Jonathan Chait

The Trouble With Permanent Responses To Temporary Problems

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Earlier today, I questioned the conservative insistence that tax cuts in response to a recession must be permanent. You can't just ratchet down revenue in response to regular, temporary downturns. Stephen Spruiell at National Review tries to rebut:

[W]hat I mean by "permanent" is that A) the tax relief should come in the form of rate cuts, not rebates, and B) the rate cuts should not be packaged with expiration dates, if possible. Notice that my definition of permanent does not include C) "and then we should have a constitutional amendment prohibiting Congress from ever raising taxes again."

Now, Chait might respond that things such as Grover Norquist's tax pledge make "C" the operative position of many conservatives anyway, lending some credibility to his over-literal interpretation of "permanent." But Norquist's tax pledge is based on the view that government is currently too big, and that Congress should cut spending before it raises taxes any further. I'm sure there is a point at which even Grover would say that federal tax rates are fair, and I'm sure that point for most conservatives would come well before revenues hit zero.

The point isn't that eventually it will hit zero. Of course it won't. Likewise, Norquist may prefer a revenue base above zero, but his preferred level is well below anything the government has or will run in my lifetime. So the hypothetical world in which Republicans will cheerfully raise taxes has no bearing on reality.

Spruiell seems to be suggesting that we should enact "permanent" tax cuts during recessions, then cancel those tax cuts when the economy recovers. His argument is that if you put expiration dates in the tax cuts, then consumers will just save the money. But if you enact them with the plan of subsequently canceling them, consumers will act as though they're permanent and respond accordingly. Of course, if you were to actually follow Spruiell's plan, I think this intention would get communicated to the public. Congress isn't going to implement a plan like this in secret. Basically, he's arguing that people are smart enough to notice when tax cuts are temporary and to change their behavior accordingly, but not rational enough to notice that Congress has "permanently" reduced their taxes but plans to cancel out the tax cuts. This is quite a fine line.

Spruiell continues by touting the overriding benefits of lower tax rates:

The importance of cutting tax rates, in terms of economic stimulus, it not just that it gives people more money to spend. The stimulus comes from the incentive effects of letting people keep more of the money they earn. If people think they are going to need to work harder and save more because the government is going to cut their Social Security, and the government is simultaneously letting them keep a higher percentage of each marginal dollar, eliminating taxes on their investments and reducing taxes that create a drag on their business activities, how could that not be a net plus for economic growth?

Leave aside the general strength of the argument that lowering tax rates has powerful economic effects, which I would dispute. Nothing that Spruiell is saying makes any more sense during a recession than  during normal economic times. Indeed, it makes less sense, since he's arguing that tax rate cuts would encourage workers to "save more," which is generally a good thing but is harmful during recessions. He's making a general supply-side argument for the incentive effects of low tax rates.

And that, of course, is my general point: All this nonsense about the need for permanent tax cuts as a recession-fighting tool is really ideological cover. Conservatives want to reduce tax rates, especially on the rich, and the recession is a pretext. They hold up the recession as a reason to implement the policy, but the recession has nothing to do with it.

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