Tax Cuts

Crossposted at Right Minds

Barack Obama’s proposed stimulus package puts lawmakers on both sides in a sticky position. Congressional Democrats really don’t need the Republicans to pass the package, unless the Republicans try to filibuster, and it’s hard to see them doing so. But the bill is so big (at least 800 billion dollars), and such a gamble (if it fails, Obama’s, and rest of the Democrat party’s, whole economic plan will be seen as a failure), that some Republican support is necessary, if only to share the blame if it fails. So the Republicans left in Congress have a disproportionate amount of influence on the direction of the stimulus bill.

Some Republicans, such as Mike Pence, claim that the best form of stimulus would be broad based tax cuts. Most Republicans agree. So do many Democrats (at least up to a point), including Obama—tax cuts are a major part of his plan. They aren’t the drastic cuts Pence and his allies want—but they are tax cuts (or more accurately in many cases, tax rebates).

This reliance on tax cuts is in line with standard Keynesian economics. Sort of. Keynesian economics decrees that during over prosperous times, when the economy is growing too fast, government should raise taxes and cut spending, while in leaner times, government should cut taxes and raise spending. (Can you see the flaw here?)

Unfortunately, there’s a catch. Any tax cuts need to be permanent (or at least must exist for the long-term). If they don’t, then people simply hoard the money and save it for a rainy day. According to Joe Biden, forty percent of Obama’s 800 billion dollar stimulus comes in the form of tax cuts. So that’s at least 320 billion dollars simply wasted.

So why not just pass some permanent tax cuts? That’s a popular conservative position—Rush Limbaugh pushes for such a plan nearly every day. Tax cuts are the heart and soul of supply side economics. Republicans don’t have much political capital, but they do have a little, so why not try to spend it on permanent tax cuts which would certainly (according to both supply-side and Keynesian economics) revitalize the economy?

Because an essential element of conservatism is fiscal responsibility. Yes, tax cuts are good things. But deficits are very bad things, and the country really can’t afford them. (It never could, really). And tax cuts, whatever conservatives might say, would mean higher deficits, especially in a poor economy.

The world is about tradeoffs, and the good that would come from tax cuts would be more than offset by the harm coming from high deficits. It’s become instinctive for conservatives to fight for higher taxes, and they are usually right in doing so—but not this time.