Peter Orszag kicks off his post-White House career as a New York Times columnist by opposing his former boss on tax policy. Barack Obama has spoken in favor of making the middle-class portion of the tax cuts permanent, but opposes extending the tax cuts for the higher earners. Orszag wants them all extended two years, noting that raising taxes on anyone in a period of low consumer demand is asking for trouble. However, Orszag argues against making any of them permanent, offering a false argument about the deficit:
In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.
Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.
Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets don’t seem at the moment to view the budget deficit as a problem — take a look at the remarkably low 10-year Treasury bond yield — there is little reason not to extend the tax cuts temporarily.
Why not make them all permanent — as would have been done in 2001 and 2003, had Democrats not threatened to filibuster them unless sunset provisions were included? Orszag says it would explode the deficit:
Both approaches lock us into a budget scenario out of which there are few politically plausible routes of escape. Although hardly anyone wants to admit it, we’re not going to solve our budget problem over the next decade unless revenue is part of the equation.
Let’s look at the facts. The projected deficit for 2015 is 4 percent to 5 percent of G.D.P., depending on whose assumptions you use. A sustainable level is more like 3 percent or lower. So we need deficit reduction of 1 percent to 2 percent of G.D.P., or about $200 billion to $400 billion a year by 2015. These figures are uncertain, but they’re the best we have (and they may well turn out to be too optimistic).
Bruce McQuain at QandO throws the flag on the fallacy:
Anyone – what hasn’t been calculated in all of this? That’s right, cut spending by that amount over the next decade. That’s 300 billion a year.
At this point, it would be helpful to recall how much spending Democrats have added to the annual federal budget since taking control of Congress: over a trillion dollars. The final budget from the Republican-controlled Congress, FY2007, spent $2.77 trillion and had a deficit of just under $200 billion, even with the war included. The last budget from Democrats came in at over $3.8 trillion, with a $1.3 trillion deficit. That’s a 38% increase in just three years.
Are we to believe that Congress can’t find $400 billion in annual spending to trim out of the massive expansion committed by Democrats? After all, those same Bush tax cuts were in place for several years by FY2007, and the annual deficit didn’t rise above $500 billion in any one year. The massive explosion in deficits didn’t come from a sudden revenue shock as much as it did from massive increases in federal spending, regulation, and expansion.
Undoubtedly, this will mean tough choices for legislators. Rep. Paul Ryan’s roadmap on the budget acknowledges that it will take entitlement reform and reduction and an end to favored government programs. But not only can it be done, even without some of those choices it was being done until Democrats took control of the checkbook.
Before taking more out of our pockets, Washington should start living within its already-monumental means.