How to Tax Like a Republican

How to Tax Like a Republican

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With Democrats apparently ready for all-out warfare over the Bush tax cuts, it’s easy to make fun of Republican politicians who insist that making all the tax cuts permanent will ultimately generate higher tax revenues.

Liberal and not-so-liberal commentators have made mincemeat out of comments by Mitch McConnell, the Senate minority leader, that "there’s no evidence whatsoever" that the Bush tax cuts diminished revenue. As Bruce Bartlett and many others quickly noted, many of former President George W. Bush’s own economic advisers have acknowledged that the tax cuts widened federal deficits.

But disproving political slogans can be like shooting fish in a barrel. Is there more compelling analytical case for making all the Bush tax cuts permanent? I decided to take a closer look at the most sophisticated champion of the tax cuts I could think of: Douglas Holtz-Eakin, former director of the Congressional Budget Office and now president of American Action Forum, a GOP think tank.

Holtz-Eakin made his case to the Senate Finance Committee on July 14. Like most Republican analysts, Holtz-Eakin argues that making the tax cuts permanent would be good for economic growth. But unlike many Republican politicians, Holtz-Eakin doesn’t even hint that the tax cuts will "pay for themselves." 

In fact, he argues that the Treasury would recoup only 22 percent of the cost over 10 years. By his reckoning, making the tax cuts permanent would still cost $2 trillion through 2020. Now that’s a far more candid and realistic assessment than McConnell’s. 

But even if you accept Holtz-Eakin’s economic modeling, the revenue losses would be higher than he suggests. For one thing, Holtz-Eakin doesn’t appear to include the cost of interest on the $2 trillion in debt. The CBO estimates that the interest expense would add $500 billion over the next decade. 

On top of that, Holtz-Eakin doesn’t include the cost of preventing a huge expansion of the Alternative Minimum Tax. The AMT, originally created to make sure millionaires paid at least some income tax, threatens to engulf tens of millions of additional families, in part because it was never indexed for inflation. Congress has prevented those tax increases by passing temporary fixes, year after year, and both parties want to freeze it permanently. But that would reduce projected revenues and increase projected deficits by more than $1 trillion over 10 years. 

The AMT can’t be separated from the Bush tax cuts, because a big share of the AMT’s expansion stems from the way it interacts with the Bush tax cuts. The Congressional Budget analyzed it this way:
1) Indexing the AMT for inflation: $558 billion through 2020
2) Interest expense on the extra debt: $125 billion
3) Interactive effect of indexing the AMT and extending the Bush tax cuts: $606 billion
4) Interest expense on that: $126 billion.
 
If the CBO is essentially right on all the other issues, Holtz-Eakin’s projected savings as a result of the growth-kick would be just a drop in the bucket: $500 billion, compared to a total revenue drain of about $3.4 trillion.