The hypocrisy of most deficit discussions

by Linda Beale
crossposted with Ataxingmatter

The hypocrisy of most deficit discussions

Congress seems incapable of setting aside electioneering rhetoric and talking straight about taxes and deficits. The GOP claims that it thinks deficits are bad things while at the same time it proposes no spending cuts (except to important safety net programs) and does propose further tax cuts.

Just a bit of background on tax cut rationales and deficits.

Back in the old days of the Bush regime, the tax cutters tended to claim that tax cuts would create jobs and raise (not lower) government revenues. They didn’t. The Bush administration had anemic job growth, certainly seeing no boost from the humongous tax cuts enacted in 2001, 2003, and 2004 (and smaller cuts throughout the term). And we have enough experience with tax cut programs from Reagan to Bush I to Bush II to see that revenues do not miraculously go up when the taxing provisions that are intended to raise revenues are cut back. Sometimes there are a few localized effects–such as increased selling of capital stocks to take advantage of a new and lower rate because it is expected that higher rates will have to be enacted later. But tax cuts cut revenues.

Further, in spite of the GOP attempt to label the Dems as the tax-and-spend party, the GOP turned out to be the tax-cut-and spend-anyway party. Government grew under Bush, even while revenues shrank. The war in Iraq, for example, resulted in huge expansions of military and defense costs, and the homeland security apparatus, much of it intrusive of our private liberty and ineffective at dealing with terrorists, piled on additional government bureaucracy and costs.

If you cut revenues without finding appropriate government programs to cut, then you will increase government borrowing and increase government deficits.

Now, deficit increases make sense sometimes. When the economy is in a slump, it means that private spending is down, so government spending is needed to move it out of the slump. A deficit that is caused by increased government spending that helps the economy by restoring jobs and getting the economy moving again is a deficit that will be reduced as the economy grows, people with jobs pay taxes, and government spending that was used to supplement inadequate private spending can be cut back. Infrastructure spending provides that kind of a stimulus–building systems that will last for years now, to create jobs and stimulate the economy serves the public interest now and for the long term. See, e.g., Laurence Seidman, Reducing Future Deficits While Stimulating Today’s Economy, 7 Economists’ Voice Art. 2 (Sept. 2010).

But the deficit created by the Bush tax cuts doesn’t make sense. It is based on “trickle down” economics–the view that if the rich get richer, everybody else will do well too. But that hasn’t been the case. Since 1980, the rich have gotten immensely richer, but most Americans have hit stagnation, with real wages not sharing at all in the productivity gains that have made corporate managers multimillionaires. The productivity gains, that is, have gone to the people at the top, and the people at the top have horded them, supporting tax policies that give themselves huge tax cuts.

Tax cuts–especially for the wealthiest people and corproations–do not make sense. That money is as likely to be invested overseas as in the US, and overseas it does nothing but contribute to the job drain. Corporations purchasing new equipment with the 100% expensing may buy that equipment from China or India or Korea–again, pushing jobs overseas and doing nothing to stimulate the local economy, but costing the government the tax expenditure that could have been used for public infrastructure projects instead.

And now to the current situation as the “Senate G.O.P. Digs In to Keep Tax Cuts”

The income tax provisions passed during the Bush regime were almost all temporary provisions–they were passed with a sunsetting provision so that they expire at the end of 2010, and the law as it was prior to the Bush administration retakes its place as the applicable law. The question now is whether new laws should be enacted along the same lines.

When the Bush cuts were enacted, the arguments were that tax cuts would lead to more revenues (they didn’t), that there was a surplus to return to the people (there wasn’t–by the time the GOP Congress enacted the 2001 tax cuts, there was already a deficit), and that the tax cuts would stimulate the economy so that it would grow really fast and create large numbers of new jobs (it didn’t–job growth was anemic).

Remember, folks, there was no huge public outcry for new tax cuts when the Bush regime passed the 2001 cuts. And the cuts were made temporary BECAUSE of the huge cost of extending them for more than ten years, which would have made the deficit creation impact too obvious. This was policy pushed by the right, not by the public. Does the fact that the teapartiers are now part of the anti-government, anti-tax hollering mean that people really want to retain the super-low taxes of the Bush period no matter what? I doubt it. Remember those teapartiers who want the government to stay away from their Medicare and Social Security? How about Center for Disease Control–would anyone want there to be no federal vaccine programs for highly contagious diseases? How about National Science Foundation–would people want basic scientific research to cease in the US, so that all our brightest young minds would go to China or India for education and work, leaving us with no innovation? How about emergency response funding–do we not want the Federal Government to be able to send people, supplies and support to Katrina-type events? What about keeping the food supply safe? the water supply? medicines? All of these things are “we the people” acting to do things that need to be done through the Federal Government.

John Boehner, the House Minority Leader and generally not a very astute person to trust with developing tax policy, had actually admitted to some rational thinking on the expiring Bush tax cuts last Sunday on Face the Nation. He acknowledged that he could support a new tax cut for the middle class, even if the wealthy didn’t get one. Daniel, Boehner says he’d support a middle-class tax cut, (Sept. 12, 2010). Of course, he resorted to the old “class warfare” attack–according to the GOP, anybody who doesn’t give a tax cut to the rich every time they give some kind of break to the poor is engaging in class warfare.

Aside on “class warfare”: But of course, the GOP has supported numerous tax breaks that are primarily for the rich–or only available to the top 40% of taxpayers–and never admit that is class warfare. e.g., the deduction for home mortgage interest on mortgages up to a million dollars, which is available only to those who itemize –about 30% of taxpayers, and of those 30%, is of the most benefit to the richest minority who pay higher rates and thus get a larger deduction, or the exclusion for municipal bond interest, which is used by the wealthiest taxpayers who have most of the financial assets, etc.

Progressives would argue that class warfare is represented by the corporatist agenda that extracts all productivity gains for managers and owners and leaves workers without even the pension promises that were made when workers accepted lower wages for higher pension benefits, or the policies that make it extraordinarily hard for workers to form a union, which would give them some semblance of equality of bargaining power with the concentrated power of megalithic multinational corporations, or the “globalization” policies that lead to free trade agreements that impose no protections for our own workers or our environment, etc.

The reasonableness represented by Boehner’s concession lasted all of a microsecond. Boehner’s deputy, the House Republican whip, got out the word on Monday that the Republicans would only be content with a bill that enacted new tax cuts for the wealthiest as well as the most vulnerable–anything else, he says, is a “nonstarter.” And Mitch McConnell, the Senate Republican leader, proposed legislation for new tax cuts that would be the same as the Bush tax cuts for everybody. See Herszenhorn, Senate G.O.P. Digs In to Keep Tax Cuts, NY Times, Sept. 13, 2010.

The cost of enacting new tax cuts that provide the same revenue reductions as the Bush tax cuts will be enormous. It will cost $700 billion over ten years for the new tax cuts for the wealthy and a total of $4 trillion over ten years to extend all of the Bush tax cuts.

McConnell’s argument is that it would hurt economic growth and job creation to tax the ultra wealthy now. But that’s a sham argument. The wealthy are likely to save, not spend, any extra monies from a new tax cut. Or invest it overseas. Or just buy some more stock on the secondary market–making a bank or another wealthy person even wealthier. They aren’t likely to start a new company or directly invest in a new start up just because they get a little more spare change from a tax cut. They’d either be doing that already or not doing it at all. And McConnell, as the Times piece notes, isn’t offering either specific spending cuts that won’t hurt the economy nor other sources of revenue to make up for the additional $700 billion needed to give these multimillionaires another tax break in addition to all of the breaks targeting the wealthy already in the Code.

What about McConnell’s argument that the Obama regime has spent the last two years putting the government in charge of everything? Note he included student loans. Just a reminder about the FACTS about the student loan issue. We used to have a direct loan program. It actually made money for the government. But due to funny accounting procedures that were used for such loans, the books didn’t look like the loans were making money for the government. That’s because they were counted as “pure” expenditures, and not as loans that included an obligation for the borrower to pay the money back to the government with interest. So they made money, but looked like they didn’t make money. The GOP seized on this, and under Reagan changed the program to a “guaranteed loan” program. The same universities would do the work, but the banks would get a significantly larger interest rate than the government had gotten for acting as a middleman but bearing no losses. In other words, the GOP privatized the loan program, ensuring banks a “cut” of profits, and providing for the government to pay the banks for any losses they might incur–privatization of gains, socialization of losses. There was less money to lend, since the banks were getting the interest income and paid by the government if there were losses. The government was losing money instead of making money. But it LOOKED LIKE the government was smaller. And the GOP bragged about its new privatized loan program. As years went on, people argued for a return to the direct loan program. This was especially true when banks managed to get students to consolidate old loans and retain their higher subsidized rate even when they were supposed to reset the rate to a lower rate. So Clinton inaugurated a small direct loan program. And we have moved from there forward, saving the government money and providing students with a cheaper loan program. The only losers in the direct loan program are the banks who no longer get their “entitlement” “welfare” handout from the government. And McConnell condemns the Dem for that change, hoping that Americans will be gullible enough to be fooled into thinking that the direct loan program represents an awful invasion into private commerce, instead of a reasonable and wise use of government funds to provide students the opportunity to have a college education.

By the way, Lieberman is, as usual, supporting the GOP platform on taxes with a statement that “the more money we leave in private hands, the quicker our economic recovery will be.” When private spending has declined, that statement is not only likely wrong, it misses the fact that without government spending there is likely to be no recovery.