More than 20 years ago, Harvard’s N. Gregory Mankiw, who would later serve as George W. Bush’s chief economic adviser, published the first edition of his best-selling Economics 101 textbook. Early in the book, trying to explain why economists are often perceived as disagreeing about everything, he wrote about the role of “charlatans and cranks.” When economists appear to be at odds, he wrote, you should be aware that sometimes the apparent dissent is coming from “some snake-oil salesman who is trying to sell a miracle cure.” He was referring to the people who told Ronald Reagan that cutting taxes would pay for itself, above all a guy named Art Laffer. As Mankiw noted, the charlatans and cranks were wrong: Reagan’s tax cuts sharply reduced revenue. And the same thing has been true every time tax-cut proponents have promised a miracle. Most recently, the 2017 Trump tax cut has led to a precipitous collapse in corporate tax receipts, twice as much as projected. Yet decades of being wrong again and again has done nothing to reduce the influence of tax-cut cranks on the G.O.P. On the contrary, their grip has gotten ever tighter. Even supposed Republican moderates like Maine’s Susan Collins justified their support for the 2017 bill by saying that it would pay for itself. And on Wednesday, Laffer will receive the Presidential Medal of Freedom. To be fair, Laffer is known for other things besides his utter faith in the miraculous power of tax cuts. He’s also known for warning about the dire effects of the Federal Reserve’s efforts to fight the financial crisis: “Get ready for inflation and higher interest rates,” he thundered a decade ago. Actually, no: Inflation has stayed low, and interest rates are close to their lowest levels in history. Now, anyone with a long career of making economic pronouncements will have made some bad calls. God knows I have. But what makes Laffer and others like them so special is both the utter consistency of their wrongness and the fact that their influence just keeps rising despite that wrongness. Or maybe I should say that their influence grows because of their wrongness. Constantly predicting great results from tax cuts for the rich and catastrophe should top tax rates go up is a bad way to devise economic policy but a very good way to ingratiate yourself with wealthy political donors. Attacking any policy that might have helped the economy while a Democrat was president was a pretty good career strategy too. What’s striking is that at this point the G.O.P. apparently has no use for economists who aren’t snake-oil salesmen. There are serious economists — like Mankiw — who happen to be conservatives, out of some combination of personal values and judgements about the proper role of government. I can respect their positions, even when I disagree. But they have no political home. Laffer’s medal, like the appointment of the fundamentally ludicrous Larry Kudlow as chief economist and the attempt to install Stephen Moore at the Fed, is like putting up a sign saying “Only charlatans and cranks need apply.”
Those decades of free-market machinations are now paying off, as a quintet of Ronald Reagan administration alumni — Kudlow, Laffer, Forbes, Moore and David Malpass—united by undying affection for each other and for laissez-faire economics, have the run of Washington once more. Members of the tight-knit group have shaped Trump’s signature tax cut, helped install each other in posts with vast influence over the global economy, and are working to channel Trump’s mercantilist instincts into pro-trade policies. Blasted by their critics as charlatans and lauded by their acolytes as tireless champions of prosperity, there’s no denying that the quintet has had an enduring impact on decades of economic policy.
Most recently, in late March, and partly at Kudlow’s urging, Trump announced his intention to nominate Moore to one of two open seats on the Federal Reserve Board of Governors, the body that sets the tempo of the global financial system.
The announcement prompted protests from economists across the ideological spectrum—George W. Bush’s top economist, Harvard’s Gregory Mankiw, said Moore lacked the “intellectual gravitas” for the job—who warned that appointing Moore, a think-tanker with no Ph.D., would politicize the Fed. Soon, it emerged that Moore had made a mistake on a 2014 tax return that led the IRS to place a disputed $75,000 lien against him, and CNN dug up scathing comments Moore had made about Trump during the presidential primary.
Whether Moore can survive the scrutiny and pass muster with the Senate will be a test of the supply-siders’ renewed cachet. They believe they can pull it off.
“I understand there are imperfections,” Kudlow told POLITICO. “I think it can be worked out.”
Moore described some of his recent conversations with Trump, which often turn to Fed Chairman Jerome Powell.
“I think his criticism of Powell is excessive and could be counterproductive,” Moore said, because it could actually provoke Powell to prove his independence by defying Trump’s wishes. Generally speaking, Trump wants Powell to keep interest rates low to decrease the chances of any economic slump before the president faces voters again next November.
Moore also recounted how he and Laffer, who began advising Trump in 2016, helped place Kudlow in his current posting.
Roughly a year into Trump’s term, as Trump’s first NEC director, Gary Cohn, prepared to depart the post, the duo sprang into action. Moore said that during this period, whenever he and Laffer engaged in their semiregular consultations with Trump, they would have some version of the following exchange:
“You know, Mr. President, you’re missing one thing,” Laffer or Moore would say.
“What is that?” Trump would ask.
“Larry Kudlow,” Laffer or Moore would tell him.
“We just drilled the message over and over,” Moore recalled. “‘Larry, Larry, Larry, Larry.’”
During that same period, following the 1974 midterms, Laffer first drewhis famous Laffer Curve — a representation of the idea that at a certain level of taxation, lowering taxes would theoretically spur enough growth that government revenue would actually rise—at a meeting near the White House with Wanniski, Dick Cheney, then an aide to President Gerald Ford, and Grace-Marie Arnett, another free marketeer active in Republican politics.
Reagan would go on to fully embrace supply-side theory, a shift from the party’s traditional emphasis on fiscal discipline, appointing Laffer to his Economic Policy Advisory Board.
Then as now, supply-side economics was criticized for favoring the rich and derided by critics as unrealistic “Voodoo Economics.” The critics got an early boost from a 1981 Atlantic cover story in which Reagan’s budget director, David Stockman, aired his doubts that this novel theory was working in practice.
The piece ruined Stockman’s standing with Reagan—Laffer calls him “the traitor of all traitors”—but Stockman’s young aide, Kudlow, now 71, remained a loyal supply-sider and struck up a relationship with Laffer.
Reagan would go on to appoint Forbes as the head of the Board of International Broadcasting, which oversaw Radio Liberty and Radio Free Europe, and Moore worked as the research director for Reagan’s privatization commission. Malpass, meanwhile, worked in Reagan’s Treasury department. Representatives for Forbes and Malpass said they were not available for interviews.
In the 1988 presidential primary, another supply-sider, the late New York congressman Jack Kemp, lost out to George H.W. Bush, curtailing the crew’s influence within the party.
But they stuck together. Moore, now 59, first became close with Laffer and Kudlow in 1991, after he recruited them to participate in an event celebrating the 10-year anniversary of Reagan’s first tax cuts for the libertarian Cato Institute.
In 1993, Kudlow and Forbes teamed up to craft a tax cut plan for New Jersey gubernatorial candidate Christine Todd Whitman, who went on to unseat incumbent Democrat James Florio.
Meanwhile, Kudlow hired Malpass to work for him at Bear Stearns, where he had been flying high as the investment bank’s chief economist.
The next year, Kudlow crashed to earth—he left the bank and entered rehab for alcohol and cocaine addiction. Laffer stuck by Kudlow, hiring the investment banker to work for his consulting firm in California when he emerged.
In 1996, Forbes, backed by Moore, entered the Republican primary and lost out to Bob Dole, but the group takes credit for getting Kemp picked for the bottom half of that year’s ticket, which lost to incumbent Bill Clinton.
And they have not stopped partying since. Members of the group have continued to actively socialize with each other over the decades, with some spending New Year’s eves together. At one birthday party for Laffer in New York, they presented the aging economist with a signed poster of the Jedi master Yoda. “I’m short, a little bit fat. I’ve got big, green ears,” Laffer explained. “I look sort of like Yoda.”
In 2015, Forbes, Laffer, Kudlow and Moore created the Committee to Unleash Prosperity, a group intended in part to counter the emergence of the “Reformicons,” a rival gang of Republican eggheads who felt the party had gone too far in the direction of laissez-faire policies favoring the rich.
Among the other 29 committee members listed in a press release were both Malpasses, Kevin Hassett, now chairman of Trump’s Council of Economic Advisers, and Andy Puzder, who was Trump’s initial pick for labor secretary until allegations of domestic abuse unearthed by POLITICO derailed his nomination.
The group sought, with considerable success, to vet Republican presidential candidates for their supply-side credentials and to influence their platforms, holding large private dinners at Manhattan venues such as the Four Seasons and the 21 Club, so that committee members and other notable invitees—like Rudy Giuliani and Roger Ailes—could feel out the candidates.
Before meeting with the larger group, candidates would huddle with the committee’s founders to receive economic tutorials. Or in the case of Ohio Governor John Kasich, to give one. “We were all sitting there, and he would talk for an hour,” Moore recalled. “We’re like, ‘No, we’re supposed to be talking to you,’ and he’s talking to us.” Moore called the episode “Classic John Kasich.”
Though the events were supposed to be off the record, journalists often attended, and an otherwise lackluster February 2015 dinner for Wisconsin Governor Scott Walker made headlines when Giuliani barged in, proclaimed he did not believe that President Barack Obama “loves America,” and insisted a POLITICO reporter could print the quote.
Last December, Republicans relied on the support of conservative economists who predicted that the party’s corporate tax cuts would boost productivity and investment in the United States substantially. The forecasts were wrong, and the silence of those who made them suggests that they knew it all along.BERKELEY – It has now been one year since US President Donald Trump and his fellow Republicans rammed their massive corporate tax cut through Congress. At the time, critics of the “Tax Cuts and Jobs Act” described it as a cynical handout for wealthy shareholders. But a substantial number of economists came out in support of it.For example, one prominent group, most of whom served in previous Republican administrations, predicted in The Wall Street Journal that the tax cuts would boost long-run GDP by 3-4%, with an “associated increase” of about 0.4% “in the annual rate of GDP growth” over the next decade. And in an open letter to Congress, a coterie of over 100 economists asserted that “the macroeconomic feedback generated by the [tax cuts]” would be “more than enough to compensate for the static revenue loss,” implying that the bill would be deficit-neutral over time.
Likewise, in a commentary for Project Syndicate, Robert J. Barro of Harvard University argued that the tax cuts would increase long-run real (inflation-adjusted) per capita GDP by an improbable 7%. And Michael J. Boskin of the Hoover Institution endorsed his analysis in a follow-up commentary.
Finally, Kevin Hassett, Chairman of the White House Council of Economic Advisers, and Greg Mankiw of Harvard University claimed that the productivity gains stemming from the tax package would primarily boost wages, rather than profits, because foreign savers would pour investment into the US.
.. To be sure, these were primarily long-run predictions. But proponents of the bill nonetheless claimed that we would see enough additional investment to boost growth by 0.4% per year. That implies an annual GDP increase of roughly $800 billion, which would require annual investment to rise from 17.5% to about 21.5% of GDP. We cannot know how much the US economy would grow in the absence of the tax cuts. But, as the chart below shows, investment has not jumped to that level, nor does it show signs of doing so anytime soon.
.. Back when all the aforementioned economists were issuing their sanguine predictions about the tax package’s likely effects, neutral scorekeepers such as the Tax Policy Center were painting a more realistic picture. And unlike most proponents of the cuts, the Tax Policy Center’s raison d’être is not to please donors or support a particular political party, but rather to make the best forecasts that it can.
The deep disagreement last year over the tax bill’s potential effects anguished Binyamin Applebaum of The New York Times. “What does it mean to produce the signatures of 100 economists in favor of a given proposition when another 100 will sign their names to the opposite statement?” Applebaum asked on Twitter at the time. “How does Harvard, for example, justify granting tenure to people who purport to work in the same discipline and publicly condemn each other as charlatans? How are ordinary people, let alone members of Congress, supposed to figure out which tenured professors are the serious economists?”
.. We can now answer that last question. Scholarship is about the pursuit of truth. When scholars find that they have gotten something wrong, they ask themselves why, in order to improve their methodology and possibly get it less wrong in the future. The economists who predicted that tax cuts would spur a rapid increase in investment and sustained growth have now been proven wrong. If they were serious academics committed to their discipline, they would take this as a sign that they have something to learn. Sadly, they have not. They have remained silent, which suggests that they are not surprised to see investment fall far short of what they promised.
But why should they be surprised? After all, it would be specious to assume, as their models do, that investment can rapidly rise (or fall) as foreign investors flood into (or flee) the US. Individuals and firms do not suddenly ratchet up their savings just because the after-tax profit rate has increased. While a higher profit rate does make saving more profitable, it also increases the income from one’s past savings, thus reducing the need to save. Generally speaking, the two balance out.
While a higher profit rate does make saving more profitable, it also increases the income from one’s past savings, thus reducing the need to save. Generally speaking, the two balance out.
All of those who published op-eds and released studies supporting the corporate tax cuts last year knew (or should have known) this to begin with. That is why they have not bothered to investigate their flawed forecasts to determine what they may have missed. It is as if they knew all along that their predictions were wrong.1
For reporters still wondering which economists to listen to, the answer should now be clear. If there is one message to take from the past year, it is: “Fool me once, shame on you; fool me twice, shame on me.”
The advocates of tax cuts are relentless, even fanatical. An indication of the movement’s fervor — and of its political power — came during the Iraq war. War is expensive and is almost always accompanied by tax increases. But not in 2003. ”Nothing is more important in the face of a war,” declared Tom DeLay, the House majority leader, ”than cutting taxes.” And sure enough, taxes were cut, not just in a time of war but also in the face of record budget deficits. Nor will it be easy to reverse those tax cuts: the tax-cut movement has convinced many Americans — like Tinsley — that everybody still pays far too much in taxes.
.. A result of the tax-cut crusade is that there is now a fundamental mismatch between the benefits Americans expect to receive from the government and the revenues government collect. This mismatch is already having profound effects at the state and local levels: teachers and policemen are being laid off and children are being denied health insurance. The federal government can mask its problems for a while, by running huge budget deficits, but it, too, will eventually have to decide whether to cut services or raise taxes. And we are not talking about minor policy adjustments. If taxes stay as low as they are now, government as we know it cannot be maintained. In particular, Social Security will have to become far less generous; Medicare will no longer be able to guarantee comprehensive medical care to older Americans; Medicaid will no longer provide basic medical care to the poor.
.. The reason Tinsley’s comic strip about the angry taxpayer caught my eye was, of course, that the numbers were all wrong. Very few Americans pay as much as 50 percent of their income in taxes; on average, families near the middle of the income distribution pay only about half that percentage in federal, state and local taxes combined.
.. In fact, though most Americans feel that they pay too much in taxes, they get off quite lightly compared with the citizens of other advanced countries. Furthermore, for most Americans tax rates probably haven’t risen for a generation. And a few Americans — namely those with high incomes — face much lower taxes than they did a generation ago.
.. In the United States, all taxes — federal, state and local — reached a peak of 29.6 percent of G.D.P. in 2000. That number was, however, swollen by taxes on capital gains during the stock-market bubble.
By 2002, the tax take was down to 26.3 percent of G.D.P., and all indications are that it will be lower still this year and next.
This is a low number compared with almost every other advanced country. In 1999, Canada collected 38.2 percent of G.D.P. in taxes, France collected 45.8 percent and Sweden, 52.2 percent.
.. Meanwhile, wealthy Americans have seen a sharp drop in their tax burden. The top tax rate — the income-tax rate on the highest bracket — is now 35 percent, half what it was in the 1970’s. With the exception of a brief period between 1988 and 1993, that’s the lowest rate since 1932. Other taxes that, directly or indirectly, bear mainly on the very affluent have also been cut sharply. The effective tax rate on corporate profits has been cut in half since the 1960’s. The 2001 tax cut phases out the inheritance tax, which is overwhelmingly a tax on the very wealthy: in 1999, only 2 percent of estates paid any tax, and half the tax was paid by only 3,300 estates worth more than $5 million. The 2003 tax act sharply cuts taxes on dividend income, another boon to the very well off. By the time the Bush tax cuts have taken full effect, people with really high incomes will face their lowest average tax rate since the Hoover administration.
.. Yet a significant number of Americans rage against taxes, and the party that controls all three branches of the federal government has made tax cuts its supreme priority. Why?
3. Supply-Siders, Starve-the-Beasters and Lucky Duckies
It is often hard to pin down what antitax crusaders are trying to achieve. The reason is not, or not only, that they are disingenuous about their motives — though as we will see, disingenuity has become a hallmark of the movement in recent years. Rather, the fuzziness comes from the fact that today’s antitax movement moves back and forth between two doctrines. Both doctrines favor the same thing: big tax cuts for people with high incomes. But they favor it for different reasons.
One of those doctrines has become famous under the name ”supply-side economics.” It’s the view that the government can cut taxes without severe cuts in public spending. The other doctrine is often referred to as ”starving the beast,” a phrase coined by David Stockman, Ronald Reagan’s budget director. It’s the view that taxes should be cut precisely in order to force severe cuts in public spending. Supply-side economics is the friendly, attractive face of the tax-cut movement. But starve-the-beast is where the power lies.
.. So the standard view of economists is that if you want to reduce the burden of taxes, you must explain what government programs you want to cut as part of the deal. There’s no free lunch.
What the supply-siders argued, however, was that there was a free lunch. Cutting marginal rates, they insisted, would lead to such a large increase in gross domestic product that it wouldn’t be necessary to come up with offsetting spending cuts.
.. The other camp in the tax-cut crusade actually welcomes the revenue losses from tax cuts. Its most visible spokesman today is Grover Norquist, president of Americans for Tax Reform, who once told National Public Radio: ”I don’t want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.” And the way to get it down to that size is to starve it of revenue. ”The goal is reducing the size and scope of government by draining its lifeblood,” Norquist told U.S. News & World Report.
.. Edwin Feulner, the foundation’s president, uses ”New Deal” and ”Great Society” as terms of abuse, implying that he and his organization want to do away with the institutions Franklin Roosevelt and Lyndon Johnson created. That means Social Security, Medicare, Medicaid — most of what gives citizens of the United States a safety net against economic misfortune.
.. The starve-the-beast doctrine is now firmly within the conservative mainstream. George W. Bush himself seemed to endorse the doctrine as the budget surplus evaporated: in August 2001 he called the disappearing surplus ”incredibly positive news” because it would put Congress in a ”fiscal straitjacket.”
.. to starve the beast, you must not only deny funds to the government; you must make voters hate the government. There’s a danger that working-class families might see government as their friend: because their incomes are low, they don’t pay much in taxes, while they benefit from public spending. So in starving the beast, you must take care not to cut taxes on these ”lucky duckies.” (Yes, that’s what The Wall Street Journal called them in a famous editorial.) In fact, if possible, you must raise taxes on working-class Americans in order, as The Journal said, to get their ”blood boiling with tax rage.”
.. The supply-side movement likes to present itself as a school of economic thought like Keynesianism or monetarism — that is, as a set of scholarly ideas that made their way, as such ideas do, into political discussion. But the reality is quite different. Supply-side economics was a political doctrine from Day 1; it emerged in the pages of political magazines, not professional economics journals.
.. That is not to deny that many professional economists favor tax cuts. But they almost always turn out to be starve-the-beasters, not supply-siders.
.. And they often secretly — or sometimes not so secretly — hold supply-siders in contempt. N. Gregory Mankiw, now chairman of George W. Bush’s Council of Economic Advisers, is definitely a friend to tax cuts; but in the first edition of his economic-principles textbook, he described Ronald Reagan’s supply-side advisers as ”charlatans and cranks.”
..Douglas Holtz-Eakin .. his conclusion was that unless the revenue losses from the proposed tax cuts were offset by spending cuts, the resulting deficits would be a drag on growth, quite likely to outweigh any supply-side effects.
.. since the 1970’s almost all of the prominent supply-siders have been aides to conservative politicians, writers at conservative publications like National Review, fellows at conservative policy centers like Heritage or economists at private companies with strong Republican connections. Loosely speaking, that is, supply-siders work for the vast right-wing conspiracy.
.. What gives supply-side economics influence is its connection with a powerful network of institutions that want to shrink the government and see tax cuts as a way to achieve that goal. Supply-side economics is a feel-good cover story for a political movement with a much harder-nosed agenda.
.. Irving Kristol, in his role as co-editor of The Public Interest, was arguably the single most important proponent of supply-side economics. But years later, he suggested that he himself wasn’t all that persuaded by the doctrine: ”I was not certain of its economic merits but quickly saw its political possibilities.” Writing in 1995, he explained that his real aim was to shrink the government and that tax cuts were a means to that end: ”The task, as I saw it, was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority — so political effectiveness was the priority, not the accounting deficiencies of government.”
.. In effect, what Kristol said in 1995 was that he and his associates set out to deceive the American public. They sold tax cuts on the pretense that they would be painless, when they themselves believed that it would be necessary to slash public spending in order to make room for those cuts.
.. But one supposes that the response would be that the end justified the means — that the tax cuts did benefit all Americans because they led to faster economic growth. Did they?
.. skeptics say that rapid growth after 1982 proves nothing: a severe recession is usually followed by a period of fast growth, as unemployed workers and factories are brought back on line. The test of tax cuts as a spur to economic growth is whether they produced more than an ordinary business cycle recovery. Once the economy was back to full employment, was it bigger than you would otherwise have expected? And there Reagan fails the test: between 1979, when the big slump began, and 1989, when the economy finally achieved more or less full employment again, the growth rate was 3 percent, the same as the growth rate between the two previous business cycle peaks in 1973 and 1979. Or to put it another way, by the late 1980’s the U.S. economy was about where you would have expected it to be, given the trend in the 1970’s. Nothing in the data suggests a supply-side revolution.
.. Does this mean that the Reagan tax cuts had no effect? Of course not. Those tax cuts, combined with increased military spending, provided a good old-fashioned Keynesian boost to demand.
.. While the Reagan tax cuts didn’t produce any visible supply-side gains, they did lead to large budget deficits. From the point of view of most economists, this was a bad thing. But for starve-the-beast tax-cutters, deficits are potentially a good thing, because they force the government to shrink. So did Reagan’s deficits shrink the beast?
.. In response to these deficits, George Bush the elder went back on his ”read my lips” pledge and raised taxes. Bill Clinton raised them further. And thereby hangs a tale.
.. Clinton did exactly the opposite of what supply-side economics said you should do: he raised the marginal rate on high-income taxpayers. In 1989, the top 1 percent of families paid, on average, only 28.9 percent of their income in federal taxes; by 1995, that share was up to 36.1 percent.
Conservatives confidently awaited a disaster — but it failed to materialize. In fact, the economy grew at a reasonable pace through Clinton’s first term, while the deficit and the unemployment rate went steadily down. And then the news got even better: unemployment fell to its lowest level in decades without causing inflation, while productivity growth accelerated to rates not seen since the 1960’s. And the budget deficit turned into an impressive surplus.
.. By the end of the 1990’s, in other words, supply-side economics had become something of a laughingstock
.. the most striking example of what skillful marketing can accomplish is the campaign for repeal of the estate tax.
.. the estate tax is a tax on the very, very well off. Yet advocates of repeal began portraying it as a terrible burden on the little guy. They renamed it the ”death tax” and put out reports decrying its impact on struggling farmers and businessmen — reports that never provided real-world examples because actual cases of family farms or small businesses broken up to pay estate taxes are almost impossible to find. This campaign succeeded in creating a public perception that the estate tax falls broadly on the population. Earlier this year, a poll found that 49 percent of Americans believed that most families had to pay the estate tax, while only 33 percent gave the right answer that only a few families had to pay.
.. the public rationale for tax cuts has shifted repeatedly over the past three years.
.. During the 2000 campaign and the initial selling of the 2001 tax cut, the Bush team insisted that the federal government was running an excessive budget surplus, which should be returned to taxpayers. By the summer of 2001, as it became clear that the projected budget surpluses would not materialize, the administration shifted to touting the tax cuts as a form of demand-side economic stimulus: by putting more money in consumers’ pockets, the tax cuts would stimulate spending and help pull the economy out of recession. By 2003, the rationale had changed again: the administration argued that reducing taxes on dividend income, the core of its plan, would improve incentives and hence long-run growth — that is, it had turned to a supply-side argument.
.. So what were the Bush tax cuts really about? The best answer seems to be that they were about securing a key part of the Republican base. Wealthy campaign contributors have a lot to gain from lower taxes, and since they aren’t very likely to depend on Medicare, Social Security or Medicaid, they won’t suffer if the beast gets starved. Equally important was the support of the party’s intelligentsia, nurtured by policy centers like Heritage and professionally committed to the tax-cut crusade. The original Bush tax-cut proposal was devised in late 1999 not to win votes in the national election but to fend off a primary challenge from the supply-sider Steve Forbes, the presumptive favorite of that part of the base.
.. the selling of the tax cuts has depended heavily on chicanery. The administration has used accounting trickery to hide the true budget impact of its proposals, and it has used misleading presentations to conceal the extent to which its tax cuts are tilted toward families with very high income.
.. The most important tool of accounting trickery, though not the only one, is the use of ”sunset clauses” to understate the long-term budget impact of tax cuts.
.. But, of course, nobody expects the sunset to occur: when 2011 rolls around, Congress will be under immense pressure to extend the tax cuts.
.. the administration has carried out a very successful campaign to portray these tax cuts as mainly aimed at middle-class families. This campaign is similar in spirit to the selling of estate-tax repeal as a populist measure, but considerably more sophisticated.
.. the 2001 tax cut, once fully phased in, will deliver 42 percent of its benefits to the top 1 percent of the income distribution.
.. It might seem impossible to put a populist gloss on tax cuts this skewed toward the rich, but the administration has been remarkably successful in doing just that.
.. One technique involves exploiting the public’s lack of statistical sophistication. In the selling of the 2003 tax cut, the catch phrase used by administration spokesmen was ”92 million Americans will receive an average tax cut of $1,083.’‘ That sounded, and was intended to sound, as if every American family would get $1,083. Needless to say, that wasn’t true.
.. About half of American families received a tax cut of less than $100; the great majority, a tax cut of less than $500.
.. David Stockman famously admitted that Reagan’s middle-class tax cuts were a ”Trojan horse” that allowed him to smuggle in what he really wanted, a cut in the top marginal rate.
.. If a couple had multiple children, if the children were all still under 18 and if the couple’s income was just high enough to allow it to take full advantage of the child credit, it could get a tax cut of as much as 4 percent of pretax income. Hence the couple with two children and an income of $40,000, receiving a tax cut of $1,600
.. But while most couples have children, at any given time only a small minority of families contains two or more children under 18 — and many of these families have income too low to take full advantage of the child tax credit. So that ”typical” family wasn’t typical at all. Last year, the actual tax break for families in the middle of the income distribution averaged $469, not $1,600.
.. through a combination of hardball politics, deceptive budget arithmetic and systematic misrepresentation of who benefits, Bush’s team has achieved a major reduction of taxes, especially for people with very high incomes.
.. Alan Auerbach, William Gale and Peter Orszag, fiscal experts at the Brookings Institution, have estimated the size of the ”fiscal gap” — the increase in revenues or reduction in spending that would be needed to make the nation’s finances sustainable in the long run. If you define the long run as 75 years, this gap turns out to be 4.5 percent of G.D.P. Or to put it another way, the gap is equal to 30 percent of what the federal government spends on all domestic programs. Of that gap, about 60 percent is the result of the Bush tax cuts. We would have faced a serious fiscal problem even if those tax cuts had never happened. But we face a much nastier problem now that they are in place. And more broadly, the tax-cut crusade will make it very hard for any future politicians to raise taxes.
So how will this gap be closed? The crucial point is that it cannot be closed without either fundamentally redefining the role of government or sharply raising taxes.
.. Politicians will, of course, promise to eliminate wasteful spending. But take out Social Security, Medicare, defense, Medicaid, government pensions, homeland security, interest on the public debt and veterans’ benefits — none of them what people who complain about waste usually have in mind — and you are left with spending equal to about 3 percent of gross domestic product. And most of that goes for courts, highways, education and other useful things. Any savings from elimination of waste and fraud will amount to little more than a rounding-off error.
.. Let’s assume that interest on the public debt will be paid, that spending on defense and homeland security will not be compromised and that the regular operations of government will continue to be financed. What we are left with, then, are the New Deal and Great Society programs: Social Security, Medicare, Medicaid and unemployment insurance. And to close the fiscal gap, spending on these programs would have to be cut by around 40 percent.
.. It goes almost without saying that the age at which Americans become eligible for retirement benefits would rise, that Social Security payments would fall sharply compared with average incomes, that Medicare patients would be forced to pay much more of their expenses out of pocket — or do without. And that would be only a start.
.. All this sounds politically impossible. In fact, politicians of both parties have been scrambling to expand, not reduce, Medicare benefits by adding prescription drug coverage
.. I think within a decade, though not everyone agrees — the bond market will tell us that we have to make a choice.
In short, everything is going according to plan.
.. Some supporters of President Bush may have really believed that his tax cuts were consistent with his promises to protect Social Security and expand Medicare; some people may still believe that the wondrous supply-side effects of tax cuts will make the budget deficit disappear. But for starve-the-beast tax-cutters, the coming crunch is exactly what they had in mind.
.. In Norquist’s vision, America a couple of decades from now will be a place in which
- elderly people make up a disproportionate share of the poor, as they did before Social Security. It will also be a country in which
- even middle-class elderly Americans are, in many cases, unable to afford expensive medical procedures or prescription drugs and in which
- poor Americans generally go without even basic health care. And it may well be a place in which only
- those who can afford expensive private schools can give their children a decent education.