The impending American debt crisis has almost nothing to do with taxes. If the Democrats get their way on the expiration of the high-end Bush tax cuts, roughly $65 Billion in revenue would be raised (assuming that this tax increase would have zero negative effect on economic growth – a disputable point, to be sure). That would fund the government for less than a week. It would pay for less than a third of proposed new spending in the coming year. Ten years of revenue from this tax cut would fail to cover one year of our current deficit – let alone help pay down past debts.
But, as the saying goes, elections have consequences and one of the consequences of this election appears to be a collective media obsession with Grover Norquist and his anti-tax pledge. Seemingly every interview with any Republican in recent days seems to revolve around their willingness to abandon “the pledge” and join with President Obama to raise taxes on the rich – and somehow that will stop us from tumbling off the fiscal cliff. There is almost no discussion of the need to tackle sequestration, the doc fix, the debt ceiling and the payroll tax holiday. Not to mention doing something to prevent America’s fifth straight year with a trillion dollar-plus deficit.
The media loves its Republican bogey-men and Norquist, with his anti-tax dogma, has become the bogey-man du jour. But in this case, the best policy option for Republicans is to abandon the pledge.
This does NOT mean the best policy is to raise tax rates, or even to try to increase tax revenues. Increasing tax rates is, quite simply, bad economic policy. The issue, however, resolves around tax expenditures. Tax expenditures are the deductions, exemptions, credits and spending that happens inside the tax code instead of inside the federal budget. Some expenditures are popular (like the home mortgage deduction), some are stupid (like the $500,000 credit for owning an alpaca farm), some help the poor (like the Earned Income Tax Credit) and some benefit the rich (like the infamous corporate jet tax break) – but the elimination of any of them would violate Norquist’s tax pledge unless taxes were lowered somewhere else in the code.
Republican unwillingness to touch these expenditures (related to Norquist or not) has created a perverse area for compromise between the parties. Democrats want to dole out federal benefits to specific interests and Republicans want to cut taxes; both can argue that a tax expenditure does just that. Thus, we get a one-time $250 tax credit to all federal retirees and no one bats an eye – in Washington-speak, it’s just a bipartisan “tax cut” not federal spending (this happened in 2012). And this spending trick is bipartisan – there is, for instance, a tax deduction with the sole purpose of lowering the taxes paid by NASCAR venues.
These Washington tricks and hidden spending are nothing new, but they have increased dramatically in recent years, in part because of Republican unwillingness to oppose anything that nominally decreases taxes. Below is the total amount of expenditures in the last twelve years and projected spending for the next two (the data comes from the Joint Committee on Taxation).
The trajectory is quite clear. And after a brief lull in expenditures due to the recession (if there are less revenues than there are less tax breaks), it looks like America has returned to a “tax-break and spend” government.
To be fair, these data lump together some expenditures that represent true tax policy – deductions that, for instance, prevent some double taxation of income. And, as I said, many of these tax rules are so popular it is politically unviable to eliminate them – the personal charitable deduction, for instance. A few may even be economically beneficial (though, as a rule, these expenditures artificially alter markets and hurt economic growth).
But that is beside the point – current Republicans are not in a position to even have these debates. The dogmatic Grover Norquist position has allowed the GOP to be hoodwinked (many of them willingly) into supportin Big Government, Big Spending tax policy. And the rapid rate of increase in the use of these expenditures demonstrates just that. The tax code needs a thorough elutriation and the Norquist agreement is, unfortunately, getting in the way.