New endangered species: the GOP deficit hawk

The Christian Science Monitor ^ | October 25, 2017 | Mark Trumbull - Staff Writer

[Jagermonster]

A SHIFT IN THOUGHT   Desperate for a legislative win, Republicans are preparing to push through a tax-cut package that analysts say could add considerably to the deficit. Voices on the right expressing concern about red ink have been few and far between.

WASHINGTON—Republicans have a storied tradition of minding the nation’s fiscal store. Calvin Coolidge pushed for tax cuts, but also for spend-less-than-you-earn budgets. After World War II, the party contributed to fiscal plans that rapidly unwound a war-related surge in debt. In ​the 1990s, ​members of the GOP supported spending restraints that helped usher in a brief era of budget surpluses​ under President Clinton​.

And as recently as 2015, as they faced off on fiscal matters against President Obama, Republicans in Congress were rallying behind fiscal plans that aimed for a balanced budget within 10 years. Yes, they wanted tax cuts, but paired with deep cuts in federal spending to reduce deficits.

Yet as the current GOP Congress takes up tax reform, there’s been a notable absence of concern about debt and red ink. Tax cuts seem to be the sum total of the Republican fiscal agenda, for now at least. The plans are accompanied by less-than-convincing assertions that the resulting economic growth will be enough to overcome any shortfall of revenues versus federal spending.

Whatever happened to the conservative deficit hawks?

In part, their decline or silence may be the latest symptom of a polarized Washington. Past instances of fiscal discipline have often involved collaboration across party lines – since tackling deficits is easiest when you have bipartisan cover.

But what’s on display is also a case of political pragmatism. Republicans know that, after failing in their efforts to “repeal and replace” Obamacare, they’re in desperate need of . . .

[conservatism_IS_compassion]

'Lower rates nearly doubled receipts, spending caused the deficit to grow. ‘

Ya think you can grow faster than the .gov monster? Good luck with that. Cuts first. Then taxes.

I refer you to my #19. The only way to limit spending is by constitutional amendment which puts Congress-biting teeth into a spending limit. And that, IMHO, implies a term limit trigger if the budget is exceeded.

Each year's spending limit should be the previous year’s revenues. Each year's spending limit must not be an extrapolation which predicts revenue based on the assumption that tax revenues are proportional to tax rates. That naive assumption led to Jack Kemp correctly labeling Bob Dole “the tax collector for the welfare state.”

[central_va]

Exactly, what increased revenue during that time period was a growing economy and the 1990's was really good for economic growth. Revenues increased despite the tax increases, not because of them.

[Harpotoo]

Barry went from 10 to 20T$. We can afford 1 or 2T$ extra under Trump for now.

[Wayne07]

Tax revenue also declined for multiple years in a row after GWB cut tax rates.

As central_va points out, tax revenue increased despite tax increases under Clinton, and we can see that tax revenue decreased despite tax cuts under Bush.

So basically tax cuts will reduce tax revenue until there is enough growth in the economy to offset them. Taxes are only one of many things affecting growth, so to expect changes just on tax rate changes is going to fail. The effective tax rate in the US is already pretty low, so it is unclear how much of a drag it is on the economy. If we still had rates in the 50%-90% range, then cuts would have more potential effect.

Spending is a vastly bigger problem than taxes right now, and will only get worse as baby boomers continue to age.

[central_va]

Recession caused receipts to fall, not tax cuts. 2001-2002 recession.

[Jim from C-Town]

The only way a balanced budget amendment could even be considered is if the Federal budget was capped at a maximum percentage of the previous year’s GDP in the same amendment.

[Wayne07]

Receipts were still below pre-tax cut levels in 2003, 2004, and 2005. The fact that we had a tax cut, and a recession is the point: the economy is a lot more complicated than the tax rate. Keeping it real, if you cut the tax rate in you will collect less money. I'm fine with that, I want the government to have less money. But cutting taxes isn't some magic wand that will always give both taxpayers AND the government more money.

Even if you look at the Laffer Curve, there is a point where cutting taxes reduces revenue, and doesn't do anything for growth.

[central_va]

You are assuming that the current rate of taxation is to the right of the inflections point! That is not true.

Tax revenue increase when the economy is growing rapidly and slows down when the economy is slowing. The tax rates affect that paradigm, they(increases/decrease) do not directly correlate to revenue.

[conservatism_IS_compassion]

Even if you look at the Laffer Curve, there is a point where cutting taxes reduces revenue, and doesn't do anything for growth.

I see the pretty picture with the “Growth Maximizing Point” label. I don’t see any rationale for the existence of a growth maximizing point. Other than to say that growth requires some stability in the value of the currency, and that requires some revenue - and thus, some tax rate.

But, for at least two reasons, I suspect strongly that the real "growth maximizing point” for the capital gains tax in particular is - zilch:

1. To the extent that the value of a stock grows, that growth in value reflects the prospect of future income. Thus, taxation on the increase in value is taxation on anticipated future income. Income which will in any case be fully taxed when (if) it eventuates, whether or not the stock is sold - and capital gains tax paid - before then. The capital gains tax therefore functions as friction in the market for, and optimal pricing of, stocks. People whose interest would best be served by selling a stock will instead tend to hold it because of the capital gains tax. And,

2. a lot of capital gains are illusory nominal gains which only reflect that the asset has not declined in value with the decline in value of the dollar due to inflation.

[Wayne07]

I’m not assuming anything, I don’t know and you don’t know either. I’m just pointing out that if you acknowledge there is an inflection point, that tax cuts don’t necessarily increase revenue. Take the example, cutting to .001%. or 1%. Cutting to 1% would help growth, but not enough to make up for the lost revenue.

[Wayne07]

I agree with your analysis, including that the growth maximizing tax rate is most likely 0%. But remember, that's not the real question at hand. The question is whether cutting tax rates always generates enough growth to offset the revenue. The most obvious example is our agreed on 0% max growth tax rate, which obviously would kill all revenue. And at the opposite extreme, a 100% tax rate would severely damage both growth and revenue. It is unclear where we are on the curve now, but the results of the Bush tax cuts, and Clinton tax increases suggest that tax cuts now would help growth, but not enough to make up the lost revenue.

I'm fine with that, it just means we need to cut spending, and I don't see the political will to do that.

[conservatism_IS_compassion]

I agree with your analysis, including that the growth maximizing tax rate is most likely 0%. But remember, that's not the real question at hand. The question is whether cutting tax rates always generates enough growth to offset the revenue.

The issue, rather, is “What rate now would maximize the credit rating of the U.S. Treasury in the long run?” I put it that way because a paper dollar is a U.S. debt instrument bearing zero interest, and the only reason for any tax at all is to keep the value of the dollar stable.

Looked at that way, anything - even if it costs money - which improves the credit rating of the Treasury helps sustain the value of the dollar. And growth of the US economy improves the credit rating of the Treasury. Thus we have the conundrum that cutting taxes increases the US economy and thereby improves the credit rating of the Treasury, even as it may, to some extent, reduce current federal tax revenue and thereby tend to degrade the credit rating of the Treasury.

So the question is, how sensitive is the credit rating of the Fed to growth, and how sensitive is growth to tax rate? We should cut taxes at least to below the point of diminishing returns. Our tax rates should be low enough that we are sure of that. Especially since we might as some future time face an actual emergency and need to increase revenue.

[Wayne07]

Again, I think that's good analysis. I'm more concerned about the effect of excessive spending and debt on the credit rating. And additionally, that excessive participation in the economy by the government also stifles growth, so it is a lose-lose.

If there is a bright side to the likely massive deficits that will come, short term, after a tax cut, it is that it may force movement on spending cuts, entitlement reform, etc.

[conservatism_IS_compassion]

I'm more concerned about the effect of excessive spending and debt on the credit rating. And additionally, that excessive participation in the economy by the government also stifles growth, so it is a lose-lose.

Although I have admitted that not all tax cuts, no matter how great, increase revenue, I do not see the prospect of tax cuts which will actually result in "massive” deficits.

If there is a bright side to the likely massive deficits that will come, short term, after a tax cut, it is that it may force movement on spending cuts, entitlement reform, etc.

. . . and that is where I emphatically agree. Jack Kemp’s seminal insight was that the GOP was in the political wilderness and would remain in the political wilderness as long as its only function was to ineffectually oppose government largess, on the one hand, and insist on raising tax rates to pay for Democrat largess, on the other.

Faced with a negotiation in which the other side gives out freebies and plays “What, me worry?” with the deficit, the only winning strategy for the Republicans was - is - to "give out” (as the Democrats would put it) tax cuts and be just as cavalier about the possibility of deficit growth as the Democrats. Any other strategy returns us to the “good old days” of chronic Democrat domination of Congress. Which went on continuously for four decades, and that’s not counting the New Deal before that, with like 4 years or so of Republican control of the House between then and 1954.

So Republican insistence on low taxes is the closest thing we have to a stabilizing force in our politics, and GHW Bush’s “Read my hips” on tax increases was all the more of a betrayal because it did not instantly cause the revenue to tank - thereby giving the Democrats a case to argue against the virtue of low tax rates. But you will notice that the resulting economy still allowed Bill Clinton defeated GHWB with an “it’s the economy, stupid” motto in ’92.

[Wayne07]

Although I have admitted that not all tax cuts, no matter how great, increase revenue, I do not see the prospect of tax cuts which will actually result in "massive” deficits.

The worry is that we are already at massive debt, and massive yearly deficit levels. If we were at balance, or only running small deficits it would be worth increasing the debt/deficit to get some growth from tax cuts. We are already looking at a ~$650 billion deficit for 2017 before tax cuts, which is shocking and horrifying.

[conservatism_IS_compassion]

We are already looking at a ~$650 billion deficit for 2017 before tax cuts, which is shocking and horrifying.

Hey, it’s nearly Halloween. Boooo!