The Myth Of Tax Cut Expirations (Updated)
The House and Senate passed a massive budget bill yesterday, a fact lost in the heat over the immigration compromise, that expands federal spending to almost $3 trillion dollars. At the heart of the new spending, now and in the future, is the elimination of the Bush administration's tax cuts from 2001-2003. The Los Angeles Times asks whether that amounts to a tax increase:
The House and Senate on Thursday approved a $2.9-trillion federal budget blueprint that, depending on whom you asked, contained the second-largest tax hike in history or, conversely, no tax increase at all.How are such different readings of one document possible? It could happen only in the world of Washington budget-speak, where political spin is at least as important as fiscal reality.
The new budget resolution, the first to make its way through Congress since Democrats took control, anticipates almost $3 trillion in spending and just under $2.7 trillion in revenue, leaving a projected deficit of about $250 billion. ...
At the heart of the dispute are the major tax cuts that President Bush pushed through Congress soon after taking office in 2001. Congress, then controlled by Republicans, approved the cuts but specified that they would expire after 2010 unless Congress extended them — a provision designed to make the size of the cuts more palatable. The GOP has since sought to make the cuts permanent.
Now the Democratic majorities in the House and Senate have voted to let some of the cuts expire — particularly those that benefit the wealthiest taxpayers. For example, the new budget resolution would allow tax rates on high-income Americans to revert to pre-2001 levels in 2011.
Tax cuts don't "expire" unless taxes get raised. Americans who pay taxes know this from long experience. Regardless of the reason or the mechanism, when taxes go up, they increase -- a fact so obvious that only Beltway insiders can get it wrong.
The Bush administration and the Republicans had to accept the sunset provisions in order to get the tax cuts passed. At the time, Democrats and a few Republicans (John McCain among them) had doubts as to whether they would actually stimulate the economy and drive a recovery from the 2000-1 recession and subsequent mediocre performance. They wanted a mechanism to raise taxes back to the levels at the time if the cuts didn't perform as advertised.
Well, they did. The tax cuts sparked an economic expansion that continues to this day, one which has increased revenues to the federal government by 22% since their full implementation. The lower rates improved capital investment in the economy, created jobs and lowered unemployment to 4.5%, and expanded prosperity.
What has been the Democratic response? Not only to raise taxes back to the pre-expansion level, but to add even more federal spending on top of it. It envisions a 5% increase over FY 2007 spending just to start. That's the largest single-year increase since 2002, and it comes on the compounded increases of 3-4% year-on-year of the Republican Congresses of the Bush term. It represents a whopping 40% increase from FY 2000, when the budget came in at $2.1 trillion.
The current Congressional leadership doesn't want people to think that they're raising taxes. If not, where do they expect to get the money for the federal budget expansion? They will take capital out of the marketplace, where it creates and maintains jobs and production, and stick it into a federal system which burdens both -- creating an even greater need for federal spending on entitlements and welfare.
This budget shows that while Republicans spent like drunken sailors, they managed to avoid picking pockets like Fagan's ring of young thieves while doing so. The Democrats want to give us both.
UPDATE: And it gets worse. Take a look at page 50 of the Conference Report. The actual size of the budget is $2.965 trillion, which makes the year-on-year increase slightly higher than I said -- but that's not the real problem. Within four years, the Democrats want to push the budget to $3.274 trillion, an increase of 10% over their proposed spending for next year, and an an increase of almost 20% over this year.
It was just ten years ago that the budget was under $2 trillion. It has already grown 35% in ten years. By the time 2012 rolls around, it will have increased 44% in the previous ten-year cycle under this plan.
Posted by Ed Morrissey on May 18, 2007 11:02 AM | Comments (29) | TrackBacks (1)
Comments (29)
Posted by Carol Herman | May 18, 2007 11:37 AM
I guess we're in the land of being ruled by the "one eyed" congress; while Bush is deaf, dumb, and blind.
And, not much of a leader, either.
How does a team with a TWO PERCENT advantage pull this off?
Okay. They got the eye. ANd, everybody else is blind, I guess?
Posted by James I. Hymas | May 18, 2007 12:38 PM
Cap'n Ed : Well, they did. The tax cuts sparked an economic expansion that continues to this day, one which has increased revenues to the federal government by 22% since their full implementation.
Wrong. The deficit and low interest rates sparked the expansion.
There was massive monetary and economic stimulus pumped into the system in '00 - '04 - partially understandable to the threat of Japanese-style deflation, but politically palatable since many like to believe they can get something for nothing.
Posted by Lightwave | May 18, 2007 12:54 PM
The problem is Ed that the system supported by massive amounts of fiat money pumped in by Greenspan is going to break it when the Democrats turn the spigot off.
The good news is the Democrats will correctly be blamed for this.
Posted by MarkW | May 18, 2007 12:56 PM
That would be the first time in history that deficit spending sparked a recovery.
Posted by the fly-man | May 18, 2007 1:06 PM
As long as they're MY drunken sailors spend on! right? How lame is that? How about lying drunken sailors. You know the kind that promise reform, restraint and conservative principles and then after selling their constituencies on the goals they'll achieve while in office, defeating; Liberalism, big Government and foreign tyrants. And once in office milk the system for nothing more than greed and unrestrained power. Again as long as it's not a Liberal drunken sailor we'll be just fine. Sacrificing a core principle is any easy trade off for maintaining power huh?
Posted by TyCaptains | May 18, 2007 1:43 PM
Low interest rates sparked a HUGE economic boom through refinancing and housing purchases. This is where most of the money spent came from. Consumers who spent, not because they got a measley decrease in their taxes but because they got huge (paper) windfalls through housing appreciation.
Posted by Adjoran | May 18, 2007 2:33 PM
What ever happened to "Paygo" anyway?
Oh, just another Democrat lie to get elected - sort of like "no 'timetables' for withdrawal from Iraq," eh?
~~~~~~~~~
I have to laugh at the persistence of the gold-bugs. How stupid do you have to be to believe in a 19th Century myth? Even though the US holds 25% of the known gold reserves in the world, it still isn't enough to cover one-third of the currency in circulation (even at today's inflated market price).
So, then, what do the gold-bugs propose? A "fractional standard" like we had for most of the 20th Century before Nixon bowed to reality, which is just as much "fiat money" as the present system? Or massive deflation of the currency, precipitating a worldwide depression that will kill billions of people in the resulting chaos?
Morons.
Posted by Lightwave | May 18, 2007 2:36 PM
And do the Democrats really think they'll have a surplus with the coming Iranian conflict caused by their precipitous withdrawal from Iraq? Oil prices will cripple the economy, the Dems raising taxes will end it.
Today the Dems dropped their timetable requirement for the war funding bill, making it meaningless and non-binding. The President rightfully told them to screw off.
NO quarter can be given on the war funding. It must be fully funded and we must finish the job.
Posted by James I. Hymas | May 18, 2007 6:38 PM
MarkW: That would be the first time in history that deficit spending sparked a recovery.
Watch out, MarkW! Dear Leader has explicitly invoked Keynesian economics as part of an economic stimulus package.
Adjoran, it may be that I'm looking forward too much to the (Canadian) holiday weekend, but what on earth brought on the diatribe regarding the gold standard?
Posted by James I. Hymas | May 18, 2007 8:21 PM
Oh, yeah. I had a look at (a small part of) the detail below the big numbers, and saw that the major changes in spending are:
Defense +34 billion
Health +103 billion
Medicare +121 billion
Income Security +42 billion
Social Security +174 billion
Veterans +20 billion
Interest +52 billion
Overseas Deployments -124 billion
which net to +369 billion of a total change of +441 billion.
Most of the increases are found in the "Mandatory Spending" category. In the interest of a constructive debate, I'd like to ask what cuts should be made, why they should be made and what effect those cuts will have.
Net interest, by the way, is forecast to be 288-billion of the total budget of 3,274-billion, or about 8.8%.
Pay $1.00 taxes, get $0.912 in services, courtesy of your friendly neighborhood deficit spenders. But then, we wouldn't want to pick the pockets of the current generation, would we?
Posted by Lew | May 18, 2007 8:37 PM
Ok, so the administration used the "K" word. What's your problem?
In a general sense every government with at least a room temperature IQ has been trying some version of the Keynsian stimulous model for at least 80 years and sometimes they get it right enough to have some salutory effect. Especially if you can get the central bank to cooperate intelligently and provide some easy money to help out.
You can argue that the fiscal side of the package had more or less effect than the monetary side, and many in the business have made whole careers out of picking that nit. The plain fact is however, that if anyone is handed a collapsing bubble on the first day in office, they'd better start pulling every lever they can get their hands on and a major income tax reduction is one of the best ones out there. Its highly visible, it shows the government doing something and its at least debatably effective in its stated goal.
Don't forget, economic decisions in a free society aren't made by economists nor for economic reasons. They're made by politicians for political reasons!
Posted by Scorpio | May 18, 2007 10:23 PM
It only raised employment if you work in Bangalore.
Posted by Scorpio | May 18, 2007 10:26 PM
It only raised employment if you work in Bangalore.
Posted by PD Quig | May 18, 2007 10:45 PM
Here's a comment: lose the g**d***ed RedOrbit pop-ups that take over the screen every time I visit your site. It's total bullcrap.
Posted by James I. Hymas | May 18, 2007 11:06 PM
Lew Ok, so the administration used the "K" word. What's your problem?
Mine, you mean? I don't have a problem with it. Keynesian economics is as good a starting place as any, and better than most. MarkW seems to imply he's found a refutation of it, though, which does surprise me.
if anyone is handed a collapsing bubble on the first day in office, they'd better start pulling every lever they can get their hands on and a major income tax reduction is one of the best ones out there.
I agree with a lot of that - but strongly disagree that tax reductions are the best first step. (OK, you didn't say 'best', you said 'one of the best' ... but there aren't really all that many broad stimulative fiscal policies to choose from. You can cut taxes, you can increase spending ... what else? Do you want to clarify?) A deliberate deficit via spending increases is easier to limit ... once you've built your NY-LA bullet train, or whatever, it's built and done. Tax decreases are harder to take away - just look at the Captain's post! Spending cuts applied to programmes to which people have become accustomed are much harder to implement - very hard to do and, I suggest based on the Canadian experience, impossible for Republicans to implement. Only the Democrats have the political room for such a thing and there's not (yet!) political will in the States to get it done.
Anyway, one way or another, the need for big-time stimulus has passed and it's time to start paying the piper.
Posted by TyCaptains | May 18, 2007 11:26 PM
James,
Does that increase in Defense spending account for the 3.5% pay increase for our soldiers that Bush is vehemently fighting against?
Posted by Wolfman | May 18, 2007 11:43 PM
Captain, I would cut the federal budget in half if I could but when making your comparisons please keep in mind that GDP increased by 37% over the past 10 years. And that's inflation-adjusted, unlike the 35% over 10 years that you cited.
Posted by gahrie | May 19, 2007 6:09 AM
Why do people try to argue that letting people keep more of the money they make does not:
A) Make them richer
B) Encourage them to work harder and make more money
C) Encourage them to spend more, thus creating more wealth for others
D) create more overall wealth, thus increasing the tax base, and thus tax revenues?
Posted by Duke DeLand | May 19, 2007 6:14 AM
The proof here is going to be the massive downturn in the economy by the time the tax cuts are brought to the front again as a tax hike....NOT a roll back.
The idiots who voted for the Dems in mind of their powerful statements against the GOP money-spending and lack of self-control are forgetting the Dems ALWAYS spend more.....BUT do it with TAX HIKES!
Posted by swabjockey05 | May 19, 2007 8:29 AM
Yes the Dhimmicrats will raise taxes...no kidding. Did you need more than a room temperature IQ to know that was going to happen?
What makes me LOL is when some schmuck socialist Canuck tells us it's "time to pay the piper"... as if he should have any say in how we are taxed...then again, maybe he DOES vote in our elections...Chicago maybe...? Florida? Maybe with a hanging chad?
Posted by swabjockey05 | May 19, 2007 8:35 AM
Yes the Dhimmicrats will raise taxes...no kidding. Did you need more than a room temperature IQ to know that was going to happen?
What makes me LOL is when some schmuck socialist Canuck tells us it's "time to pay the piper"... as if he should have any say in how we are taxed...then again, maybe he DOES vote in our elections...Chicago maybe...? Florida? Maybe with a hanging chad?
Posted by CoRev | May 19, 2007 8:42 AM
Ed, this is another urban myth: "...while Republicans spent like drunken sailors,...." In fact the deficit has been coming down since 2004contrasting the urban myth. They actually controlled spending keeping it BELOW the revenue growth rate.
Another less know fact is that the deficit could go POSITIVE in 2008. Yes, I said the deficit could be over next year! Anyone know what it is/was as of the May Treasury Report? Answer: $144B down from $248B at the start of the Fiscal Year (FY). It sh/could go below $100B by FY end. Since it has been going down at over $100B per year, I expect the Dem's to look for ways to claim credit for it happening on their watch. Of course any knowledgeable budget watcher will know what caused it.
BTW, the Fed has raised interest rates all during this cycle that the economy took off. Didn't appear to slow it at all. So, careful crediting Fed Credit decreases for the increasing economy.
Posted by swabjockey05 | May 19, 2007 8:42 AM
Oh noooooooooo a Troll says BushHitler is not going to give us automaton (uneducated fools and pawns) an XX % pay raise...that’s it man, game over.
The Capt's trolls again succeeded in giving me my first good belly laugh in the morning. Many times I don't vote for the Republican candidate...but I'd never vote for a Dhimmicrat...no matter how many alligator tears the dhimi trolls shed because BushHitler really "hates" the troops...LOL.
Posted by swabjockey05 | May 19, 2007 8:47 AM
Oh noooooooooo a Troll says BushHitler is not going to give us automaton (uneducated fools and pawns) an XX % pay raise...that’s it man, game over.
The Capt's trolls again succeeded in giving me my first good belly laugh in the morning. Many times I don't vote for the Republican candidate...but I'd never vote for a Dhimmicrat...no matter how many alligator tears the dhimi trolls shed because BushHitler really "hates" the troops...LOL.
Posted by CoRev | May 19, 2007 8:53 AM
Ed, this is another urban myth:
In fact the deficit has been coming down since 2004 contrasting the urban myth. They actually controlled spending keeping it BELOW the revenue growth rate.Another less know fact is that the deficit could go POSITIVE in 2008. Yes, I said the deficit could be over next year! Anyone know what it is/was as of the May Treasury Report? Answer: $144B down from $248B at the start of the Fiscal Year (FY). It sh/could go below $100B by FY end. Since it has been going down at over $100B per year, I expect the Dem's to look for ways to claim credit for it happening on their watch. Of course any knowledgeable budget watcher will know what caused it.
BTW, the Fed has raised interest rates all during this cycle that the economy took off. Didn't appear to slow it at all. So, careful crediting Fed Interest decreases for the increasing economy.
Posted by susanb | May 19, 2007 12:22 PM
Does the new spending increase the number of troops and planes we need for the war, or it is just earmarks, pork, and welfare? We need to build up our military, need more Marines, double the Army guys, stop using reserves as much, and less Navy projects (aka pork). This will be expensive. I don't object to increased spending that goes to the actual duties of the Federal Government, like defense and border security. Problem is, I don't have much confidence this "new spending' is going for any of that, not with the Dems in charge. The government is busy spending money on things that individuals should do for themselves, like buy their own health insurance.
Posted by James I. Hymas | May 19, 2007 2:12 PM
Well, I see that after a brief interlude of rational discourse, we're back to our regularly scheduled name-calling. SwabJockey05, what prompts you to label me a socialist? What did I say that so offends your ideals of laissez-faire borrowing? Is it my liking for balanced budgets - if not every year, then over a cycle, at least? It's not so long ago that other epithets were thrown at me for that - but I guess times change.
As far as your sensitivity to foreign criticism is concerned, I can only suggest that you go picket a Tim Horton's or something.
And CoRev, I'm sure that you, as a knowledgable budget watcher, are aware that revenues have been increasing not so much due to taxes on earned income, per se, as they have on capital gains earned from a stock market that has nearly doubled in five years. Should I take your confidence as a hot stock market tip?
Current projections are for a balanced budget in 2012 - which I'll believe when I see it, but never mind. Balanced budget? Big deal. When do you believe the trillion dollars-odd borrowed 2002-2006 will be paid back? The hard part of Keynesian economics is actually paying the money back after the pump-priming fun part.
And when you're talking about the fiscal deficit - which fiscal deficit do you mean?
Posted by gahrie | May 19, 2007 4:10 PM
revenues have been increasing not so much due to taxes on earned income, per se, as they have on capital gains earned from a stock market that has nearly doubled in five years
And why has the stock market risen so fast and consistently? Because people have more of their money left after taxes and are investing it in the stockmarket. The stockmarket is no longer the playground of the rich...almost every worker with a retirement plan and/or a 401k is invested in the stockmarket.
Posted by CoRev | May 19, 2007 4:42 PM
James I Hymas, anyone who changes the terms, mine: deficit, yours fiscal deficit, and then asks " which fiscal deficit do you mean?" is either a spin doctor or a poseur. If you have to ask, then it is not worth answering. BTW, try looking at the Treasury, OMB, or CBO to answer that question.
Most of your links did not work. Those that did were a little dated. Bottom line: $144B deficit as of May Treasury Report.