Tax Cuts: a Painful Way to Keep Bleeding

The Co-Chairmen of the bipartisan commission to reduce the deficit released a proposal for the commission members and general public to consider as to what is needed to reduce the national debt.  In their comments they bluntly make it clear the reduction can only come with pain to the American people; there is no other way.  Of course Americans have never taken kindly to pain when it comes to economics and thus politicians who vote on policies which affect the nation’s economy tend also not to make the hard decisions in fear of being voted out of office. 

The U.S. Congress is going to take up the issue of making permanent the Bush era tax cuts.  This is being done while simultaneously there are calls to shrink the national debt.  These are the tax cuts that Mike Kimel and Michael Kanell in PRESIMETRICS characterize in this way:

Consider, for instance, that less than two months after taking office GW laid out a plan to aggressively pay down the debt while simultaneously cutting taxes and boosting military spending.  The plan was titled, ‘A Blueprint for New Beginnings: A Responsible Budget for America’s Priorities.’  One can only wonder what an irresponsible budget might have looked like to GW’s advisors. 

According to what I’ve read, making the Bush-era tax cuts permanent will add $4 Trillion (that’s $4,000,000,000,000.00) to the national debt.  One wonders whether any Americans are really fiscally responsible or conservative who can advocate this right now.

Christmas is a time when kids tell Santa what they want and adults pay for it.  Deficits are when adults tell government what they want and their kids pay for it. (Richard Lamm)

The push for the tax cuts at this point seem to be the usual American nearsightedness when it comes to fiscal issues: we want immediate gratification and don’t want to be troubled by the fact that what we do today will have  future repercussions.  

“… a president who cuts taxes while at the same time driving up the debt is not really ‘cutting taxes.’  He is merely transferring taxes from now until some later date.”  (Mike Kimel & Michael Kanell, PRESIMETRICS)

A president who cuts the national debt, on the other hand, saves you from having to make interest and principal payments on that debt in the future, and therefore reduces you tax bill later. Unfortunately, most people don’t seem to make the connection between fiscal irresponsibility today and increased taxes later on.  (Mike Kimel & Michael Kanell, PRESIMETRICS)

We would do well to remember how we got into the national fiscal mess we are in and not perpetuate those same mistakes and then magically hope for a different result.  We might consider the words of U.S. founding father James Madison

“… war should not only be declared by the authority of the people, whose toils and treasures are to support its burdens, instead of the government which is to reap its fruits: but that each generation should be made to bear the burden of its own wars, instead of carrying them on, at the expense of other generations.”

It is we the people, or at least we through our elected political leaders, who got US into the current financial mess.  It is the current and past president and the current and past congresses which have made the decisions to  bury us in debt.

Somehow, some keep singing the song to reduce taxes, as if that is the panacea for all that ails the American economy.  Yet the national debt also ails the economy and we are not going to reduce the national debt by reducing taxes,  anymore than someone can reduce their credit card debt by reducing their income.  If we are serious about reducing the national debt, we are going to need a different remedy than reducing taxes to pay down the current debt.

I do not know where the idea that reducing taxes is the best way to grow the economy comes from – but if PRESIMETRICS  measures the data right, then reducing taxes isn’t the panacea needed.  Consider the following based on Kimel and Kanell’s analysis of the data available from 1952-2008 (Presidents Eisenhower to GWBush):

“in recent decades, higher tax burdens have been associated with faster, not slower, economic growth.” (p 120)

“there doesn’t seem to be any evidence here for the proposition that lower taxes result in higher incomes  … lower taxes- at least by themselves- are not the way to increase economic growth.”   (pp 124-125)

“The numbers are pretty compelling.  Lower average tax burdens do not produce faster economic growth, or more jobs, or bring in more tax revenues.  Similarly, tax cuts also do not produce faster economic growth, faster income growth, or more jobs, or bring in more tax revenues.  … Unexamined faith in a principle that is demonstrably false is no way to run a country.”  (pp 129-130)

So, is the idea that tax cuts are beneficial to the economy based upon intuitive assumptions rather than on any statistical analysis?    It seems like it should be true that lowering taxes would benefit tax payers in every way, but the data which PRESIMETRICS studies doesn’t uphold what is a cornerstone of political beliefs for many.

This may be a case where we need to stop believing what we think, and actually examine the data to see what in fact will bring down the national debt and help the economy.  Maybe we actually are going to have to do some of the painful things the bipartisan commission is considering, including both raising taxes and cutting spending.  Ouch!

Or maybe we will continue to pretend there is some magical and painless way to reduce the budget deficit and keep doing all the things we currently are doing. 

Any magic left in these contenders?

In the Harry Potter books and movies, ultimately it is not magic that saves the day and defeats evil, but rather the courage and persistence of its “all too human” heroes to do the right thing despite their weaknesses, even when it is very painful.

Our politicians need to learn a bit of that magic called courage.