J. T. Young

Liberals find themselves in a tax trap. A tax bill trap, that is. While the recently enacted tax bill certainly has elements with which conservatives can rightfully disagree, there are far more – and far bigger – parts for liberals to dislike. Following the adage “the enemy of my enemy is my friend,” conservatives should love this legislation.

The most obvious problem for liberals with the extension of all the Bush tax cuts for an additional two years is the bipartisan mention of its positive economic effect. This has become the consensus selling point for this legislation.

The question that such commendation raises is: When will less economic growth be the desired outcome of fiscal policy? Not for the foreseeable future for sure.

This is a particularly acute problem for liberals because the yardstick by which they measure the economy’s strength is the unemployment rate. This is the reason liberals historically have been willing to trade inflation for increased employment. Today, despite a growing list of positive economic indicators, the Left sees the current economy as unimproved because of high unemployment.

Unemployment is also the indicator that most believe will be the last one to show a rebound. Both the Congressional Budget Office and the Federal Reserve recently released projections showing a strengthening economy, but persistently high unemployment for the next few years. CBO sees the unemployment rate as being 9 percent next year and averaging 6.7 percent over 2012-2014. The Fed is even more pessimistic – projecting unemployment at 9.1 percent next year, 8.2 percent in 2012, and 7.4 percent in 2013.

So the question to liberals becomes: When will lower growth and higher unemployment be acceptable? With such unemployment estimates, it is hard to imagine the answer coming until well after the current two year extension.

The second liberal problem is that implicit in the embrace of the current tax bill is the admission that the earlier spending stimulus bill was a failure. So not only has conservatives’ policy prescription won, theirs has lost.

In the public’s mind, had the spending stimulus bill worked, the country would not be at this juncture now. The proof lies again in liberals’ favored economic variable. Had unemployment gone down, or even remained the same, they could have attempted to make some case for either more spending or higher taxes. But it did not, so liberals’ favored fiscal tools are distinctly out of favor.

A third problem for the Left is that the earlier spending stimulus and the current tax preservation proposal are roughly equal in size. The former was roughly $800 billion and the latter $860 billion. This equivalence sets up an obvious comparison in the public’s mind. Should the economy gain momentum and unemployment fall over the next two years, it will be hard to convince the public that this is simply coincidental.

Fourth, liberals see conservatives’ tax agenda taken off the budget table in one stroke. While it is receiving bipartisan economic commendation, it is also receiving bipartisan budget insulation. With public concern over rising deficits, liberals must watch as their favored fiscal tool, federal spending, bears the brunt of this concern.

All this comes on top of what was already a weak liberal argument for higher taxes. We need look back only three years to put the lie to the claim that higher taxes are necessary budget-wise. In 2007, the year before the recession, tax revenue equaled 18.5 percent, while the deficit was just 1.2 percent, of GDP.

This level of revenue came despite the Bush tax cuts being in place and the AMT being “patched” to exclude the large majority of Americans. And it came with less than robust economic growth. The economy had 2.7 percent real growth in 2006 and just 1.9 percent in 2007. Neither high taxes nor an explosive economy were needed to effectively negate the deficit – it only took controlled spending.

So what have liberals lost in the recent tax debate, besides the bill itself? They have seen the most powerful justification for fiscal policy – economic growth – ceded to conservatives. They have seen conservatives’ policy put in position to reap the credit for any cyclical recovery.

They have seen lower taxes given a two-year opportunity to firmly establish a cause/effect relationship with the public – and if you doubt that potency, then just recall the New Deal is still incorrectly credited with ending the Depression. And liberals have seen the spending they favor put at the mercy of the nation’s fastest growing issue: rising federal deficits and debt.

And all this comes when conservatives already had a strong case that lower taxes are economically better and still fiscally sound.

Conservatives may have problems with this bill, but they are inconsequential compared to the threat this legislation poses to liberals – now and over at least the next two years.


J. T. Young

J.T. Young was Communications Director in Office of Management and Budget (2003-2004) and Deputy Assistant for Tax and Budget Policy at the Department of Treasury (2001-2003) in the Bush Administration.