Wonkbook: Yes, tax cuts increase the deficit

at 08:16 AM ET, 02/03/2012

An earlier version of this column referred to spending increases as spending cuts in describing Senate Minority Leader Mitch McConnell’s position that spending increases, but not tax cuts, must be offset for budget purposes. This version has been updated.

On Thursday, House Republicans unanimously rejected a resolution from Rep. Gary Peters stating, among other things, that the Bush tax cuts added to the deficit. If you read the text they were voting on, it's pretty clear that it wasn't built for bipartisanship: It's phrased to suggest that Bush was a liar and Republican governance was a fraud. That kind of thing doesn't pick up votes across the aisle.


House Speaker John Boehner of Ohio speaks during a news conference in Washington on Feb. 2. (Luis M. Alvarez - AP)
But there's a more important economic debate here. Republicans occasionally flirt with the idea that tax cuts don't increase deficits. Senate minority leader Mitch McConnell has said this directly. Speaker John Boehner has decreed that tax cuts don't need to be offset, but spending proposals do. But there's a very easy way to see that Republicans don't really mean this: They believe that tax cuts cause deficits when Democrats are behind them.

The ongoing debate over the payroll tax is a good example. When Republicans proposed a payroll tax cut as stimulus in 2009, it wasn't offset. When they agreed to it in the 2010 tax deal, it wasn't offset. But since it has become the White House's favored policy, House Republicans -- the same House Republicans who passed the CUTGO rules stating that spending proposals had to be paid for but tax cuts didn't -- are insisting the payroll tax cut be offset.

Then there's the Bush tax cuts. When Republicans tally up Obama's deficits over the last few years, they're adding $620 billion for the two-year extension of the Bush tax cuts. When they project his deficits for the next five years, they're assuming the extension of the Bush tax cuts. And they're doing so explicitly. Earlier in the week, I worked with the Center on Budget and Policy Priorities on a column summing up the projected budgetary impact of every single piece of legislation Obama had signed into law. In the end, my numbers showed, Obama has passed policies adding about a trillion dollars to the deficit. But Keith Hennessey, who directed the National Economic Council under George W. Bush, responded that I had ignored the trillions of dollars in deficits "from policies President Obama proposes to enact in the future (like extending most but not all tax cuts rates beyond 2012)".

And Hennessey is right. Not about my analysis, which was restricted to actual policies, not proposed policies (should I also have subtracted $4 trillion from the deficit because Obama favors a deficit deal of that size?). But about the Bush tax cuts, which will add trillions of dollars to the deficit if Obama extends all or most of them in 2012.

Finally, there is a particularly odd claim you occasionally hear about the Bush tax cuts: Revenue increased in their aftermath. Dan Holler, the communications director for the Heritage Action, tweeted as much at me yesterday. "revenues increased between 2003 and 2007...how does @ezraklein argue Bush policies 'pushed revenues' down?"

This relies on mixing up the effects of inflation, economic growth, and taxes. The normal way to measure how much revenues a given tax regime is pulling in is to look at taxes as a percentage of GDP. In 2001, taxes revenues were 19.5 percent of GDP. In 2002, they fell to 17.6 percent of GDP. In 2003, 16.2 percent of GDP. In 2004, 16.1 percent of GDP. Some of that is the 2001 recession. But at no point in Bush's presidency, and at no point since, have taxes returned to 19 percent of GDP.

Or, to put it slightly differently, if tax cuts actually increased revenues, then it would have been absurd for George W. Bush to propose tax cuts as a way of paying down the surplus. In that world, tax cuts would have made the surplus larger, and given the government even more of the people's money. We would end up in a fiscal paradox, with the government constantly trying to give back its surplus, but ending up with an even larger surplus as a result. But that's not the world we live in.

Top stories

1) Expectations are modest for today's jobs report, reports Peter Whoriskey: "With the government’s monthly unemployment report expected Friday, economists predicted it will show that the United States added about 150,000 jobs last month, sustaining the modest momentum in the economy. The emphasis might be on modest. Although the nation’s number of employed people has been on a stop-and-go rise for two years, it is still about 6 million short of what it was at the peak of the boom in 2007, according to last month’s report from the Bureau of Labor Statistics...The recent drop in the unemployment rate -- which fell to 8.5 percent in December -- has added to consumer confidence. But at current rates of growth, it could take more than three years simply to regain peak employment levels."

2) When you think Nevada caucuses, think "housing crisis," reports Neil King Jr.: "On the eve of Nevada's GOP presidential caucuses, Ms. Buck and other conservatives here want more aggressive action, including a move by Congress to force banks to slash the amount owed on mortgages that greatly exceed the market value of the home. Nevada's worst-in-the-nation housing crisis hasn't loomed large in this week's abbreviated campaign before Saturday's caucuses, which Mr. Romney is expected to win. But it is expected to be a big theme in the general election, when both parties will fight to win swing states such as Nevada and Florida where the housing crisis hit hard. President Barack Obama sent his housing secretary here last week to preview the plan he proposed Wednesday to make it easier for homeowners to refinance their home loans, an idea immediately rejected by House Republicans."

@fivethirtyeight: If you think either Obama or Romney is more than a 60/40 favorite if they go head-to-head, you're probably not looking at the data right.

3) Senate Republicans want to shift the sequester's defense cuts to federal workers, reports Suzy Khimm: "Together with five other Republican senators — including minority whip Jon Kyl, a member of the dissolved supercommittee — McCain unveiled a bill to eliminate the triggered defense cuts for a year. The legislation would replace the $109 billion in cuts that are scheduled to happen in 2013 with cuts to the federal workforce instead: It extends the federal employee pay freeze through June 2014 and 'restricts federal hiring to only two employees for every three leaving, until the size of the federal government workforce is reduced by five percent,' which is expected to save $127 billion within 10 years. That said, even if the bill passed, it would still leave about $491 billion in triggered defense cuts that would begin in 2014. Why undo the cuts for only one year, instead of the full decade? It’s probably that finding an additional $491 billion in offsets would be politically difficult, and proceeding without them would mean increasing the deficit by nearly half a trillion dollars"

4) Corporate taxes as a share of profits are the lowest in decades, reports Damian Paletta: "U.S. companies are booking higher profits than ever. But the number crunchers in Washington are puzzling over a phenomenon that has just come into view: Corporate tax receipts as a share of profits are at their lowest level in at least 40 years. Total corporate federal taxes paid fell to 12.1% of profits earned from activities within the U.S. in fiscal 2011, which ended Sept. 30, according to the Congressional Budget Office. That's the lowest level since at least 1972. And well below the 25.6% companies paid on average from 1987 to 2008. Corporate income-tax receipts typically fall during recessions, and they declined sharply after the 2008 financial crisis, which wiped out big swaths of profits across the huge financial sector. But U.S. profits have rebounded sharply in recent quarters, while tax receipts have stayed low."

5) The Komen Foundation is changing its explanation for cutting Planned Parenthood funding, report Lena Sun, Sarah Kliff and N.C. Aizenman: "Executives of the Susan G. Komen Foundation gave a new explanation Thursday of their decision to cut funding to Planned Parenthood, but their contradictory statements failed to quell a rising controversy that led several of the organization’s affiliates to openly rebel. Komen had said the decision was the result of newly adopted criteria barring grants to organizations under investigation -- affecting Planned Parenthood because of an inquiry by a Republican congressman. On Thursday, Komen President Elizabeth Thompson told reporters that the funding decision was unrelated to the investigation into whether Planned Parenthood was illegally using federal funds to pay for abortions."

@radleybalko: Seems Komen donations are way up. And Planned Parenthood donations are way up. Lesson: Mix politics with health care as often as possible!

CHART: What Planned Parenthood actually does, in one chart.

Top op-eds

1) Romney's policies show a lack of concern for the poor, writes Paul Krugman: "Mr. Romney’s position seems to be that we need not worry about the poor thanks to programs that he insists, falsely, don’t actually help the needy, and which he intends, in any case, to destroy. Still, I believe Mr. Romney when he says he isn’t concerned about the poor. What I don’t believe is his assertion that he’s equally unconcerned about the rich, who are 'doing fine.' After all, if that’s what he really feels, why does he propose showering them with money? And we’re talking about a lot of money. According to the nonpartisan Tax Policy Center, Mr. Romney’s tax plan would actually raise taxes on many lower-income Americans, while sharply cutting taxes at the top end. More than 80 percent of the tax cuts would go to people making more than $200,000 a year, almost half to those making more than $1 million a year, with the average member of the million-plus club getting a $145,000 tax break."

2) Conservatives should back Romney, writes Jonah Goldberg: "Let me try to offer some solace. Even if Romney is a Potemkin conservative (a claim I think has merit but is also exaggerated), there is an instrumental case to be made for him: It is better to have a president who owes you than to have one who claims to own you. A President Romney would be on a very short leash. A President Gingrich would probably chew through his leash in the first ten minutes of his presidency and wander off into trouble. If elected, Romney must follow through for conservatives and honor his vows to repeal Obamacare, implement Representative Paul Ryan’s agenda, and stay true to his pro-life commitments. Moreover, Romney is not a man of vision. He is a man of duty and purpose. He was told to “fix” health care in ways Massachusetts would like. He was told to fix the 2002 Olympics. He was told to create Bain Capital. He did it all. The man does his assignments."

@rortybomb: Serious question: What is the set of problems that middle-income people have that the poor don't?

3) America faces three deficits, writes Laura Tyson: "This year began with a series of reports providing tantalizing evidence that economic recovery in the United States is strengthening. The pace of job creation has increased, indicators for manufacturing and services have improved, and consumption spending has been stronger than anticipated. But it is too early to celebrate. Output growth in the US remains anemic, and the economy continues to face three significant deficits: a jobs deficit, an investment deficit, and a long-run fiscal deficit, none of which is likely to be addressed in an election year...Painful choices about how to close the long-run fiscal gap should be decided now and implemented promptly once the economy has recovered. But, for the next few years, the priorities of fiscal policy should be jobs, investment, and growth."

4) The Buffett rule won't make so much as a dent in inequlity, writes Michael Kinsley: "The rule would be a phased-in requirement that all taxpayers making more than $1 million a year pay federal taxes of at least 30 percent of their adjusted gross incomes...First, it will affect so few people that it will have no measurable effect on income distribution. Citizens for Tax Justice, a liberal tax reform group, figures that the Buffett Rule would affect about 0.08 percent of taxpayers, or one out of every 1,250. People will be tempted to think that by enacting the Buffett Rule, we will have solved the problem of growing income inequality, when we won’t really have even touched it. What about people making $500,000? Don’t they need to kick in something, too? The median family income in this country is about $50,000. That means if two people in your family are working and they bring in a total of more than $50,000, you’re in the top half. Any redistribution through the tax system for the purpose of reducing inequality will increase your taxes, not reduce them."

5) Progress is being made on a structure to let big banks fail, writes Simon Johnson: "The drafters of the Dodd-Frank financial reform law got an important thing right. Despite fierce pushback from the banks -- and lackluster support from the White House at critical moments -- the legislators communicated a key new intent: megabanks must be able to fail, and the Federal Deposit Insurance Corporation should be in charge of that liquidation process. The F.D.I.C. was an inspired choice for this role, because it is less captivated by the 'magic' of Wall Street and less captured by its money and influence than any other group of officials...By creating a Systemic Resolution Advisory Committee of informed outsiders and by Webcasting the deliberations of that group, the agency has brought perhaps an unprecedented degree of transparency to public policy for banks."

Electropop interlude: Ellie Goulding plays "Starry Eyed" live on BBC's Live Lounge.

Got tips, additions, or comments? E-mail me.

Still to come: Payroll tax extension talks get sidetracked; the Komen controversy continues; an amended STOCK Act passed the Senate; offshore wind gets the fast track; and a dog meets snow for the first time.

Economy

Q&A: Sen. Sheldon Whitehouse explains how the Buffett rule will work.

The S.E.C. has repeatedly granted waivers to big banks in fraud cases, reports Edward Wyatt: "Even as the Securities and Exchange Commission has stepped up its investigations of Wall Street in the last decade, the agency has repeatedly allowed the biggest firms to avoid punishments specifically meant to apply to fraud cases. By granting exemptions to laws and regulations that act as a deterrent to securities fraud, the S.E.C. has let financial giants like JPMorganChase, Goldman Sachs and Bank of America continue to have advantages reserved for the most dependable companies, making it easier for them to raise money from investors, for example, and to avoid liability from lawsuits if their financial forecasts turn out to be wrong. An analysis by The New York Times of S.E.C. investigations over the last decade found nearly 350 instances where the agency has given big Wall Street institutions and other financial companies a pass on those or other sanctions."

The Obama administration will continue its push to wind down Fannie Mae and Freddie Mac, reports Brady Dennis: "The Obama administration plans to push forward this spring with efforts to wind down government-backed housing giants Fannie Mae and Freddie Mac and attract more private funding to mortgage markets, Treasury Secretary Timothy F. Geithner said Thursday...Since the financial crisis, the country’s housing finance system has relied almost exclusively on federal support for funding new home loans. In a white paper last February, the administration outlined three options for a long-term overhaul of the housing market. Each of those proposals retained the Federal Housing Administration, which focuses on loans to borrowers who can’t afford sizable down payments. Each option also proposed the elimination of Fannie and Freddie but offered different approaches on how -- or whether -- to replace them."

Obama's focus on manufacturing taps into trends, reports Annie Lowrey: "In his State of the Union address, President Obama called for a wide-ranging package of policies to help create American manufacturing jobs, including trade enforcement measures, business tax breaks and worker training programs. In many ways, the proposal is surprising, as few economists now consider manufacturing a potent engine for job growth in the United States. Manufacturers have added about 330,000 jobs in the country in the last two years...But the administration argues that big trends -- like rising wages in developing countries, falling wages in America and a weaker dollar -- have made moving work to or keeping work in the United States a much more viable option. And they say that manufacturers will continue to add jobs domestically, especially with a little help from Washington."

Negotiations over payroll tax extension are being bogged down by side issues, reports Seung Min Kim: "They bickered over boiler regulations, rambled about research and development credits and discussed the finer points of business expensing. But there was one important matter the payroll tax conference committee didn’t debate Thursday: the payroll tax itself. Twenty-six days remain until the popular tax cut is set to expire for 160 million Americans. But the debate so far has been consumed by side issues. And though the 20 negotiators stress that they all agree the tax holiday as well as jobless benefits and the Medicare reimbursement rate should be extended through 2012, they are avoiding the $64,000 question that stumped Congress in December: how to pay for it all. "

Longform interlude: Richard Beck on the history of Pitchfork.

Health Care

Congress members are speaking out against Komen, reports Sam Baker: "The firestorm surrounding the Susan G. Komen foundation intensified Thursday with a coordinated attack from congressional Democrats and high-profile dissent from within the Komen organization. Twenty-six Democratic senators signed a letter urging Komen to restore its grants to Planned Parenthood and accusing the charity of putting women's health at risk to serve a political agenda. 'It would be tragic if any woman -- let alone thousands of women -- lost access to these potentially life-saving screenings because of a politically motivated attack,' the letter states. Rep. Mike Honda (D-Calif.) is gathering signatures in the House for a similar letter."

Domestic Policy

The Senate passed an ethics reform bill, reports Paul Kane: "In a sign of just how unpopular Congress has become, rank-and-file senators hijacked a debate over a narrowly tailored ethics bill and won broad approval Thursday of a more far-reaching reform package that would impose new conflict-of-interest rules and mandate more transparency on K Street. Minor Senate bill transformed into broad reform packageText Size PrintE-mailReprintsBy Paul Kane, Thursday, February 2, 1:17 PMIn a sign of just how unpopular Congress has become, rank-and-file senators hijacked a debate over a narrowly tailored ethics bill and won broad approval Thursday of a more far-reaching reform package that would impose new conflict-of-interest rules and mandate more transparency on K Street.From conservative backbench Republicans to liberal junior Democrats, senators launched an ethical arms race of amendments by offering changes that were not even considered five years ago when Congress last rewrote its ethics rules."

Some states are considering 'creativity indexes' for schools, reports Erik Robelen: "At a time when U.S. political and business leaders are raising concerns about the need to better nurture creativity and innovative thinking among young people, several states are exploring the development of an index that would gauge the extent to which schools provide opportunities to foster those qualities. In Massachusetts, a new state commission began meeting last fall to draft recommendations for such an index for all public schools, in response to a legislative requirement. Meanwhile, the California Senate last month approved a bill calling for the development of a voluntary Creative and Innovative Education Index. The emerging state efforts to promote creativity and innovation among their students pick up on a theme that's been gaining steam for some time in American political, business, and education circles."

The CBO got federal pay wrong, writes Colleen Kelley: "The logical policy implications of the CBO conclusions would be to provide significant raises to the highest-paid federal employees, which would amount to $30,000 to $50,000 for annual salaries of $150,000 to $200,000. The union I lead represents some very highly educated and skilled attorneys, physicians and nuclear scientists in this pay range; we would support, but do not expect, such increases...It is clear that the public and its representatives in Congress do not support compensating even the most educated and skilled employees at the level they could attain in the private sector...This report veers from the middle path that allows the government to attract and retain the best civil service workforce while keeping both the top and bottom compensation levels reasonable and fair."

Adorable animals being adorable interlude: A dog plays in the snow for the first time.

Energy

The Obama administration fast tracked offshore wind projects, reports Ryan Tracy: "The Obama administration said it planned to make areas off the coasts of Maryland and New Jersey available to wind-energy developers by year's end, paving the way for the first leases under a program designed to fast-track offshore wind farms. While President Barack Obama has said he favors an 'all of the above' approach to energy development, Thursday's announcement highlighted the stronger emphasis he places on wind and solar power compared with Republicans. A House committee on Wednesday approved three bills promoting oil-and-gas exploration, an issue also stressed by the GOP's presidential candidates. Announcing the wind plan, Interior Secretary Ken Salazar said his department found there would be 'no significant impact' on the environment from issuing the leases and allowing developers to test whether the areas are viable. The decision eliminates a step from the environmental-review process, shortening it by as much as two years."

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

 
Read what others are saying

    Most Read: Business

    DJIA
    -0.68%
    S&P 500
    -0.58%
    NASDAQ
    -0.42%
     Last Update: 07:02 PM 09/23/2014

    World Markets from      

     

    Other Market Data from      

     

    Key Rates from