Libertarian Support of the Tax Compromise

Why libertarians should be uneasily in support of extending the Bush-era tax laws

Yesterday, the Senate passed an $858 billion bill that extends the Bush-era tax rates for another two years and extends unemployment benefits another year. As the bill moves to the House, it is being criticized from both sides of the aisle. The bill, an extension of a compromise deal reached between Congressional Republicans and President Obama, does not offer matching spending cuts to cancel out the addition to the deficit. And while the unemployment extensions won't allow individuals to collect checks beyond 99-weeks, it does ensure continued funding for those seeking more than the traditional 26-weeks of benefits. However, from a pragmatically libertarian perspective, I offer a tepid and uneasy argument in support of the legislation.

Let's be clear at the start: I am uncomfortable with it. It's expensive. It's rushed. It doesn't push spending cuts. But letting tax rates go up would be an even worse mistake. The tax hike would be two hands around the throat of American savings, investment, consumption, and entrepreneurship—squeezing hard.

And let there be no doubt, ending the Bush-era laws would be a massive, far-reaching, unconscious tax hike, pure and simple. This is just as upsetting from a libertarian perspective as having to compromise on additional spending and a lack of spending cuts. American individuals and businesses have been living with the current rates for nearly a decade and would perceive the higher tax bill as a hike. 

Some have argued that, yes this is a hike, but we need the revenues. However, we have yet to have the substantive debate necessary on how to solve the debt and deficit problem. In fact, it is just beginning. At the end of the day, it may or may not be possible to balance the budget without some tax hikes. But if changes to the tax code are needed, we should not up rates without some substantive debate, and conscious intent. Allowing the calendar to dictate a tax hike ad hoc that isn't part of an intentional plan to address America's budget problems is very poor tax policy. 

Now, I am sympathetic to those conservatives who are balking at this tax deal because it extends unemployment benefits. Over the past few years, this has created incentives for people to turn down work while looking for more favorable jobs, or to turn down employment opportunities that would require moving. But if this is the price to pay for avoiding a sharp contraction in employment from a tax hike hitting employers across the country, it is worth it.

I am sympathetic to those who argue the compromise fails to offer matching spending cuts thereby adding to the deficit. However, this is largely an issue of semantics. The government has also grown accustomed to its current stream of revenues (the impact of the recession notwithstanding). So in that sense the extension of the Bush tax laws will not be a cut in the revenue stream. Rather it will be a cut in the estimated revenue projections of the Congressional Budget Office and others. (And after all, fewer revenues means forcing the government confront the need to become smaller and more efficient.)

Ideally, we could match the "cuts" with reductions in spending since from a technical perspective there will be less revenue in the coming two years than was expected by the CBO. But extending the current rates for two years is no more a "cut" in revenues than the imaginary failure of Congress to push income tax rates to 75 percent across the board in 2008 was a cut.

I am also sympathetic to the view being championed by former Massachusetts Governor Mitt Romney that a temporary, two-year extension won't encourage businesses to make any long-term investments. But while a short-term extension isn't perfect, and does yield relatively limited benefits, a tax hike would be substantively worse, and would discourage economic growth—a principle goal of free market thinking.

At the end of the day, allowing a sweeping tax hike on all Americans—even on "the wealthy"—is a bad idea. That shouldn't be allowed to happen. And libertarians should stand against it.

My hope is that the current tax laws will be kept in place until we can have a healthy discussion on what to do about the national debt and deficit in a comprehensive way. That is a principled and pragmatic libertarian approach. Remember, just because there is a two-year extension doesn't mean a tax code debate should wait two years. The Reid-Pelosi Congress failed to deal with this comprehensive matter the past four years. Hopefully, the Reid-Boehner Congress won't see this deal as a way to avoid the conversation, but as a temporary stay of execution until the matter can be sorted out. 

I don't like passing a $800-plus billion tax cut bill that fails to have matching spending cuts. But given the political reality facing Congress, an extension of the current tax rates in exchange for a one-year unemployment benefit extension is a fair trade so that Congress has time to pass substantive, positive reform. Whether they will in the next two years is a frustrating debate all its own.

Anthony Randazzo is Director of Economic Research





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