Wednesday, April 07, 2010

The Death of Tax Cuts as a Political Issue

For decades, Republicans have consistently pushed the idea of cutting tax rates as a major national campaign issue. While Republicans can continue to insist on holding the line on taxes while working toward spending cuts and meaningful entitlement reform, I fear that cutting taxes no longer exists as a serious policy issue. It was mortally wounded by the Bush administration, in concert with a Republican Congress, with final execution being accomplished by President Obama and a Democratic Congress.

Here's why:

Tax cutting has always created short-term deficits, but fiscally responsible people could still advocate them for two reasons: 1) Tax cuts would generate economic growth, with the long term result that tax revenues would increase and eventually eliminate the deficit at the lower rate; and 2) Tax cuts served as a means of starving the beast. The natural tendency is for government to expand, so the government will always be seeking more revenue. Cutting taxes is a means of controlling the size of government.

But the beast will no longer be starved. The political class, both Republican and Democrat, over the last decade have exercised unprecedented recklessness with regard to the mismatch between revenue and spending. Huge new spending programs -- Medicare Part D and the Iraq War under President Bush and Health Care Reform and a variety of other spending programs under President Obama -- have been adopted without revenue streams to pay for them that any serious person finds credible, in spite of historic deficits and an impending entitlement crisis. Regarding that entitlement crisis, those issues have been kicked down the road for so many years that resolving them will be painful, and our political class has shown no willingness to make politically difficult decisions -- either in the form of entitlement reductions or spending increases.

No doubt, Republicans will reflexively continue to call for tax cuts -- and if that results in holding the line on taxes while focusing on spending reforms, then that will be a good thing. However, the issue of cutting taxes is dead. The structural, long term spending issues that the country now faces require serious leadership from both parties. One wonders where we will find it in the current carnival of clowns.

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