Two Smart Critical Takes on the Tax Deal

by Reihan Salam

Zachary Karabell, one of my favorite economic thinkers, writes the following in Time:

Even if you accept the notion that the rich ought to pay more (something that Warren Buffett and Bill Gates believe), that moral position still doesn’t move the economic needle. Talk of social justice and equity won’t invigorate the U.S. or maintain its innovation and dynamism in a world where Shanghai seems to New York City what New York City once seemed to the capitals of Europe:humming with potential, exuding confidence. Tax cuts are political catnip; they excite, then they wear off. It is as if we are content to expend large amounts of energy just to stay in place —and this at a time when other nations are spending to upgrade their infrastructure: China with its airports and high-speed rail, Australia paying tens of billions of dollars to build a next-generation wireless network for the entire country.

I would spin this a bit differently. The overall tax burden is not as important as work incentives and cost-effective government. If our government were as effective on a per dollar basis as that of Singapore or Switzerland or Canada, we’d all be much wealthier. And if our tax code were somewhat better designed, i.e., if we eliminated most if not all deductions, we could raise more revenue while increasing work effort and leaving the vast majority of household with more disposable income. We need to get the structure right. 

In a very different vein, Charles Krauthammer suggests that congressional Republicans were badly misled by their obsession with tax cuts over all else:

If Obama had asked for a second stimulus directly, he would have been laughed out of town. Stimulus I was so reviled that the Democrats banished the word from their lexicon throughout the 2010 campaign. And yet, despite a very weak post-election hand, Obama got the Republicans to offer to increase spending and cut taxes by $990 billion over two years — $630 billion of it above and beyond extension of the Bush tax cuts.


No mean achievement. After all, these are the same Republicans who spent 2010 running on limited government and reducing the debt. And this budget-busting occurs less than a week after the president’s deficit commission had supposedly signaled a new national consensus of austerity and frugality.

Some Republicans are crowing that Stimulus II is the Republican way — mostly tax cuts — rather than the Democrats’ spending orgy of Stimulus I. That’s consolation? This just means that Republicans are two years too late. Stimulus II will still blow another near–$1 trillion hole in the budget.

I do disagree with where Krauthammer goes next, in a brief parenthetical:


At great cost that will have to be paid after this newest free lunch, the package will add as much as one percent to GDP and lower the unemployment rate by about 1.5 percentage points. That could easily be the difference between victory and defeat in 2012.

Obama is no fool. While getting Republicans to boost his own reelection chances, he gets them to make a mockery of their newfound, second-chance, post-Bush, tea-party, this-time-we’re-serious persona of debt-averse fiscal responsibility.

To be clear, I welcome a lower unemployment rate, regardless of what it does for the president’s reelection prospects. Yet my concern is that this improvement will be purchased at the expense of a longer-run drag on the economy. I can’t say if that will indeed be the case, but it is cause for concern. And I definitely agree that the Republicans have undermined their claims to deficit-hawkery.