Recount

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JANUARY 21, 2002

Recount

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.

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