Wednesday, July 26, 2006

The downside of tax cuts

I've argued before that debt-fueled stimulus is a bad idea. Bush has borrowed $2 trillion and dumped it into the economy. That will certainly have a positive effect on short-term economic growth, just like maxing out a credit-card works pretty well in the short term.

But that's the wrong way to look at the issue, because it will take decades to pay off the money he borrowed to achieve that effect -- and that's the best case scenario, where economic growth remains strong, spending grows at little more than the rate of inflation and all the additional revenue goes to debt repayment. Needless to say, the likelihood of any of that happening, much less all three, is slim at best.

Now the Treasury Department seems to agree with me.

The federal government will need to either cut spending or raise taxes down the road to pay for extending President Bush's recent tax cuts, the Treasury Department said in a report released yesterday, dismissing the idea popular with many Republicans that such sacrifices can be avoided.

No duh, right? What's interesting is that the report reached this conclusion despite using a new methodology called "dynamic analysis", an approach supported by the administration because they think it will better show the "hidden" benefits of supply-side economics.

The Treasury report was its first using "dynamic analysis," an approach that looks at how tax changes alter consumer and business behavior in ways that affect the economy's growth.

A reduction in income tax rates, for example, might initially reduce the government's revenue, but over time might encourage more people to work, and to put in longer hours, increasing tax payments to the government over time.

I don't mind the new methodology, as long as the assumptions it uses are reasonable. Economic behavior is complex, and if a new model comes along that appears to do a better job of predicting that behavior, I'm willing to try it.

But even using this supply-side-friendly method, the economics of tax cuts come up short.

The Treasury report released yesterday relieved "a lot of fears that dynamic scoring would lead to the view that cutting taxes raises revenue," said Jason Furman, a senior fellow at the liberal Center on Budget and Policy Priorities. Rather, the report "pours a huge bucket of cold water on the exaggerated claims that tax cuts transform the economy and pay for themselves."

On the contrary, Furman said, the Treasury's estimates suggest that, under the best long-run scenario, the tax cuts' boost to tax payments would offset less than 10 percent of their initial cost.


Short-term, targeted tax cuts to provide short-term stimulus are an okay idea, as long as they're not carried to extremes. Deficit spending in a national emergency is acceptable. Reining in spending is a good idea. Keeping taxes low is a good idea.

But Bush has cut taxes, supercharged spending and launched a mind-numbingly expensive invasion, all at the same time. The mind boggles at the size of the bill the administration and their Congressional allies are handing to our children and grandchildren.

We are supposedly responsible adults. Let's start acting like it, and start paying our own bills instead of pushing them on to future generations.

Update: Forgot the link to the actual report.

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