Let’s Get Real on Tax Cuts

President Obama’s recent budget depressed most everyone. It showed unprecedented annual deficits of $1.3 trillion not just for the current year but for a decade out. The president made some proposals that would reduce the deficit to $1 trillion in 2020, but that’s disappointing progress.

How could we do better? There are many paths out of the fiscal swamp, but one in particular should be considered: paying for tax cuts.

From 2001 to 2003, Congress reduced taxes for just about everyone. Most of these changes were temporary and are slated to expire at the end of 2010, as is the indexing of the alternative minimum tax and various other temporary tax provisions. Why not simply allow these provisions to expire as planned (or extend them for only another year or two if needed to support the economic recovery)? Alternatively, we could make any permanent extension conditional on the public and their elected representatives accepting much deeper spending cuts or offsetting revenue increases to make the tax cuts affordable. In other words, applying pay-as-you-go rules in a more serious way than the weakened form in which they were recently enacted. The message to the public would be simple: If you want to keep taxes low, you have to forgo some benefits. As my parents used to say, no dessert without the spinach.

Allowing the tax cuts to expire or paying for them would bring the federal budget very close to balance by 2020. And posing the choice this way creates the imperative for Congress to find the offsetting cuts.

Yes, in today’s political environment such disciplined action by Congress is unlikely. But if Congress is paralyzed, taxes will revert to their former levels. That’s actually not a bad outcome — those tax levels were associated with rapid growth and plentiful jobs in the 1990s, along with surpluses in the federal budget. Will Democrats get blamed for “raising taxes” if this happens? Not if they are clear that they favor lower taxes, but only if Republicans suggest and support specific spending cuts sufficient to pay for the tax cuts. As the party of smaller government, the GOP should take some responsibility for actually cutting spending, something Republicans failed to do even when they controlled the White House and Congress in recent years.

Decisions about a possible temporary extension of existing tax cuts to aid the recovery and about how to pay for any permanent extension may take a lot of negotiation, but it’s key to retain the principle that any extension must be paid for. Whatever the budgetary outcome – and it might be some combination of tax extensions and spending cuts – giving up on pay-go is fiscally irresponsible.