MONEY

Tax cuts and Medicare could kill the economy

Here’s part two of my extended interview with renegade supply-side economist Bruce Bartlett, including some thoughts on Medicare that might just scare the pants off you. See here for part one, and here for the less-wonky version that’s running in Money’s November issue.

David Futrelle: As one of the original supply-siders, you worry that supply side economics had been reduced to little more than a religion of tax cuts, tax cuts, and more tax cuts.

Bruce Bartlett: That’s right. A lot of what’s wrong with conservative economists today is that they still act as if we’re living in 1980 — as if we’re facing inflation and massively high tax rates — and they’re advocating policies that were perfectly appropriate for 1980 in an environment in which they make no sense.

A lot of conservative economists, practically all of them except me, think tax cuts were the way we should have gone back in February, rather than with fiscal stimulus. And I keep saying, “What good are tax cuts when people don’t have any income to tax? When there are no capital gains? When corporations have no profits?”

DF: Of course, nobody pounded tax cuts quite as hard as George W. Bush.

BB: He got it all wrong. A critical point about supply side economics that’s gotten lost over the years is that it’s not tax cuts per se that are good for the economy. Rather, it’s cuts in the marginal tax rate, the tax on each additional dollar you earn, that matter, because what you want to do is to increase the incentive to earn additional income.

So tax cuts that don’t affect incentives are essentially worthless. They’re just giveaways of money. A a huge percentage of Bush’s tax cuts in were for child credits and tax rebates, not reducing tax rates. And all of Bush’s tax cuts had an expiration date on them. Supply-siders argue that temporary tax cuts don’t do any good because it takes people time to change their behavior.

A lot of conservatives today still don’t get it right. They think that any tax cut is better than government spending. but a lot of tax cuts today essentially are government spending: We’re just mailing out checks and calling them tax refunds.

DF: You’ve recently been quite critical of what you call the GOP’s misplaced rage.

BB: What they’ve done is to take all of Bush’s mistakes and blame them on Obama. Conservatives look at the deficit, and they somehow or other convince themselves that it would have been zero if McCain had won. Now, the Congressional Budget Office projected a deficit for this year of $1.2 trillion. They projected this in January, before Obama took the oath of office. They’ve since raised the estimate to $1.6 trillion. If you want to blame Obama for that $400 billion, that’s fine, but if you go through the CBO’s accounting, the bulk of it is because the economy has been even worse than they thought it was going to be in January, and that reduces tax revenues and increases spending automatically.

And what has John McCain said since election day that would lead you to believe that he has better ideas about what we should be doing? He’s been pretty quiet, if you ask me.

DF: What do we do once we’re out of this crisis?

BB: The longer-term problem is the aging of society and uncontrolled entitlements. I’m afraid that when we reach the point where everybody finally recognizes that we need fiscal tightening, it’ll be impossible to cut spending because it’ll all be going to the old people, who command a lot of votes, and who will veto any big cuts.

That leaves us with one and only one alternative, which is to raise taxes. The common conservative view today is that all tax increases are equally bad. I honestly feel that conservatives would rather default on the debt than raise taxes.

But there are better and worse ways of raising taxes. What we need a is value-added tax. It’s a consumption tax that has very little negative effect on incentives, meaning that you can raise a lot of revenue at relatively low economic cost.

But conservatives have the attitude that’s the worst possible tax precisely because of its virtues. They think that if we make it too easy for the government to raise revenues, then they’ll raise too much revenue, and the next thing you know we’ll be like Europe. It’s just total [expletive deleted] nonsense. Have these people ever been to Europe? The people there are not exactly living in abject poverty and slavery.

DF: It seems much more likely that the Obama administration will raise taxes on the rich.

BB: Not raising taxes is simply not an option. If the Republicans refuse to put any tax increase on the table, the Democrats will to raise taxes in the way that suits them: They’ll raise the capital gains tax, they’ll raise corporate taxes, they’ll raise taxes on the so-called rich. The only thing that can forestall that is if you put a better tax on the table.

DF: Of course, in the days of multi-million-dollar bonuses, the rich certainly do have plenty of money to tax.

BB: The big mistake of the left is that they assume you can raise these rates on the rich and the rich won’t react. Now I’m not saying that all these people will go on a John-Galt-type strike. But they will put a lot more effort into tax avoidance and tax evasion.

Let’s say Obama raises the top rate back up to 39.6% — which happens automatically when the Bush tax cuts expire. Add on another few points to pay for health care, and we’re back up to 45%. If you’re a rich person, all you have to do is essentially incorporate, and then you’ll pay only 35 percent. That won’t do anyone any good except tax lawyers.

DF: Obama says we can’t solve our fiscal problems without health care reform — which he says will cut the costs of health care. Do you agree?

BB: I voted for Obama. I believed all that stuff he said about health reform being essential to budget reform, because it’s true. But I’ve been disappointed. When he put his plan together it didn’t have anything to do with reducing health care costs. Of course, Republicans have no reforms of their own to push. They’re just against whatever the Democrats are for. Period. That’s just irresponsible.

Medicare is the biggest fiscal problem we have. I’ve always thought or at least hoped that the one way you might be able to get control of Medicare is if you did it as part of a package that more or less created a national health insurance program. You’re not going to be able to do a national health insurance program as generous as Medicare is, and so what you might be able to do is to reduce Medicare benefits to the same level as everybody else under the new plan.

DF: That idea isn’t going to go over well in today’s political climate, to put it mildly.

BB: I think it’s crazy that the Republican party is trying to position itself as the party of Medicare, saying we can’t cut one penny of it. That’s insane. Cutting Medicare is exactly what we have to do.

For more Bruce, see his blog, his Forbes.com column, or his provocative new book, The New American Economy.

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