“Reaganomics” Still Wrong


Jon Chait’s Los Angeles Times column lands a few more kicks and punches on the theory that “supply-side magic” via tax cuts was responsible for higher-than-expected tax revenue of late. Here’s a bit we didn’t mention yesterday:

First, the rise in revenues mainly reflects temporary factors. Economic growth is nothing special at this point in a business cycle, and revenue from individual income tax withholdings — that is, regular wages — are actually growing very slowly. As Mark Zandi of economy.com has noted, the primary factor is the red-hot housing market, which is causing capital gains, as well as bonuses for brokers and underwriters, to skyrocket. A second factor is the hot stock market from 2004, which is already cooling. On top of that, a provision in a 2004 tax bill encouraged corporations to bring home overseas profits right away, causing them to pay more in taxes in 2005 but less in subsequent years.

The upshot of all this is that a bunch of short-term factors have come together to cause revenues to shoot up this year. It has nothing to do with President Bush’s “pro-growth” tax cuts, unless you think the tax cuts have somehow caused the housing run-up.

Quite so. One other note: It’s true, as Matthew Yglesias argues over at TAPPED, that the “dangers of relying overmuch on the deficit as a political issue” do exist. As I noted yesterday, these aren’t the biggest problems in the world right now. We were told by balanced-budget hawks that there would be all sorts of short-term problems with running crippling deficits, but as it happens, inflation has been spectacularly low during Bush’s first term, long-term interest rates are still down—no one seems to know why, but they are—and government deficits haven’t “crowded out” private investment, as was often predicted.

At the same time, persistent budget shortfalls, whether they’re a hundred billion dollars more than expected or a hundred billion dollars less than expected, pose a very severe problem for the not-so-far-away future, because eventually borrowing costs will catch up with us. Max Sawicky of EPI has written in more detail on the subject, and if you look at his Table 1, it’s clear that thanks to the deficits we’re currently running, net interest costs will become far more expensive than Medicare in about 60 years. Social Security, meanwhile, is a pretty small part of this long-term problem.

Now I can’t vouch for the political wisdom of the lesson here, but higher income taxes are inevitable—they probably need to be raised to about 20 percent of GDP, if we want to fund various discretionary programs like education and roads decently. More if universal health care becomes a reality. That’s still much, much less than virtually all European countries, none of whom are throttled by their tax burdens, and even 20 percent remains slightly lower than the tax burden in the later Clinton years when, I noticed, the economy seemed to hum along nicely. The math is pretty clear on the necessity here, though unfortunately, the Bush administration very wrongly insists on singling out Social Security—the best-financed program in all of government—as the problem.

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