Extend the Tax Cuts?

My friend Brad Delong suggests in a recent post that the Bush tax cuts should not be made permanent.  Brad is responding to a recent call by President Bush to do just that.

Brad and I, and along with every economist with a pulse, agree that either spending has to decline or taxes have to increase.

Brad and I disagree, however, over whether we should cut taxes.  My view is that Congress will spend any tax increase, so it is better to keep taxes low.   This view is consistent with my view that large chunks of current spending are bad for the economy and should be cut even if we had a budget surplus.   Pork barrel spending is one example.  Enforcement of drug prohibition is a second example.  The Iraq war is a third example.  And entitlements for the middle class are a fourth example.

Brad probably agrees with me that some components of current expenditure are too high.  Brad probably still disagrees with me overall, however, because he fears that even if tax cuts put downward pressure on spending, the "wrong" things will get cut.  This is a reasonable concern.

On net, however, the one thing that seems likely based on past experience is that when poltiicians have have lots of money to spend, they spend it.  So, while budget deficits are an admittedly crude tool for generating cuts in bad programs, they seem to me better than the alternative.

Comments

[Gabriel Mihalache]

Nice job with the new layout and location!

Returning to the issue at hand... this might be more of a political question but when you say that "tax cuts put downward pressure on spending" this implies that politicians aim to avoid deficits, but at least my experience is that simply not caring for the remainder of the term and then passing the buck to the next elected officials is a rather common strategy.

So, how credible are budget deficits, be it local or national, in retraining spending?

Didn't Bush inherit more than a trillion+ in surplus?

[Mike Huben]

Imagine if your personal finances were run this way. You're spending more than you earn, and have too much debt on your credit cards.

Miron's solution: get a pay cut and hope you change your spending habits.

A real solution for fiscal health involves getting a raise AND real action to change spending habits where it matters. Diddly little spending such as pork and war on drugs doesn't matter much in terms of fiscal health. Ridiculously large military spending does. So do tax-giveaways to the rich and corporations.

Middle class entitlements are part of what keeps the middle class large, healthy, productive, and independent.

[James]

"Middle class entitlements are part of what keeps the middle class large, healthy, productive, and independent."

How is this supposed to happen? Never mind the assertion of causation or the blurry definition of "middle class." Just explain the arithmetic. Somehow, I suspect that most of these entitlements are little more than redistributions of wealth from the middle class to the middle class.

[Chris]

"Somehow, I suspect that most of these entitlements are little more than redistributions of wealth from the middle class to the middle class."

That is certainly part of it, though the middle class is a net beneficiary of tax revenue (something tells me that they actually get more benefit than the poor, but I can't find the study that lays out all the numbers) Since the middle class is net beneficiary at least some of that wealth transfer is coming from the upper class.

@Huben - There is a VERY large disincentive to earn your $100Kth dollar. It is plausible that the middle class is so large is because there is no incentive to become wealthy unless you can become VERY wealthy.

You claim that entitlements are what keep the middle class the middle class without providing any theory at all why this would be. Such a theory would need to include a plausible explanation of the very large and rapid growth of in the middle class of China and India and the rapidly shrinking middle class in EU.

I also fail to square how paying the lion's share of taxes equate tax-givaways to the rich as if paying most of the taxes still isn't enough.

Where I do agree is that "starving the beast" does not seem to be a sensible approach to fiscal policy thus far. I don't see raising taxes as the correct answer, but taxes shouldn't be decreased any furthur without reigning in spending. (I would support revenue nuetral simplification though.)