POLITICS JANUARY 21, 2002
It's hard to think of a fiscal argument that's been refuted as quickly and spectacularly as the one President Bush made on behalf of his tax cut last year. (Sure, in 1993 just about every Republican economist and politician argued that President Clinton's tax hike would destroy the economy, but that prediction took several years to be disproved, by which time almost everybody had forgotten about it.) Just six months ago Bush insisted we could pass a huge tax cut, save the entire Social Security surplus, increase military spending, and fund new domestic programs--and still leave aside plenty of money for unforeseen contingencies. Now, of course, not only is the government dipping into the Social Security surplus, it's due to run actual deficits for the next few years.
Yes, the vanishing surplus is due mostly to factors other than the tax cut; but that was exactly the critics' point: They said over and over that it was unrealistic to assume there would be no unanticipated claims on government largesse or substantial drops in economic growth. "[T]he president's tax cut leaves almost nothing for the next ten years for natural disasters or national defense emergencies," argued then-Minority Leader Tom Daschle last February. "[I]f our economy slows even a little, the surpluses people are predicting now could easily turn into deficits instead." But not even Daschle and his fellow liberal critics thought it would happen so fast. As it turned out, the skeptics weren't skeptical enough.
Given all this, you might think that Bush and his supporters would be somewhat chastened. But far from apologizing, Republicans have actually spent the last week on the offensive--gleefully accusing Democrats of plotting to raise taxes, a charge Democrats have been frantic to deny. House Minority Leader Dick Gephardt released a defensive statement pleading against a "partisan blame game." The phrase is telling: It's not supporters of the Bush tax cut who fear being blamed; it's their opponents. Something deeply perverse is going on here.
Bush captured the alternate-universe quality of the current debate in his "not over my dead body" speech last Saturday. "There is an amazing new kind of economic theory working its way through Washington, and it said that tax relief causes recessions," the president declared. "The worst thing you can do is raise taxes during a recession."
Consider the various dishonesties packed into these two short sentences. The first is that Democrats believe Bush's tax cut precipitated the recession, a canard that has since reverberated through the echo chamber of the conservative punditry. Bush is distorting a speech given two days before by Daschle, who argued not that the tax cut caused the recession, but that it failed to avert it (as Bush had promised it would) and may make it longer. How could the tax cut worsen the recession? By raising interest rates. It's simple supply and demand: Businesses compete to raise capital. Budget deficits force the government to soak up some of that pool of capital. When the supply of capital available to the private sector shrinks, the cost rises, which is reflected in higher interest rates. So, for instance, when Clinton pledged to reduce the deficit, long-term interest rates fell. Since passage of the Bush tax cut, the expectation of future deficits has pushed up long-term interest rates. This counteracts the short-term stimulus of tax cuts.
Then there's Bush's claim that Democrats want to raise taxes during a recession. Now, it's true that Daschle and Co. have been extremely slippery about their desire to undo the Bush tax cut, couching their plans in euphemisms like "restore fiscal responsibility." But when it comes to which elements of the plan they propose to undo--er, restore to fiscal responsibility--they explicitly say only those that will take effect after this year. After all, a huge portion of the Bush tax cut won't take effect until his second term, by which time the recession will almost certainly have ended. And rescinding future tax cuts now--such as the estate tax, which is scheduled for repeal in 2009--not only wouldn't slow down an economic recovery, it could actually help it along by lowering long-term interest rates.
But the silliest claim peddled by Bush and his allies is that Democrats want to "raise taxes" at all. The liberal position, remember, is to cancel out those portions of the Bush tax cut that have yet to take effect. Tax cut proponents insist that this constitutes a tax hike. Appearing on CNN last weekend, pro-tax-cut Democrat John Breaux was specifically asked about taxes "in the long run"--an important detail because it signifies that the question was not about repealing tax cuts that have already gone into effect. Breaux replied, "to go back on that program would, in effect, be a tax increase."
When you tell most people they're getting a tax increase, of course, they think their tax rate is going to go up. Canceling the unimplemented portions of the Bush tax cut would do no such thing. It would merely give people a smaller tax cut than they had been promised. You could argue that once the government has promised a future tax cut, any downward deviation from that promise counts as a tax increase--and indeed this seems to be the position that Republicans are taking. But it's a spectacularly dishonest one, for two reasons. First, to minimize its ten-year budgetary cost, the Bush tax cut is scheduled to phase out entirely after 2010, at which point (barring what tax-cutters hope will be a routine extension) taxes will revert to their pre-Bush level. So, according to the logic being used against Democrats, supporters of the Bush tax cut actually voted for the largest tax increase in American history.
The second problem is that, when it comes to spending, Republicans have consistently taken the exact opposite position. Remember the Republican Revolution's jihad over Medicare? Since the population of elderly people was growing, as was the cost of medical care, it cost the government more money each year to keep the program at a constant level of services. The GOP Congress wanted to give Medicare more money each year in absolute dollars, but less than what was required to maintain its level of services. Republicans insisted that this did not constitute a "cut" in Medicare, and successfully browbeat most of the media into banishing the word from its reporting.
Bush has adopted this same logic himself. He ridicules the notion that federal programs need to account for inflation and population growth as funny Beltway math. "We've had to learn new accounting," he likes to say. Or, as he guffawed last year, "in Washington, the definition of a cut is that you haven't increased the budget as much as anticipated." But in Bush's White House, the definition of a tax increase is that you haven't cut taxes as much as anticipated. When Bush said he had to learn new accounting, maybe he wasn't kidding.