If Tax Cuts Cause "Deficits," How Does The Left Explain the Obama Years?

If Tax Cuts Cause "Deficits," How Does The Left Explain the Obama Years?
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In a recent column for the New York Times, David Leonhardt observed about the Republican tax bill proposal that it's a "dreadful piece of policy. It would cause the deficit to soar and, as a result, probably reduce economic growth. It would also raise taxes for millions of middle-class families.” While the economics of the tax cut bill aren't optimal, they are much better than the current code. What would improve the bill dramatically would be significant cuts to both the top individual rates and the tax on capital gains.

What is dreadful is Leonhardt's understanding of economics. He starts with a standard talking point from the static modeling camp, “Tax cuts will cause the deficit to soar." The simple truth is that deficits occur because governments spend more money than they collect in tax revenue. The federal overnment has a forecast of how much tax revenue it will collect each year. It also has a detailed spending plan. This means that when the government runs a deficit that it's planning on running a deficit.

Deficits aren't an accident; they don't happen due to a sudden shortfall in revenue or a series of unexpected expenses. Increased government spending is what causes the deficit to grow, not tax rate cuts. As a matter of fact, the opposite is true. History shows us that reducing marginal tax rate leads to greater economic expansion and more tax revenue. Further proof of Leonhardt's faulty reasoning is provided by the fact that while there have been no tax cuts in the last 8 years, only tax increases, government debt grew by nearly 10 trillion dollars. Tax cuts did not produce the 10 trillion dollars of additional debt. Deficit spending plans were the culprit.

Leonhardt tells us that increasing deficits will probably reduce economic growth without any kind of an explanation as to why he thinks this is true. In Leonhardt's mind, high tax rates and reduced deficits are what stimulate economic growth. Again, he could not be more wrong. It wasn't high tax rates that produced the economic boom in the late 1990's. The stronger than normal growth was ignited by a 40% cut in the Capital Gains Tax Rate in 1997, and the increased tax revenues that flowed to the treasury, as a result, are what eliminated the deficits. Slower economic growth is not a function of whether the government chooses to borrow more or fewer dollars to fund their spending, as much as it is a function of how much the government spends overall. Every dollar the government spends must first be taken out of the private economy through taxes.

Economic growth is the result of greater investment in productive capacity, something that is easier to do if you're not sending as much of your individual and corporate earnings to Washington. When the government creates a policy mix with incentives for additional investment, you get more of it and greater investment is what causes economic growth. The reverse is also true. If you penalize investors with high marginal tax rates you'll get less investment and less growth.

To bolster his argument on how terrible the tax bill is for the poor and the middle-class, Leonhardt cherry-picks data from a study by the Joint Committee on Taxation that measures after-tax income. Why Leonhardt chooses to use only one year, 2027, out of a 10-year series is obvious once you look at the rest of the series. It is the only year in which every group would experience a drop in average after-tax income or no change, except for those in the higher income brackets. Households with $500,000 or more would see an increase of less than 0.5%. The group that is hardest hit in 2027 are those workers earning between $10,000- $20,000 per year, who will see a reduction in after-tax income of 1.5%. What Leonhardt doesn't tell readers is that workers at that income level don't pay income taxes. That 2027 is two years after the individual tax cuts expire, is also conveniently left out of his article.

Leonhardt then pretends to be upset that the same dreadful tax laws, the ones he hopes won't become law, may expire in eight years. He opposes the tax cuts because he claims they don't provide relief for the middle class and poor but is also against the tax cuts expiring. This is taking both sides of the argument. If Congress wants to keep the tax cuts from expiring they can pass a new law. No Congress can bind a future Congress to legislation, so no tax cut or increase is permanent.

He calls the GOP plan cynical; saying it is the direct opposite of the party's middle-class rhetoric. Leonhardt writes “Once Republican leaders filled their plan with tax cuts for the wealthy, they didn’t have much money left for the middle class.” While there is considerable tax relief for corporations and pass-through entities in the bill, his claim that it's a big tax cut for the wealthy is just wrong. And Leonhardt knows it's wrong. The top individual rate in the House bill stays at 39.6%, and the Senate version reduces the top rate to by 1.1% to 38.5% from 39.6%. The only real break for wealthy individuals was raising the bracket where the top rate applies from $480,000 to $1,000,000. But if the GOP proposal is passed he needn't worry about running out of tax relief for the poor and middle class, as the additional revenues generated by a booming economy will let Congress come back and reduce tax rates even more.

Dave Cribbin,ChFC, is currently the president of Rolling Thunder Cigars. 

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