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Why Congress should let the Bush tax cuts expire

By Ruth Marcus
Wednesday, July 28, 2010; A15

The modern Republican argument about taxes seems to boil down to two principles, both misguided: Taxes can be reduced, but they can never be allowed to go up. And whatever level taxes are at, they are too high.

Think back to the beginning of the Bush administration tax cuts. It seems almost impossible to believe, but the argument then was that the budget surplus was too large. There was, or so President George W. Bush assured us, ample cash to cut taxes for everyone and protect the Social Security surplus and set aside $1 trillion over the next decade for "additional spending needs" and pay down the national debt.

"The people of America have been overcharged, and, on their behalf, I'm here asking for a refund," Bush told Congress in February 2001.

You know what happened next. The refund came. The supposed surplus evaporated. The Social Security surplus was spent. Instead of being paid down, the $3.3 trillion national debt ballooned to $9 trillion.

The only thing that remained the same was the clamor for tax cuts. Same argument, different rationale. The Bush tax cuts are set to expire at the end of this year, and the argument now is that they must be extended -- for everyone. This time not because the fiscal bottom line is too healthy but because the economy is too shaky.

I expressed frustration a few weeks back with the denialism among some liberal Democrats about the need to curb entitlement spending and the conviction that simply socking it to the rich would solve the fiscal problem. But the Republican position seems even more intransigently divorced from reality. Perhaps there is some magical point at which Republicans might accept the reality that the government needs more revenue than it is currently set to take in -- but I haven't heard it yet.

Quite the opposite. At a breakfast with reporters the other day, Minnesota Gov. Tim Pawlenty, one of the GOP's rising stars and a more-likely-than-not 2012 presidential candidate, was asked what his reaction would be if the president's debt commission were to recommend a mix of spending cuts and tax increases.

"Not good," Pawlenty said. "I don't think the argument can be credibly made that the United States of America is undertaxed compared to our competitors." Actually, the United States is on the low end in terms of the overall tax burden -- 28 percent of gross domestic product in 2007, according to the Organization for Economic Cooperation and Development, compared with an average of 36 percent in the 30 OECD countries. Only South Korea, Mexico and Turkey were lower.

Of course, Pawlenty is hardly alone in his tax delusions. Senate Minority Leader Mitch McConnell proclaimed the other day that the Bush tax cuts actually raised money. "There's no evidence whatsoever that the Bush tax cuts actually diminished revenue," the Kentucky Republican told Brian Beutler of the Web site TPMDC. "They increased revenue, because of the vibrancy of these tax cuts in the economy."

Here's some evidence. Tax revenue fell from 21 percent of GDP in fiscal 2000 to 17.5 percent in 2008. (I'm leaving out the recession-induced plunge, to under 15 percent this year and last.)

Which takes us back to the matter of whether it would be risky to let any of the Bush tax cuts expire. As a practical matter, Democrats and Republicans agree that the cuts should remain in place, at least temporarily, for families making less than $250,000 a year. That's a debatable point. Former Federal Reserve Board chairman Alan Greenspan, whose blessing was responsible for propelling the tax cuts forward in the first place, said recently that Congress should let them lapse.

The real disagreement is over extending the high-end tax cuts, and on this even some supposedly fiscally responsible Democrats -- I'm talking to you, Kent Conrad -- have gone wobbly. The no-new-taxes-now crowd cautions against raising taxes in a recession -- a fair point, except that there are more efficient ways to spur the economy than giving more money to those least likely to spend it. Alternatively, they cite -- and inflate -- the supposed impact on small business of raising the upper-end rates.

This would be more convincing if the Republican line were something other than "no new taxes, ever." The economic and fiscal circumstances may change, but the prescription remains the same. And the patient is too ill to tolerate another dose of this quack medicine.

marcusr@washpost.com

Related reading: Ruth Marcus's Overtaxing the rich isn't the answer, the editorial Bush tax cuts are bad for business and the essay Five myths about your taxes.

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