for tax cuts”. To me, a tax cut is not something that needs to be “paid for”. The military needs to be “paid for”. Schools need to be “paid for”. Etc. When the government gives me a tax cut, it is not spending one thin dime. It is letting me keep more of what I earn. If what they mean by “how do we pay for” a tax cut, is that theyre worried about a resulting loss of revenue to the government, then thats what they should say.
I don’t know anyone who doesn’t understand that “paying for tax cuts” means “making up the revenue lost by tax cuts”. It’s just a quicker way of saying it.
(and why dont the politicans ever ask how can we “pay for” actual spending increases or new spending of any kind. No, its only when tax cuts are proposed do they complain “how are we going to pay for this?”)
The main reason that tax cuts are receiving most of the focus currently is because tax cuts are the most costly item in the proposed policies of both candidates. In any case, PAYGO rules do apply to entitlement spending as well as tax cuts. Following, is a description of PAYGO from this link.
Summary of the PAYGO Rule. The new House PAYGO rule establishes a point of order in the House of Representatives, effective immediately, against consideration of any entitlement or revenue bill that would, in net, increase projected deficits. In this memorandum, we refer to a bill that does not increase projected deficits, and so does not violate the PAYGO Rule, as being “deficit neutral.” The PAYGO rule does not apply to discretionary appropriations, which are controlled instead by the annual targets set in congressional budget plans.
The application of the PAYGO point of order is based on the net cost of a bill. If some provisions of a bill increase entitlement costs, then other provisions of that bill must fully offset or pay for those increased costs by reducing the costs of other entitlements or increasing revenues. Likewise, if some provisions of a bill cut taxes, then other provisions of that bill must fully offset or pay for those revenue losses by raising taxes or reducing the costs of entitlements. This is why the Rule is known as a “pay-as-you-go” rule.
As I previously mentioned, I think that PAYGO is the only realistic way to cut spending. At the point of a tax cut, the politicians passing it have their maximum political capital. And the electorate, in the process of getting a “dessert” (the tax cut) will be more amenable to “eating their vegetables” (accepting a spending cut). The other supposed methods for cutting spending, most notably the “starve-the-beast” approach, are simply excuses to avoid the difficult decisions and kick the can down the road, in my opinion.