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Tuesday, September 29, 2009

Fiscal Responsibility Requires Higher - Magazine Article

Fiscal Responsibility Requires Higher Taxes
Bruce Bartlett / Notations
09.25.09, 12:00 AM ET
Throughout most of our nation's history, political conservatives really only had one thing in common: They all believed in a balanced federal budget. They might disagree on religion, foreign policy and any number of other issues, but everyone who thought of themselves as a conservative believed absolutely in the necessity of balancing the budget on an annual basis.

Today, the notion seems quaint. Republicans pay lip service to balancing the budget, but only when Democrats are in office. When they were in power under George W. Bush, they all agreed with Vice President Dick Cheney when he told Treasury Secretary Paul O'Neill, "Reagan proved deficits don't matter."

It doesn't really matter whether Cheney was speaking about the politics or economics of deficits. He was articulating the now-universal view among conservatives that deficits are not worth suffering any political pain to deal with. In particular, taxes must never be raised to reduce deficits. That's a cure worse than the disease, virtually all conservatives believe today.

This reversal of the historical conservative position has had enormous implications for our national finances. By effectively taking taxes off the table, conservatives unwittingly opened the flood gates of spending.

The reason why conservatives supported a balanced budget in the first place wasn't so much about the economics as a belief that it was a constraint on spending and the growth of government. That deficits were inflationary, raised interest rates and led to crowding out in financial markets, which reduced economic growth, was really a secondary consideration.

A key reason why a balanced budget requirement constrained spending is that deficits led to higher taxes. Since people don't like paying taxes, they put a brake on spending that couldn't be financed out of current revenues. In the event that there was some new program that was widely deemed to be desirable, such as Social Security or Medicare, it was commonly understood that new taxes dedicated just to these programs were an essential requirement for enactment.

Programs that couldn't be financed weren't seriously considered until the Bush 43 administration. Contrary to the experience of Social Security and Medicare, he offered no dedicated financing for the Medicare drug benefit. It simply added to the budget deficit and will add as much to it over the next decade as the February stimulus package that every Republican voted against.

And, of course, no effort was made to pay for tax cuts or pork barrel projects. In fact, Republicans jettisoned PAYGO (pay as you go) budget rules in 2002. These were first imposed in the 1990 budget deal, engineered by George H.W. Bush at great personal and political cost. But many budget experts believe they were the primary reason for the surpluses of the 1990s, because they required that new programs be paid for with tax increases or spending cuts. This made it very hard to enact tax cuts or spending increases, leaving the budget on automatic pilot and allowing surpluses to emerge.

When pressed about their abandonment of support for the balanced budget, Republicans say that supporting higher taxes to reduce deficits only made them tax collectors for the welfare state. Democrats bought votes with seemingly costless deficits and controlled Congress for decades. Republicans complained about deficits and stayed in the minority for decades.

Eventually, Republicans decided that fighting deficits just wasn't working for them. People might support a balanced budget in public opinion polls, but they opposed every single thing that would actually reduce deficits, especially higher taxes.

In the 1970s, conservatives talked themselves into believing that cutting taxes was a better way of restraining government's growth than supporting a balanced budget. Just take away Congress's credit card, Ronald Reagan used to say, and it will be forced to cut spending.

This reversal of the long-held conservative position proved to be extremely popular, politically, and had a lot to do with the Republican takeover of Congress in 1994. It is now Republican dogma that taxes must never be increased no matter how big the deficit. The last Republican to do that, Bush 41, got thrown out of the White House on his ear for doing so, Republicans believe.

Such a fate is not going to befall any congressional Republican today. Their mantra is that all tax increases must be opposed with every fiber of their being, and there is no problem that can't be cured by tax cuts.

During Bill Clinton's administration, Democratic economists got religion on deficits. They believe that his 1993 tax increase sparked an economic boom. They also saw that as the federal budget went from deficit to surplus, this had enormously positive economic effects by adding to the stock of national saving and reducing real interest rates, which raised investment and reduced unemployment.

Clinton's big mistake was in not locking up the surpluses in some way. One idea would have been to use the surpluses to create private Social Security accounts that Republicans wouldn't have dared to touch any more than they would dare to cut Social Security benefits.

Instead, the surpluses were completely dissipated on temporary tax cuts and spending programs that bought reelection for Republicans in 2002 and 2004, but made no lasting contribution to the economy's growth. Even as the surpluses turned into deficits, Republicans' position didn't change--they were still for big tax cuts regardless of the budgetary circumstances.

Indeed, back in February when Congress was debating the stimulus package and the Treasury was facing a deficit of $1.2 trillion this year, the Republican position was that tax cuts--and only tax cuts--would stave off a deep recession. How that would have helped when incomes were falling to such an extent that tax revenues were virtually collapsing on their own was never explained. Tax cuts were a mantra to be repeated endlessly whether they had any rational connection to the economy's problems or not.

Everyone knows that fiscal discipline must be restored eventually, or we will face truly horrifying consequences--defaulting on the debt, nonpayment of Social Security benefits, a collapsing dollar, and double-digit inflation and interest rates. Everyone also knows that this will involve a combination of higher revenues and lower spending. The idea that we can restore fiscal health only with spending cuts is childish, as I tried to explain last week.

What we face is a game of chicken. Republicans think if they wait until the last possible second to support the smallest possible tax increase necessary to make a budget deal work, they can get the largest possible spending cuts. The problem is that there is not one iota of historical evidence that this strategy will work. The budget deals of the 1980s and 1990s were all roughly 50-50: half tax increases, half spending cuts.

At some point, taxes have to be back on the table as the price that must be paid for profligate spending. Only then will the American people realize that they can't have their cake and eat it too, as Republicans have preached for the last decade. Only when the American people go back to believing that spending must be paid for will they stop demanding something for nothing and put the country back on the path to fiscal sanity.

Bruce Bartlett is a former Treasury Department economist and the author of Reaganomics: Supply-Side Economics in Action and Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. Bruce Bartlett's new book is available for pre-order: The New American Economy: The Failure of Reaganomics and a New Way Forward. He writes a weekly column for - Magazine Article

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