JONATHAN CHAIT DECEMBER 1, 2010
National Review editorializes in favor of permanently extending all the Bush tax cuts.The argument begins by asserting that even the compromise Democratic offer to extend tax cuts for all income below one million dollars a year would be too onerous for the poor, poor families trying to scrape by on a low seven-figure salary:
Plan B was a large tax hike on families earning $250,000 or more. But that would have punished a lot of small businesses, not to mention a fair number of two-earner households consisting of the likes of policemen, nurses, public-school administrators, and other professionals whose combined household incomes frequently top $250,000 but who can hardly be demonized as “the rich.” So now Sen. Claire McCaskill, a Missouri Democrat, has trotted out Plan C: confining rate hikes to “millionaires,” meaning any household with an income exceeding $1 million. Senator McCaskill has never been the sharpest financial mind in the Senate, but even she should be able to figure out that a married couple earning $1 million in 2010 does not necessarily consist of “millionaires” — depending on their state and local tax burdens, they’re likely to be barely halfway there even before they have spent one thin dime of their own earnings.
Of course, the definition of "millionaire" is not net income over a million dollars a year, it's net wealth over a million dollars. That's the sort of thing you ought to get straight before accusing your targets of stupidity.
Anyway, households earning more than a million dollars a year constitute less than two-tenths of a percent of America. At some point, you have to give up the poor regular middle-class folks and just admit you're defending tax cuts for a tiny slice of the very richest Americans.
More interestingly, NR proceeds to argue that the Congressional Budget Office has actually blessed the idea of making the upper-income portion of the Bush tax cuts permanent:
As the always-sensible Reihan Salam reports in the current edition of National Review, economists expect that raising taxes at the top end would reduce economic growth significantly. Democrats will call that a Republican talking point, but it is consistent with the findings of the nonpartisan Congressional Budget Office, currently under the management of Douglas Elmendorf, a Democratic appointee. The CBO numbers suggest that a partial preservation of the Bush tax rates — meaning a compromise that raises taxes on “the rich,” in this instance defined as those earning $250,000 or more — would reduce real GNP by 1.2 percent, as lower revenue necessitates more government borrowing, slowing down long-term economic growth. But an across-the-board extension would reduce real GNP by only 0.6 percent, cutting the economic losses in half. Another way of saying that is that the growth effects of extending the tax cuts at the affluent end of the scale would make up half of the forgone real GNP associated with the tax cuts. That isn’t Arthur Laffer’s analysis, it’s the Democratic-led CBO’s.
Wow, so the CBO says the tax cuts will increase growth? Not exactly. Here's what Reihan Salam actually wrote:
the CBO’s strong labor-response model finds that a partial tax-cut extension as proposed by the president would reduce real GNP by 1.2 points — the growth effects of the tax cuts would not be sufficient to offset the lost government revenue. A full extension, in contrast, would reduce real GNP by only 0.6 points, suggesting that the addition of the high-income rate reductions would actually increase GNP by 0.6 points, despite the revenue loss. The weak labor-response model finds that partial and full extension have the same impact on GNP.
What is the "strong labor response model"? Let me explain. For years and years, conservatives been been lambasting the CBO because its economic models do not assume the explosive incentive effects that supply-siders believe, in the face of all evidence, must exist. After years of hounding, the CBO has including a "strong labor response model" in its projections alongside its normal projections. NR pretends that this one alternate assumption is the CBO's only finding.
Anyway, even if taken at face value, NR doesn't seem to realize just how weak of a claim it's making about the CBO. Here's the CBO report they trumpet in chart form:
CBO is saying that extending the tax cuts, in any form, will decrease long term economic growth. Under one set of assumptions -- the assumptions that NR pretends are the only assumptions in the report -- extending all the tax cuts will harm the economy less than extending only tax cuts on income under $250,000. In other words, if we accept right-wingers' views about the incentive effects of tax cuts, then we can go an additional $700 billion in debt in order to decrease economic growth by 0.6% of GDP less than otherwise. The overall policy is to take on hundreds of billions in additional debt in order to decrease long-term economic growth. This is what NR is touting as an endorsement of the tax cuts!
Indeed, CBO's analysis is consistent with the assumptions of essentially all economists from left to right. Debt-financed tax cuts decrease economic growth. The only way you can create an assumption of higher economic growth is to package those tax cuts with equal-sized spending cuts. Of course, the tax cuts in question are not packaged with any spending cuts whatsoever.
NR waves away this inconvenient fact by citing a "mood" to cut spending:
If the CBO is correct, then there probably will be revenue forgone by extending the Bush tax rates, but the wholesome fact is that the American people and the new Republican majority in the House are in a mood to cut spending. Thankfully, the chairmen of President Obama’s deficit commission have shown a good deal more sense than the tax-happy Democrats in Congress, and their list of spending cuts would be an excellent place to get started reducing the size, scope, expense, and arrogance of the federal government.
It's nice that they're conceding that it's "probably" true that tax cuts will decrease revenue. It's also touching that NR has so much faith that in the power of Congressional anti-spending rhetoric, though I note that this rhetoric has not manifested itself in, say, a requirement that Congress at least find offsetting spending cuts before it digs the deficit hole deeper with more tax cuts. I'd also note that NR is advocating revenue levels far below the spending levels that would prevail even in the wildly unlikely event that the Republican leadership spending plans are approved wholesale. So, beneath the veneer of reality-based economics, what we have here is the familiar, faith-based insistence that tax cuts for the rich will lead to a massive growth spurt along with a vague hope of future spending cuts.
Let me clue you in on how this ends: the tax cuts pass, the spending cuts don't materialize, the deficit stays high, and NR laments that true conservatism was never really tried.