The Cost Of War

In the November 26, 2009 Forbes editorial "The Cost Of War," Bruce Bartlett makes the case that wars financed by deficits last longer than those paid for by taxation:

In recent years, Republicans have been characterized by two principal positions: They like starting wars and don't like paying for them. George W. Bush initiated two major wars in Iraq and Afghanistan, but adamantly refused to pay for either of them by cutting non-military spending or raising taxes. Indeed, at his behest, Congress actually cut taxes and established a massive new entitlement program, Medicare Part D.

Bush's actions were unprecedented. During every previous major war in American history, presidents demanded sacrifices from rich and poor alike. As Robert Hormats explains in his 2007 book, The Price of Liberty: Paying for America's Wars, "During most of America's wars, parochial desires--such as tax breaks for favored groups or generous spending for influential constituencies--have been sacrificed to the greater good. The president and both parties in Congress have come together … to cut nonessential spending and increase taxes."

During World War II, federal revenues roughly tripled as a share of the gross domestic product (GDP) and the number of people paying income taxes expanded tenfold, from 3% of the population in 1939 to 30% by 1943. In 1940, a family of four needed close to $80,000 of income in today's dollars before it paid any federal income taxes at all. By the war's end, it saw its effective tax rate rise from 1.5% to 15.1%. (Today such a family only pays a federal income tax rate of about 6%.) But taxes weren't the only way the war was paid for. Spending on nondefense programs was cut almost in half, from 8.1% of GDP in 1940 to 4.4% in 1945.

Even during wars closer in magnitude to those in which we are presently engaged, significant sacrifices were made. In 1950 and 1951 Congress increased taxes by close to 4% of GDP to pay for the Korean War, even though the high World War II tax rates were still largely in effect. In 1968, a 10% surtax was imposed to pay for the Vietnam War, which raised revenue by about 1% of GDP. And there was conscription during both wars, which can be viewed as a kind of tax that was largely paid by the poor and middle class--young men from wealthy families largely escaped its effects through college deferments.

However, Bush and his party, which controlled Congress from 2001 to 2006, never asked for sacrifices from anyone except those in our nation's military and their families. I think that's because the Republicans understood, implicitly, that the American people's support for the wars in Iraq and Afghanistan has always been paper thin. Asking them to sacrifice through higher taxes, domestic spending cuts or reinstatement of the draft would surely have led to massive protests akin to those during the Vietnam era or to political defeat in 2004. George W. Bush knew well that when his father raised taxes in 1990 in part to pay for the first Gulf War, it played a major role in his 1992 electoral defeat.

Consequently, Republicans resolved to fight our wars on the cheap and with deceptive cost estimates. On the eve of war in December 2002, Office of Management and Budget (OMB) director Mitch Daniels claimed that the war in Iraq could be fought at a total cost of $50 billion to $60 billion. Indeed, Bush even fired his top economic adviser, Lawrence Lindsey, for saying publicly that the war might cost between $100 billion and $200 billion.

Of course, both Daniels and Lindsey grossly underestimated the actual cost. According to a recent report from the Congressional Research Service (CRS), the wars in Iraq and Afghanistan have cost close to $1 trillion thus far. That is exactly what economists not on the White House payroll expected. (See this December 2002 report from the American Academy of Arts and Sciences.)

In his 2008 book, What a President Should Know, Lindsey said that lowballing the cost of the war was a "tactical blunder" because it allowed Bush's enemies to claim that he lied us into war. But at the same time, Lindsey acknowledges that the administration never rose to "Churchillian levels in talking about the sacrifices needed." He also says that asking for sacrifice in the form of spending cuts and tax increases would have served the important purpose of involving the American people in the war effort. As it is, war is largely out of sight and out of mind.

According to the CRS, the marginal cost of continuing the Iraq and Afghanistan wars is about $11 billion per month, with no end in sight. Although there has been some decline in spending for the Iraq war, it has been more than offset by the rising cost of the war in Afghanistan. According to OMB director Peter Orszag, it costs about $1 million per year per soldier in the field, so adding 30,000 additional troops in Afghanistan, as President Obama is expected to do next week, will cost another $30 billion per year.

The White House has given no indication of how it plans to pay for expanding the war in Afghanistan. More than likely, it will follow the Bush precedent and just put it all on the national credit card. But at least some members of Congress believe that the time has come to start paying for war. On Nov. 19, Rep. David Obey, D-Wis., introduced H.R. 4130, the "Share the Sacrifice Act of 2010." It would establish a 1% surtax on everyone's federal income tax liability plus an additional percentage on those with a liability over $22,600 (for couples filing jointly), such that revenue from the surtax would pay for the additional cost of fighting the war in Afghanistan.

It's doubtful that this legislation will be enacted. But that's not Obey's purpose. He will probably offer it as an amendment at some point just to have a vote. Republicans in particular will be forced to choose between continuing to fight a war that they started and still strongly support, or raising taxes, which every Republican in Congress would rather drink arsenic than do. If nothing else, it will be interesting to see those who rant daily about Obama's deficits explain why they oppose fiscal responsibility when it comes to supporting our troops.

Obey makes no secret of his motives. He knows that deficits need to be reduced at some point and this will put pressure on spending programs he supports. "If we don't address the cost of this war, we will continue shoving billions of dollars in taxes off on future generations and will devour money that could be used to rebuild our economy," Obey explained in a press statement.

He is not alone in his fear that war presents a threat to the Democratic agenda. As Boston University historian Robert Dallek told Obama at a White House meeting earlier this year, "war kills off great reform movements." He cited the impact of World War I in ending the Progressive Era, World War II in killing the New Deal, the Korean War in terminating Harry Truman's Fair Deal program and the Vietnam War in crushing Lyndon Johnson's Great Society.

At this point, Republicans are probably nodding in agreement. If it takes wars to end ill-conceived social programs, then that's another argument in favor of continuing the Iraq and Afghanistan campaigns. But that's a very short-sighted view because, as essayist Randolph Bourne once put it, "war is essentially the health of the State." Historians Robert Higgs and Bruce Porter, among others, have documented the pernicious effect of war on the size and scope of government. It creates a ratchet effect in which taxes and spending grow and civil liberties are restricted permanently, because when war ends, we never go back to the status quo ante.

If it takes the threat of a tax increase to get people to think seriously about whether it's worth continuing to fight wars far from home--wars that have only the most tenuous connection to the national interest--then it's a good idea. History shows that wars financed heavily by higher taxes, such as the Korean War and the first Gulf War, end quickly, while those financed largely by deficits, such as the Vietnam War and current Middle East conflicts, tend to drag on indefinitely.

If Americans aren't willing to follow John F. Kennedy and "pay any price, bear any burden, meet any hardship" to fight a war, then we shouldn't be fighting it.
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Bruce Bartlett is a former Treasury Department economist and the author of Reaganomics: Supply-Side Economics in Action and Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. Bruce Bartlett's new book is: The New American Economy: The Failure of Reaganomics and a New Way Forward. He writes a weekly column for Forbes.

GOP has little credibility on budget deficit

In the November 24, 2009 Nashua Telegraph editorial "GOP has little credibility on budget deficit," Froma Harrop points out the hypocrisy in Republican cries for greater fiscal responsibility since they created much of the current problems when they controlled the White House and Congress.

Nearly every Republican these days calls for tax cuts and lower deficits, and in the same sentence. Point out that these goals clash – that taxes pay for government and not paying for government causes deficits – and the Republican counters: “We must shrink government, instead.”

Sure. And you’re just the boys to do it.

There hasn’t been a balanced budget since the last Democratic administration. During the George W. Bush years of mindless tax cutting, the national debt doubled, and GOP claims to fiscal rectitude became a bizarre joke.

The last fig leaf fell off this summer when Republicans demagogued efforts to save more than $100 billion by ending subsidies for the private Medicare Advantage health plans.

Here was the lowest-hanging fruit in the fastest-growing government program. It was something most Medicare beneficiaries would barely notice was gone, yet Republicans hollered that Democrats were pulling the plug on grandma.

That dashed any residual Republican pretenses that Bush had led them astray on spending, and a lesson was learned. Clearly, they’re not changing a thing.

Bruce Bartlett, an economist in Ronald Reagan’s Treasury Department, has criticizing such inconsistencies for several years. Republicans could have embraced his 2006 book, “Imposter: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy,” as evidence that they truly regretted the fiscal wreckage of the Bush years. Instead, they turned Bartlett into a Republican pariah.

Bartlett has just come out with another book, “The New American Economy: The Failure of Reaganomics and a New Way Forward.” It has received an equally chilly reception from the right-wing media and associated think tanks. That is, they’re making no mention of it.

I asked Bartlett whether he feels beaten up by former fellow Republicans. (He’s now an independent.) No, he said, “One of the funny things since ‘Imposter’ came out is the refusal of people on the right to even debate me.” One can’t entirely blame them for trying to smother his book sales.

Democrats would be hard-pressed to find better talking points anywhere else – though Bartlett does find fault with them, too.

Bartlett’s main point is there’s almost no place to cut domestic discretionary spending. Subtract money going for defense, entitlements (such as Medicare) and payments on the debt, and there’s precious little left.

Domestic discretionary spending in fiscal 2008 last year totaled $485 billion, while the deficit was $459 billion. You would have had to kill nearly every domestic program to balance the budget. That would have meant nothing for education, agriculture, housing, border patrols, the FBI, highways.

Taxes must go up, and on that subject, Bartlett takes issue with the current president.

“You have to look at some other broad-based revenue raising,” he said, “but then you run up against the problem that Obama has made the promise not to raise taxes on anyone earning less than $200,000.”

He deems that approach “irresponsible.” The rich can’t bear all the costs of government.

The answer is a value-added tax, which is basically a national sales tax. The VAT would tax consum- ption, rather than income, and at low cost to economic growth. Europeans use a VAT to pay for their cushy benefits.

Bartlett thinks Congress should commit itself to a number, say $1 trillion, for deficit savings over 10 years. Then it should ask a commission to find a third of that money from higher revenues, a third from entitlement cuts and a third from discretionary spending.

Welcome to the world of grownups, where tax cuts don’t magically pay for themselves – and where middle-class people must pay more for middle-class benefits. When it comes to addressing deficits, Democrats may be lax adolescents, but Republicans are total babies.

Froma Harrop serves on the editorial board of The Providence Journal and is a syndicated columnist. E-mail her at fharrop@projo.com.

Republican Deficit Hypocrisy

In the November 2009 Forbes article "Republican Deficit Hypocrisy," conservative Bruce Bartlett reminds readers that the current U.S. budget problem was created by Republicans:

The human capacity for self-delusion never ceases to amaze me, so it shouldn't surprise me that so many Republicans seem to genuinely believe that they are the party of fiscal responsibility. Perhaps at one time they were, but those days are long gone.

This fact became blindingly obvious to me six years ago this month when a Republican president and a Republican Congress enacted the Medicare drug benefit, which former U.S. Comptroller General David Walker has called "the most fiscally irresponsible piece of legislation since the 1960s."

Recall the situation in 2003. The Bush administration was already projecting the largest deficit in American history--$475 billion in fiscal year 2004, according to the July 2003 mid-session budget review. But a big election was coming up that Bush and his party were desperately fearful of losing. So they decided to win it by buying the votes of America's seniors by giving them an expensive new program to pay for their prescription drugs.

Recall, too, that Medicare was already broke in every meaningful sense of the term. According to the 2003 Medicare trustees report, spending for Medicare was projected to rise much more rapidly than the payroll tax as the baby boomers retired. Consequently, the rational thing for Congress to do would have been to find ways of cutting its costs. Instead, Republicans voted to vastly increase them--and the federal deficit--by $395 billion between 2004 and 2013.

However, the Bush administration knew this figure was not accurate because Medicare's chief actuary, Richard Foster, had concluded, well before passage, that the more likely cost would be $534 billion. Tom Scully, a Republican political appointee at the Department of Health and Human Services, threatened to fire him if he dared to make that information public before the vote. (See this report by the HHS inspector general and this article by Foster.)

It's important to remember that the congressional budget resolution capped the projected cost of the drug benefit at $400 billion over 10 years. If there had been an official estimate from Medicare's chief actuary putting the cost at well more than that, then the legislation could have been killed by a single member in either the House or Senate by raising a point of order. Then-Senate Majority Leader Trent Lott, R-Miss., later said he regretted not doing so.

Even with a deceptively low estimate of the drug benefit's cost, there were still a few Republicans in the House of Representatives who wouldn't roll over and play dead just to buy re-election. Consequently, when the legislation came up for its final vote on Nov. 22, 2003, it was failing by 216 to 218 when the standard 15-minute time allowed for voting came to an end.

What followed was one of the most extraordinary events in congressional history. The vote was kept open for almost three hours while the House Republican leadership brought massive pressure to bear on the handful of principled Republicans who had the nerve to put country ahead of party. The leadership even froze the C-SPAN cameras so that no one outside the House chamber could see what was going on.

Among those congressmen strenuously pressed to change their vote was Nick Smith, R-Mich., who later charged that several members of Congress attempted to virtually bribe him, by promising to ensure that his son got his seat when he retired if he voted for the drug bill. One of those members, House Majority Leader Tom DeLay, R-Texas, was later admonished by the House Ethics Committee for going over the line in his efforts regarding Smith.

Eventually, the arm-twisting got three Republicans to switch their votes from nay to yea: Ernest Istook of Oklahoma, Butch Otter of Idaho and Trent Franks of Arizona. Three Democrats also switched from nay to yea and two Republicans switched from yea to nay, for a final vote of 220 to 215. In the end, only 25 Republicans voted against the budget-busting drug bill. (All but 16 Democrats voted no.)

Otter and Istook are no longer in Congress, but Franks still is, so I checked to see what he has been saying about the health legislation now being debated. Like all Republicans, he has vowed to fight it with every ounce of strength he has, citing the increase in debt as his principal concern. "I would remind my Democratic colleagues that their children, and every generation thereafter, will bear the burden caused by this bill. They will be the ones asked to pay off the incredible debt," Franks declared on Nov. 7.

Just to be clear, the Medicare drug benefit was a pure giveaway with a gross cost greater than either the House or Senate health reform bills how being considered. Together the new bills would cost roughly $900 billion over the next 10 years, while Medicare Part D will cost $1 trillion.

Moreover, there is a critical distinction--the drug benefit had no dedicated financing, no offsets and no revenue-raisers; 100% of the cost simply added to the federal budget deficit, whereas the health reform measures now being debated will be paid for with a combination of spending cuts and tax increases, adding nothing to the deficit over the next 10 years, according to the Congressional Budget Office. (See here for the Senate bill estimate and here for the House bill.)

Maybe Franks isn't the worst hypocrite I've ever come across in Washington, but he's got to be in the top 10 because he apparently thinks the unfunded drug benefit, which added $15.5 trillion (in present value terms) to our nation's indebtedness, according to Medicare's trustees, was worth sacrificing his integrity to enact into law. But legislation expanding health coverage to the uninsured--which is deficit-neutral--somehow or other adds an unacceptable debt burden to future generations. We truly live in a world only George Orwell could comprehend when our elected representatives so easily conflate one with the other.

Of course, there are good reasons conservatives oppose expanding the government, as the pending health legislation would do, even if it adds nothing to the deficit. But anyone who voted for the drug benefit, especially someone who switched his vote to make its enactment possible, has zero credibility. People like Franks ought to have the decency to keep their mouths shut forever when it comes to blaming anyone else for increasing the national debt.

Franks is not alone among Republicans for whom fiscal responsibility never consists of anything other than talk. The worst, undoubtedly, is DeLay, who actually went so far as to attack Sen. John McCain, R-Ariz., last year for his principled vote against the drug benefit, one of only nine Republican senators to do so. (By my count, there are still 24 Republicans in the Senate who voted for the drug benefit, including such alleged conservatives as Jim Bunning and Mitch McConnell of Kentucky, John Cornyn of Texas, Mike Crapo of Idaho, Orrin Hatch of Utah and Jon Kyl of Arizona.)

Amazingly, leading Republicans still defend the drug benefit. Just the other day, former Senate Majority Leader Bill Frist, R-Tenn., celebrated its passage, and at a recent American Enterprise Institute forum, former House Ways and Means Committee Chairman Bill Thomas, R-Calif., berated me for criticizing it. In each case, their main argument was that it ended up costing a little less than originally projected. Somehow, I doubt that Frist or Thomas would feel the same way if their wives thought it was OK to buy a closet full of expensive new shoes just because they were on sale.

I don't mean to suggest that Democrats are any better when it comes to the deficit, although they have a better case for saying so based on the contrasting fiscal records of Bill Clinton and George W. Bush. The national debt belongs to both parties. But at least the Democrats don't go on Fox News day after day proclaiming how fiscally conservative they are, and organize tea parties to rant about deficits, without ever putting forward any plan for reducing them. Nor do they pretend that they have no responsibility whatsoever for projected deficits, at least half of which can be traced directly to Republican policies, according to Office of Management and Budget Director Peter Orszag.

It astonishes me that a party enacting anything like the drug benefit would have the chutzpah to view itself as fiscally responsible in any sense of the term. As far as I am concerned, any Republican who voted for the Medicare drug benefit has no right to criticize anything the Democrats have done in terms of adding to the national debt. Space prohibits listing all their names, but the final Senate vote can be found here and the House vote here.

Bruce Bartlett is a former Treasury Department economist and the author of Reaganomics: Supply-Side Economics in Action and Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. Bruce Bartlett's new book is: The New American Economy: The Failure of Reaganomics and a New Way Forward. He writes a weekly column for Forbes.

The GOP's Misplaced Rage

In the August 12, 2009 Daily Beast editorial "The GOP's Misplaced Rage," "leading conservative economist Bruce Bartlett writes that the Obama-hating town-hall mobs have it wrong—the person they should be angry with left the White House seven months ago."

Where is the evidence that everything would be better if Republicans were in charge? Does anyone believe the economy would be growing faster or that unemployment would be lower today if John McCain had won the election? I know of no economist who holds that view. The economy is like an ocean liner that turns only very slowly. The gross domestic product and the level of employment would be pretty much the same today under any conceivable set of policies enacted since Barack Obama’s inauguration.

Until conservatives once again hold Republicans to the same standard they hold Democrats, they will have no credibility and deserve no respect.

In January, the Congressional Budget Office projected a deficit this year of $1.2 trillion before Obama took office, with no estimate for actions he might take. To a large extent, the CBO’s estimate simply represented the $482 billion deficit projected by the Bush administration in last summer’s budget review, plus the $700 billion Troubled Asset Relief Program, which George W. Bush rammed through Congress in September over strenuous conservative objections. Thus the vast bulk of this year’s currently estimated $1.8 trillion deficit was determined by Bush’s policies, not Obama’s.

I think conservative anger is misplaced. To a large extent, Obama is only cleaning up messes created by Bush. This is not to say Obama hasn’t made mistakes himself, but even they can be blamed on Bush insofar as Bush’s incompetence led to the election of a Democrat. If he had done half as good a job as most Republicans have talked themselves into believing he did, McCain would have won easily.

Conservative protesters should remember that the recession, which led to so many of the policies they oppose, is almost entirely the result of Bush’s policies. According to the National Bureau of Economic Research, the recession began in December 2007—long before Obama was even nominated. And the previous recession ended in November 2001, so the current recession cannot be blamed on cyclical forces that Bush inherited.

Indeed, Bush’s responsibility for the recession is implicit in every conservative analysis of its origins. The most thorough has been done by John Taylor, a respected economist from Stanford University who served during most of the Bush administration as the No. 3 official at the Treasury Department. In his book, Getting Off Track, he puts most of the blame on the Federal Reserve for holding interest rates down too low for too long.

While the Fed does bear much responsibility for sowing the seeds of recession, it’s commonly treated as an institution independent of politics and even the government itself. But the Federal Reserve Board consists of governors appointed by the president and confirmed by the Senate.

Because the president appoints the board, he has primary influence over its policies. This is especially the case for chairmen of the Fed appointed by Republicans because they often have ties to Republican administrations. Chairman Ben Bernanke was originally appointed as a member of the Fed in 2002, serving until 2005, when he became chairman of the Council of Economic Advisers in the White House, a position that made him Bush’s chief economic adviser.

As early as 2002, a majority of the seven-member Federal Reserve Board was Bush appointees, and by 2006 every member was a Bush appointee. While many critical decisions about monetary policy are made by the Federal Open Market Committee, the board’s position always prevails.

The Treasury secretary also has had breakfast with the Fed chairman on a weekly basis for decades. Consequently, most economists generally believe that every administration ultimately gets the Fed policy it wants. Therefore, one must conclude that if there were errors in Fed policy that caused the current downturn, it must be because the Fed was doing what the Bush administration wanted it to do.

To the extent that there were mistakes in housing policy that contributed to the recession, those were necessarily committed by Bush political appointees at the Department of Housing and Urban Development, Fannie Mae, Freddie Mac, and other agencies. To the extent that banks and other financial institutions made mistakes or engaged in fraudulent activity, it was either overlooked or sanctioned by Bush appointees at the Securities & Exchange Commission, the Comptroller of the Currency, the Commodity Futures Trading Commission, and elsewhere.

But in a larger sense, the extremely poor economic performance of the Bush years really set the stage for the current recession. This is apparent when we compare Bush’s two terms to Bill Clinton’s eight years. Since both took office close to a business cycle trough and left office close to a cyclical peak, this is a reasonable comparison.

Throughout the Bush years, many conservative economists, including CNBC’s Larry Kudlow, extravagantly extolled Bush’s economic policies. As late as December 21, 2007, after the recession already began, he wrote in National Review: “the Goldilocks economy is outperforming all expectations.” In a column on May 2, 2008, almost six months into the recession, Kudlow praised Bush for having prevented a recession.

But the truth was always that the economy performed very, very badly under Bush, and the best efforts of his cheerleaders cannot change that fact because the data don’t lie. Consider these comparisons between Bush and Clinton:

• Between the fourth quarter of 1992 and the fourth quarter of 2000, real GDP grew 34.7 percent. Between the fourth quarter of 2000 and the fourth quarter of 2008, it grew 15.9 percent, less than half as much.

• Between the fourth quarter of 1992 and the fourth quarter of 2000, real gross private domestic investment almost doubled. By the fourth quarter of 2008, real investment was 6.5 percent lower than it was when Bush was elected.

• Between December 1992 and December 2000, payroll employment increased by more than 23 million jobs, an increase of 21.1 percent. Between December 2000 and December 2008, it rose by a little more than 2.5 million, an increase of 1.9 percent. In short, about 10 percent as many jobs were created on Bush’s watch as were created on Clinton’s.

• During the Bush years, conservative economists often dismissed the dismal performance of the economy by pointing to a rising stock market. But the stock market was lackluster during the Bush years, especially compared to the previous eight. Between December 1992 and December 2000, the S&P 500 Index more than doubled. Between December 2000 and December 2008, it fell 34 percent. People would have been better off putting all their investments into cash under a mattress the day Bush took office.

• Finally, conservatives have an absurdly unjustified view that Republicans have a better record on federal finances. It is well-known that Clinton left office with a budget surplus and Bush left with the largest deficit in history. Less well-known is Clinton’s cutting of spending on his watch, reducing federal outlays from 22.1 percent of GDP to 18.4 percent of GDP. Bush, by contrast, increased spending to 20.9 percent of GDP. Clinton abolished a federal entitlement program, Welfare, for the first time in American history, while Bush established a new one for prescription drugs.

Conservatives delude themselves that the Bush tax cuts worked and that the best medicine for America’s economic woes is more tax cuts; at a minimum, any tax increase would be economic poison. They forget that Ronald Reagan worked hard to pass one of the largest tax increases in American history in September 1982, the Tax Equity and Fiscal Responsibility Act, even though the nation was still in a recession that didn’t end until November of that year. Indeed, one could easily argue that the enactment of that legislation was a critical prerequisite to recovery because it led to a decline in interest rates. The same could be said of Clinton’s 1993 tax increase, which many conservatives predicted would cause a recession but led to one of the biggest economic booms in history.

According to the CBO, federal taxes will amount to just 15.5 percent of GDP this year. That’s 2.2 percent of GDP less than last year, 3.3 percent less than in 2007, and 1.8 percent less than the lowest percentage recorded during the Reagan years. If conservatives really believe their own rhetoric, they should be congratulating Obama for being one of the greatest tax cutters in history.

Conservatives will respond that some tax cuts are good while others are not. Determining which is which is based on something called supply-side economics. Because I was among those who developed it, I think I can speak authoritatively on the subject. According to the supply-side view, temporary tax cuts and tax credits are economically valueless. Only permanent cuts in marginal tax rates will significantly raise growth.

On this basis, we see that Bush’s tax cuts were pretty much the opposite of what supply-side economics would recommend. The vast bulk of his tax cuts involved tax rebates—which failed in 2001 and again in 2008, because the vast bulk of the money was saved—or tax credits that had no incentive effects. While marginal rates were cut slightly—the top rate fell from 39.6 percent to 35 percent—it was phased in slowly and never made permanent. Neither were Bush’s cuts in capital gains and dividend taxes.

I could go on to discuss other Bush mistakes that had negative economic consequences, such as the Sarbanes-Oxley Act, which imposed a massive regulatory burden on corporations without doing anything to prevent corporate misconduct, and starting unnecessary wars in Iraq and Afghanistan, which will burden the economy for decades to come in the form of veterans’ benefits.

But there is yet another dimension to Bush’s failures—the things he didn’t do. In this category I would put a health-care overhaul. Budget experts have known for years that Medicare was on an unsustainable financial path. It is impossible to pay all the benefits that have been promised because spending has been rising faster than GDP.

In 2003, the Bush administration repeatedly lied about the cost of the drug benefit to get it passed, and Bush himself heavily pressured reluctant conservatives to vote for the program.

Because reforming Medicare is an important part of getting health costs under control generally, Bush could have used the opportunity to develop a comprehensive health-reform plan. By not doing so, he left his party with nothing to offer as an alternative to the Obama plan. Instead, Republicans have opposed Obama's initiative while proposing nothing themselves.

In my opinion, conservative activists, who seem to believe that the louder they shout the more correct their beliefs must be, are less angry about Obama’s policies than they are about having lost the White House in 2008. They are primarily Republican Party hacks trying to overturn the election results, not representatives of a true grassroots revolt against liberal policies. If that were the case they would have been out demonstrating against the Medicare drug benefit, the Sarbanes-Oxley bill, and all the pork-barrel spending that Bush refused to veto.

Until conservatives once again hold Republicans to the same standard they hold Democrats, they will have no credibility and deserve no respect. They can start building some by admitting to themselves that Bush caused many of the problems they are protesting.

Bruce Bartlett was one of the original supply-siders, helping draft the Kemp-Roth tax bill in the 1970s. In the 1980s and 1990s, he was a leading Republican economist. He now considers himself to be a political independent. He is the author of Reaganomics: Supply-Side Economics in Action and Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. His latest book, The New American Economy: The Failure of Reaganomics and a New Way Forward, will be published by Palgrave Macmillan in October.

Tax Tea Parties Misstate U.S. Tax Burden

Lies, distortions, and offensive signs seem to be a common component of tax tea party rallies. At least one conservative Republican is trying to set the record straight.Photo courtesy of Jesse Russell in Madison, WI.

In his April 10, 2009 Forbes editorial "Tax Tea Party Time?," Conservative columnist Bruce Bartlett questions the presumption by tax tea party advocates that U.S. taxes are excessively high. Taxes are necessary to fund the government services expected by citizens. Current federal tax revenues are the lowest since 1950 when measured as a share of overall income.

According to Bartlett:

Next week is April 15, the day when most Americans have to file their federal income tax returns. To protest the allegedly high level of taxation in the United States, various right-wing groups are organizing tea parties around the country in the spirit of the Boston Tea Party of 1773.

The irony of these protests is that federal revenues as a share of the gross domestic product will be lower this year than any year since 1950. According to the Congressional Budget Office, the federal government will take only 15.5% of GDP in taxes this year, compared to 17.7% last year, 18.8% in 2007 and 20.9% in 2000.

The truth is that the U.S. is a relatively low-tax country no matter how you slice the data. The following tables illustrate this fact by comparing the U.S. to other members of the Organization for Economic Cooperation and Development, a Paris-based research organization.

As Table 1 shows, total taxation (federal, state and local) amounted to 28% of the GDP in the U.S. in 2006. Only four of the 30 OECD countries had a lower tax ratio. Taxes averaged 35.9% for the OECD as a whole and 38% in Europe. Citizens of Denmark and Sweden paid very close to 50% of their total income in taxes.

Table 1: Total Taxes as a Share of GDP, 2006

Denmark 49.1
Sweden 49.1
Belgium 44.5
France 44.2
Norway 43.9
Finland 43.5
Italy 42.1
Austria 41.7
Iceland 41.5
Netherlands 39.3
U.K. 37.1
Hungary 37.1
Czech Rep. 36.9
N.Z. 36.7
Spain 36.6
Luxembourg 35.9
Portugal 35.7
Germany 35.6
Poland 33.5
Canada 33.3
Ireland 31.9
Greece 31.3
Australia 30.6
Slovak Rep. 29.8
Switzerland 29.6
U.S. 28.0
Japan 27.9
Korea 26.8
Turkey 24.5
Mexico 20.6

Source: OECD


There's a stronger case for the U.S. being a high tax country when looking at the top statutory tax rate on labor income. The OECD calculated the U.S. rate at 41.4% in 2007. As Table 2 shows, this put America right in the middle of the distribution despite a reduction in the top rate from 46.7% in 2000. The reason is that 19 OECD countries have reduced their top rate since 2000; only 3 have increased it.

Of course, the top rate applies only to those with very high incomes. According to the OECD, one would need to make almost 9 times the average worker's wage to pay the top rate in the U.S. In most OECD countries one hits the top rate at an income barely above that of the average worker, which puts workers in other countries in much higher tax brackets than those in the U.S.

Table 2: Top Statutory Income Tax Rate, 2007/2000

Denmark 59.7/59.7
Sweden 56.5/55.4
Belgium 53.5/63.9
Netherlands 52.0/60.0
Finland 50.5/55.2
Austria 50.0/45.0
Japan 50.0/50.0
France 47.8/53.3
Germany 47.5/53.8
Australia 46.5/48.5
Canada 46.4/46.4
Italy 44.9/46.4
Spain 43.0/48.0
Switzerland 42.1/43.2
Portugal 42.0/35.0
U.S. 41.4/46.7
Ireland 41.0/44.0
Greece 40.0/45.0
Norway 40.0/47.5
Poland 40.0/40.0
U.K. 40.0/40.0
N.Z. 39.0/39.0
Luxembourg 38.9/47.1
Korea 38.5/44.0
Hungary 36.0/40.0
Iceland 35.7/45.4
Turkey 35.6/35.6
Czech Rep. 32.0/32.0
Mexico 28.0/40.0
Slovak Rep. 19.0/35.0

Source: OECD


Table 3 presents effective tax rates for an average one-earner couple with two children. It shows American workers paying 11.8% of their income in taxes in 2007. Only five countries had lower tax rates. The average for all OECD countries was 21%--almost twice the rate paid by American workers.

One may wonder how working people manage to pay so much in taxes in other countries. The answer is that they get a lot back from the government in other ways. For example, most other countries have a broad system of family allowances that come in the form of cash payments to virtually all families regardless of income.

Table 3: Personal Income Tax Rate on an Average Worker, 2007

Hungary 38.7
Denmark 35.8
Austria 31.8
Netherlands 31.7
Belgium 30.6
Turkey 30.3
Finland 30.1
Sweden 27.6
Norway 27.1
Greece 26.5
U.K. 25.4
Poland 24.7
Germany 23.9
Australia 23.4
France 21.9
N.Z. 21.5
Italy 20.4
Canada 16.9
Switzerland 16.5
Japan 16.3
Luxembourg 15.3
Portugal 14.8
Iceland 14.4
Spain 12.4
U.S. 11.8
Czech Rep. 10.8
Slovak Rep. 9.7
Korea 9.5
Ireland 5.9
Mexico 5.2

Source: OECD


When these cash payments are deducted from taxes, the effect is to substantially reduce the effective tax rate in almost every OECD country. As Table 4 shows, in many cases the impact of cash allowances is dramatic. The effective tax rate falls to just 2.8% from 21.5% in New Zealand, and in Ireland workers get back more than 200% of their tax payments.

Another way that workers in other countries benefit is in having almost all of their basic health care expenses covered by the government. According to the OECD, 19 of its 30 member countries cover 100% of health care costs, and another eight cover more than 89% of costs. Of the three remaining countries, Turkey covers two-thirds of health expenses, and Mexico pays for half.

In the U.S., however, the government covered only 27.4% of health costs in 2006. And almost all of that went either to the elderly in the form of Medicare or the poor in the form of Medicaid. The American average worker either had to pay for his own insurance in the form of deductions from his pay or go without.

In 2008, employer-provided health insurance reduced the cash wages of American workers by 7.9%, according to the Bureau of Labor Statistics. If businesses didn't have to pay for health insurance, they could afford to pay their workers 7.9% more and be no worse off. If workers paid 7.9% more of their income in taxes to pay for national health insurance, they would also be no worse off.

To a large extent, this is exactly what happens in other countries. Workers see the higher taxes they pay the same way Americans view the deduction from their pay for health insurance--not as money down a rat hole, but as the payment for a tangible benefit.

This isn't necessarily an argument for national health insurance. There are lots of reasons why it may be preferable to maintain the largely private health system we have in America. No one thinks it would be a good idea to pay higher taxes in return for having the federal government provide us with food. Variety and quality would undoubtedly suffer a great deal. The same would be true if the federal government took over the provision of health care.

The point is that one can't look just at the taxes people pay here or elsewhere without looking at what they get in return. It doesn't automatically follow that the places with the lowest taxes are the best places to live and work. This is obvious when we think about where to buy a house. We always look at the quality of local schools as a major factor and are willing to pay higher property taxes in return for good schools. The same is true at the national level as well. Higher taxes may pay for services that people value and thus are not as burdensome as they might appear at first glance.

Table 4: Income Tax Rate Less Cash Transfers, 2007

Turkey 30.3
Denmark 29.3
Netherlands 26.9
Greece 26.5
Poland 24.7
Hungary 24.4
Germany 23.9
Finland 22.9
Belgium 22.4
Norway 21.5
U.K. 20.6
Austria 19.8
Sweden 19.8
France 17.5
Japan 13.9
Italy 12.5
Spain 12.4
U.S. 11.8
Canada 10.6
Portugal 10.3
Australia 10.0
Korea 9.5
Switzerland 9.3
Iceland 6.7
Mexico 5.2
Slovak Rep. 4.4
N.Z. 2.8
Luxembourg 2.8
Czech Rep. -6.3
Ireland -12.0

Source: OECD

Another offensive sign at a tax tea party rally:
"The American Taxpayers Are The Jews For Obama's Oven" reads one sign in Chicago--Tony Ramao.


Bruce Bartlett was part of two Republican presidential administrations. He served as a domestic policy adviser to President Ronald Reagan and served as a treasury official under President George H.W. Bush.