Cutting Spending To Obtain Tax Hikes Is Nuts

A blog about business and economics.
Dec. 13 2012 11:18 AM

Cutting Spending To Obtain Tax Hikes Is Nuts

With Jonathan Chait's revised statement of his position on raising the Medicare eligibility age, I think I now understand what he's saying and why he's wrong. He thinks Obama can get about $800 billion of new revenue out of the GOP without making any big concessions. I agree. He thinks that if Obama wants more revenue than that, he'll have to make some big concessions. I agree. And he thinks that of the big three concessions that could be made—raising the Medicare eligibility age, slashing spending on poor people, or big cuts to Social Security—that raising the Medicare eligibility age is the least bad concession. I agree with that too. So he says Obama should do it. I disagree.

The key disagreement? Chait writes:

I place a pretty high value on more revenue.
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That's nuts. The reason you might want tax revenue is so as to finance useful spending. Cutting useful spending in order to obtain extra tax revenue is a crazy idea. And I want to be clear that this doesn't hinge on any unusual economic doctrines. It's a straightforward consequence of the actual politics of fiscal policy in the United States as well explained in (for example) Chait's book.

The way it goes is this. When Republicans run the show, they enact gigantic deficit-financed tax cuts with the scale of tax cuts tempered to an extent by free-floating fear of public sticker shock and by the business community's concerns about the extent of sustainable deficits. When Democrats run the show, they enact legislation on a pay-as-you-go basis where new programs have to be offset by tax hikes or spending cuts. When government is divided, the parties fight and bargain. These are laws of politics, not of economics, but they're no less binding. But the impact is that during the "fight and bargain" phase of the game, the priority for sensible people should be to preserve valuable spending not to maximize tax revenue.

That's because the political imperative for Democrats to undertake new initiatives exclusively in the PAYGO context floats freely from the baselines. Republicans fought the Affordable Care Act furiously because it raised taxes on the rich, and they were given powerful tools of political combat from the fact that it reduced Medicare spending but it had to do those things because it had to meet the PAYGO test. And it would have had to meet that test even if the 2001 and 2003 tax cuts had been somewhat smaller and thus the deficit had been somewhat lower.*

Obama's proposal includes $1.6 trillion worth of tax hikes that savvy Democrats think are politically viable. If Obama doesn't get $800 billion of them, and in exchange doesn't agree to cut Medicare, then that makes it easier not harder for Hillary Clinton to enact a universal preschool program. Obama's legacy to her administration would include $800 billion worth of politically viable tax hikes she can try to use as pay-fors, and even leave open the possibility of a seniors-for-kids swap in which spending is redirected away from 66 and 67 year-olds to the more valuable target of 2 and 3 year-olds. If Obama enacts a "more responsible" budget with higher taxes and lower spending, that doesn't take Hillary off the hook to be "responsible" herself, it just makes it more politically difficult for her to come up with "responsible" offsets for her agenda.

* Correction: This post originally said the deficit would have been "somewhat higher" had the tax cuts been smaller, which is backwards.

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