It's Always the Right Time For a Tax Cut

Republican tax policy has long since descended into parody. A case in point is this post at The Corner by supply-side devotee Larry Kudlow:

The Wall Street Journal’s Gerald Seib has an excellent column this morning on the threat of an economic downturn and the relevance of tax cuts to reignite the economy. He notes that Republicans have an important opportunity to push tax cuts as a spur to the slumping economy, whereas Democrats are still stuck with a tired tax-hike message and an obsessive desire to undo the Bush tax cuts.

Seib does not go into the incentive effects of lower marginal tax rates versus the one-shot demand-side effects of temporary tax cuts.

Former Clinton Treasury Secretary Lawrence Summers is now predicting a 2008 recession. But he’s calling for temporary tax cuts for low and middle-class families. Unfortunately, history clearly shows this approach will not work.

Many years ago, the late Milton Friedman wrote about the permanent-income hypothesis. The basic idea is that temporary additions to income (from tax cuts) won’t be spent, they will be saved. On the other hand, permanent reductions to personal tax rates will be spent, will be saved, and will be invested.

It never ceases to amaze me how quickly advocates of tax cuts will switch gears and offer completely contradictory rationales for cutting taxes. When the economy is growing, it is a sign that prior tax cuts are "working" and that we should therefore cut taxes even further. When the economy is contracting, we also need to cut taxes in order to kickstart the economy. In other words, no matter how the economy is doing, the proper course of action is to cut taxes. This is exactly what happened in 2001 as the economy faltered in the midst of Bush's push to pass sweeping tax cuts. Overnight the rationale for cutting taxes switched from returning surplus tax receipts to stimulating the contracting economy.

Moreover, these tax cuts cannot be temporary or they won't work. Kudlow is very clear about this. Only permanent tax cuts will produce the desired effect. And in case there was any doubt about which tax payers these tax cuts should be targeted toward, Kudlow puts it to rest:

The real supply-side “bang for the buck” comes at the top-end.

Now, there is actually a respectable policy argument for implementing temporary tax cuts for low and middle income tax payers in order to stimulate a flagging economy. The idea is that these tax payers (as opposed to wealthy ones) are more likely to spend their tax savings and thereby stimulate sales. Why only temporary cuts? Well, for the painfully obvious reason that you cannot provide permanent tax cuts every time the economy turns South. If you did that, then every business cycle would bring the government closer to bankruptcy (which is basically what's happening). Moreover, when you repeatedly cut taxes during the growth years, you can no longer afford to cut taxes when the next recession comes. That's the position we find ourselves in now, as the economy teeters toward recession and we are faced with already massive deficits (not to mention massive spending growth and the prospect of existing tax cuts expiring).

The idea that you can just keep cutting taxes forever and expect the government to meet its revenue needs is pure lunacy. But that's what Republican economic policy has become.

And that bodes ill for the country. It's a real problem. Since Grover Norquist launched his anti-tax jihad in the late 80s, virtually every Republican at the national level has signed his pledge never to raise taxes under any circumstances. And they've been true to their world. Not a single Republican at the national level has voted in favor a tax increase since 1990. Bill Clinton's 1993 tax bill, which raised the top income tax bracket, passed with zero Republican votes in either the House or Senate (indeed, most Republican breathlessly warned that the bill would cause economic catastrophe).

There is no other issue in American politics that elicits such Stalinistic party discipline. It's pure madness. And as a result, the prospect of our country putting its fiscal house in order at any time in the near future is negligible at best.