The GOP's Tax Position Is Anti-Growth

It's likely that the president will propose to extend the payroll tax cut for a period of time in his September speech on the economy. The White House wants stimulus that will pass Congress, and Republicans will only vote for tax cuts. The overlap is temporary tax relief.

Except not all Republicans like the idea. The Wall Street Journal editorial page, a reliable proxy for conservative opinion, said it prefers tax cuts that are "broad-based, immediate and permanent." Rep. Dave Camp, Republican chairman of the House committee responsible for taxes, said "I don't think that's a good idea," because it would increase the deficit. (True enough, but that's the point.)

Progressives claim they've caught the right wing in a lie. The party of lower taxes doesn't like a tax cut that just happens to be a Democratic president's idea of stimulus? The party that won't raise taxes on millionaires suddenly doesn't mind higher payroll taxes on the middle class in 2012?

The position that we should neither cut payroll taxes in 2012 nor raise income taxes ever implies one of three things: (1) President Bush made tax levels perfect in 2003, and they should never change; (2) The deficit is more important than the economy right now; (3) Temporary tax cuts never work. I think these positions are wrong; obviously wrong; and probably wrong:

1) The ideal level of taxation is a mystery. But it's unlikely that our tax code -- which preferences large mortgages, fails to account for negative externalities like carbon emissions, and has reduced effective tax rates on all families even as it has added promised retirement benefits -- is the right system to incentivize growth while paying for the boomers' retirement.

2) It doesn't make sense to be a short-term deficit hawk while interest rates are at 2% and the economy is growing less than 1%. If you're not growing, it doesn't matter how small your deficits are. The biggest weight on the economy right now is household debt, and as long as government can borrow cheaply, it should help families by continuing to spend much more than it takes in.

3) Temporary tax cuts aren't ideal, from an economist's perspective, because some consumers pocket the savings with the expectation that taxes will increase later. This is called Ricardian equivalence theory. That's why broad-based, immediate and permanent tax cuts are considered the best way to grow spending and investment. The problem with permanent tax cuts is that, being permanent and all, they make government poorer. Without commensurate spending cuts, this leads to huge deficits. Tax revenue as a percentage of GDP is already at historical lows for the last half-century thanks to three decades of tax cuts and the Great Recession.

My bottom line is that the GOP's position isn't really "pro tax-hikes," as Harold Meyerson claims, since they're only calling for the restoration of a tax that funds Social Security. But this position is anti-growth -- in two ways. Today, we need a tax code that helps families deleverage. Spending cuts cannot help but do the opposite. In two years, we'll want a tax code with lower marginal rates, higher effective rates above the median tax payer, and smarter treatment of carbon emissions. Refusing to raise effective tax rates on any individuals prevents this kind of wholesale reform.