Reconnecting Tax and Budget Policies

For decades, right-wing anti-government forces have waged a deliberate and largely successful attempt to separate perceptions of tax policy from the rest of the government's budget, including the deficit. However, the current budget debate in Congress shows with crystal clarity the tradeoff between additional tax cuts for the rich and reductions in vital domestic services.

Congress wrapped up the first stage of budget work last week, with each chamber of Congress passing similar (but different) budget blueprints (see Sticking Points in the Budget). Over the next five years, the budgets call for tax changes which would reduce revenue by over $100 billion, as well as for cuts to domestic discretionary programs of over $200 billion. In addition, there are additional proposed cuts to Medicaid and other entitlement programs.

Contrast the cost of just the tax cuts for dividends and capital gains—$23 billion over 10 years—with proposed cuts of up to $20 billion for Medicaid. Over half of the benefits from the dividend and capital gains tax rate reduction would go to those with incomes of over $1 million. Average taxpayers would hardly see any change, but those making more than $1 million would get, on average, a $35,000 cut.[1] On the spending side, the cuts to Medicaid will cost states billions in funding from the federal government and will threaten health benefits for the most vulnerable Americans.[2]

The House and Senate will soon begin to attempt to work out the differences between the two budget versions, with the hope of finding something acceptable to both sides. However the details are worked out, it appears that the budget proposal will include both cuts to domestic services and investments, as well as tax changes that will reduce revenue. Each of the Congressional budgets, as well as the president's proposal, would also dramatically increase the deficit.

For most Americans, it would seem natural to think that if we don't have the revenue base to fund vital domestic services and investments—like education for our kids, health care for our veterans, or support for the elderly—then these services will suffer. However, anti-government conservatives, knowing that these programs are popular, must find some way rhetorically to create the impression that revenue can be cut without causing any harm.

How do they do this? By employing a handy three-part strategy:

1. Claim that tax rate reductions will spur the economy and actually increase revenue—so the government would have more revenue, not less;
2. Claim that there is plenty of waste, fraud, and abuse so that spending and taxes can be cut without harming anyone;
3. Claim that the government harms people anyway, so it needs to be cut.

Laid out like this, it's easy to see the inconsistencies in the arguments; but no matter, they all seem to have the same implication: taxes should be cut. For the record, there is ample evidence that the old supply-side argument in claim #1 is theoretically possible, but empirically false. For claim #2, while there is inevitably some degree of "waste, fraud and abuse" in the system, the right approach is to attack this directly by improving the efficiency of service provision, not by bluntly slashing funding.

The contention in claim #3 is that the government gets in the way of national and individual success. However, there are many instances in which government has successfully stepped in to solve pressing national problems, to protect the most vulnerable, create economic opportunity, or to rebuild and invest in our communities. And the American public has embraced such efforts. The enduring success and popularity of the Social Security program is just one obvious example.

The anti-government philosophy has been summed up in the bumper sticker version: "It's your money, you should keep it." But we need not accept the right wing's negative, pessimistic vision of what America can accomplish.

Yes, indeed it is our money—every American pays some taxes—and we together decide what we can accomplish as a nation. If we want to spend it on education, scientific research, and the national highway system, or on national parks and health care for the elderly and low-income Americans, that should be our choice. And we should not be thwarted by a right-wing tax policy designed to starve the federal government of the revenue base needed to effectuate those choices.

Those in Congress who support the current budget need to realize this and not stand in the way of progress.

John S. Irons, Ph.D., is the director of tax and budget policy at the Center for American Progress.

[1] See the Tax Policy Center estimates available at http://www.taxpolicycenter.org/TaxModel/tmdb/TMTemplate.cfm?DocID=748&topic2ID=60&topic3ID=62&DocTypeID=1

[2] For state details of the proposed cuts, see John S. Irons, "Proposed Budget Would Enact More Tax Cuts at the Expense of Commitments to Health Care," Center for American Progress, March 11, 2005, available at http://americanprogress.org/site/pp.asp?c=biJRJ8OVF&b=453265

For more on taxes, read the American Progress Tax Plan