Tax Cut Rorschach

Tax cuts are in the eye of the beholder. The House voted today 234 to 188 to extend the Bush tax cuts for people earning less than $250,000 a year. The vote was mostly split along party lines, with Democrats voting for the extension and Republicans voting against it. Democrats say they’re voting to lower taxes and accuse the Republicans of opposing tax breaks for ordinary Americans. But Republicans say they’re the ones who are voting against tax hikes, and claim the Democrats are actually raising taxes.

It’s a matter of perspective, of course. The fact is that in 2001 and 2003, the Republican Congress voted to phase in lower tax rates. Because Congress couldn’t come up with spending reductions to offset these tax cuts, Congress set the cuts to expire at the end of this year in order to get around rules meant to keep it from increasing the deficit. That means that if Congress does nothing in the next month, taxes will go back up to pre-Bush levels. So whether this is a vote to raise or lower taxes depends on what you think the baseline is—whether the relevant comparison should be what the tax rate is today or what it will be next year if the law isn’t changed—and what you think the rate should be.

So Democrats say that by extending tax cuts for people making less than $250,000, they are lowering taxes compared to what they would otherwise be. But Republicans say that by not extending the tax cuts for people making more than $250,000 Democrats are effectively increasing taxes compared to what they are now. Democrats can say that Republicans are opposing lower taxes for ordinary Americans, while Republicans can say that by not extending the tax cuts for all Americans Democrats are raising taxes on the wealthy.

This is all stuff for campaign fliers and attack ads. Both parties’ calculations are largely driven by how their votes could be portrayed by the political opposition. The real question is, what should the tax rate be? Extending the tax cuts for anyone will make the deficit substantially larger—dwarfing any savings that might come from cutting earmarks or freezing the wages of federal employees. The truth is it’s essentially impossible to cut discretionary non-defense spending enough to offset extending the tax cuts. Roughly speaking every dollar we lower taxes has to either come out of Medicare, Social Security, or defense—the things that most of us don’t want to cut—or add to our growing deficit. And that’s something that neither party seems to want to acknowledge.