Reponomics.

To be fair (See: Demonomics), Josh Barro has savaged Republican tax plans in two recent “Upshot” pieces in recent days.[1] Since the Reagan years Republicans have been in thrall to “Supply Side Economics.” The doctrine behind tax cuts for high-income earners is that the untaxed income will flow to investment; investment leads to economic growth; and America needs both investment and growth. Democrats ridicule this as “trickle-down economics.”[2] Now, however, another school of thought has arisen among some Republican dissidents. They favor cutting taxes on the middle class. For example, some pushed for a substantial tax credit–$2,500—for each child long before President Obama discovered “middle class economics.” They also wanted to leave the top tax rate at 35 percent, and not cut the tax on capital gains.

Some Republican leaders have sought to paper over this feud by suggesting that both types of tax cuts be implemented. Not only would middle-class earners get their tax cut, but the taxes on capital gains and on dividend income would be cut to zero. Furthermore, the plan would offer corporations the option of having their profits taxed as if they are wages (at a lower rate than corporate profits).

Barro lashes this as the “Puppies and Rainbows Tax Plan.” He argues that the combined plan would cost at least $2.4 trillion in lost revenue over a decade.[3] If the Republicans can add the White House to their control of the Congress, they will find themselves responsible for controlling the deficit. Hence, they will have to settle for much smaller tax cuts than they currently envision. Moreover, they may have to choose between giving little dribs and drabs to both types of cuts or getting something noticeable for one type of cut. Which will they choose?

Then Barro found himself crossed by a report from the Tax Foundation that concluded that the combined tax cuts would stimulate so much investment that GDP would rise 15 percent and wages 13 percent over a decade. A wide range of economists quickly derided the forecasts. Barro argues that Republicans like economic analyses that predict high benefits from tax cuts. This matters, because the Congressional Budget Office has just adopted “dynamic scoring”[4] in estimating the impact of different budget plans. He is clearly worried that nonsensical assumptions about growth will be deployed to justify big tax cuts.

Barro comes across as a Democratic partisan, but he’s not alone in seeing the flaws in these plans.[5] A House Republican plan to eliminate deficits within a decade would allow an expansion of military spending beyond the levels set by the “sequester” under the guise of emergency war funds. (President Obama plans the same maneuver.) It also cuts a trillion dollars from entitlement programs (Medicare and Medicaid, Social Security) without specifying how—what with 24 Republican Senators up for re-election in 2016. It assumes a trillion dollars in revenues from taxes levied as part of the Affordable Care Act (ACA) even while proposing to repeal the ACA. Puppies and rainbows indeed.

[1] Josh Barro, “Something for Everyone In a Republican Tax Plan,” NYT, 12 March 2015; Josh Barro, “Under This Plan, Tax Cuts Still don’t Pay for Themselves,” NYT, 17 March 2015.

[2] Republican presidential candidate George H.W. Bush ridiculed it as “voodoo economics.” Bush didn’t inspire much enthusiasm among Republicans. He ended up as Reagan’s Vice President and one-term heir as President.

[3] Barro is silent on the cost in revenue from President Obama having fought hard to make 98 percent of the George W. Bush administration tax cuts permanent. On this score, as on many others, it’s like living during the Cheney Administration.

[4] Basically, assuming that tax cuts or increases will affect the growth rate of the economy. D’uh. Obviously they do. However, the essential question becomes how accurate is the model used to predict the effect.

[5] Nick Timiraos and Kristina Peterson, “House GOP Outlines Plan to End Deficits,” WSJ, 18 March 2015.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s