The Coburn Challenge: Cut Spending Through the Tax Code as Well as Through the Budget

One of the key reasons why the U.S. has a massive budgetary problem is a core Republican belief that no provision of the tax code that reduces revenue is unjustified or harmful economically. Consequently, all tax cuts are per se good regardless of the economic or financial circumstances and all revenue-reducing provisions of the tax code must be preserved indefinitely; any effort to eliminate any of them is considered a tax increase and an impermissible violation of the tax pledge signed by almost every Republican in Congress and rigidly enforced by Americans for Tax Reform (ATR) and its Tea Party allies.

As I explained last week, Sen. Tom Coburn (R-OK) has taken issue with ATR’s uncompromising position. While he believes, as all Republicans do, that spending needs to be cut as much as possible, Coburn understands that revenues cannot be kept completely off the table as ATR and the Tea Party insist.

First, the deficit and the debt are problems in and of themselves and it’s dangerous to put off dealing with them until Republicans get control of the House, the Senate, and the White House – and have a filibuster-proof majority in the Senate as well. That’s what it would take to solve our budgetary problem 100 percent with spending cuts. Moreover, that scenario is absurdly optimistic because Republicans had all those things in the early 2000s and didn’t cut a nickel of spending; instead they loaded the budget with pork and enacted a new entitlement program, Medicare Part D, which will add $55 billion to the deficit this year alone.

Second, House Republicans are foolish and arrogant to act as if they control the entire government and can insist on “my way or the highway” on every budgetary issue. We live in a democracy and the Constitution requires agreement between the Republican House, the Democratic Senate and a Democratic president to change the law. Unfortunately, many of the newly-elected House Republicans must have slept through civics class because they talk as though we live in a parliamentary system in which the lower house of the legislature effectively controls the legislative process.

Furthermore, it would be one thing if the great budget issues under discussion at least had the potential for major savings. But those that Republicans continually focus on, such as defunding National Public Radio, are trivial in dollar terms. They resist putting big ticket programs such as national defense and Social Security on the table. And although Republicans say they are primarily motivated by concern for the deficit, they adamantly oppose even talking about revenues.

The truth is that Republicans don’t care anything about the deficit. They made that abundantly clear when they controlled Congress during the dismal George W. Bush years. What all of the current budget discussion is about is defunding programs that benefit Democratic constituencies and if possible destroying institutions, such as labor unions, that historically support the Democratic Party. In other words, it’s all about political power; any concern for the deficit is purely for show, window dressing to disguise the true Republican agenda.

A few days ago, an unnamed senior House Republican aide let the cat out of the bag, telling reporter Brian Beutler, “This debate has always been about discretionary spending – not autopilot ‘mandatory’ spending or tax hikes.” In short, it has nothing whatsoever to do with reducing the deficit.

Just to remind people, we had budget surpluses not too long ago. Bill Clinton and a Democratic Congress bequeathed a surplus of 2.4 percent of GDP to the Republicans. They promptly dissipated it with tax cuts that reduced revenues by about 2 percentage points of GDP, increased domestic discretionary spending by about 0.5 percent of GDP, and defense spending by about one percent of GDP.

As noted earlier, Republicans made the problem with entitlement programs worse by adding a new unfunded benefit to Medicare just to buy the votes of seniors in 2004. They also repeatedly postponed cuts in Medicare physician payments that they themselves had enacted during the Clinton administration. While Republicans are not responsible for all of the increase in mandatory spending in the 2000s, they are guilty today of insincerity on the budget when they focus exclusively on domestic discretionary spending while exempting defense and entitlements from cuts.

Republicans say they will get around to entitlement reform one of these days when they have finished cutting programs for the poor and the unemployed. But any discussion of revenues will remain off limits.

One argument that Republicans always make is that tax increases are unnecessary because revenues are projected to rise from 14.8 percent of GDP this year to 19.9 percent in 2014. But that is only because the Congressional Budget Office is required to assume that all existing provisions of law will be implemented on schedule. Since the Bush tax cuts are scheduled to expire at the end of 2012, this accounts for almost all of the projected revenue increase.

But as we saw last year, Republicans will do everything in their power to make sure that all expiring tax cuts are extended indefinitely; indeed, they want them to be made permanent. And ATR insisted that failure to vote for an extension of the Bush tax cuts in December would constitute a violation of the pledge. It is a 100 percent certainty that it will take the same position next year when Republicans will again insist that failure to extend the Bush tax cuts would constitute the largest tax increase in history.

Thus Republicans want their cake and eat it, too. They want to imply that they are fiscally responsible by taking credit for a rise in revenues that is the main factor in the projected improvement in the deficit after 2012, but at the same time they oppose allowing any tax cut to expire. Moreover, Republicans have imposed no moratorium on their continuous advocacy of still more tax cuts. Virtually every Republican supports a cut in the corporate tax rate, while adamantly refusing to name a single provision of the tax code that could be eliminated to pay for it. They may say they favor tax reform, but in practice they don’t; it’s just an excuse for still more tax cuts.

Sen. Coburn is not among these Republican budgetary hypocrites. He knows that there are many provisions of the tax code that are just as unjustified as those on the spending side of the budget. Indeed, there are many provisions, such as refundable tax credits, that are literally spending in every meaningful sense of the term. It would not only help our budgetary situation to clean these loopholes out of the tax code, but it would improve economic performance by eliminating the bias that causes investment to be channeled out of areas governed by the market into those directed by government through the tax code.

While some people would favor wholesale elimination of the $1.1 trillion of “tax expenditures” now part of the law – the Simpson-Bowles budget commission made that recommendation – most economists would be more selective. After all, even if one takes the position that all tax expenditures are unjustified, a position I do not hold, they are not all equally unjustified.

Sen. Coburn has chosen to take on what he believes to be the single most unjustified tax subsidy: the tax credit for ethanol production, which gives producers 45 cents per gallon in the form of a credit that lowers federal revenues by about $6 billion per year. Said Coburn when introducing his legislation:

“As our economy begins to grow again, we need to bring our budget under control through a combination of smart cuts and smart investments. Cutting yet another subsidy to big oil that is making big profits is smart policy. Rather than underwriting ethanol subsidies that are causing food prices to skyrocket, we should be supporting American innovation in more sustainable alternative fuels the results of which will help create jobs, lower energy costs and strengthen our national security.”

Coburn cites a recent U.S. Government Accountability Office report, which found that the ethanol credit “is largely unneeded today to ensure demand for domestic ethanol production.” Nevertheless, in a March 29 letter, ATR immediately attacked Coburn for violating the tax pledge and promised to oppose him if he offered an amendment to repeal the credit.

Coburn wrote back to ATR making a profoundly important point. The case for spending cuts is that the government should reduce its impact on the private economy. But tax subsidies also distort private economic decisions. Conservatives can’t only demand cuts in direct spending while giving every tax subsidy a pass, as ATR effectively does. “Continuing to issue blanket defenses of all tax expenditures is a profoundly misguided embrace of progressive, activist government and a strategy for tax complexity, tax deferment, excessive spending and unsustainable deficits,” Coburn said.

Every Republican is frightened to death of Tea Party opposition in the primaries next year and know that being charged with violating the tax pledge would probably lead to loss of the Republican nomination even if the result would be election of a Democrat. So they keep their mouths shut no matter what misgivings they have about the Tea Party/ATR strategy of only cutting domestic discretionary spending, giving a pass to defense and entitlements, and refusing to consider higher revenues under any circumstances no matter how big the deficit gets.

Tom Coburn can afford to challenge this new Republican orthodoxy because his record of fiscal conservatism is unquestioned and because he has already announced his retirement at the end of this term. That means he can’t be bullied the way other Republicans routinely are to go along with the Tea Party agenda no matter how ridiculous. Anyone who genuinely cares about our national finances should support Dr. Coburn in his effort.

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