Republican Economist Mendacity About Some Alleged Tax Bomb

Via Greg Mankiw comes a bit of fiscal mendacity from John Cogan and Glenn Hubbard:

As the presidential campaign enters its final stages, there will be increased debate over budget priorities and how they will be paid for. Many commentators and political leaders, including Sens. Hillary Clinton and Barack Obama, believe that tax increases are needed to restore near-term budget balance and finance longer-term entitlement growth. These claims fail budget arithmetic and economics. Worse, they raise serious questions about the nation’s broad fiscal policies and its commitment to economic growth. By historical standards, federal revenues relative to GDP, at 18.8% last year, are high. In the past 25 years, this level was only exceeded during the five years from 1996 to 2000. Still, we stand on the verge of a very large tax increase, one that will occur unless the next Congress and president agree to rescind it. Letting the Bush tax cuts expire will drive the personal income tax burden up by 25% – to its highest point relative to GDP in history. This would be the largest increase in personal income taxes since World War II. It would be more than twice as large as President Lyndon Johnson’s surcharge to finance the war in Vietnam and the war on poverty. It would be more than twice the combined personal income tax increases under Presidents George H. W. Bush and Bill Clinton. The increase would push total federal government revenues relative to GDP to 20% … Proponents of bigger government invariably argue that allowing all or some of President Bush’s tax cuts to expire is necessary in the near term to balance the federal budget, and necessary in the longer term to finance the retirement and health-care promises made to the baby-boom generation. But a tax increase is neither wise nor necessary. As has so often been true in the past, the economic damage caused by the tax increases and tax avoidance behavior will prevent the promised revenues from being realized. At the same time, the promise of higher revenues will encourage Congress to continue its profligate spending. As a result, a tax increase won’t lower the budget deficit. Moreover, current tax rates can be maintained and even reduced and still allow for necessary increases in national security appropriations and the balancing of the federal budget. Although budget balance may not be achieved overnight, a firm commitment by the next president to spending control will enable balance by the end of his or her first term.

I’m calling this mendacity for several reasons. Cogan and Hubbard fail to inform their readers that the current tax rates are leaving us with a massive General Fund deficit, which means we have substantial deferred tax liabilities not showing up in the current tax figures. As they claim we can balance the budget and still have large defense spending, they are failing to tell their readers that the only way this works out in the long-run is to have the Social Security Trust Fund subsidize the General Fund. Translation for the average Joe: expect to continue to pay those high payroll contributions as you watch your Social Security benefits slashed.

But my main – and a somewhat new – complaint about this GOP spin is how Cogan and Hubbard highlight a subset of income taxes. Our graph shows not only the personal income tax to GDP ratio they focus on but also total Federal income taxes as a share of GDP with the difference being mainly profits taxes. Federal income taxes were around 13% of GDP in 1981 but then declined to less than 11% as a result of the Reagan tax cuts. Of course, the Reagan years were a period of deferred taxation as well. The Clinton years saw a restoration of fiscal responsibility by getting Federal income taxes to once again reach 13% of GDP. While Cogan and Hubbard are correct to note that personal income taxes as a share of GDP were high by historical standards during the late 1990’s, they fail to tell the reader that profit taxes as a share of GDP had declined over the years. What do I draw from looking at this data? The reason that personal income taxes as a share of GDP had to increase was NOT that Federal spending had increased but because there was a shift away from taxing capital and towards taxing labor. But Cogan and Hubbard try to paint a very different picture by giving only a portion of the overall tax story. I hate to say this about Glenn Hubbard – but he has lent his name to what appears to be a very dishonest message.

Update: Kay Baily Hutchison gets downright silly in her call to make the tax cuts permanent:

But in 2010, those tax cuts, which spurred growth and created 8.1 million jobs, are set to expire. If they are allowed to expire, we will witness the largest tax increase in American history.

Wick Allison responds:

First, dear Kay, “tax-and-spend” is preferable to the borrow-and-spend philosophy of the current GOP administration, which has created the highest deficits and the largest increases to the national debt in our history. Second, if the Bush tax cuts are responsible for the economy’s job creation, why did the Clinton-era tax increases result in even more jobs? Third, besides opposing a redesign of the Bush tax cuts, what exactly do you, as a United States Senator, propose to do to restore fiscal sanity to a federal government whose spending has run amok during your last seven years in office? Really, this has gotten to be too much. This is a party — my GOP — that wouldn’t even raise taxes to pay for a war. It is locked in an ideological mind-set whose chief attribute is recklessness. It stands against everything that conservatism once stood for: pragmatism, prudence, and the idea of safeguarding our country’s patrimony to future generations. (And, beloved Senator, what have you done today about Medicare and Social Security, besides, of course, voting to expand its costs?)

Update II: Stan Collender must have anticipated the Cogan-Hubbard spin when he wrote his “fiscal fitness” post. Read the whole thing but here’s the Cliff Notes version:

There are two current budget arguments I personally find most distressing. The first is that current or proposed levels of federal spending and revenues are somehow inappropriate, unjustified or unpatriotic because they deviate from the historical average … The second most misleading and depressing argument used these days is that the budget problem is only a spending problem.