Scot Lehigh

The duel over tax breaks

President Obama has just kicked off round two of the tax-cut debate — and that means it’s time for some big-picture perspective on the duel of ideas that will characterize this campaign.

The GOP won round one back in the 2010 lame-duck session, when hard-bargaining Senate Republicans made extension of all the Bush-era tax cuts the price of progress on the president’s other priorities. With that extension set to expire at year’s end, Obama now hopes to use the issue to portray himself as the champion of the middle class and to paint the GOP as concerned primarily with protecting the well-to-do — all while changing the campaign subject from another disappointing month of job creation.

Thus on Monday, the president called on Congress to extend the breaks for those making less than $250,000 for another year, even as the White House vowed to veto any bill that also extends the breaks for incomes above that level.


This is obviously a political maneuver. Yet it’s also a legitimate way to highlight the two parties’ competing political priorities and economic ideas. Obama believes the economy is suffering from inadequate demand, and that the best way to create jobs is to put money into middle-class pockets so consumers will spend more, which will, in turn, cause businesses to hire more to produce more products.

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Republicans profess to see the unemployment problem as one that must be solved by restoring private-sector confidence, in part by providing a tax climate that induces business executives to invest more in plants and equipment and to increase hiring. Contending that the route to recovery runs through entrepreneurs and small-business types who earn upwards of $250,000, the GOP insists that the Bush tax cuts must also be extended for those incomes as well.

That economic outlook suffers from several problems. For one, absent increased demand for a company’s products or services, it’s hard to see why firms would step up hiring, no matter how much extra revenue they have. Secondly, the economy has performed considerably better in eras when far higher marginal rates prevailed. And though some conservative commentators predicted in 2010 that extending the upper-income cuts would give the economy a big shot in the arm, that hasn’t proved the case.

There’s also a problem with Obama’s proposed tax-cut extension, however: Although extending the tax cuts for the middle class should help stave off an economic contraction, it’s unlikely to give the laggardly economy a boost, since keeping those rates merely maintains the status quo. Viewed strictly as a matter of economic stimulus, Mitt Romney can certainly argue that his call for an additional 20 percent income-tax reduction for all earners would provide a bigger boost.

But that brings us to the dots Romney ignores and the president didn’t fully connect on Monday: The effect of permanent tax cuts on the federal deficit. With the economy still struggling, more short-term deficit spending shouldn’t be a big concern. The problem for Romney, however, is the long-term budgetary effect of his new tax cuts. They would cost some $5 trillion over 10 years, or about a third more than the Bush-era breaks that helped blow a hole in the budget. And the Republican nominee-to-be hasn’t offered a remotely realistic plan to pay for them.


In a time of big structural deficits, new tax cuts mean one of four things: exploding the deficit even further, raising other revenues to offset the new breaks, or cutting projected spending on entitlements like Medicare and Medicaid much more deeply than would otherwise be necessary. Or some combination of the three. Unless one makes preposterous assumptions about the rate of economic growth, there’s just no way around that reality.

No wonder, then, that Romney hasn’t offered any meaningful details on how he’d pay for his new tax cuts.

In fairness, Obama has also indulged in some fanciful thinking: The notion that the long-term deficit can be tamed without more tax revenue from anyone making less than $250,000. That’s simply not realistic. That said, given the size of the new tax cuts Romney has proposed, it’s fair to judge the Republican candidate guilty of peddling far bigger fiscal fantasies.

Campaigns, of course, have always been a time when candidates try to lead voters down the primrose path. And that’s why informed voters should be wary of promises that simply seem too good to be true.

Scot Lehigh can be reached at
lehigh@globe.com. Follow him on Twitter @globescotlehigh.