From time to time, some high-ranking Republican official in Congress or at the White House will insist that tax cuts can pay for themselves. The idea, basically, is that the government can cut taxes, which will in turn create economic growth, which in turn create more wealth. When people and businesses have to pay taxes on their new gains, revenue will flow into the government and — presto! — the tax receipts will compensate for the tax cuts.
Except it doesn’t work. It never has; it never will; and no one who deserves to be taken seriously on policy matters believes differently. It doesn’t happen often, but occasionally, even Republicans in positions of authority will acknowledge reality.
Tax cuts don’t pay for themselves. This might sound like dog-bites-man news, except for one thing: This rather unremarkable statement comes from Jim Nussle, the new director of the Office of Management and Budget in an administration whose president is given to saying things like “You cut taxes, and the tax revenues increase” (February 2006) and “We have cut taxes, causing economic growth, which caused there to be this year alone 187 billion more tax dollars coming into the Treasury” (August 2007).
As Mr. Nussle acknowledges, “There are those including myself who . . . in the passion of the argument have made statements — I think I even made a statement once — that tax relief did pay for itself.” In fact, Mr. Nussle said yesterday at a breakfast with reporters sponsored by the Christian Science Monitor, “Some say that [the tax cut] was a total loss. Some say they totally pay for themselves. It’s neither extreme.”
Once we cut through the rhetoric, we see a pleasant surprise — even Bush’s own budget director is willing to concede that tax cuts can’t pay for themselves. Reality in a Bush administration statement is so rare, it feels like a cause for celebration.
All of this is particularly relevant right now for two reasons. The first is the congressional effort to fix the Alternative Minimum Tax (AMT). If tax cuts can’t pay for themselves, the Republican approach is in big trouble.
Congress is debating whether a proposed $50 billion-plus “patch” exempting millions of taxpayers from the alternative minimum tax should be paid for, as Democrats have argued, or can simply be added to the national credit card bill, as congressional Republicans prefer. “Tax relief pays for itself,” House Minority Leader John A. Boehner (R-Ohio) declared this month, explaining why no one should fuss about another $50 billion. […]
“Preventing a tax increase in one area should not be an excuse for raising taxes in other areas,” Mr. Bush said [in a speech in Indiana on Tuesday]. “Congress should eliminate the tax increases in the bill and send the AMT relief to my desk as soon as possible. That’s what the American taxpayer expects.” Indeed, that’s the kind of free lunch American taxpayers have gotten accustomed to from this administration. If tax cuts don’t pay for themselves, though, the administration and its congressional enablers need to explain: Who is going to foot the bill, those enjoying the benefits of the patch or their grandchildren?
Good question.
And the second reason this is important now is that Republican presidential candidates are so detached from reality, they’re still arguing that tax cuts can pay for themselves.
In September, for example, Rudy Giuliani said the AMT could be eliminated over the long term by balancing it out with even more tax cuts.
I realize Giuliani isn’t the sharpest crayon in the box, but this isn’t that complicated. The AMT was created to prevent a handful of wealthy taxpayers from exploiting loopholes and not paying income taxes. It was not, however, indexed for inflation, which means the AMT is poised to hurt the middle-class. Everyone says they want to fix the AMT, but it’s expensive — costing up to $100 billion in 2010 alone.
Demonstrating the kind of policy expertise that makes his presidency a scary prospect, Giuliani said he would cap, and eventually eliminate, the AMT. “Over time we can figure out how to eliminate it…. If we were going to eliminate it, though, we’d have to balance it with additional tax cuts,” Giuliani said, leaving confused expressions throughout his audience. “That might be by making the Bush tax cuts permanent.”
This reflects the sophistication of a small child who picked up a copy of the Weekly Standard, and hoped to make sense of what he didn’t understand. Eliminating the AMT would cost billions. Additional tax cuts would cost billions more. Trying to strike a “balance” this way is like trying to put out a fire with kerosene.
Maybe he had succumbed to what Nussle described as “the passion of the argument”?