An earlier version of this column misstated when Bill Clinton reached a deal on tax increases. It was in 1993, not 1992.
To deal with the deficit, let the tax cuts expire
For the past few months, we have heard powerful, passionate arguments about the need to cut America's massive budget deficit. Republican senators have claimed that we are in danger of permanently crippling the economy. Conservative economists and pundits warn of a Greece-like crisis in which America will be able to borrow only at exorbitant interest rates. So when an opportunity presents itself to cut those deficits by about a quarter -- more than $300 billion! -- permanently and relatively easily, you would think that these people would be leading the way. Far from it.
The "Bush tax cuts," passed in 2001 and 2003, remain the single largest cause of America's structural deficit -- that is, the deficit not caused by the collapse in tax revenue when the economy goes into recession. The Bush administration inherited budget surpluses from the Clinton administration. What turned these into deficits, even before the recession? There were three fundamental new costs: the tax cuts, the Medicare prescription-drug bill and post-9/11 security spending (including the wars in Iraq and Afghanistan). Of these the tax cuts were by far the largest, adding up to $2.3 trillion over 10 years. According to the Congressional Budget Office, nearly half the cost of all legislation enacted from 2001 to 2007 can be attributed to the tax cuts.
Those cuts are set to expire this year. Republicans say they want to keep them all, even for those making more than $250,000 a year (less than 3 percent of Americans), because higher taxes will hurt the recovery. But for months Republicans have also been arguing that the chief threat to the economy is our gargantuan debt and deficit. That's what's scaring consumers, creditors and businesses. Yet given a chance to address those fears by getting serious about deficit reduction, they run away. By contrast, British Prime Minister David Cameron, a genuine fiscal conservative, concluded that to deal with his country's deficit, which in structural terms is not so different from America's, he would have to raise taxes as well as cut spending.
Democrats, for their part, are also running scared, proposing to keep all the tax cuts except those affecting the very rich. But they were opposed to these tax cuts in 2001 and 2003. If they were a bad idea when budget deficits were small, why are tax cuts a good idea when deficits are around $1.3 trillion?
The idea that the average American is overtaxed is a nice piece of populist pandering. In fact, federal taxes as a percentage of the economy are at their lowest level since the Truman administration. Chuck Marr and Gillian Brunet of the Center on Budget and Policy Priorities have calculated that a family of four at the exact middle of the income spectrum will pay only 4.6 percent of its income in taxes. Remember, almost half of the country pays no income taxes at all. The top 2 percent of Americans contribute almost 50 percent of federal income taxes.
The simple facts are these: All of the Bush tax cuts were unaffordable. They were an irresponsible act of hubris enacted during an economic boom. Conservatives thought they would force us to shrink the government. But with Republicans controlling the White House and both houses of Congress, did reduced taxes cause reduced spending? No. They led to ever-increasing borrowing and a ballooning deficit.
We have one of the smallest governments among all the world's rich countries. Yet we refuse to pay for it. (Yes, health-care spending is the big exception and, yes, we will have to get those costs under control.) I understand the fear that this is not a good time to raise taxes. But the impact of marginal shifts in tax rates on growth is pretty unclear. Bill Clinton raised taxes in 1993 and ushered in a period of extraordinarily robust growth. George W. Bush cut taxes massively in 2001 and got meager growth in return. Three tax cuts enacted since the financial crisis have done little to spur growth. In any event, if timing is the issue, Congress could extend all the tax cuts for a year but then let them expire. Better yet, spend money on far more efficient ways to spur job creation, such as tax credits for jobs, which the Congressional Budget Office estimates would create four to six times as many jobs as would tax cuts.
I don't like our current tax system. It's unwieldy, it taxes the wrong things (income instead of consumption) and its loopholes are legalized corruption. But we are not going to create the perfect tax code today. In front of us is a simple, easy way to bring America's fiscal house in order, reduce our dependence on foreign borrowing, restore U.S. credibility and power, and provide a stable revenue base from which to make key investments for future growth. All we need is for Congress to do what it does so well: nothing.
Fareed Zakaria is editor of Newsweek International. His e-mail address is firstname.lastname@example.org.
More Post content on the Bush tax cuts: Alan S. Blinder, Mark Zandi, Robert Greenstein and other economic experts on whether to extend the tax cuts. Columnist Ruth Marcus says we can't afford quack medicine on taxes. Five myths about the Bush tax cuts.