Budget Balancing Act: Tax and Cut Spending

Budget Balancing Act: Tax and Cut Spending

One of the key reasons the U.S. has a massive budgetary problem is a core Republican belief, enforced by Americans for Tax Reform (ATR) and the Tea Party, that all tax cuts are per se good regardless of the economic circumstances and all revenue-reducing provisions of the tax code must be preserved indefinitely. 

Sen. Tom Coburn (R-OK) has taken issue with ATR’s uncompromising position. While he believes spending needs to be cut as much as possible, Coburn understands that revenues cannot be kept completely off the table.

It’s dangerous to put off dealing with the deficit until Republicans get control of the House, the Senate, and the White House – and have a filibuster-proof majority in the Senate as well. That’s what it would take to solve our budgetary problem 100 percent with spending cuts alone. Moreover, that scenario is absurdly optimistic because the GOP had that power in the early 2000s and didn’t cut a nickel of spending; instead they loaded the budget with pork and enacted a new entitlement program, Medicare Part D, which will add $55 billion to the deficit this year alone.

It would be one thing if the great budget issues under discussion at least had the potential for major savings. But Republicans resist putting big ticket programs such as national defense and Social Security on the table and adamantly oppose even talking about revenues.

One argument that Republicans always make is that tax increases are unnecessary because revenues are projected to rise from 14.8 percent of GDP this year to 19.9 percent in 2014. But that is only because the Congressional Budget Office is required to assume that all existing provisions of law will be implemented on schedule. The Bush tax cuts that are scheduled to expire at the end of 2012 account for almost all of the projected revenue increase. But as we saw last year, Republicans want them to be made permanent.

They want to imply that they are fiscally responsible by taking credit for a rise in revenues that is the main factor in the projected improvement in the deficit after 2012, but at the same time they oppose allowing any tax cut to expire. Moreover, they continue to advocate still more tax cuts. Virtually every Republican supports a cut in the corporate tax rate, while adamantly refusing to name a single provision of the tax code that could be eliminated to pay for it.

Sen. Coburn knows that many provisions of the tax code, such as refundable tax credits, are just as unjustified as those on the spending side of the budget. It would not only help our budgetary situation to clean these loopholes out of the tax code, but it would improve economic performance by eliminating the bias that causes investment to be channeled out of areas governed by the market into those directed by government through the tax code.

While some people would favor wholesale elimination of the $1.1 trillion of “tax expenditures” now part of the law – the Simpson-Bowles budget commission made that recommendation – most economists would be more selective. After all, even if one takes the position that all tax expenditures are unjustified, a position I do not hold, they are not all equally unjustified.

Sen. Coburn has chosen to take on what he believes to be the single most unjustified tax subsidy: the tax credit for ethanol production, which gives producers 45 cents per gallon in the form of a credit that lowers federal revenues by about $6 billion per year. Said Coburn when introducing his legislation:

“As our economy begins to grow again, we need to bring our budget under control through a combination of smart cuts and smart investments. Cutting yet another subsidy to big oil that is making big profits is smart policy. Rather than underwriting ethanol subsidies that are causing food prices to skyrocket, we should be supporting American innovation in more sustainable alternative fuels the results of which will help create jobs, lower energy costs and strengthen our national security.”

Coburn cites a recent U.S. Government Accountability Office report, which found that the ethanol credit “is largely unneeded today to ensure demand for domestic ethanol production.” Nevertheless, in a March 29 letter, ATR immediately attacked Coburn for violating the tax pledge and promised to oppose him if he offered an amendment to repeal the credit.

Coburn wrote back to ATR that while spending cuts reduce the government’s impact on the private economy, tax subsidies distort private economic decisions. Conservatives can’t only demand cuts in direct spending while giving every tax subsidy a pass, as ATR effectively does. “Continuing to issue blanket defenses of all tax expenditures is a profoundly misguided embrace of progressive, activist government and a strategy for tax complexity, tax deferment, excessive spending and unsustainable deficits,” Coburn said.

Every Republican is frightened to death of Tea Party opposition in the primaries next year and knows that being charged with violating the tax pledge would probably lead to loss of the Republican nomination. So they keep their mouths shut no matter what misgivings they have about the Tea Party/ATR strategy of only cutting domestic discretionary spending, giving a pass to defense and entitlements, and refusing to consider higher revenues under any circumstances no matter how big the deficit gets.
Anyone who genuinely cares about our national finances should support Dr. Coburn in his effort.

Related Links:
Senator Coburn Plan to End Ethanol Credit Tests Republican Tax Principle (Bloomberg) 
Big-time Conservatives Squabble over Ethanol (New York Times)
Tom Coburn Traps Grover Norquist (The New Republic)