Politics & Policy

Tax Cuts . . . And?

Sen. Lindsey Graham on Capitol Hill (Jonathan Ernst/Reuters)
Doing more on fiscal reform

‘If you’re a Republican and you don’t want to simplify the tax code and cut taxes, what good are you to anybody?” So inquires Senator Lindsey Graham, a Republican from South Carolina.

What good are you if you do?

House Republicans and Senate Republicans were at an impasse on Friday after the Senate produced its budget document. The House, led by Representative Diane Black (R., Tenn.), who chairs the Budget Committee, wanted at least $200 billion in cuts from so-called mandatory spending (mostly meaning entitlements); the Senate wanted to give President Donald Trump his “MASSIVE” (the president is fond of capital letters) tax cut, even if that meant adding $1.5 trillion — note the “t” — to the debt. The impasse lasted about four minutes before the House leadership went down like Galtieri facing British commandos — the “battle” they’d promised over spending cuts turned out to be as lopsided as the Falklands War.

This, as I noted earlier, constituted conflict between two schools of Republican fiscal thought. House Republicans wanted (or said they wanted) to reduce the federal footprint by lowering spending on a program-by-program basis, for instance by using a work requirement to gently scooch a few million able-bodied adults without dependents off the food-stamp program. The school of thought regnant in the Senate (and, now, apparently, in the House) holds that economic growth is more important than fiscal reform per se: If the economy grows fast enough, then those federal programs and the deficits they produce become less burdensome as a share of the overall economy. There’s something to both sides: You can reduce the burden of entitlement spending as a share of GDP by cutting entitlement spending or by having a bigger GDP.

There is ample valid criticism of the naïve model of supply-side tax cuts, the deathless Republican canard that these things “pay for themselves.” There might be imaginable situations in which they do, but probably not in a large, complex, globalized economy with a moderate tax burden. There often are growth effects from tax cuts, but they do not usually amount to 100 percent of the notionally forgone tax revenue, much less 110 percent or 150 percent or whatever the radio economists are selling this week. There isn’t much evidence for a sales pitch that goes: “Pass these massive” — pardonne-moi! — “MASSIVE tax cuts, and then we’ll have 4 percent GDP growth, and they will pay for themselves and then some.”

Contra Senator Graham, there is more to the Republican party than tax cuts. It is, or was, a party whose members had at least a theoretical commitment to fiscal probity, a strong national defense, social conservatism, and limited government. If a too-high federal tax burden were what was really holding back the U.S. economy, then big tax cuts would be in order.

But there isn’t any real reason to suppose that is the case, and Republicans are taking the wrong tack here in desperate hopes of being able to put at least one mark in the “W” column of their legislative record and thus prove to . . . someone . . . that they aren’t the feckless thumb-twiddlers they often are accused of being.

What to make of their plan?

Taxes can be a drag on growth, but so can deficits. Government debt hoovers up capital and puts upward pressure on interest rates. (Our policymakers have spent the better part of a decade taking extraordinary measures to keep interest rates down.) And spending isn’t all up-side, either, inasmuch as it can crowd out private investments that would in the long term be more beneficial to the overall economy. As President Trump has rightly emphasized, regulation also presents a potentially significant drag on the economy; by some estimates, U.S. companies pay more in regulatory-compliance costs than they do on business taxes. It is not at all clear that tax rates are the major issue — or even a major issue — when it comes to economic growth and job-market dynamism in 2017 and the near future.

So, tax cuts apparently trump cuts to mandatory spending. No surprise: Tax cuts are popular, and spending cuts are not. Real profile-in-courage stuff right there, Republicans.

They could have done both.

The virtue of a more bipartisan approach is that the outcomes are more stable.

There is no compelling reason that we could not match a substantial tax cut — say $500 billion to $700 billion over ten years — with an equally large spending cut. We spend $50 billion a year on federal housing aid alone. We spend about $600 billion a year on national security. We have about $70 billion a year in discretionary outlays at the Department of Education. There is room to cut spending. And, if the naïve supply-siders turn out to be right and the growth effects from those big tax cuts end up largely or even entirely offsetting the on-paper revenue loss, then that gives us a very big pile of unexpected money that can be used to pay down the national debt or buy a bunch of new Navy ships, whichever seems most prudent in ten years.

Republicans could even have done something truly radical and seen if they could get the Democrats on board with some of that. They’ll need to do that in the future, in any case.

It won’t be an easy sell. The Republicans may have some dodgy fiscal analysis from time to time, but the Democrats’ current budgetary offerings are pretty much bonkers. Senator Sherrod Brown (D., Ohio) has reached way back into the 1930s playbook with big plans for “patriot employers,” i.e. tax credits for businesses that operate their businesses the way Sherrod Brown wants them to. This “economic patriotism” stuff has been looming large in the Democratic imagination for some time: Barack Obama said a lot of dumb things along those lines, and Ted Strickland gave a straight-up Italian-corporatist speech on the theme at the 2012 Democratic National Convention.

But surely there is somebody somewhere in the Democratic party who is unhappy with the party’s standing in Congress and in the states, who is tired of being in the minority and tired of the current Democratic strategy on that front, i.e. waiting for the Republicans to screw up badly enough to get thrown out by the voters. Chuck Schumer and Nancy Pelosi are not good-faith negotiating partners, but there must be some Democrat in Congress who could approach Republicans and say: “Look, we disagree about lots of things, but we all are worried about the deficit, about the burden of taxes on the middle class and the poor, and about economic growth. Here is a list of ten tradeoffs I’d be willing to support in order to get some of our priorities into the budget. Pity you guys weren’t smart enough to do the same with health care.”

Of course the Republicans can, for the moment, steamroll right over the Democrats. But the Republicans cannot steamroll over one another, and, in the long run, they cannot steamroll over the math, either. Deficits are sustainable until they aren’t, at which point you have a national fiscal crisis.  

Compromise for the sake of compromise, as though it were a virtue in and of itself, is meaningless. But the lesson that we keep failing to learn from the Affordable Care Act and from Republican efforts to undo the Affordable Care Act is that party-line votes on issues of broad national consequence produce unstable policies. Part of the current budget maneuvering is necessary because the package is being put together in such a way as to be passed through the budget-reconciliation process, meaning that it can be sent to the president with a simple majority rather than be held up by a filibuster. But a long-term fiscal plan predicated on the assumption that the other side never will come back into power is a house built on sand — just like a long-term health-care plan built on the same assumption.

The virtue of a more bipartisan approach isn’t that it’s nice — hurting Chuck Schumer’s tender feelings, if he has any, would be a bonus. The virtue of a more bipartisan approach is that the outcomes are more stable. American investors, entrepreneurs, and business managers need a stable policy environment in which to make long-term decisions about investment, hiring, product lines, factories, business partnerships, and much more. One of the truly mad things to come out of the Trump administration is its recent proposal that NAFTA be renegotiated every five years, depriving U.S. firms doing business in our two largest export markets of any predictable trade regime. Bringing a new pharmaceutical to market, or a new model of car, often takes well more than five years.

We’d be better off with a more moderate fiscal package today than with a more ambitious program that falls apart after the next election, or the one after that. In the long run, the Republicans will have to work out a responsible deal with the Democrats. Unfortunately, they couldn’t even work out a responsible deal with each other.


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