Two-Faced on Taxes

A lot of the debate we have in America about economics (like many issues) ends up being statements of principle masquerading as analysis of empirical reality. And maybe this is my bias talking, but it seems like most of this comes from the conservative side. For example, it's now become disturbingly common to hear conservatives say that when you cut taxes, total tax revenues actually go up, since the tax cutting creates an explosion of economic growth that brings in lots of new revenue. This idea has zero empirical support. It isn't that cutting taxes can't increase growth somewhat, it's just that it doesn't increase it enough to make up for the lost revenue. Yet no matter how many times economists demonstrate that cutting taxes doesn't actually increase revenue, Republican politicians continue to claim that it does. This is widely known as the "Tax Fairy," since believing in it makes about as much sense as believing in the Tooth Fairy. But conservatives would certainly like it to be true. Their belief in low taxes, particularly for the wealthy, is really a moral position more than anything else. And if cutting taxes actually increased revenue and enabled us to cut the deficit, then that would be great too. But their moral belief is where things originate, and why empirical evidence that their preferred policy produces problems doesn't make them change their position.

I thought about this when I read this article in yesterday's New York Times by David Leonhardt, in which he relates a conversation he had with Paul Ryan about taxes. He gave Ryan a chart showing economic growth over the last few decades, to initiate a discussion about the efficacy of tax cuts. As you might remember, Bill Clinton raised taxes in 1993, and what ensued was a period of spectacular economic growth, with 23 million jobs created overall during Clinton's two terms. Then George W. Bush came in and cut taxes repeatedly, and what ensued was a decade of economic stagnation. How does Ryan explain the fact that in the real world, things worked out exactly the opposite of what conservative dogma predicts? His answer reveals the core contradiction at the heart of Republican beliefs about taxes:

"I wouldn't say that correlation is causation," Mr. Ryan replied. "I would say Clinton had the tech-productivity boom, which was enormous. Trade barriers were going down in the Clinton years. He had the peace dividend he was enjoying."

The economy in the Bush years, by contrast, had to cope with the popping of the technology bubble, 9/11, a couple of wars and the financial meltdown, Mr. Ryan continued. "Some of this is just the timing, not the person," he said.

He then made an analogy. "Just as the Keynesians say the economy would have been worse without the stimulus" that Mr. Obama signed, Mr. Ryan said, "the flip side is true from our perspective." Without the Bush tax cuts, that is, the worst economic decade since World War II would have been even worse.

Since that conversation, I have asked the same question of conservative economists and received similar answers.

Here's what's important about this. Ryan is right; correlation isn't causation. Tax policy isn't everything. The problem is that he only seems to believe that when he's talking about the experience of the past. When Republicans argue about what we should do in the future, on the other hand, they act as though tax policy is all that matters. If we raise taxes, they say, economic disaster will ensue. If we cut taxes, we'll be rewarded with spectacular growth. Changes in tax policy will shape the economy

In fact, the supposed efficacy of tax cuts is almost their entire argument about future economic growth. Yes, they'll mention cutting regulations (though they're usually vague about which ones) or free trade, but tax cuts are the sine qua non of Republican economic policy. They'll testify not only that the economy can't possibly have healthy growth without tax cuts, but that tax cuts all but guarantee that growth will improve. They'll also say that if we were to raise taxes, we'll either plunge into another recession or at the very least we won't be able to grow at a good pace.

When you confront them with the actual facts of the last couple of decades, it isn't that they don't have an explanation for what happened. They do. But their explanation contradicts everything else they say about economics. During the Clinton years, what mattered was the tech boom, they say. During the Bush years, it was the wars, and the lingering effects of the tech boom's end. But what these arguments come down to is this: If we're explaining what happened in the past, tax policy doesn't matter. It's all but powerless before other forces operating in the economy. We increased taxes, we cut taxes, and in the end it didn't make much difference.

So Republicans really ought to be asked to reconcile this contradiction. Which is it? Does tax policy matter, or doesn't it? And if it didn't matter for the last twenty years, why is it going to matter in the next four?

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