What’s holding up action to avert going over the so-called fiscal cliff—and the economic troubles such a leap would bring—is congressional Republicans’ unwillingness to let the Bush tax cuts for the wealthy expire. The fact is, however, that the Bush tax cuts were founded on a deceit, and that deceit has been exposed under the cold hard light of revenue shortfalls, economic weakness, and projected budget deficits. It’s time to move on and allow these cuts to expire.
The problem with the Bush tax cuts passed in the last decade is that they cut revenue to unsustainable levels. Needing a way to cloak this fact, the legislation enacting the tax reductions included expiration dates so that, on paper, over the budget period, the cost in rising federal deficits and debt weren’t evident.
In fairness, the more principled supporters of this subterfuge believed two things. First, they believed that by cutting taxes, the economy would grow so much that tax revenues would pour in. Thus, when the tax cuts reached their expiration date, extending them would be painless and obvious. In their eyes, the stunt of including an expiration date was merely a way around misguided official estimates that failed to account for the economic effects that, in fact, made the cuts entirely affordable. Although such “supply-side” miracles had failed to materialize from past tax cuts, the true supply-side believers continued—and continue—to believe.
Not surprisingly, it didn’t work out this way. The economy, in the wake of the tax cuts, performed dismally. Instead of a strong economy, we saw a decade of anemic phantom growth fueled by private debt, which culminated in the biggest economic downturn since the Great Depression. Revenues have dropped to their lowest levels in more than 60 years and if we keep taxes this low, federal deficits will be unsustainable. Once again, the theory that tax cuts will pay for themselves through economic growth was a bust.
The other rationalization for the subterfuge was that if revenues were reduced, Congress and the president would be compelled to cut government spending so that by time the tax cuts were set to expire, there would be no need for the additional revenue. But that didn’t happen either. The main reason it didn’t happen is that we, as a country, don’t actually want to significantly cut federal spending. Yes, for every one of us, there’s something we’d like less to be spent on. But for almost everything the federal government spends money on—and certainly for the big-ticket items that matter such as Social Security, Medicare, defense, roads, and the like—there is a solid majority support for the spending.
While people may call for spending cutbacks in the abstract, they don’t actually want the federal government to do less. So when it comes time for Congress and the president to cut spending, they don’t come up empty, but they do come up short. There is certainly smart and responsible trimming to be made in the federal budget, but nothing on the scale needed to pay for the Bush tax cuts.
In fact, the president has gone more than halfway in trying to find spending cuts. Before a dime of taxes has been raised, he has agreed in the last two years to $1.5 trillion in spending—cuts that will bring some areas of government spending down to levels not seen in decades. And in the negotiations to avert the so-called fiscal cliff, he has offered, in exchange for letting taxes rise, hundreds of billions of dollars in additional spending cuts in programs that are very close to his heart and the hearts of his allies—most notably in Medicare.
But that’s all off the table for one reason: an unwillingness to let the Bush tax cuts for the wealthy expire. A reluctance to part with tax cuts that have been proven to be unsustainable is no reason for congressional Republicans to block a serious long-term budget deal involving both taxes and spending, and it is certainly no reason to drive the nation over the so-called cliff and into another economic downturn.
Michael Ettlinger is Vice President of Economic Policy at the Center for American Progress.