Do We Need Yet Another Tax Loan?
By Sam Copeland on February 9, 2009 at 1:00 PM in Barack Obama, TARP, stimulus tax package
Sam Copeland on political strategy
I was struck by the paradox of two poll questions asked by CBS News during the first week of February:
In your opinion which will do more to get the U.S. out of the current recession: increasing government spending, or reducing taxes?
16% Increasing government spending
62% Reducing taxes
Would you approve or disapprove of the federal government passing an economic stimulus bill costing more than 800 billion dollars in order to try to help the economy
51% Approve
39% Disapprove
Logically, these poll results make no sense. The majority of Americans want a tax cut, and the majority of Americans want a stimulus bill that is a tax increase. While it is true that not every poll respondent holds this contradictory position, at least some do, representing confusion among the American people.
This confusion is understandable because politicians on both sides of the aisle continue to pander to the public by misleadingly labeling tax increases as tax cuts. The current stimulus package is no different.
Let me explain.
The current US federal budget is roughly $3 trillion. The stimulus package looks like it will be around $800 billion. So, before the stimulus package passes, Americans needed to pay $3 trillion to fund the government. After the stimulus package passes, they will need to pay $3.8 trillion. They won’t pay that extra $0.8 trillion this year, but they will have to pay for it as some point (with interest). This should be known as a tax increase.
It gets confusing because the stimulus package proposes “tax cuts” for some Americans. But these really aren’t tax cuts but tax loans. Basically, some Americans will have a reduction in taxes this year, but that reduction will have to be paid for in future years (with interest).
In order for it to be a real tax cut, there has to be a cut in government services or a change in the tax code so that someone else pays more taxes to make up for the lost government revenue. Without this, these so-called tax cuts are nothing more than what happens when you get cash back from your VISA card. It is a loan – not income – that you (or someone else if you default) will have to pay. And once that VISA is maxed-out, real economic troubles begin.
The failure to distinguish a tax cut from a tax loan has produced the mess we are in.
When George W. Bush gave “tax cuts” to his rich buddy friends without cutting government services – in fact he increased overall government spending – he was really giving Americans a tax loan. Bush’s tax loans amount to the largest tax increase ever.
When Arnold Schwarzenegger gave Californians a “cut” on their car taxes without cutting the corresponding $6 billion per year of government services – in fact he increased overall government spending – he was really giving Californians a tax loan.
In all fairness, we can see why politicians continue to offer us tax loans masquerading as tax cuts. It makes everyone happy in the short-term – we have lower taxes and all the government services we want. But in the long-run, as the VISA maxes out from purchasing junk at the mall and too many cash-backs, the bill becomes due and the economy freezes up.
As the stimulus package worked its way through Congress, we saw the “same old-same old” as each partisan attempted to pander to their constituencies resulting in what in all likelihood will be at best an ineffective measure.
Now, it may surprise you but I am in favor of a stimulus package. Sometimes it makes sense to take out a loan. For example, an individual is smart to take out a home mortgage (not necessarily at the peak of a housing bubble, however) or invest in job skills. A business is smart to take out a loan to increase productivity and efficiency or to expand to meet market demands.
There are times when a nation needs to take out a loan to invest in its future too. FDR was smart to run deficit spending to stimulate the economy out of the Great Depression (and it worked too, until the right-wing Supreme Court prevented him from implementing some of his programs). I think that the current recession-near-depression calls for similar measures. George W. Bush has left us in just this big of a mess.
The rub is this: God or the devil is in the details (depending if you prefer to quote a poet or an architect). It makes sense to increase spending – even if it is a tax loan – if that spending increases productivity and economic growth. Examples of such spending includes development of infrastructure, aid to small businesses (one of the main sources of jobs), and promoting favorable conditions for innovation and entrepreneurship. Nevertheless, we should always remember that such spending is not a tax cut but a tax loan that at some point will need to be paid back – hopefully at a point when our economy is stronger and we can better afford to pay it back.
Obama’s leadership on the stimulus package has demonstrated a lack of vision and communication skills. What he should have done is stated very clearly his vision of what is wrong with the economy and how to fix it. Part of that vision should have included the need to take out a tax loan to build our nation’s productivity and to jump-start the economy. To communicate his stimulus package, he should have then justified each spending item with a clear statement on how it meets economic goals.
Had he done this, there would not have been the hodge-podge political process that we saw with the current bill, Americans would be less likely to hold a contradictory opinion as evidenced in the CBS News Poll, and the Democrats would not be squandering their political capital.
by Ronald Scott
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