Tax Cuts Are Not the Answer
NEW YORK -- The Obama campaign's attack ad about Bain Capital presented a simplistic picture of a complicated reality. Private-equity firms can play a crucial role in keeping companies competitive. And although some firms have engaged in some bad practices, on the whole the industry has grown so large because it performs a useful function. But the worst part about the ad was that it had little to do with America's challenges or Obama's policies.
By contrast, Mitt Romney's first major ad is substantive -- and wrong. He tells us that on his first day in office -- after approving the Keystone XL pipeline -- he will introduce tax cuts "that reward job creators not punish them." The one idea that is almost certain not to jump-start this economy is a tax cut.
Why can we be sure of this? Because this is what we have done for the past three years. For those who think President Obama's policies have done little to produce growth, keep in mind that the single largest piece of his policies -- in dollar terms -- has been tax cuts. They actually began before Obama took office, with the tax cut passed under the George W. Bush administration in response to the financial crisis in 2008. Then came the stimulus bill, of which tax cuts were the largest chunk by far -- one-third of the total. The Department of Transportation, by contrast, got 6 percent of the total to fix infrastructure.
This wasn't the end of it. There was the payroll tax cut, the small-business tax cut, the extension of the payroll tax cut, and so on. The president's Twitter feed boasted: "President Obama has signed 21 tax cuts to support middle class families." And how has that worked out?
In the wake of a financial crisis caused by excessive debt, tax cuts are highly unlikely to lead to increased economic activity. People use the money to pay down their debts rather than shop for cars, houses and appliances. As for the idea that employers are not creating jobs because their taxes are too high, think about it: Would Mitt Romney invest more of his money in American factories if only he had paid less than the 13.9 percent rate he paid last year? Please!
The Wall Street Journal invoked Milton Friedman to say that the problem with all of these tax cuts is that they are temporary. If only we had across-the-board cuts in rates. Except that these were tried as well. The 2001 Bush tax cuts were designed precisely along those lines. They were, in dollar terms, the largest tax cuts in U.S. history.
And the nonpartisan Congressional Research Service concluded in 2010 that "by almost any economic indicator, the economy performed better in the period before the (Bush) tax cuts than after the tax cuts were enacted. ... GDP growth, median real household income growth, weekly hours worked, the employment-population ratio, personal saving, and business investment growth were all lower in the period after the tax cuts were enacted." The years 2000 to 2007 were the period of the weakest job growth in the United States since the Great Depression. The one certain effect of tax cuts would be to balloon the deficit. Bruce Bartlett, a former economic official under Ronald Reagan, points out that the aggregate revenue loss of the Bush tax cuts was the largest in U.S. history: "Both Harry Truman and Ronald Reagan passed larger individual tax cuts, but both took back about half of them with subsequent tax increases."
When pressed, Romney and his advisers sometimes say that they are just for tax reform; other times, they cite the Simpson-Bowles plan. I've long argued that reforming the nation's bloated and corrupt tax code is vital and that Simpson-Bowles is a superb framework for deficit reduction. But neither would cut taxes. Simpson-Bowles raises them by more than a trillion dollars. You can use euphemisms such as "ending tax expenditures" and "closing loopholes," but when you do that, someone's taxes will go up. And when you close big loopholes such as the deduction of mortgage interest -- which is the only way to get real revenue -- tens of millions of people's taxes will rise.
Tax cuts have been a central cause of America's deficit problems. For four decades, Washington politicians have bought popularity by cutting taxes, always saying that spending cuts or growth will make up for lost revenue. That rarely happened, and the result is $11 trillion in federal debt held by the public. To perpetuate this pandering one more time is not just dishonest -- it is dangerous.
Fareed Zakaria's email address is comments(at symbol)fareedzakaria.com.Copyright 2012 Washington Post Writers Group