December 16, 2010
No Deal on the Tax Deal
Charles Krauthammer, Mike Pence, and Mitt Romney are right. Paul Ryan and Chris Christie are wrong. The proposed tax deal is not the best deal achievable. Doing nothing is better.
The logic in favor of the tax deal (from conservatives) is understandable: It is not exactly what we wanted, but it is the best deal we can get, and it is better than no deal at all. The idea is that the current tax rates are extended for everyone, which is what we wanted. While other stuff, undesirable stuff, was added, the package is two-thirds goodness, and we can live with that.
I do believe it is the best deal we could get from the Democrats, given that the Senate is still run by Harry Reid and will be next year as well and that Barack Obama is still president. The nub of the issue is this: this deal is not better than no deal at all.
Believe me: I'm troubled by going against the likes of Paul Ryan and Chris Christie. Ryan is of the "best deal we can get" school. Christie was in favor of a temporary extension before the negotiations even began.
The real issue is that there are two types of tax cuts: (1) genuine structural changes to tax law, and (2) just another way to hand out cash and hope it stimulates. You could call them supply-side and demand-side tax cuts.
Examples of the first type, genuine structural changes, are the Harding cuts of the 1920s, the Kennedy cuts of the 1960s, and the Reagan cuts of the 1980s. These were permanent changes to tax law that lowered and flattened rates. And they worked.
Examples of the second type, of using the IRS to hand out cash, are the Bush rebates of 2008 and the Obama "stimulus" of 2009, which was actually about one third tax cuts and tax credits. I would say they didn't work. Another example would be Japan, which tried multiple tax stimuli in the last twenty years, only to be mired in two lost decades.
The key difference is in a phrase that the White House actually brags about: "targeted and temporary." "Targeted" means that politicians will attempt to pick who the winners and losers are. "Temporary" means you can't do any long-range planning based on them.
These are the exact opposites of what good tax law should be: broad-based and permanent. Yet in the tax deal now being voted on, what is not temporary is targeted, and what is not targeted is temporary. That leaves nothing broad-based and permanent.
These cuts will not work. To be more precise, they will work just as well as Obama's $814-billion stimulus worked. I confess to not originally understanding Krauthammer's notion that a tax cut is just a "stimulus." After all, it is our money that we get to keep. But in this case, he is correct. The targeted and temporary nature of this package makes it nothing more than Stimulus II.
I am all about the supply-side, but this package is all demand-side. Barack Obama thinks you stimulate an economy by handing out cash so people can spend it, even when that cash was borrowed from that same economy. I think you can't stimulate an economy; it is already alive and raring to go. What you need to do is stop smothering it.
A government that picks and chooses among whom to target and then advertises that it makes up policy as it goes along smothers investment, confidence, and opportunity.
The alternative of no deal would be better. Let the Bush rates expire -- all of them. Let's just go back to the tax rates under President Clinton. I think the economy would actually be better off with those rates if we knew they would be permanent or, if anything, revised downward in a later Congress.
So economically, this package will not stimulate anything, yet it adds hundreds of billions to the federal debt. Politically, it will become an albatross. It will be sold as yet another "trickle-down" Republican idea that didn't work. Republicans will be painted as hypocrites and non-serious about the deficit. For Republicans, it is lose-lose.
Paul Ryan has a great Roadmap, but he's wrong with this tax deal, just like he was with Medicare Part D, the TARP bailout, and the auto bailouts. Of all people, Sarah Palin both endorsed Ryan's Roadmap and come out against this tax deal. In my view, both of her positions are correct, yet shared by very few people. She just might not be as stupid as people say.
In two years, after this deal passes, the unemployment rate will likely still be north of 9% and the federal debt will be closer to 100% of GDP. Would you want to run in 2012 on your record of voting for Obama Stimulus 2.0?
Randall Hoven can be contacted at firstname.lastname@example.org or via his website, randallhoven.com.