In my last two posts, I compared the top tax rates over the last 60 years and found that tax cuts correlate neither with economic growth nor with reduction in the unemployment rate. Does this mean tax cuts have no place in a president’s budget? Certainly not. However, the trouble arises when democrats and republicans hem tax policies into their core philosophies in ways that prevent them from coming to an agreement on how the government can support the economy, particularly during and after a recession. In this regard, the two tax cuts enacted by George W. Bush in 2001 and 2003 are particularly revealing.
The conditions in which Bush assumed office were as follows: the economy had witnessed an expansion not seen in decades; the federal budget was yielding surpluses; unemployment had dropped below the 5% mark (indicating “full employment”); poverty levels were on the decline; and the US was even apportioning some of its revenue to pay down the national debt. Given this scenario, what were the tax cuts exactly supposed to accomplish? Bush and his fellow republicans (who controlled both houses of congress) knew well that these tax cuts would significantly add to the deficit. Passing the bill required them to overcome democrat opposition, which they did by employing an arcane budgeting maneuver called “reconciliation”. Even then, because the bill would add to the deficit, senate rules required them to stipulate a 10-year limit (hence they were originally set to expire in 2010). The 2001 tax cuts were soon followed by the tragic events of 9/11 and the engagement of the US in Afghanistan. War is an expensive endeavor in many ways, including financially. Yet Bush did not seek for financial resources to pay for the war and did not roll back/suspend his tax cuts. Instead, he passed another round of tax cuts in 2003 and then engaged in another war with Iraq. Whether he was right to attack Iraq is another issue altogether; however, his reluctance to increase government revenue to offset the spending on wars unveils the troubling patterns in politics today. For it conveys that no circumstances, not even war, justifies a government to collect more revenue.
Is it surprising then that 95% of all republican congressmen and republican candidates who ran for president in this election, including Mitt Romney, lined up to sign Grover Norquist’s pledge not to increase taxes under any conditions? Or that Mitt Romney raised his hand when asked in the republican primaries if he would not accept even a $1 increase in tax revenue for every $10 in spending cuts?
Going back to “W”, in his final months as president, George Bush would pass yet another spending package worth $700 billion (known as TARP), this time to save the entire financial sector from extinction. It marked the beginning of a recession which rivaled the Great Depression. Like with the Iraq war, we could debate what really caused the most recent recession. However, there is no doubt that the government would have been better equipped to pass TARP, the stimulus, and numerous tax incentives if its financial resources had not been squandered in the Bush tax cuts. Likewise, Mitt Romney’s new rounds of tax cuts would further weaken the ability of the government to provide the necessary support not only during the current recovery, but also in future economic crises. The country needs a different course.