Stop Distorting Spending Priorities into Tax Cuts

It is unfortunate that much of the congressional debate regarding the stimulus package is phrased in terms of a summary statistic: what fraction of the stimulus is to be increased spending and what fraction is to be tax cuts. It currently looks to be about 70-30, but the Republicans say they want more in tax cuts and the Democratic holdouts say they want more in spending.

To judge the merits, one has to go into greater detail. One can have smart spending and stupid spending. (The U.S. has had plenty of both in recent history.) Similarly, one can have smart tax cuts and stupid tax cuts (ditto). At the present juncture, some of the tax cuts I strongly support include (i) fixing the Alternative Minimum Tax (to help the middle class) and (ii) letting more low-income workers have the child deduction (to help reduce what are currently some of the highest effective marginal tax rates facing any class of American workers) . And there are plenty of other examples, where “letting Americans keep their money” is indeed a more efficient way of achieving social goals than having the government spend it.

But summing things up in an overall tax-cut-vs.-spending statistic can be pernicious. How so? Many things that government does that are more efficiently accomplished by spending. Defense and transportation infrastructure are two obvious examples, but I personally would add much of health care and primary education. The result of the bias in favor of tax cuts is that all sorts of initiatives go through a tortuous re-casting as tax credits or deductions. In many cases this leads to increased paperwork and an ever-more complicated tax system.

Both parties have been responsible for this “junking up” of the tax code. Consider this 2001 rendition of what happened in the 1990s, from those who know: “Martin Feldstein asked Gene Sperling whether Republicans were to blame for the Clinton administration’s apparent use of tax expenditures [e.g., tax credits for education] rather than direct expenditures. That is, Republicans accused Democrats of being the party of taxing and spending, so the Clinton administration responded by finding a way to achieve implicit spending objectives while ostensibly reducing taxes. Sperling responded that he largely agreed…” [American Economic Policy in the 1990s, edited by Jeff Frankel and Peter Orszag (MIT Press, 2002), pages 188-189.]

I realize that the preference for tax cuts over spending was originally motivated by a preference for smaller government over bigger government. But it doesn’t work anyway. Leave aside those on the Left who think that – because of the Bush failure, Obama victory, financial crisis, and recession – the case for big government has now returned. Even those on the Right who retain their belief in small government, at least at a rhetorical level, should admit that the Bush policies of big tax cuts did nothing to shrink the rate of growth of spending, which was in fact far higher after 2001 than in the preceding decade.

Originally published at Jeff Frankel’s Weblog and reproduced here with the author’s permission.

5 Responses to “Stop Distorting Spending Priorities into Tax Cuts”

Genevieve in FloridaFebruary 6th, 2009 at 9:05 pm

Like most Americans, I am sickened by watching Republicans squeeze as much TV time and money out of a stimulus package. A package meant to put people back to work, not give those still working another useless tax refund. The last one did not help us. Anyone learning anything here? Sadly, I realized that Washington has to change too. Republicans want tax cuts for working Americans. How many Americans are going to be working when the Republicians are finished?

GuestFebruary 7th, 2009 at 7:30 am

Like most Americans I am sickened at the stimulus bill that will soon be passed. No one yet has been able to explain to me in an intellectual way how more debt will be able to rescue us when excessive debt at the consumer and government level got us where we are at today. It sickens me that I will be also asked to help pay down peoples debt caused by living above there means in the last 10 years while I lived within my means. No body talked about sharing the wealth when house prices were rising to fast to be true and people borrowed against this to live a lavish lifestyle. I went through something similar as a Dairy Farmer in the late seventies and early eighties. They handed credit out to anybody that wanted to farm, production increase beyond demand (like housing) and the bubble burst – it was painful. When the market needs a correction it will come and no matter what politicians do the market will always win. I am convinced they can only make it worse.I was not a big Bush supporter because I thought he was a fake conservative (I am libertarian) but he did do some things right, the Tarp was not one of them. I will say this, previously to Aug. of 2008, while Bush was President, were the best years economically for me, my 401 plan tripled in value and my salary increased by 60%. This came about by opportunities due to the expanding economy and my skill level. My Job is still in tack, my 401 is now a 201 but I believe my company will weather the storm hopefully my job will to. Had I really known the schemes the investment institutions were doing to gain value I would of moved my 401 around to preserve it better. I am sorry but a home mortgage is only worth so much and to group the different mortgages into different packages and sell them say they are worth more is a ponzi scheme. The only way you gain is through a foreclosure under a time of increasing real estate values, guess what that did not happen.As a person just out of high school I lived through the seventies, which I consider the worse decade of my lifetime ending with the Carter years. I thought that put an end to the stupidity of John Maynard Keynes ideas but apparently he is back. It just goes to show you can not fix stupid.I believe we are going to repeat the decade of the seventies and have a L shape recovery just like Japan of the nineties with the policies we are implementing. Some experts think the problem was the way Japan implemented their recovery idea but they do not realize that a bad idea will not work no matter how you implement it.

GuestFebruary 15th, 2009 at 10:10 am

I agree that Bush was a fake conservative.And I agree that most Americans are sickened by the money spent on TARP.But I don’t agree that most Americans oppose large-scale action like the fiscal stimulus package; they know we are in a serious situation and most of them want action like this.Of course what the public thinks it wants and what is good for them are not always the same thing. In the case of the stimulus package, in spite of a bit of the inevitable political fiddling in Congress, it is mostly to the good, in my view. In the case of TARP, that is much more questionable. Hopefully the money spent to fix the banking system will be better designed (less bailing out of bankers and more protection for the taxpayer) in the near future than it has been in the past.Jeff Frankel

Dr. Fred in PAFebruary 15th, 2009 at 4:29 pm

Tax cuts of course cannot ever compel reduced spending. A balanced budget amendment would compel it as would a populace that held their representatives accountable for irresponsible fiscal behavior. Instead, we get nitwits like Dodd and Frank and Waters in charge of our financial system and the result is what we are now looking at.

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Emre Deliveli is a freelance consultant, part-time lecturer in economics and columnist. Previously, Emre worked as economist for Citi Istanbul, covering Turkey and the Balkans. He was previously Director of Economic Studies at the Economic Policy Research Foundation of Turkey in Ankara and has has also worked at the World Bank, OECD, McKinsey and the Central Bank of Turkey. Emre holds a B.A., summa cum laude, from Yale University and undertook his PhD studies at Harvard University, in Economics.

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