Are Tax Cut-Defending Republicans Inconsistent in Concern over Budget Deficits?

August 8, 2010

Democrats are attacking Republicans for their supposed hypocrisy when it comes to hyping the significance of the large budget deficits that have occurred under President Obama's watch while also proposing to extend the entire Bush tax cuts.

So how can the Republicans defend themselves when it comes to this apparent inconsistency? There are three general responses that Republicans often give to this critique, each of which I address below.

(1) We are in a recession and tax hikes are the last thing we should be doing.
(2) It's a false dichotomy because the tax cuts will cause revenues to increase.
(3) If taxes go up, it will just "feed the beast" and lead to more spending with little deficit reduction.

Regarding the first response, we can argue the merits of this as a standalone issue and it sure sounds good as an election year talking point, but we could be in the midst of a rapid expansion and most Republicans would likely be supporting the exact same policy so I don't know how much we should buy into this response. (To be fair, the same can be said for many Democrats who often use timing excuses for not wanting to cut certain spending items…spending items they'd never want to cut in the first place.)

Regarding the second response, it's just not true at our existing tax levels. If tax rates were at 90 percent or even 70 percent, I would say "good response." But at the current levels, cutting individual tax rates reduces revenue. Does it cost the full amount of the static score? (i.e., is there no supply-side response?) No, but the growth in the base is not big enough to offset the tax rate cut. (To be fair, it is the case that the tax cuts for high-income individuals that are the subject of disagreement would have the largest supply-side feedback over the long-term of any of the tax cuts based upon economic evidence on elasticities by income group, but such feedback is still not large enough for the tax cuts "pay for themselves.")

The third response is, in my opinion, the most defensible of the three. There is no guarantee that 100 percent of additional revenues would be devoted to deficit reduction. Allowing the tax cuts to expire and the level of future government spending may not be totally independent. The relevant question is what is the "feed the beast" ratio? By "feed the beast" ratio, I'm asking the question: If you gave government $100 more in revenue, what would happen to spending? Would it increase by $50, implying a ratio of 0.5? Or would it increase by exactly $100, implying a ratio of 1 (i.e., no deficit reduction)? Or would it increase by more than $100, implying a ratio greater than one? Or would it be negative as possibly Bill Niskanen would argue on the theory that people would perceive government as being more expensive and thereby demand less? In total, the lower the "feed the beast" ratio is, the less we should buy the Republican claim that they are serious about deficit reduction while also pushing extension of the tax cuts.


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