Tom Coburn and Jeb Bush . . . don't get it

I once admired Tom Coburn without stint, and when it comes to wasteful government spending, he is still one of the best in the business. Sadly, however, he has fallen victim to the Beltway mentality when it comes to taxes, as has Jeb Bush recently. Even worse, they think their political illness is actually a cure.

Coburn fell under the spell sometime last year; he came to the conclusion that the massive deficits cannot be reduced or eliminated by cutting spending alone – “you can’t say you want a net decrease and negotiate” (NRO). Bush articulated the same thing earlier this month, and again (more cryptically) in National Review Online: “But to make sure that we do not lose the advantage of that clear difference, we must not layer onto our fundamental beliefs thick black lines of ideology — black lines that we do not allow ourselves to cross.” In other words, they have mistakenly concluded that anti-tax-hikers take the positions they do for ideological, rather than practical reasons.

Nothing could be further from the truth. Contrary to Washington conventional wisdom, tax hikes are not politically problematic; they are economically problematic, and in ways that undermine the very deficit-reduction attempts of which they are a part. The reasons are these.

Tax increases never bring in the revenue they are supposed to bring: One fundamental rule of economics is that when a behavior is taxed, it is also reduced. In microeconomics, this is a feature, not a bug; gas taxes encourage fuel efficient vehicles; cigarette taxes discourage smoking, etc. Yet macroeconomic policymakers manage to forget this and simply assume tax-avoiding behavior will go right on without any change despite the fact that the tax can no longer be avoided. This is why “closing loopholes,” while an excellent policy (so long as rates are reduced overall to match), it is a poor way to raise deficit-reducing revenue. In fact, it ignores the history of the loophole in the first place. Today’s loophole was yesterday’s “targeted tax credit,” designed to encourage a particular behavior. The idea that removing it won’t then discourage said behavior is foolhardy. As a result, tax increases never fulfill the promises of the politicians who enact them, resulting in “unexpectedly large” future deficits – and more pleas for deficit-reduction plans. The very deficit reduction deal Jeb Bush cites (his father’s in 1990) is testament to this: the tax increases generated less than one-fifth of expected revenues, and Bush the Elder left office with deficits at a record level. The five-year plan he signed into law was replaced by his successor in less than three.

This leads to two more problems. First, spending cuts always lag behind tax increases in budget deals. While one could lay this at the feet of devious Democrats or naive Republicans, the fact is, tax increases always affect behavior almost instantly, while spending cuts (even “immediate” ones) need the entire fiscal year to be felt. Moreover, spending cuts promised after the next Congressional election can always be ignored by the next Congress, while tax hikes are permanent.

So, with tax increases creating immediate economic pain and mistaken revenue projections, while spending cuts are still largely backloaded, the deficit-reduction deal is usually cut short and replaced by another one, with more up-front tax increases and spending cuts delayed. I’ve already mentioned the 1993 Clinton tax increase, which was part of his deficit-reduction plan that wiped out the 1990 deal two years early. What is not remembered is that the 1990 deal itself replaced a 1987 budget deal that had failed, but was tried because a 1984 agreement hit the skids, despite being enacted itself to replace the wheezing 1982 deal. All of the 1980s deals involved tax hikes of some kind (the 1982 version was the largest tax increase in history up to that time); all were supposed to make dramatic deficit reductions; all of them failed.

To be fair to Coburn, he didn’t come to Washington until 1995, so he might not be aware of this history (and those who were aware had enough of a hand in it that they’d rather not the word be spread). Bush, meanwhile, has never been in Congress, and began his political career began in 1994 when he first ran for Governor of Florida.

Still, for the rest of us, the 1980s and early 1990s should be instructive. The only balance budget deal that actually balanced the budget came in 1997 – and that one cut taxes rather than raised them.

This isn’t about ideology, “black lines,” or Grover Norquist. It’s about the economic reality of tax increases. That is why they should not be part of any budget deal.

Cross-posted to Virginia Virtucon

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