A Good Day for Supply-Siders

The decision to extend the Bush era tax cuts is a win-win. It will either boost the economy or force government to accept some tough spending cuts.

A rule of thumb in negotiations is that when both sides leave the table annoyed, it means that a good compromise was made.  The deal hammered out regarding: the looming Bush tax cut expiration is one that qualifies as such.

For conservatives: the top marginal income-tax rate will stay at 35 percent; the dividend and capital-gains tax rates will stay at 15 percent. Over the next two years, the estate tax will be lower than it has been for almost any part of the last several years. Mr. Obama also agreed to an additional reduction in tax rates: payroll taxes will also be temporarily reduced and businesses will be allowed to deduct the full cost of all investment expenses over the next two years.  Not bad if you believe that empowering the private sector (read: keep more money in their hands) is the best way to foster a sustainable economic recovery.

For liberals: an extension of certain favored tax credits and, most important, a 13-month extension of federal subsidies for unemployment benefits — with no compensatory spending cuts. This stretches subsidies for the jobless out to three years.

As the editors of National Review summed up succinctly: "If it won’t do much good for the economy, it will avert a serious blow to it."

When it comes to the government, I tend to lean towards Hippocrates: "First do no harm."  The fact is that with hundreds of billions in stimulus the economy is still in the throws of an anemic recovery.  The latest unemployment rate of 9.8% comes as a painful reminder of this fact (we were supposed to be below 8% post-stimulus if the administration's stimulus projects were accurate -- as predicted by many on the right, they were not).

As a rule, I oppose raising  taxes for two fundamental reasons: economic and moral. Economically, I am a supply-sider.  Always have been.  I believe the overall record shows that tax cuts and increased revenues go hand in hand.  It is common sense.  A more robust economy creates more economic activity and thus higher tax receipts. (As in all economic theory, one can produce studies supporting or contradicting this view to fit into an ideological belief.  There is not enough space here for the debate which is futile anyway: a number can be tortured to say anything.)

Morally very few liberal phrases irk me as much as "they [the rich?] can afford to pay more."  Oh? And who decides this?  And what makes them think that the federal behemoth can spend my money (it is my money remember) better than I can?  Why should I be compelled to pay even more into a system that has shown itself to be inefficient, corrupt and broken?  What many liberals do not understand is that it is not a matter of paying taxes per se that bother many on the right.  We get that government has an integral role to play in our society... to a point.  It is that we feel the money already being coerced from us is not being put to good use!  It's a bad investment.

The US government is not a business, I know.  For one thing, it can raise revenues (in theory at least) at will.  And it need not provide quality service or product to maintain its "competitiveness" for a lack of better terms. Let's say for sake of argument increased taxes will raise receipts.  This only perpetuates a problem.  For the more government brings in, the more it will spend.  We do not have a revenues problem, but a spending problem.  The only way to make it more efficient is to reduce its revenue.  The argument that taxes must be raised to help close the deficit implies that only superficial spending cuts are possible. That (and I laugh here) the government is running as a lean machine.  Please, as any businessman/woman can tell you, when your back is against the wall, when revenues are down, it is amazing how much inefficiency and unnecessary spending you can really weed out of the expenses column.   You'd be amazed.  A lot of businesses discovered just this between 2008 and now.  Time for government to learn the same lessons.

So I see this as a win for the country.  If supply-siders are right, then the economy will grow and revenues will increase (although as I said I see little hope for the federal monster curbing its appetite for more spending if this happens).  If we are wrong, more money will at least be in the hands of those to whom it belongs in the first place, and the government will be compelled to finally enact the draconian and deeply painful cuts needed to reset us back to where we were before this disastrous turn towards progressive government activism of the last fifty years--and the lost treasure it implies.

At some point we must decide what kind of country we wish to be.   A vibrant free market arena, or a soft welfare state.  Perhaps the extension of the Bush tax cuts is a first step towards having that dialog.  We'll see.