Thursday, May 11, 2006

Republican Endgame: Lower Taxes, Higher Spending

Having pretty much comprehensively failed to govern the country in a relevant, let alone competent, fashion, the Republican majority in Congress is going back to the tax-cut well one more time. For the sake of the nation's finances, pray it will be the last time:

Congress is poised to extend a number of tax cuts on dividends and capital gains, along with a very temporary "fix" of the alternative minimum tax and a deceptive new retirement savings break. House Speaker Dennis Hastert, who's worried he will become Minority Leader this November, called it a "day of celebration for the American people."

We don't hear much celebrating. According to the Brookings-Urban Institute Tax Policy Center, 80 percent of this bill's benefits would go to the top 10 percent of taxpayers, with almost 20 percent going to the top one-tenth of one percent of taxpayers. And the cost of this highly concentrated bonanza is being disguised by (a) making it a "temporary" extension, even though the Bush administration and its GOP allies fervently want to make these tax cuts permanent, which would expand the cost 15-fold; and (b) treating a new Roth IRA rollover provision as a revenue raiser, when it's clear the long-term impact would be quite negative.

This certainly continues the Bush Era GOP pattern of cynically hiding the cost to the public of tax cuts by making them temporary, and then extending them to "avoid tax increases" (hence the name of this legislation: the Tax Increase Prevention and Reconciliation Act). But this particular exercise in chicanery is even more cynical: The administration and the Republican congressional leadership have made it clear they will come back with another tax cut bill between now and the November elections, creating, no doubt, another "day of celebration." Slicing up the tax cuts not only enables them to squeeze legislation into the special rules that prevent a Senate filibuster; it also helps distract attention from the continuing imbalance between serial tax cuts that balloon the budget deficit and the small spending cuts (mainly affecting low-income Americans and those relying on student loans) they've enacted.

To put it another way, this strategy represents deficit financing on the installment plan, and fiscal irresponsibility in bite-sized nuggets.

In a minute, I'll get to why I'd characterize the size of the irresponsibility as Value rather than Bite. But let's just stay with the politics for a moment. The DLC brief goes on to note that the new tax cut package "is intended to remind privileged GOP constituencies they have a tangible stake in helping Republicans hang on to power, while offering a withered booby prize to dispirited conservative "base voters" agitated by the aimless drift of their party and its leaders." That's true, as far as it goes, but it's only half, or maybe a third, of what the mutant-strain Republicans plan to do in pursuit of their political self-perpetuation. Their main complementary strategy is the other half of what we might call the Thomas Frank Two-Step: angry up the blood with a raft of proposals that have no chance of passage, but might stoke the fires of librul-hate.

The House and Senate agendas are packed with bills that, even supporters concede, have no chance of passing but that social and fiscal conservatives clamor for, like constitutional amendments banning flag-burning and gay marriage. By bringing them up, Republicans hope to inspire a constituency that has fractured in its support for President Bush and the party. They also hope to cast Democrats as obstructionists by drawing their plentiful ''no" votes.

But some GOP moderates fear the strategy risks alienating moderate voters, whom vulnerable Republicans need at the polls in November.

The strategy is on display during what Senate majority leader Bill Frist dubbed ''health week" in the Senate. On Monday, the Republican-controlled Senate considered two bills that would limit medical malpractice judgments, even though the Democrats were expected to stop the measures with a filibuster, and did.

Still, Republicans used the Senate debate to blast Democrats for their ties to trial lawyers and to accuse them of blocking progress. Meanwhile, the GOP leadership has tabled bolder but more controversial healthcare proposals, such as expanding stem cell research and allowing US citizens to import prescription drugs from Canada.

''What a waste of time," said Richard J. Durbin of Illinois, the Senate's number-two Democrat. ''Republican leadership has given up on doing anything that is substantial and necessary. All they're dealing with now are bumper-sticker issues."

The efforts to feed red meat to their base come as opinion polls indicate that Bush and GOP congressional leaders' approval ratings are sinking near record lows.

The third leg of the right-wing stool (a word I use advisedly) is what Newsweek's Howard Fineman describes as Karl Rove's "Nightmare" strategy: switch the focus from endemic Republican failures by demonizing heretofore-obscure Democrats like John Conyers, Charlie Rangel and Henry Waxman, who might be in line for committee chairmanships should Democrats reclaim a majority. The pushback against this assault will tell us how far the Democrats have--or haven't--come since Rove won the 2004 election with one of the great political accomplishments ever: turning the election into a referendum on John Kerry's character (or rather, Rove's caricature of same) rather than on George W. Bush's first-term job performance.

So much for politics; back to the interesting stuff. The June Atlantic Monthly describes a recent analysis conducted by economist William Niskanen, chair of the libertarian and fiercely anti-tax Cato Institute, on the relationship between tax cuts and spending. Niskanen's findings strongly suggest that a basic premise of Republican governance over the past quarter-century--that tax cuts constrain the growth of government by limited resources--is 100 percent wrong. Far from "starving the beast," the most cherished dream of Grover Norquist and the generation of right-wing activists now in power, it seems that cutting taxes actually encourages higher government spending:

To the naked eye, Starve the Beast looks suspiciously counterproductive. After all, spending (as a share of the gross domestic product, the standard way to measure it) went up, not down, after Reagan cut taxes in the early 1980s; it went down, not up, after the first President Bush and President Clinton raised taxes in the early 1990s; and it went up, not down, following the Bush tax cuts early in this decade.

Niskanen recently analyzed data from 1981 to 2005 and found his hunch strongly confirmed. When he performed a statistical regression that controlled for unemployment (which independently influences spending and taxes), he found, he says, “no sign that deficits have ever acted as a constraint on spending.” To the contrary: judging by the last twenty-five years (plenty of time for a fair test), a tax cut of 1 percent of the GDP increases the rate of spending growth by about 0.15 percent of the GDP a year. A comparable tax hike reduces spending growth by the same amount.

Again looking at 1981 to 2005, Niskanen then asked at what level taxes neither increase nor decrease spending. The answer: about 19 percent of the GDP. In other words, taxation above that level shrinks government, and taxation below it makes government grow. Thanks to the Bush tax cuts, revenues have been well below 19 percent since 2002 (17.8 percent last year). Perhaps not surprisingly, government spending has risen under Bush.

As the author notes, these findings--particularly coming from the leader of a cornerstone institution of the conservative movement--are "in a sense tragic" for true believers on the right. They signal an unanswerable disconnect between favorite means (tax cuts) and cherished ends (smaller government). If tax cuts lead to bigger government, then the right has abetted what by its own lights is a great evil, and now faces a Hobson's choice of either turning away from further cuts--indeed, embracing higher taxes--or driving the economy right over the cliff. The latest Republican tax package indicates that we'd all best keep our seatbelts buckled.

Grover Norquist has come to national prominence as "the Lenin of the Right." Of course, Lenin's USSR eventually fell under the weight of its internal contradictions and wrong assumptions. Norquist's movement might be poised to suffer the same fate.

No comments: