JONATHAN CHAIT SEPTEMBER 13, 2010
American Enterprise Institute economist Alan Viard, former member of George W. Bush's Council of Economic Advisors, laments the end of the upper-income Bush tax cuts. It happened, Viard argues, because Bush failed to properly sell the upper-income tax cuts:
[T]he high-income rate reductions provide much greater incentive for investment and other economic activity, relative to revenue loss, than the middle-class tax cuts. The expiration of the former and extension of the latter therefore combine much of the disincentive effects of full expiration with much of the deficit increase of full extension.
If this outcome occurs, much of the blame will rest with supporters of the Bush tax cuts. Over the last nine years, the high-income rate reductions have been the neglected stepchild of the tax cuts. The Bush administration downplayed these reductions when the 2001 tax cut was adopted, and supporters have generally failed to make the growth case for them. Most defenses of the high-income rate reductions continue to rely on misplaced arguments about small-business aid and Keynesian demand stimulus. These arguments solidified political support for the initial passage of the tax cuts, but impeded the establishment of lasting pro-growth tax policy. Laying a firm foundation for sound tax policy will require bringing the neglected stepchild in from the cold and making the economic-growth case for the high-income rate reductions.
I'd put it slightly differently. Cutting taxes for the rich was unpopular in 2001. In order to get Congress to act, the Bush administration coupled those upper-income tax cuts with a bunch of middle-class tax cuts, then tarred any opponents of the upper-bracket tax cuts as opponents of middle-class tax cuts. They also seized upon the recession as a pretext to enact what they hoped would be permanent tax changes as a Keynesian demand-side response to a very shallow recession. Viard does not mention this, but they also insisted repeatedly that the Bush tax cuts would make the tax code more progressive, even though this was the opposite of the truth. In other words, they just lied like crazy.
Now, Viard thinks Bush should have tried to make a straightforward argument for reducing upper-bracket taxes -- incentive effects and all the rest. But of course it's very hard to change the public' mind on an issue like that.
Moreover, while I disagree with Viard about the incentive effects of upper-bracket tax cuts -- I think the impact is extremely minimal -- I do think you could usefully reduce upper-bracket taxes rates in a way that wouldn't impact either the progressivity of the tax code or the deficit. You'd simply have to compensate for the lower tax rates by closing tax loopholes. But the Republican Party, as opposed to a few academics loosely affiliated thereto, is much less interested in the theoretical benefits of tax rate reductions and much more interested in policies that simply increase the after-tax income of the very rich, so the point is moot.