The Byrd Rule

August 16, 2010 Tagged with: politics

Why Are the Bush Tax Cuts Expiring in the First Place?: Here’s why Bush’s tax cuts are set to expire – the income tax cuts and the estate tax cuts.

If Republicans love their tax cuts so much, why didn’t they enact them for perpetuity? Because they didn’t have enough votes, thanks to an obscure parliamentary rule known as the Byrd Rule.

The Byrd Rule, first adopted in 1985 and named for the late Robert C. Byrd, allows senators during the reconciliation process to block a piece of legislation if it significantly increases the federal deficit more than 10 years in the future.

Any senator can raise a procedural objection to legislation that does affect the deficit more than a decade out. If the objection is sustained, whatever provision is at fault for raising the deficit 10 years out is eliminated from the legislation, unless a 60-vote majority says otherwise.

The paradox here is clear. Conservatives constantly champion supply-side and trickle-down economics. But if they gave in to the Byrd Rule, they must have been conceding the fact that the tax cuts were going to have a negative effect on the deficit in 10 years. (Or they’ll just chalk it up to meaningless politically maneuvering to get their desired legislation passed.)

For the record – and before I get jumped on by someone on the Right – I do absolutely believe that tax cuts stimulate the economy. But they can’t “just” stimulate the economy – they have to do so to such a degree that they generate enough new taxable revenue to offset themselves, and this is trickier.

Example: if you have a 25% tax rate, cutting $1 in taxes means that $1 cut has to generate $4 in taxable revenue in order to replace the $1 you just cut from actual tax revenue (25% of the $4 in newly-generated taxable revenue replaces the $1 we just cut from actual tax revenue). With a 90% tax rate, your $1 tax cut would have to generate just $1.10 in new revenue.

So, do tax cuts stimulate the economy that much? At our current tax level, I personally doubt it, but I don’t know for sure. Furthermore, I don’t think anyone can know for sure because getting an exact measurement on the effect of a tax cut is next to impossible, given all the other things going on in the economy at any given time (for instance, inflation and population growth alone will roughly double our GDP every decade).

In the end, everyone is just guessing. They all trot out their pet reasons, but our economy is such a massively complex moving target, that no one knows for sure.

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