McConnell: Tax Cut Deal in December Didn’t Work
Yesterday, Dave Weigel caught Mitch McConnell making the novel statement that tax cuts don’t work.
“I, as you recall, negotiated in December an extension of current tax rates. They still had 59 Democrats and a 40-seat majority in the House when the vice president and I negotiated an extension of the current tax rates, and the president went around and said to do otherwise would be bad for the economy. Now, does anybody in this room think the economy is better now than it was in December? I don’t think so. So, look: Taxes aren’t going to be raised.”
That sounded to me like an admission that the tax cut deal hadn’t worked — which meant extending Bush rates plus adding sweeteners didn’t work. And that wasn’t what many Republicans were saying in January, when early job numbers pointed to a possible recovery. I asked McConnell to expand on that: If keeping the Bush tax rates wasn’t helping the economy any, why would we expect keeping those rates, or lowering them, would lead to growth?
“Well, if borrowing a trillion dollars in spending, largely on government, and over-regulating the economy, is good for the economy, we’d be in a boom time. So my view is: Quit doing what we’ve been doing. You certainly don’t want to raise taxes in the middle of the recession, which the president [agreed with] in December.”
It was a nice dodge. But McConnell was basically saying that the stimulus from the tax cut deal was negligible. And of course it was. Ezra Klein managed to point that out, in a brief aside that infuriated me. He said that the correct answer for McConnell would have been “the tax cuts were already in effect so the tax deal didn’t amount to much net stimulus,” but that would have been problematic for various reasons.
Well, yes! In fact MOST of the tax cut deal in December was extending current law! Almost all of it, save for some accelerated business expensing and the difference between the payroll tax cut and the Making Work Pay tax cut that it replaced. In an $800 billion bill, you had maybe $100 billion in net stimulus, if you’re very charitable about how much the business expensing will cost.
So why were Ezra Klein and all his buddies so gung-ho on the tax cut deal then? And why did he use a really imperfect measure that didn’t take into account current law?
If you look at the numbers alone, the tax cut deal looks to have robbed Republicans blind. The GOP got around $95 billion in tax cuts for wealthy Americans and $30 billion in estate tax cuts. Democrats got $120 billion in payroll-tax cuts, $40 billion in refundable tax credits (Earned Income Tax Credit, Child Tax Credit and education tax credits), $56 billion in unemployment insurance, and, depending on how you count it, about $180 billion (two-year cost) or $30 billion (10-year cost) in new tax incentives for businesses to invest.
But of course, most of what’s mentioned up there was merely an extension of current law. So the stimulus on net was negligible relative to the cost of the deal. And that cost, and the increase in the budget deficit it accompanied, set the stage for the major spending cuts we’re facing today. On net, there will be a fiscal contraction once this deal is over.
Elsewhere, Klein correctly observed that the bill was anti-contractionary rather than stimulative. But he went back and forth on it, vacillating from calling the bill a real coup to calling it imperfect but not too bad.
Setting aside his really pathetic take on Inside Job, where he decides that because Michael Lewis didn’t see the crisis coming nobody could, even though the evidence for this is a 2007 Lewis piece in Bloomberg where he criticizes people who did see the crisis coming, I’d say that this kind of stuff is what makes me mental. It was obvious to anyone looking at the numbers that there was little in the way of “stimulus” in the tax cut deal. In fact, what stimulus there was in there was sure to be eaten up by the anti-stimulus of federal budget cuts that the lack of 2011 appropriations or the debt limit increase in the deal heralded. But everyone moved forward like lemmings. The deal in December, in other words, was the problem.