October 21, 2010

Albuquerque Journal

Letting Tax Cuts Expire Will Take Courage (Op-Ed)
By Sergio Pareja, Professor, UNM School of Law

As we look forward to the election, it also helps to look back. When Clinton left office in 2001, the top tax bracket was 39.6 percent, and there was a budget surplus. At the time, the government was forecasting an annual surplus of $850 billion for 2010.

Shortly after taking office, Bush demanded a tax cut to, he'd say, give Americans their money back. He only found enough votes to pass a temporary cut, a tax holiday that would last until Dec. 31, 2010.

Apart from expiring by their very terms, these "Bush tax cuts" were unprecedented because they were backloaded; that is, the cuts were small in early years and very large in later years of the nine-year tax holiday, making the cost initially seem small.

Why would Congress pass an expiring, backloaded tax cut? Cynics claimed that it was so Republicans could frame the debate in the 2010 midterm election by calling the end of the tax holiday a "tax increase."

Supporters of the Bush tax cuts said passing an expiring tax law was not sleazy politics — it was a sensible experiment. Tax cut advocates had long argued that lowering tax rates increases federal revenue because tax cuts stimulate the economy, generating more income to be taxed. If they proved to be correct, Congress could then make the cuts permanent. If incorrect, the cuts could expire.
Opponents of the Bush tax cuts, like myself, argued in 2001 that they would have a horrible effect on the federal deficit in 2009 and 2010.

The surplus, we argued, should go to debt reduction. Period.

I have never believed that lowering taxes automatically increases government revenue. If that were true, why don't we lower the top tax rate to 1 percent? At some point, even if such a low rate were to increase the tax base, the rates are too low to sustain the level of government spending that Americans demand.

How did we get into this huge deficit situation? President Bush submitted his 2009 spending request to Congress in 2008. The 2009 fiscal year began on Oct. 1, 2008, well before President Obama was even elected. Obama took office in late January of 2009, and he did not radically alter Bush's spending plan. The 2009 fiscal year ended on Sept. 30, 2009, with a $1.4 trillion deficit.

The 2010 fiscal year just ended last month. It was Obama's first full budget year, and it just ended with a $1.3 trillion deficit.

Most Republicans and tea-partiers claim that the solution is simple — cut non-defense spending to balance the budget. Do not, they say, allow any portion of the Bush tax cuts to expire. They apparently have not considered our actual budget situation. The 2010 budget, as approved by Congress last fall, projected federal revenue of $2.38 trillion and spending of $3.55 trillion. This $3.55 trillion in spending consisted of $2.18 trillion in "mandatory" spending and $1.37 trillion in "discretionary" spending.

Mandatory spending includes things that Congress cannot cut. For example, Social Security and Medicare payouts as well as interest on the national debt. As appealing as it might be to just "cut" spending on interest, Social Security, or Medicare next year, doing so would destroy the financial credibility of the U.S. government.

So, all that's really left to cut is the $1.37 trillion of discretionary spending. Of that, about $756 billion consists of spending on defense, veterans and homeland security. These are off the table for most of the anti-tax crowd.

What's left of our discretionary spending? Only $614 billion of non-defense-related spending. This includes spending for courts, education, to ensure food, drugs and airplane travel are safe, etc. As mentioned, the 2010 deficit was $1.3 trillion. Even if 100 percent of this $614 billion of non-defense-related discretionary spending could be cut, it is not close to balancing the budget.

The bottom line is that anybody who says we can fix our budget without raising taxes, gutting the military, or failing to honor our current mandatory obligations is wrong. As mentioned, we just tried to stimulate the economy with nine years of our current lower rates. Why would continuing Bush's failed experiment suddenly work next year?

I am a fiscally conservative, independent voter. As such, I believe we must elect politicians who are bold enough to cut some discretionary spending. That certainly is important. However, that alone won't do it. We must also elect people who recognize that Bush's tax holiday, or at least major portions of it, must come to an end.

If the Bush tax rates expire, the top rate will increase from 35 percent to 39.6 percent (for people making over about $380,000 a year). This is not radical socialism — it is being responsible citizens. Any negative effect that the small rate increase will have on our economy is greatly outweighed by the benefit of stopping the insanity of borrowing to pay for everything.

In the 1930s and early 1940s, amidst a Great Depression and World War II, the top rate was gradually increased to an astounding 94 percent. The economy subsequently boomed. Although I do not suggest that we go so far, the "Greatest Generation" demonstrated courage and a sense of personal responsibility that most now lack. We must elect people who have that kind of courage or our economy will collapse under its debt.