The GOP, Tax Cuts and Keynesian Rhetoric

Posted: Apr 19, 2012 6:46 AM
Rep. Eric Cantor is leading House Republicans in a push for a temporary small business tax cut. President Obama has promised that he will veto the legislation if it makes it through the House and gets approved by the Senate. This might be good policy, but it's an example of how the GOP sometimes dangerously delves into Keynesian policy.

At its most distilled, Keynesianism is the use of fiscal policy to attempt to temporarily boost economic growth using deficit spending. The Small Business Tax Cut Act is exactly this: a one-year tax cut for small businesses without any reciprocal tax increases or spending cuts to make up for lost money. For a party that decries the Keynesianism brought to the economy by the Obama Administration, Rep. Cantor should be careful.

Republicans haven't been altogether hostile to Keynesianism in the past, however. Greg Mankiw, an economist at Harvard University and a self-labeled "New Keynesian," was a prominent economic advisor to George W. Bush and, in May 2008, George W. Bush issued a $168 billion tax rebate in part to try to stimulate the economy.

If a tax cut is a good idea, Republicans should push for it on the merits and make it permanent. The particular argument that a tax cut is particularly necessary, and would be temporary, to stimulate the economy is something that Republicans needn't resort to. In a time of massive deficits, mounting debt and a need for budgetary restraint, deficit-financed tax cuts undermine the GOP's claim to fiscal conservatism.

There are well-founded economic arguments that deficit-financed temporary tax cuts can boost economic activity and growth. Republicans can very often fall prey to the "do something" form of immediate politicking that Washington is prone to, especially when it comes to tax cuts. Make no mistake, though: a policy of temporary, deficit-financed tax cuts designed to stimulate the economy is a form of Keynesianism.