Tax Cuts

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To the Editor:

Bruce Bartlett’s defense of the Bush tax cuts is considerably more subtle and compelling than the spin coming out of the Bush White House, which Mr. Bartlett, to his credit, concedes to be incoherent [“Explaining the Bush Tax Cuts,” June]. But this is like saying that Patrick Buchanan’s analysis of Middle Eastern politics is more subtle than that of Saddam Hussein’s former information minister. With so low a baseline for comparison, even a dramatic improvement leaves us far below the desired level.

Mr. Bartlett commits a number of medium-sized analytical errors and one giant conceptual error. The Bush tax-cut proposals coincided with the appearance in the late 1990’s of huge projected budget surpluses. “Conservatives were wary of these predictions,” Mr. Bartlett writes, “fearing that surpluses would lead to massive new government spending.” But it was Democrats and moderate liberals who suspected that the projected surpluses were too good to be true. Conservatives not only defended the projected surpluses as accurate, they insisted that the projections were too small. When questioned in 2001 about the possibility that surpluses might prove chimerical, White House budget director Mitch Daniels said, “Well, we really can’t miss here. . . . We’ve been underestimating revenue by as much as $80 billion a year. And we are likely to continue doing that.”

In his major economic speech of 2001, Bush himself cleverly spoke of his uses of the surplus in the past tense: “We have increased our budget at a responsible 4 percent, we have funded our priorities, we have paid down all the available debt, we have prepared for contingencies, and we still have money left over”—as if the money had already flowed into the Treasury. In the Democratic response, House minority leader Richard Gephardt warned that Bush was not realistically accounting for his own spending plans, and was leaving no room for the possibility of an economic downturn or military emergency. Those fears were vindicated in spades.

Mr. Bartlett likewise defends the distribution of the Bush tax cuts, citing the fact that the richest 20 percent of Americans now pay only a slightly smaller share of federal income and payroll taxes. This statistic, while less misleading than, say, Bush’s ludicrous insistence that “by far the vast majority of my tax cuts go to the bottom end of the spectrum,” is still misleading. Not only does it omit Bush’s repeal of the estate tax, which is paid entirely by the very wealthy, but it obscures the fact that the greatest benefits of the tax cuts fall to the richest 1 percent, whose share of the federal tax burden will decrease by about a tenth by 2010.

Mr. Bartlett does not entirely deny the distributional effects of the Bush tax cuts. Rather, he argues, “With the tax burden skewed so heavily toward the rich, it is simply impossible to reduce that burden in a way that is not similarly skewed toward the rich.” Impossible? In 2001, left-wing Democrats proposed giving everybody who pays taxes a $350 refund. If that seems too Marxist, we could simply reduce the rate paid by the bottom tax bracket or reduce the rates for all the tax brackets. Mr. Bartlett’s claim that it is impossible to cut taxes without having distributional results similar to those brought about by Bush is simply false.

Mr. Bartlett’s biggest failure is his attempt to explain away deficits. Republicans generally make two main defenses against the charge of deficit-mongering. The first is that tax cuts, by reducing revenues, will “starve the beast,” forcing commensurate reductions in spending. As Mr. Bartlett concedes, this argument is nonsense. Spending slowed after George H.W. Bush and Bill Clinton raised taxes in an attempt to restore fiscal discipline; only after George W. Bush convinced Congress to throw away its inhibitions did spending rise again.

The second GOP defense, which contradicts the first, is that tax cuts will permanently raise economic growth to so great an extent that revenues will actually rise. Somehow, there are supply-siders who still believe this, even after they predicted in unison that Clinton’s 1993 tax hike would cripple the economy and cause revenues to drop. But Mr. Bartlett does not argue for magical revenue growth, either.

Mr. Bartlett’s only defense on this point is to pooh-pooh the effect that deficits have in driving up interest rates. The relationship between deficits and interest rates is an economic truism, as even Greg Mankiw, the Harvard economist appointed by Bush to head the Council on Economic Advisors, has conceded. “Interest rates are determined by so many different factors,” Mr. Bartlett argues, “that it is absurd to think that the deficit is the overriding influence.” But nobody claims that deficits are the “overriding” factor, just that they are a factor.

Even if this were not true, Mr. Bartlett ignores altogether the even more important fiscal logic. Bush has reduced taxes far below what is sufficient to pay for what even a government under unified conservative Republican control wants to spend. In 2004, federal spending accounted for 20 percent of the gross domestic product (GDP), which is not unusually high. Federal revenues, by contrast, accounted for 15.8 percent of GDP, which is the lowest percentage since 1950. Economic growth should bring that figure up, but without corrective action, it will not come anywhere close to matching outlays. Bush has left us with a tax system that, into perpetuity, will raise several hundred billion dollars less than the government will spend.

Spending must be paid for somehow. If we do not pay for it through taxes, our children will pay for it with interest. It is perfectly clear why the administration would desire such an outcome: why not foist the bill for their spending onto taxpayers who will be voting long after Bush has left office? What is not clear, and what Mr. Bartlett does not even attempt to explain, is why anybody who has the national interest in mind would agree.

Jonathan Chait

The New Republic

Washington, D.C.

To the Editor:

Bruce Bartlett’s paean to the Bush tax cuts argues that they will have little effect on long-term deficits and will promote long-term growth; that their benefits have been distributed equitably; and that they represent tax reform. We disagree on all three counts.

If the tax cuts are made permanent (and not gradually erased by the effects of the Alternative Minimum Tax), they will add $3.7 trillion in deficits over the next ten years. More importantly, they will worsen the already grim long-term budget picture. The Urban Institute-Brookings Institution Tax Policy Center has found that over the next 75 years—the period customarily used to assess Social Security’s finances—the cost of the tax cuts will be three to five times the entire Social Security shortfall. The tax cuts just for the top 1 percent of households will be as large as the entire Social Security shortfall.

Mr. Bartlett’s assertion that the tax cuts will promote long-term growth does not stand up, either. Several of the tax cuts, such as the reductions in marginal rates, might modestly promote growth if they were paid for. But they are not, and consequently will swell the deficit. Studies conducted by the Brookings Institution, the Federal Reserve, the Congressional Budget Office, and Congress’s Joint Committee on Taxation have found that the growth-reducing effects of the enlarged deficits will cancel out most or all of the tax cuts’ growth-promoting effects.

Mr. Bartlett’s defense of the fairness of the tax cuts is also misleading. When describing the effect of the tax cuts on the share of taxes that high-income individuals pay, he leaves out the effects of repealing the estate tax, which benefits only the very affluent. In addition, he ignores the best measure of a tax cut’s effects on different income groups: its impact on after-tax income. The Bush cuts make the distribution of after-tax income more unequal by giving the vast bulk of their benefits to wealthy households.

Moreover, since the tax cuts cannot be deficit financed forever, they ultimately will have to be paid for through some combination of budget cuts and tax increases. Under almost any approach likely to be adopted, the bottom 80 percent of the population will end up as net losers. They will lose more from the measures adopted to pay for the tax cuts than they gain from the tax cuts themselves. Only the top 20 percent will come out ahead.