Anti-Tax Orthodoxy Runs Deep–and Wide
June 6th, 2011 . by economistmom
Here’s a really excellent front-page story by Lori Montgomery in today’s Washington Post, where she focuses on Grover Norquist’s so-far-successful super-gluing of blinders on the GOP when it comes to the idea of reducing tax expenditures. Lori explains that the growing sensibility of some of the Republican party’s wisest fiscal policy leaders on this issue have not yet swayed Norquist away from his self-contradictory, ideological stance (emphasis added):
On Capitol Hill, Norquist has admonished Coburn (Okla.), Crapo (Idaho) and Chambliss (Ga.) for suggesting a tax option for tackling the debt: reducing credits and deductions worth an estimated $1 trillion a year. Although most of the cash would be used to lower tax rates for everyone, a portion would be dedicated to restoring national solvency.
No good, says Norquist’s group, Americans for Tax Reform. Under the pledge, raising revenue in any way requires an equal tax cut elsewhere to avoid expanding the size of government. And, yes, that sometimes means protecting tax breaks that Republicans view as bad public policy, Norquist and his supporters say.
The GOP’s three-decade-old campaign against taxes has clearly had a significant impact. Neither major party would advocate a return to the 1970s, when people earning more than $200,000 a year faced a top rate of 70 percent. But the top rate is now half that and, partly because of the recent recession, tax collections have fallen to their lowest level as a share of the economy in 60 years.
Major tax cuts in 2001 and 2003 also contributed to the decline in revenue — and helped drive up budget deficits. Today, the spiraling debt ranks well ahead of too-high taxes on the list of economic concerns. And the GOP’s hard line on the issue stands, alongside Democratic resistance to cutting federal retirement benefits, as the biggest obstacle to a bipartisan agreement to tackle that problem.
“Grover’s not realistic,” said former senator Judd Gregg of New Hampshire, a self-described “Reagan robot” elected to Congress in 1980. Gregg retired last year after serving with Coburn and Crapo on the bipartisan fiscal commission that recommended stabilizing borrowing by trimming tax breaks and sharply cutting spending.
With the number of people on Medicare and Social Security set to double, Gregg said, “your government is inevitably going to grow. And you’re either going to have to finance that, or you’re going to end up running the country into the ditch.”
In recent weeks, prominent Republicans have urged a more flexible approach to taxes. Former Federal Reserve chairman Alan Greenspan joined the chorus Friday, dropping his support for the 2001 George W. Bush tax cuts. Greenspan told CNBC he’s so “scared” by the debt that he now favors a return to the higher rates of the Clinton administration.
Martin Feldstein, a Harvard economist who served as chief economic adviser in the Reagan White House, supports the commission’s approach to raising money by ending tax breaks.
“When the government gives a tax credit to homeowners who buy solar energy panels, it’s just like giving them a cash subsidy to buy those panels,” Feldstein wrote last week in the conservative Weekly Standard magazine, suggesting that the value of deductions and credits be capped at 2 percent of adjusted income.
“Although government accounting rules treat the end of a tax credit or the limit of a tax deduction as a revenue increase, the economic effect is the same as a cut in spending,” Feldstein wrote. “Anyone who favors less government spending should also favor cutting tax expenditures.”
But Norquist argues that equating tax breaks with spending “is a threat to the modern Republican Party’s worldview,” which calls for a vastly smaller government and “dramatically reducing the tax drag on the economy.”
That worldview supports eliminating tax breaks, Norquist said, but only if all the proceeds are used to push tax rates “down as far as possible.” The work of reducing the national debt must be done entirely by shrinking government, he said. Any compromise that includes taxes would hinder that goal and taint the Republican brand.
Norquist compared Coburn, the most outspoken of the Senate trio, to a “malignant” cell in the body politic. “So,” Norquist said, “we use chemo and radiation to protect all the healthy cells around it, so it doesn’t grow and metastasize.”
So Norquist opposes reducing tax expenditures even though he knows and acknowledges it would improve the efficiency of the tax system, simply because it (alone) would raise revenue and therefore must mean (in Grover’s mindset but not Feldstein’s) that it would grow the size of government. As I’ve commented several times before but most recently on Paul Ryan’s plan, all is not hopeless here. The key to getting bipartisan agreement on this is not to bully the Republicans into giving up their “anti-tax orthodoxy”–but to enable them to discover (among themselves even) that reducing tax expenditures–even if the extra revenue is not spent on rate reduction–is actually consistent with their anti-tax orthodoxy. And I think we can get somewhere on this issue even if we stick to “civilized” means, such as the way the “Gang of Six (Now Five)” has been doing.
This “anti-tax orthodoxy” isn’t confined to the most conservative of Republicans, however. Last Friday the top Democrat on the tax-writing House Ways and Means Committee, Sander Levin, had this to say about reducing tax expenditures:
The discussion so far has been dominated by those calling for a sweeping cut to the top tax rates and paying for them through the elimination of tax credits and deductions – the largest of which benefit America’s middle class. Some of the more concrete proposals, such as one of the options put forth by the bipartisan fiscal commission, have called for the elimination of virtually all of these provisions in order to pay for lower rates.
The discussion of tax credits and deductions needs to recognize that the vast majority of these provisions – by value – benefit individuals, not businesses…
So to reduce the top marginal rate for the wealthiest people in this country to 25%, Republicans would need to eliminate many provisions that benefit – and indeed helped build – the middle class of this country. There is a growing assumption that tax benefits, and itemized deductions in particular, primarily benefit the wealthy and that their elimination, in conjunction with lower rates, would benefit the middle class. I don’t believe this – my experience and, more importantly, the data support the reality that many of these provisions have helped support and build the middle class…
[I]t is hard to see how the tax reform outline in the Republican budget would benefit working families. While a top rate of 25% may sound tantalizing to some, to raise the revenue necessary to keep the reform revenue neutral, you would have to eliminate virtually every tax incentive for middle-income and poor families. Even if proponents of such a rate eliminate the capital gains and dividend preferences, a rate that low still likely means a tax cut for many of those at the top, and a tax increase for broad portions of the middle class.
We should simplify the code to reduce overlap and unnecessary complexity. We should make sure that tax incentives are working as intended. But we should not blindly cut back the policies that helped to build a strong middle class in order to remake the rate structure in a way that benefits those at the top.
The need for tax reform also comes at a time when we need to find common ground on a balanced framework for immediate and long-term deficit reduction that allows for investments in economic growth…
In a nutshell, he’s saying the Democrats don’t want to reduce tax expenditures either. Except this bit of “anti-tax orthodoxy” is dressed in the very different clothing of a (legitimate) concern for adequate “progressivity” in public policies. There are some civilized conversations to be had here, too.
First, Levin’s criticism of the principle of reducing tax expenditures seems limited to the notion of outright eliminating all tax expenditures–rather than just paring back on them, which Levin doesn’t seem to want to admit could be done in as progressive a manner as we desire, by (for example) capping or otherwise limiting the value of the tax expenditures to those amounts that benefit households at all income levels more equally. Second, what Levin really objects to in the fiscal commission and Ryan tax reform plans is not the deficit reduction that would be achieved by reducing tax expenditures, but the spending of much of the extra revenue that would otherwise be raised on tax rate cuts–which indeed are there to sweeten the deal for Republicans because tax rate reductions do disproportionately benefit the rich and are more consistent with (at least the adequate financing of) smaller government. That’s why I’ve tried to explain that “Piece #1″ of Paul Ryan’s tax plan is actually something we can build on in terms of bipartisan agreement on tax reform for deficit reduction.
Once we convince Republicans that reducing tax expenditures is reducing the size of government, they won’t be so hell-bent on opposing the increase in revenue (and reduction in the deficit) that results. And once the Republicans then give up that “Piece #2″ of the Ryan tax plan, Democrats could better focus on the fact that reducing tax expenditures is one of the most progressive (and pro-growth) ways we could come up with to reduce the deficit.
Those of us who see the wisdom and necessity of reducing tax expenditures as a major part of deficit reduction just need to keep talking, in a way that respects what’s really behind the different forms of “anti-tax orthodoxy” held by both sides.
“Former Federal Reserve chairman Alan Greenspan joined the chorus Friday, dropping his support for the 2001 George W. Bush tax cuts. Greenspan told CNBC he’s so “scared” by the debt that he now favors a return to the higher rates of the Clinton administration.”
Lori Montgomery’s “excellent” article was a little weak on the facts. Among other things, Greenspan didn’t “join the chorus” last Friday. He came out in July 2010 in favor of letting all the tax cuts expire, and not just those for the “rich”. In this respect, he’s been leading the chorus, not just joining it last Friday. The Bloomberg story can be found here:
http://www.bloomberg.com/news/2010-07-15/greenspan-says-lawmakers-should-let-bush-s-tax-cuts-lapse-to-trim-deficit.html
Anti-Expenditure Cut Orthodoxy Runs Deep -
Economistmom and her Democrat cohorts feed fuel into Grover Norquists anti-tax fire. Her inability to propose significant cuts in Medicare and Social Security expenditures only feed suspicions held by Republicans that Democrats expect the deficit reduction to be made up almost entirely with revenue increases.
So I urge the Republicans to refuse to increase the debt ceiling and let Obama decide which programs get cut. Hint: bond holders will continue to get their interest and principal payments so we won’t have to worry about a financial market meltdown.
Only then will obstinate Democrats be forced to actually come forward with their own plan for cuts in expenditures instead of playing politics.
Gipper, the response of every government to threats to cut revenue is to halt the most popular services (e.g., police, fire, schools) in order to maximize public reaction. Service the voters rate as lower priority (medical coverage for non-citizens, unionized workers’ jobs, pay, and benefits) will NOT be cut because that would reduce the spenders’ political leverage.
Only after several cycles of this tactic will voters begin to realize the trickery. Even then a majority of voters may reluctantly decide to accept tax increases. This is how it has been played time and again at the state level. Democrats have a very strong hand here.
AMTbuff,
I disagree this time. There is no way Obama will cut off checks to Social Security, Medicare, interest on the debt, military personnel, State Department, health and safety, FBI, FAA, and Homeland Security.
This is different than a fight over appropriations that occurred in 1995-1996. This is a fight over prioritization of revenue, and there’s no way that HHS and NPR are going to go to the front of this line.
Basically, the Democrats’ entire non-entitlement welfare state will be screwed by a debt ceiling crisis. The Republicans should just sit back and enjoy seeing 30% of the federal government shut down because there isn’t enough revenue to go around. Let Obama worry about what the 70% most important things are for the government to fund, and which 30% of programs go wanting.
This could be fun. Give me some popcorn and the remote while I watch DC property values take a nose dive. Hurray!
Back in 2006 I told a young person in DC that it was a bad idea to buy a house in a bubble economy, and that DC would fare the worst when the bubble burst, due to massive cuts in government spending. The second half of my advice was exactly wrong, or at least much too early. The spending tsunami has stimulated the DC area so much that it’s as if the recession never occurred.
Call me stubborn but I agree with you that DC home values are going to move much lower relative to the national average. When? Oh no, you won’t get me to make that mistake again!
Gipper,
I’m not an economist, but it sure seems to me (and I’ve seen some economists confirm this) that immediately removing from the economy government spending representing several percentage points of GDP would very likely result in recession or worse (particularly given the softness of the economy already). I don’t think one need be much of a Keynesian to make that assumption.
If anyone can offer links to opinions of economists to the contrary, please do.
I didn’t save links to where I’ve seen the view I’ve mentioned, and one such view was expressed by a prominent economist who was kind enough to correspond with me by email so I’ll keep those comments private.
Gipper,
I’m sympathetic to your point of view but ultimately I think you’re wrong to think about the “benefits” of not raising the debt ceiling.
What would be most likely to happen (in my view) is one of two things…neither good. Either the government would massively inflate by printing dollars to cover the difference or it would simply start issuing IOUs instead of cash. Take it from a citizen of IL where the state is currently $8 billion in arrears on its payments.
The predictions of catastrophe are correct but the catastrophe would not be the one you imagine. In addition, Brooks is also correct, you can’t remove 8 to 10 percent of GDP from the economy and not drive us into a double dip.
SteveinCH,
The Federal Reserve is prohibited by law from lending money directly to the Treasury. It can only purchase debt held by the public.
Issuing IOUs would be a violation of Article I Section 8 of the Constitution giving Congress sole authority to borrow money on the credit of the US. The executive branch cannot do that without incurring a losing legal battle.
Regarding the Keynesian Aggregate Demand concerns, my response is that AD stimulus policies have (as what occured under Roosevelt during the 1930’s) delayed the necessary corrections the markets needed to enter a strong recovery. Obama’s stimulus policies have delivered an anemic, halting psuedo-recovery, at the cost of huge debts that will affect our future consumption options. Keynesians only worry about the present, to the detriment of our future economic health.
Gipper,
You may be right about issuing IOUs but the court fight would take a while and wouldn’t be in our best interest.
I think the notion of the US government losing a court fight over IOUs makes the shock far worse and I’m almost willing to guarantee you that, if faced with the real debt ceiling, the monthly budget balance would not drop to zero.
On AD, I’m not making a Keynesian stimulus argument but a calculate GDP argument. If GDP is C+I+G+NX, a decline in G of 40 percent or so is going to smack the GDP numbers upside the head. You may or may not think this is a good thing but you cannot deny the impact it would have on GDP in the short term.
There’s simply no way the government would allow that.
Since when has the Constitution stopped the federal government from doing what it badly wanted to do?
Steve — The final line in your last comment makes it unclear now if you are saying the likely consequences would make the move (suddenly cutting spending to the level of revenues) undesirable or if you’re just assessing political likelihood of such a move. (Kind of a pet peeve of mine when people do that, b/c it comes across as trying to have it both ways re: what one actually would like.) Which is it?
Gipper — Although there’s something to your point re: fiscal stimulus potentially impeding desirable market corrections, you seem to ignore some negative, vicious circle dynamics of economics, such as “the paradox of thrift”. I think such dynamics can magnify the negative consequences of large spending reductions if done far too quickly and/or at vulnerable points in the economic cycle.
In other words, even if we generally assume that much lower federal (and overall government) spending would lead to a “better” economy (due to lower deficits and/or lower taxation, and less interference with market forces), I don’t we can simply assume that any move in that direction is, on balance, desirable — even on a macro level (leaving aside those who get hurt on an individual/segment level) — regardless of how sudden & great the reduction and regardless of timing. Even leaving aside any desire to sacrifice on a macro level (forgoing an optimal overall economy) to protect some among us, I don’t think we can totally discard all Keynesian considerations re: impact at that macro level.
Again, I’m not an economist, but your view seems to reflect a reckless oversimplification that is terribly dependent on excessively simple theory.
I agree with Brooks. Sudden massive changes, or even the prospect of them, can kill the economy. Arguably the sharp left turn the voters took in November 2008 caused a mild version of this effect, prolonging the recession.
When it comes to the economy, easy does it. Slamming into a wall, any wall, is simply a bad idea.
Brooks,
Let me try it this way. The consequences of cutting Federal spending by 40 percent (or so) would be very bad for the economy.
However, I think if the debt ceiling is not raised, the government will not cut activity by 40 percent. It will instead invent new ways to “finance” that activity (IOUs, extraordinary actions by the Fed, etc). This will be short lived but will have the likely effect of making the outcome even worse than if it simply cut spending by 40 percent or so.
Steve,
So either way, you’re saying that refusing to raise the debt limit for any significant period of time would be the worst case scenario, and if you have to choose between (1) refusing to raise the debt limit for some significant period of time, or (2) raising the debt limit sometime soon even if there were no deal to substantially cut spending, you’d much prefer #2, correct?
Brooks,
That’s correct although I think that’s a choice between very bad and disastrous. I prefer very bad.
Although similarly, I might ask you. If the choice was between raising the debt ceiling with significant (say 10%) cuts in spending and failing to raise it at all, you’d prefer the first, wouldn’t you?
10% “cuts” vs. what?
and with what kind of timing?
In general, vs. current law baseline I assume I’d want at least a 10% spending cut F2013-F2022.
I’m saying 10% in FY2012. See the debate as all are in Washington is all about framing.
The question you posed to me was the Dem framing. Namely, since a clean bill is better than not raising the ceiling, we should vote for a clean bill.
My response might be the Rep framing. Since a bill cutting spending immediately by 10% and raising the ceiling is better than not raising the ceiling at all, Dems should vote for that bill.
What’s likely to happen is that we’ll have a strong spending cut bill come through the House and a wishy washy we’ll figure it out later bill come through the Senate. The real question is which of those bills would you rather have. My answer is that if the spending cut bill is modest (10% or less now with more to come), I’d take that bill over the wishy washy we’ll figure it out later bill. You might feel differently
Steve,
Re: The question you posed to me was the Dem framing. Namely, since a clean bill is better than not raising the ceiling, we should vote for a clean bill.
I made no such implication. I haven’t expressed or implied any view on that. I just asked that hypothetical to get clarification on your views and priorities, since you had stated them ambiguously.
As for a 10% cut in FY 2012, I don’t know. It could even be that we should have higher spending as stimulus. I really don’t know. I do think that some reasonably credible plan for the medium and long-term is badly needed, and a big part of it should be spending reduction vs. current law baseline.
But sadly for the rest of the world, you and I define the terms “spending reduction” differently ; )
I’ll add that hitting the debt limit wall today may be preferable to hitting the bond market crash wall later. When the bond market dies there will be no new debt AND no rollover of maturing debt either. That will double to fiscal challenge.
If your car accelerates out of control, safety courses teach that the correct response is to sideswipe anything and everything to slow the car down. One could argue that refusing to raise the debt ceiling is analogously necessary to avoid a bond market crash.
Steve,
I meant explicit expenditures, same as you.
The Democratic end of the game theory (game of chicken / “battle of the sexes”) aspect of the debt ceiling battle reminds me a bit of the ads by the mattress retailer that “We’ll beat the best advertised price you find or we’ll give you $500 cash!” Well, presumably any difference in price would be much less than $500, so why wouldn’t the retailer just slightly beat the price rather than pay $500? Similarly, if the Democratic side came to believe that their choice were only between a 40% spending cut or a substantial but much lesser cut Republicans demand, they wouldn’t resist for long (unless they saw political gain in allowing the more severe cuts to occur/continue).