Are Republicans Confused on the Issues Involved with the Sequester or Is Ezra Klein?

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Sunday, 24 February 2013 08:14

Ezra Klein tells us that both sides are badly confused about the issues at stake in the sequester. (The piece is more appropriately headlined in the print version, "Why both sides are misreading the budget battle.")

Klein explains that tax expenditures, like the mortgage interest deduction and the deduction for state and local income taxes, are really forms of spending. He says that the problem is that Republicans are just failing to understand this fact:

"No one has worked harder to disabuse Republicans of this misconception than top Republican economists. Harvard’s Martin Feldstein, who served as President Ronald Reagan’s chief economist, says “the distinction between spending cuts and revenue increases breaks down if one considers tax expenditures.” Former Federal Reserve chairman Alan Greenspan says they should be 'viewed as cuts in outlays rather than a reduction in revenues.' Greg Mankiw, who led President George W. Bush’s Council of Economic Advisers, calls them “stealth spending implemented through the tax code.”

"For Republican economists, the task is an urgent one. If Republicans will cut tax expenditures, Democrats will, in return, cut entitlement spending — and that’s what Republicans believe is really behind our unsustainable deficits. Moreover, Republicans like defense spending, and a deal that traded cuts in tax expenditures for cuts in entitlements would also spare defense. If Republicans could get over their ratio obsession, they could get almost everything they want."
 
So the tragedy here is that the Republicans in Congress can't understand what their economists are telling them. But let's try an alternative hypothesis. Let's imagine that Republicans don't care at all about spending. Let's hypothesize that they care about money in the pockets of rich people (MPRP).
 
Suppose that they embrace cutting tax expenditures. It probably would not be difficult to get some agreement on curbing the mortgage interest deduction, but it is almost inconceivable that they would eliminate it altogether. Most likely any change would take the form of capping the amount of interest that could be deducted and limiting the rate at which it is deducted (e.g. 15 percent rather than 39.6 percent for high income taxpayers.) This reform would drastically cut its cost but primarily by reducing MPRP. 
 
It is likely that other reforms of tax expenditures would also follow this pattern. The amount of expenditures would be reduced, but primarily by limiting the extent to which high income taxpayers could benefit. The result would be reductions in MPRP.
 
So we have one possibility, that Ezra is right and the Republicans are just being dumb. Alternatively, the Republicans might understand exactly what is going on and just be putting on a charade for folks like Ezra that they only care about spending and just can't figure out what people like Martin Feldstein, Alan Greenspan, and Greg Mankiw are telling them. I report, you decide.