Mixed conservative reaction to tax deal caused by lack of clarity around deficit impact

For all the talk of the tax cut deal’s impact on the deficit, if Republicans can get spending cuts to pay for the $60 billion or so that it would cost to extend unemployment insurance for a year then the agreement will be acceptable to a majority of even the most conservative among them.

That explains the relative silence from the right over the past few days, as the left has erupted in anger at the deal and congressional Democrats have lashed out over being excluded in the bargain-making.

The White House attributed the conservative quiet this week to better discipline. But in truth, the Republican discontent among both lawmakers and outside groups has in fact been limited based on substance, and those who have publicly criticized the deal – such as Sen. Jim DeMint, South Carolina Republican – have softened their critique.

Some of this dynamic – where talk of spending and deficit impact in the tax deal has prompted questions about why the GOP is not more exercised about adding an announced $858 billion to the deficit – is due to disagreement and occasionally confusion over whether tax cuts add to the deficit or not.

Some of that may have been the reason that while groups like Tea Party Patriots and Tea Party Nation came out against the tax deal on Thursday, mostly around the issue of deficit spending, groups like FreedomWorks and the National Taxpayers Union announced their support.

“While changes to the compromise may mean we need to abandon our support, we support the framework of this compromise as we know it today,” wrote FreedomWorks CEO Matt Kibbe, in a letter to senators released Thursday evening.

“Ultimately, we want fundamental tax reform and serious spending cuts so Washington may be both less of a burden on the economy and also live within the means taxpayers are willing to provide. We believe this compromise puts us in a better position to achieve those goals than letting tax rates go up dramatically on January 1st, 2011.”

But staunch conservative columnist Charles Krauthammer blasted the deal in a Friday column, saying that President Obama, “despite a very weak post-election hand … got the Republicans to offer to increase spending and cut taxes by $990 billion over two years.”

“These are the same Republicans who spent 2010 running on limited government and reducing debt. And this budget busting occurs less than a week after the president’s deficit commission had supposedly signaled a new national consensus of austerity and frugality,” Krauthammer wrote.

None of the potential Republican presidential candidates have voiced an opinion on the tax deal, in probably the clearest indication of how politically thorny an issue it is.

Yet Republicans often add to the lack of clarity about the impact of tax cuts – and thus to the merits and demerits of a proposal such as this tax deal – with rigid ideological answers about how they are allowing hard-working Americans to keep more of their money.

The typical GOP stock answer ignores the impact on the budget deficit. Tax cuts do reduce revenues in the short term, thus widening the gap between money coming in and money going out. That increases the deficit.

But the conservative philosophy is that by “starving the beast” with reduced revenues, it forces Congress to cut spending to reduce the deficit, rather than increasing taxes. In addition, lower taxes are widely held to be a stimulus for businesses to expand and hire, decreasing unemployment and increasing revenue in the medium to long term.

That is why conservatives say that tax cuts – or as in this case the extension of tax cuts – does not grow the national debt. Growing revenues and shrinking spending, they argue, actually decreases the debt.

  • ron8072

    Mr. Matt Kibbe of Freedom Works says “Ultimately, we want fundamental tax reform and serious spending cuts”. Ultimately? I thought the election’s message back in November was “Immediately, we want fundamental tax reform and serious spending cuts. Ultimately means someday, not a fixed time in the future. I voted for immediately, which means now, right now. If typical senators and congress people got the message sent, they are ignoring it now. Same old, same old. Our legislative branch will not go willingly, we are going to have to drive them there with a bullwhip.

    • Joe Steel

      “I thought the election’s message back in November was “Immediately, we want fundamental tax reform and serious spending cuts.”

      No. That’s not it. The voters said they didn’t like the way the Democrats were doing things…so the Democrats are changing their ways. They’re not going to accept the Republicans’ terrorism and Obama’s appeasement.

  • gringott

    I have been asking this question for a while now; who does the earnings from labor belong to? The laborer, or the government? If it belongs to the government, then we are not free men, we are slaves.

  • gedouglas

    I agree with Mr. K almost all of the time but, in this case he is buying into one of the basic principles of the Marxism ‘all money belongs to the government for them to distribute as they see fit’. The national conversation regarding this issue contains a lexicon straight out of “1984”. First, we are not not talking about tax cuts. We are, in reality, talking about allowing the tax rates to remain the same as they have been for the last 10 years. In affect, by not allowing the current tax rates to expire, we won’t face tax increases. Second, this idea that by maintaining the current tax rates the government somehow “adds to the deficit” or has to borrow money to pay for it is ridiculous and only plausible if you accept the basic wealth re-distribution and communal tenant of Marxism. Not raising taxes simply means the government is taking in less revenue (and there is an argument to made that lowering taxes will actually increase revenue). The only way it adds to the debt is by the government spending more of YOUR money that they don’t yet have by assuming it is theirs to take. So, it’s not a deficit problem it’s a SPENDING problem. It’s like me spending 100k a year on a 50k salary. I would obviously be in debt and have to borrow and borrow and borrow until I realized duh, maybe I should STOP spending more than I make. Lastly this class warfare the leftisit are promoting by demonizing anyone making over 250k by accusing them of greediness and being morally corrupt is again right of the Marxist lay book. The idea that not raising taxes on higher income earners is somehow giving them something is doublespeak. Some democrat commie congressman named Ellison calls tax cuts for the nation’s top income earners “disturbing” and claims these “giveaways” will only contribute to “funding our own demise.” Allowing Americans to keep the money they earn is somehow viewed as the government giving away something? Exactly what is the government giving them and where did they get it to give? And exactly who did these so called rich people steal all this evil money from? The conservative pols and pundits need to change the lexicon surrounding this conversation about money, taxes, and debt so it reflects the truth about constitutional principles of limited government, taxation, and individual responsibility. Government, especially one run by Marxists and democrat socialist, has become nothing more than a strain of mafia developing new and improved ways to steal, manipulate and abuse citizens of this country. To be a democrat in America anymore is to be truly un-American. A topic for a rant at another time.

  • Swen

    ““I think that if you talk to economists, both conservative and liberal, what they’ll say is the problem is not next year. The problem is, how are we dealing with our medium-term debt and deficit, and how are we dealing with our long-term debt and deficit?,” Obama said.”

    So just give that ol’ can another kick down the road. ‘No need to worry about the current debt and deficit, we can let someone else worry about paying the bills later.’ Isn’t that sort of thinking how we got in this mess?

  • loudog

    On the often repeated myth that tax cuts pay for themselves;

    The chair of CEA from 2003-2005, Greg Mankiw: “Some supply-siders like to claim that the distortionary effect of taxes is so large that increasing tax rates reduces tax revenue. Like most economists, I don’t find that conclusion credible for most tax hikes, and I doubt Mr. Paulson does either.”

    He’s right! Hank Paulson, Bush’s last Treasury Secretary, doesn’t: “As a general rule, I don’t believe that tax cuts pay for themselves.”

    That opinion was shared by Andrew Samwick, Chief Economist on Council of Economic Advisers, 2003-2004: “No thoughtful person believes that this possible offset [the Bush tax cuts] more than compensated for the first effect for these tax cuts. Not a single one.”

    and Edward Lazear, chair of the Council of Economic Advisers in 2007: “I certainly would not claim that tax cuts pay for themselves.”


    Bruce Bartlett, staff economist for Representative Jack Kemp:
    “We believed that our tax plan would stimulate the economy to such a degree that the federal government would not lose $1 of revenue for every $1 of tax cut. Studies of the 1964 tax cut showed that about a third of it was recouped, and we expected similar results. Thus, contrary to common belief, neither Jack Kemp nor William Roth nor Ronald Reagan ever said that there would be no revenue loss associated with an across-the-board cut in tax rates. We just thought it wouldn’t lose as much revenue as predicted by the standard revenue forecasting models…”

    I think that’s overly optimistic (recovering a third), but even that is a far cry from self-financing.”


    • krjohnson

      You’re right on with that quote from Bruce Bartlett. Whether or not the tax cuts pay for themselves have to do with which side of the Laffer Curve they are on in the first place (google “Dan Mitchell Laffer Curve”). Raising them, though, will always bring in less revenue than projected. If you’re on the wrong side of the curve you’ll actually lose revenue. But the real question is whether or not the lower tax rates will stimulate growth.

      If we lower taxes but increase spending (which this compromise does) we’ll end up borrowing more money, printing more money, and we’ll actually impede growth. We’ve got to lower taxes and spending or we’ve got problems.

      • loudog

        I don’t disagree that spending needs to be cut but tax rates have already been cut beyond what we can afford when we have 14 trillion in debt to pay off, imo. The rates in the 90’s also accompanied record economic growth.
        Here’s what lower tax rates did for corporations from 2005-2007.


        • krjohnson

          Well, that has do with the fact that we have the HIGHEST corporate tax rates in the industrialized world. I believe the present rate of tax on corporate income was adopted in the Tax Reform Act of 1986. There wasn’t any cut.

          There have been quite a few fortune 500 companies that have actually left the country in order to protect their profits. How many fortune 500 companies were based in the US?
          2007: 162
          2008: 153
          2009: 140
          2010: 139
          If we don’t lower the rate we’re going to continue the downward spiral. Regulations like Sarbanes-Oxley, which has reduced the number of companies going public to a trickle, don’t help those numbers either.

          IMO, the corporate tax is a vicious form of double taxation since the profits that are taxed will ultimately be either payed out in employee compensation, paid out in dividends or reinvested in the company. Two of those three options will be taxed anyway and the 3rd will directly grow the economy and increase the tax base.

          • loudog

            But revenue should’ve grown with tax cuts, theoretically, but they didn’t. I agree we should have a lower flat rate though.