February 6, 2012

Time to End "Temporary" Tax and Spending Policies

Charles Blahous

J. Fish and Lillian F. Smith Chair
Summary

Charles Blahous writes about tax and spending policies at Economics21.org.

Contact us
To speak with a scholar or learn more on this topic, visit our contact page.

This article excerpt by Mercatus scholar Charles Blahous originally appeared at Economics21.org:

No matter who is elected president this November, he would do himself, both political parties and the nation an enormous service if he began his term with a successful bipartisan effort to end the multitude of “temporary” tax and spending policies under current law. The artificial statutory “sunsets” of many such provisions cripple the efforts of lawmakers – on both sides of the aisle -- to craft sensible solutions to our fiscal problems. Without such sweeping reform, we should expect an indefinite continuation of the economic policy paralysis that has so infuriated the public in recent years.

Late last year I wrote a piece entitled “Why There is No Bipartisan Budget Deal,” in which I explained various substantive factors that render a comprehensive fiscal bargain so elusive. Too often the public and press are told that such a deal would be possible if only those on the other side of the aisle were not so intransigent. The reality is more complex; certain elements of current budget law make it very difficult for lawmakers of good faith -- but of different economic policy views -- to reach even modest compromises. The result is an impasse that serves neither side’s vision of optimal economic policy.

Under current law, various budgetary policies are scheduled either to change dramatically or to expire altogether within the next few years. The parties will often disagree on how exactly these policies should be extended going forward, while generally agreeing that the expiration threatened under law should not be allowed to occur.

Both parties agree, for example, that tax rates should not rise for all income taxpayers at the end of 2012. Yet under current law, they would. Our “current law” forecasts, therefore, show a much smaller deficit than we will almost certainly have. And at the same time, someone who advocates changing the law simply to reflect what both parties agree upon is accused of proposing to increase the deficit. This leads to grandstanding, brinksmanship, higher deficits, and economic uncertainty. It’s the worst of all policy worlds.

The situation has become so perverse that the Congressional Budget Office (CBO) now routinely publishes two alternative scenarios for the government’s fiscal outlook. One, the “extended baseline” scenario, reflects current law and shows relatively smaller deficits, but bears almost no relationship to what is likely to happen. The other projection -- the “alternative fiscal scenario” -- assumes that various current policies are not allowed to expire and shows disastrously high deficits. This latter scenario is closer to where we are actually headed, but puts scorekeepers in the awkward position of making predictions of how lawmakers will choose to override various current-law provisions.

The problems with employing “temporary” policies go beyond the understatement of likely deficits. They exert a crippling effect upon budget negotiations. A quick glance at CBO’s two fiscal scenarios shows why.

Continue reading 'Time to End "Temporary' Tax and Spending Policies."