Tax Debate Ranges from Imprudent to Reckless

The biggest debate we have in Congress between now and the elections, and even after the elections and through the remainder of the 111th Congress, and even into the 112th Congress, revolves around taxes.

Right now, the core party positions have been clearly framed: Republicans are foursquare behind making permanent all the Bush-era tax cuts. Democrats want to maintain the Bush tax cuts for those making less than $250,000 and let lapse those for wealthier Americans.

The tax cut debate flows naturally into two other key areas: how to make sure the fragile and weak economy recovers and begins to create more jobs--and does not sink into either a double-dip recession or deflation--and how to make sure the dangerous deficit and debt dynamics do not careen out of control in a few years, leading to either hyperinflation or economic collapse.

Unfortunately, the debate we are seeing between the parties is about as bankrupt as it could be, and the impasse on the tax issue could lead us into a policy disaster.

Let me start with deficits and debt, issues that clearly grip a wide swath of voters, especially independents, and that Republicans have tried to make their own. Here in a nutshell is the core of the GOP plan: Add $4 trillion to the debt, including nearly a trillion dollars in additional interest payments alone, over the next 10 years via permanent tax cuts.

Of course, extending the tax cuts for two years is five times more fiscally responsible than extending them for 10 years.

In other words, to merely get us back in a decade to the already disastrous future we face on the debt front, Republicans would need to find $4 trillion in spending cuts, meaning huge chunks out of Social Security, Medicare, Medicaid, veterans health and other entitlements, along with huge chunks out of discretionary programs, domestic and defense--all before finding additional ways to discipline spending to get the country back on a healthy path.

If this is the program for a party of fiscal discipline, I shudder to think of what we would get from a party of profligacy.

But Democrats are not a whole lot better--they only want to add $3 trillion to the national debt over the next decade by extending the tax cuts for the under-$250,000 population. To be sure, some Democrats are not talking about making the tax cuts for the middle class, as it were, permanent, but that is the gist of the party program, and it is not in the vicinity of being fiscally responsible.

Some Democrats, such as Sen. Evan Bayh (Ind.), along with Sen. Joe Lieberman (ID-Conn.) and many nervous House Democrats from swing districts, have glommed onto the Republican program, at least in part, arguing that now is not the time for a tax hike on anybody and that to take away the tax cuts for those making more than $250,000 would depress job growth. So we are increasingly hearing talk of a potential compromise--extending all the Bush tax cuts for two years.

Of course, extending the tax cuts for two years is five times more fiscally responsible than extending them for 10 years. But we know well that Republicans looking favorably on a two-year extension have every intention, before the ink on that compromise is dry, to begin a noisy campaign to make sure that two years becomes 10 years and becomes permanent.

And the fact is that a two-year extension puts the issue right smack into the middle of the 2012 presidential campaign, and no Republican presidential candidate will accept anything other than making all the tax cuts permanent.

It is certainly true that having taxes go up now, in the midst of a weak economy with incipient signs of deflation, would be foolish. But that suggests we should be looking at the best possible means to get the economy moving--and if the existing tax cuts were so good for the economy, it would be moving today a whole lot better than it is. There are better alternatives, and it is both frustrating and sad that they do not appear to be on the table.

Here is the best one: Eliminate the tax cuts for the rich--and use every penny of it to finance a temporary payroll tax holiday, while holding the Social Security Trust Fund harmless to keep the tax holiday from weakening the program's health.

The payroll tax holiday, a boost to employers to hire and to employees to pay bills and put money into the economy, would last as long as the economy and unemployment numbers stay weak. Thus, there would be no tax increase at a bad time, but the stimulative and job-creating effect would be much greater than continuing the existing tax cut for the rich, which many analyses have shown has a modest effect, if any, on job growth. (Eighty percent of the "small businesses" benefiting from the individual tax cuts are sole proprietorships with no employees.)

If I had my druthers, I would also create a public/private Entrepreneurship Bank, giving the unemployed more access to microloans to start new businesses, and an Infrastructure Bank, given the need to spur the economy and to deal with aging and crumbling infrastructure across the country.

But it is clear in this political environment that any new spending programs are radioactive, so keeping the focus on tax cuts makes sense. Can't we at least make that focus a constructive and productive one?

Norman J. Ornstein is a resident scholar at AEI.

Photo Credit: iStockphoto/Jonathan Larsen

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