Deficits as far as the eye can see--what's the story?

Let me tell you a story of the passage of time, the passage of tax cuts, and who really cares about deficits or the impact of tax cuts or deficits on the middle class.

Back in 2001,  Bush and the Republican controlled Senate and House passed a huge tax cut, purportedly targeted at middle income Americans.  Americans had not been clamoring for tax relief.  The tax relief planned by the Bush Administration and Congress didn't result from long deliberation about how to achieve a less distorting tax and fairer tax system, like the 1986 tax reforms.  Bush merely took advantage of the relatively decent economic years under Clinton (much of which, we now know, was a mirage caused by the fevered frenzy of big banks speculating in the market through securitizations, derivatives, and other means and generating profits for wallstreet financial institutions and their Wall Street trader barons, but only phantom gains in housing for ordinary mainstreeters).  There was (at least on paper) a budget surplus (for the first time in years).  And instead of using that surplus to spend on public infrastructure projects or to pay down public debt, Bush said we should "give it back" to those who created it through tax cuts.  There was some fidgeting about deficits, but ultimately enough of the spineless Dems went along with the Republican rush for tax cuts galore to pass what was projected (with the use of sunsetting gimmicks) to be a $1.3 trillion tax cut.

Interestingly, once a tax cut is offered, Americans are generally quite willing to grab onto it.  It will be liked...

So in most of the rest of the years of the Bush administration there was additional tax cut legislation, in spite of the fact that Bush had engaged us in what now seems an endless state of war--with the huge, long-term costs of war including transportation to overseas locales, training of soldiers, providing care til death of wounded (both physically and psychologially) veterans, and payment for the many privatized military services instituted since Reagan (Blackwater mercenaries made many times the salary of enlisted soldiers--proving that private enterprise does not do government work more efficiently than government does, which was the original justification for privatization).  And in spite of the fact that tax cuts (ultimately mostly benefiting the wealthy) and war increases meant record deficits.  Congress whimpered a little about the deficits, but they didn't dampen the Congressional appetite for tax cuts.  Various Republicans didn't bother to whimper--they just justified them with their (now disproven) rhetoric that tax cuts would actually increase tax revenues (the laughable line based on the discredited Laffer Curve arguments).  See these ataxingmatter posts for a discussion of the Laffer Curve and why it doesn't even count as theory, much less as generally accepted theory: CFP's Laffer Curve Video; Laffer Curve II--proof?; Reagan's Trickle Down Economics Doesn't Work: tax cuts don't pay for themselves.

Moreover, most of these cuts were set up as "temporary" provisions that would sunset in a few years, reversing to their pre-2001 tax cut stage.  That was done not because the Republicans in Congress didn't intend to make these cuts permanents but because they wanted to hide the real impact on the budget and the huge deficits that the tax cut packages would create.  So they claimed they would "only" cost $1.3 trillion over ten years.....

Of course, that they would make them permanent if at all possible was clear from the outset--both in explicit statements and in the actions over the next few years, as various provisions were offered again and again as permanent revisions to the Code.  Take the estate tax as an example.  The Bush change lowered the rate and increased the exemption amount over several years.  That was then speeded up, with the estate tax being "repealed" for one year in 2010 and then the law would sunset, bringing the pre-2001 estate tax back from the dead in 2011.  Every year, some Republican would introduce a bill to repeal the estate tax that year once and for all or, once that got to be very expensive, to change it to a 35% rate only applicable to amounts above $10 million.   And even now, even the Dems are considering making the 2009 estate tax provisions ($3.5 million exemption for one, $7 million for a couple, 45% rate) permanent!  See "Estate TAx: Why don't the Dems get it?" on ataxingmatter.

Further, in spite of cutting individual taxes and then given corporations the dream package they'd been lobbying for for years, and in spite of reducing taxes on dividends down to the capital gain rate (giving wealthy investors part of what they'd been asking for for years--close to zero taxation), and in spite of continually offering bills to cut something new, resulting in even less government revenues while watching the deficit spiral out of control, Congress also knew that the alternative minimum tax (AMT) would gradually claw back the reductions for those at the bottom of the distribution.  See earlier ataxingmatter series on the AMT in which this is explained in detail:  The Senate and the House on the AMT (July 12, 2005); What Should Congress Do About the AMT (Part I, Part II, Part III, Part IV, Part V, Part VI).

So it seems fairly clear that Congress didn't really care much about deficits (it would not have cut more and more revenues to the government while spending more and more money on war and "homeland security" --remember those giddy military contractors during the heyday of the Bush free flow of money) or about the middle class (it would not have cut taxes with one hand and taken them back with the other AMT hand or cut taxes that primarily benefited the wealthy--such as capital gains and dividends).

Now, of course, Congress--the Republicans and the "blue dog" Democrats--are mouthing their concerns about deficits at every turn of the Great Recession and health care reform discussions.  You'd think their hypocrisy would concern them, but apparently it doesn't.  They are likely to pass a health care reform bill that gives a windfall to private insurance (mandatory premiums from all those who are relatively healthy and have chosen in the past not to be covered) while costing the federal government (coverage of the vulnerable, which will be picked up by government)--a repeat of the privatization of gains/socialization of losses that has been the norm for our handling of the financial crisis.  And part of the reason we did so much of the economic stimulus bill as tax cuts that really don't do much for stimulus--instead of infrastructure building and other projects that would have aided everyone with both REAL PERMANENT infrastructure projects and REAL job creation--was to apease the Republicans who wanted all tax cuts and no infrastructure spending.  Again, some were arguing that infrasturcture spending was deficit-creating and tax cuts were an inherent good.

So it is nice to see someone now looking back to note what the real facts are about the Bush tax cuts.  David Cay Johnston, Easing Impact of a Tax Rise, NY Times (Oct. 28, 2009), writes that the Bush tax cuts have cost us $2.34 TRILLION in revenues, according to new calculations done for the Times by the Tax Policy Center, a nonpartisan research institute whose research is respected by both Democrats and Republicans.  

Just to understand what the cost of those tax cut goodies was when it dug a $2.3 trillion hole--next year, Johnston says, we'll need to dedicate every penny in taxes paid by individuals for one month just to cover the interest on the financing of the federal debt needed to make up for that shortfall. Id.

Johnston goes on to highlight some of the ways that high-income taxpayers can save on taxes, assuming that the Bush tax cuts are allowed to lapse for them.  (Obama has--somewhat foolishly, from my perspective--promised to hold anybody making less than $250,000 harmless from tax rises, and for that reason has supported making the Bush cuts permanent for quite well-to-do families.  That is/was a mistake from my perspective--a quarter of a million in annual income is almost a quarter of a million more than most Americans have --about $50,000 is the median, and even those in the second quintile make much less than a quarter million annually.)  So there's always delaying charitable contributions so you get them against higher taxed income in 2011 rather than against lower taxed in 2010; paying property taxes later (same goal); taking more income now and less then (if you own your own company and can set your own salary and if you think the IRS won't pursue you have paying an unreasonably low salary next year if your company's income is about the same--they should, but probably won't).  These gimmicks are ones that wealthy people can afford to do, and ordinary Americans typically cannot, since they haven't got the luxury of paying themselves or they don't have enough to make significant charitable contributions int he first place, etc.  And with this kind of planning, Johnston notes, the 400 highest-income taxpayers with an average of $266 million in annual income apiece in 2006, paid at an effective tax rate of only 17%, the same rate more or less as that paid by people with an average of $50,000 to $75,000  in annual income apiece in 2006. Id.

Now that right there is a pretty good reason for having a hefty estate tax.  We should get progressive tax payments from the wealthy one way or another.  A hefty estate tax--a reasonable exemption ($1 or $2 million) and a progressive rate structure (45% rising to perhaps 65%)--would be one way to address the fact that most wealthy taxpayers can manipulate their taxes by timing their income or deductions and in other ways.

Comments

[Raza]

Thank you for a comprehensive post, Linda. Excellent.

[Zack]

A lot of Republican voters, including myself, favored tax cuts not for the few extra dollars we kept, but rather as a lever by which the size and power of the government could be reduced. Rather than use this lever we witnessed the government increase spending anyway faster than ever and finance it by borrowing. Although many politicians may be a bit hypocritical in railing against the deficits, a lot of us voters are not and felt that way all along. The recent Democratic takeover is fueled largely by Republican voters feeling betrayed and staying home in droves.

Unfortunately I am not optimistic about our economic future. The reality is that deficits do (barring a collapse of the dollar) increase employment and standard of living in the short run at the expense of significantly reduced economic growth and standard of living in the long term. But voters seem disconcertingly predictable in rewarding or punishing politicians based on good or bad short term economic performance. It is almost certain that if Bush had not enacted his tax cuts and practiced fiscal responsibility that in 2004 the unemployment rate would have been a half point or so higher, and Kerry would have defeated him in the election as a result. Obama will likewise probably be reelected since the stimulus seems timed not for quick recovery but rather for maximum benefit in the 2012 time frame at the expense of huge debt being left to future generations.

[LindaMBeale]

Zach--Certainly tax cuts have been touted by Republicans for two (contradictory) goals, both of which are, from my perspective, lamentable. The first was the notion that by cutting taxes--mostly on the type of income enjoyed by the super-rich--you could increase revenues. The idea behind that was supposedly that the rich people would have even more after tax dollars to invest in American enterprise and that would encourage entrepreneurialism which would create good businesses which would also pay taxes and hire people. That was mostly nonsense. Rich people tend to put their money where it makes money for them--often in hedge funds where they are gambling in the shadow financial system or in overseas markets that can take advantage of cheap labor to make rent profits. Most real entrepreneurialism comes from small players who start out with very little, not from rich titans of commerce already esconced in their cushy kingdoms.

The second idea was the "starve the beast" notion that started with Reagan (the government is the problem) and the radico-liberatarian wing of this country that wants to decimate government as an end in itself. Now, we may all think that there is too much cronyism and corruption in government, but the notion underlying the "starve the beast" movement--stated not infrequently by commenters on almost every major blog in the country--is that private enterprise is better than government so shrinking government is inherently good. I find such statements extraordinarily naive and short-sighted. IN fact, the last four decades of the aftermath of the Reagan revolution have proved the opposite. We privatized and deregulated and handed government over to lobbyists. The result has been a country that doesn't know how to deliberate honestly about hard questions to find resolutions and the financial catastrophe of the last year. Add to that the fact that many that talk about downsizing really mean downsizing only the parts of the government that were created under the New Deal to help the vulnerable and don't mean downsizing at all the military-industrial complex that has grown under every Republican President, from Reagan on, as exemplified by GWB's thrilling in starting not one but two preemptive wars in Afghanistan and Iraq that are still dragging on today at tremendous cost in lives and materials.

Yes, we need to talk about what programs make sense for government, and if we had an honest conversation about that without the lies that have been tossed around like confetti, we'd likely end up with a national single-payer, single-provider health care system that would redress the awful problems of our third-rate health care system, while we'd likely transition military spending down and environmental spending up.

When programs are cut, it seems its usually the most vulnerable people (the poor or near poor) or the most important programs (education, basic science and research, pollution control, consumer protection, etc.) that get cut. Corporate welfare, outsized military expenditures, and earmarks to gain constituent votes are seldom on the table. And when taxes are cut while spending increases (which has also been the case with Republican administrations), that is sheer folly, since the only recourse is to increase government borrowing.

Bush practiced fiscal responsibility--just what are you basing that on? We had huge deficits under Bush because of profligate spending--especially on the military--and irresponsible tax cuts. The few items that appeared to be budgetary improvements were in the main achieved with budgetary gimmicks--like accelerating the estimated tax payments just so they fell within the five year period that was being counted or passing a law that eliminated the estate tax one year only to reinstate it at the pre-2001 rates the next. I will agree, however, that most voters make poor decisions a great deal of the time. I think they do so because the economic circumstances that face them are a huge factor in their sense of how well or how badly things are going, but also because they are so poorly informed and so easily misled by the prevailing mode of disinformation and misleading information, much of it spewed by "think-tanks" that serve as propaganda generators rather than producers of credible, unbiased analysis.