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How Tax Cuts Dupe Conservatives: A Case Study

I've always wondered why how Republicans are able to get their political coalition to support an economic policy consisting almost entirely of deficit-financed regressive tax cuts. The policy has a terrible track record of promoting growth, and it even has a terrible track record of shrinking the size of government. So why are Republicans so devoted to it?

My theory, which I explain at more length in my book, is that you have a tiny group of supply-side true believers. Then you have a larger group of rich people who benefit from regressive tax cuts. This coterie has managed to grab the reins of the right-wing policy apparatus and spew an endless stream of propaganda supporting those policies. Meanwhile, most people have very little understanding of economic and fiscal policy, so it's easy to convince anybody with a general predilection for small government that regressive, debt-financed tax cuts are advancing the small government cause.

A perfect example is this column by Nick Gillespie, editor of the libertarian magazine Reason. Gillespie is not a policy wonk, nor is he a reflexive GOP partisan. So it is instructive to watch him work toward the position that the Bush tax cuts must be made permanent. Gillespie begins by showing a chart of the nominal revenue and spending totals since 2002. He concludes:

Here's the actual federal revenues gathered under Bush (whose budgets cover fiscal years 2002 through 2009, which actually includes some spending signed by Obama due to the inability of the government to hit its own budget deadlines). Prior to 2008, when the current recession had gone big, you'll notice exactly one year-over-year decline in revenue. ...
So if the feds were generally pulling in more bucks each year - even with those tax cuts that so decimated federal revenue - where did the deficits come from?
Oh, that's right: From massively expanded spending that happened both under a lying GOP Congress and a feckless Democratic majority. The story of the Bush years isn't to be found on the revenue side of the ledger, but on the spending side
Granted, I've been an English major all my life and I'm not much for book-larnin' and those fancy words and plus and minus signs, but when I look upon these two charts, something hits me in the mush with all the force of a friendly Dick Cheney shotgun blast: "It's the spending, stupid."

There are numerous, massive problems with the analytic method on display here. First of all, focus on this assertion: "Prior to 2008, when the current recession had gone big, you'll notice exactly one year-over-year decline in revenue, you'll notice exactly one year-over-year decline in revenue." In fact,the government also experienced year-to-year drops in revenue from 2001 to 2002, reflecting both the shaky economy and the effects of the Bush tax cuts. Gillespie oddly fails to include those years, instead leaning on the strange implication that the Bush tax cuts began in 2002. Moreover, he excludes the drop in nominal revenue in 2008, which he attributes to the recession. Obviously, though, economic conditions work both ways. When the economy is expanding, revenue tends to rise even in the absence of policy change. When the economy is contracting, it tends to drop. Gillespie's approach is to ignore the state of the economy when it creates data that seems to bolster his argument, and to take account of the economy when it creates data that undermines it.

A more accurate way to report Gillespie's statistic would be that nominal federal revenue has fallen in four of the eight years since the Bush tax cuts have taken effect. Yet that statistic, too, is misleading for various reasons, the most important being...

Second, and much more problematically, nominal budget sums are not a serious way to consider the sieze of government. Inflation, population growth, and a growing economy all impact the value of a given dollar sum of taxation of spending. Pointing out that the nominal size of government is growing is a nice tactic to use for the Rush Limbaugh audience. Any remotely serious economist looks at revenue and spending as a proportion of the economy. Here is the data:

Now, we can see from this that outlays have exploded and revenues have crashed. How you decide to resolve that depends on how you define the problem. If you define the problem as "the deficit," then clearly the Bush tax cuts are part of the problem, and extending those tax cuts will make the problem worse, which is not to say that ending them is the entire solution. Now, if you are indifferent to the deficit and define the problem entirely as the size of the federal government, then you do not consider the Bush tax cuts to be part of the problem.

But Gillespie frames his column as a rebuke to those who do define the deficit as the problem. And, of course, if you do define the deficit as the problem, then the reply that the "real" deficit issue is that we're spending too much is meaningless. It's exactly as persuasive as arguing that the "real" deficit problem is the decline in revenue caused by the Bush tax cuts, so let's pretend that my plan to double everybody's Social Security check has nothing to do with the size of the deficit.

And even if you're totally indifferent to the deficit and care only about the size of government, it is still not a good argument for deficit-financed tax cuts. Gillespie argues:

This talk about whether tax cuts are irresponsible given the fiscal pickle we're in is nothing more than a way of diverting attention from what Milton Friedman identified years ago as the true cost of government: how much the government shells out in a given year. We're on the hook for it, either through higher taxes now or higher taxes later.

That is exactly correct. The size of government is defined by the size of federal spending. Yet he does not grasp the obvious implication: debt-financed tax cuts do not reduce the size of government. They merely defer the cost.

Try to follow the logic of Gillespie's conclusion:

We're in a lousy economy and most folks would agree that it's not a great idea to hike taxes or create huge new entitlements and regulations that will take years to figure out. That sort of action creates exactly the sort of uncertainty that freezes people. So do desperate attempts to keep house prices from falling, zombified banks and car companies from going belly up, etc.
The one thing the federal government could conceivably do is bring some commitment to freezing or rolling back spending and intervention to some baseline. The first rule when you find yourself in a deep hole? Bitch and moan that it's the other guy's fault. The second rule? Stop digging.
Yes, I know, it's unlikely but not impossible that the feds would actually stop spending (go check Clinton's first four years).
But this much is certain: To talk about how "tax cuts" inexorably add to deficits ignores the amount of tribute that poured into D.C. throughout most of the '00s. It's a fundamentally faulty and fruitless discussion.

You have a nod to the idea that "uncertainty" about policy is the cause of the economic crisis and/or that 1937-esque spending cuts are the solution. Neither of these offers any reason to support permanent, deficit-financed tax cuts. Then there's just a lot of vaguely anti-government, anti-Obama hand-waving, culminating in the conclusion that we should stop blaming the Bush tax cuts for contributing to the deficit. It's a telling portrait of how your tertiary anti-government type goes about deciding to sign up for Team Tax Cuts.