Stop Distorting U.S. 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 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.

Comments

[actionashley:]

At what point can we just come together and agree on something??? I thought part of Obama's schtick was that he was going to bring the nation together with all of his wonderful changes?!?! If we can't even get on the same page with the whole economy discussion, how are we going to agree on anything else from here on? Are we all going to agree on what his to-do-list features?? Perhaps we can all throw in our two cents on what his to-do list should include... This website asks what you would like to see Congress and Obama tackle first in his first 100 days in office. Definitely check it out:
www.friendsoftheuscham...

You have a voice. USE IT!

Feb 08 08:29 AM

[a. palmer jr.:]

My voice is to ask why Pres. Obama didn't have more of a hand in writing the stimulus package rather than having Pelosi and Reid hijack it. He sounded so good in his speeches that he could have surely come up with something better. I'm not Dem or Rep. exclusively but it looks like more pork barrel Democrat spending to me.

Feb 08 11:22 AM

[Prudent Man...:]

Obama and his lefties don't have Bush to kick around now they have all of us. Nixon can relax in his grave as the Left switched to Bush and now telling us that we have to bow down to most reckless, inexperience, Socialistic president in our history. Etiher Obama has a screw loose or those who follow him do. One thing is sure about Obama is that he is an admitted Socialist who will use any scare tactic in the book to further that agenda.

Anyone who speaks out against this Adminsitration will surely be deemed a racist of using "dirty tricks". To the Left, the Truth is a dirty trick.

The economy today is all about politcs and not productivity. Those in power never produced anything and know nothing about that terrible Free Enterprise System where the productive, not the elite, are rewarded.

Feb 08 11:52 AM

[Vox Rationalis:]

For those keeping score, please add PrudentMan, CFA to the list of folks who don't know what "Socialist" means. Not a racist, not a truth-teller. Simply a person who doesn't know what socialism is.

Feb 08 04:26 PM