Maybe you remember David Stockman. He was the Director of the Office of Management and Budget under President Reagan. Mr. Stockman wrote an op-ed piece for the New York Times last week which raises a significant question about the relationship between tax cuts and the national debt. The theory goes that tax cuts pay for themselves and, in fact, generate more revenue for the government than if they had not been enacted. If we dig a little deeper we can see that this “tax cuts equals increased government revenue” is based on supply-side economics. According to Martin Wolf, chief economics commentator for the Financial Times, “Supply-side economics said that one could cut taxes and balance budgets because incentive effects would generate new activity and so higher revenue.” Wolf went on to say that if supply-side economics followed the concepts underpinning the theory one could promise lower taxes, lower deficits, and unchanged spending. What’s not to like about such an idea.
Time has shown us that supply-side economics happens to be one of those pipe dreams that come along every so often. We want to believe it because it appears to have nothing but benefits. Intuitively the theory makes sense because it is easy to think that if we have more money to spend, it will generate more business growth and expansion, more revenue is generated for the government, and everyone is happy. Stockman was a strong proponent of supply-side economics in the 1980’s when the theory was introduced but now insists that “if there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing.” I am not trying to suggest that Republicans are solely to blame for our fiscal mess because both parties have been in and out of power as the national debt increased. However, I am trying to suggest that tax cuts do not contribute to the fiscal health of our country at a time when the national debt is unsustainable.
As it turns out, there are economic incentive effects following tax cuts. However, Wolf points out that they are not large enough to offset the fiscal impact of the tax cuts. That means we get deeper and deeper into debt if tax cuts are not offset by spending cuts and/or increased revenue. According to Stockman, we have dug ourselves one gigantic financial hole and “The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing….” He blames this on “the decaying fruit of bad economic policy.”
Alan Greenspan, former Federal Reserve Chairman, is on record as saying that extending the Bush tax cuts without paying for them could be “disastrous” for the economy. He said that tax cuts do not pay for themselves by generating revenue and productivity and calls it “tax cuts with borrowed money.” Even Eric Cantor (R-VA) acknowledges that extending the tax cuts will sharply increase the national debt. But he wants to extend the tax cuts anyway.
I do not like paying taxes any more than the next person but we are sitting on a $13 Trillion debt. There is no easy solution, no free lunch, and no painless exit from this mountain of debt. At this point, how we got here is irrelevant. How we address the issue is not. I realize that good reasons exist to extend these tax cuts but there will always be some good reason to avoid the sacrifice necessary to address the debt. I think it is time we bit the bullet and start paying down the debt so our children can have as good of a world as we have been so fortunate to enjoy. I am going further than the Democrats intend to go because I think all of the Bush tax cuts should be allowed to expire so we can stop borrowing foreign money and pay down our debt. Let us not kick the can down the road.