20

The fiscal purists go mad

A quarrel over ethanol lays bare Republican divisions on tax

 

IT IS bad enough that Republicans and Democrats are so divided on how much to spend and tax. But if you want to feel really gloomy about America’s ability to tackle its deficit, consider the ideological, almost theological, arguments about tax that are taking place within the Republican camp itself. In the past few weeks these have been revealed in all their dreadful clarity by an esoteric debate about the tax break for ethanol.

To balance the budget you can spend less or tax more. The Republicans are allergic to tax increases, and since their capture of the House of Representatives in November’s mid-term elections have succeeded in focusing the debate almost exclusively on what should be cut. One bit of spending that has caught the eye of Tom Coburn, the Republican senator for Oklahoma, is the $6 billion a year the government doles out in tax breaks to refiners who blend ethanol into their petrol. By general consent, this is not money well spent. Farmers may relish receiving taxpayers’ money to grow the corn that goes into ethanol, but corn-based ethanol is not the green fuel it is cracked up to be. Almost as much energy is used to make it as when it is burned. Here, you would think, is one subsidy that any Republican fiscal conservative in his right mind would want to get rid of.

Senator Coburn, being in his right mind, has proposed an amendment that would scrap the subsidy. As it happens, he was a member of the bipartisan Bowles-Simpson deficit-reduction commission set up last year by Barack Obama. The president has paid scant attention to the commission’s report since it was published in December. But Senator Coburn continues to tell anyone who will listen that nothing is more urgent for America than to reduce its Himalaya of debt before the bond markets take fright and slap on punitive rates of interest before they lend more. He is one of six senators, three from each party, working discreetly behind the scenes in search of a compromise. As for ethanol, the senator is under no illusion that scrapping the subsidy is a solution to the deficit problem. It is a drop in the ocean. But, hell, the tax credit is a waste of public money and should be scrapped. Who on the tax-cutting side of the debate could argue with that?

 

Grover Norquist: that’s who. And on the face of it this is peculiar. Mr Norquist is the pugnacious founder of Americans for Tax Reform (ATR), a mighty pressure group that deems taxes no less of an evil than alcohol was in the eyes of the 19th-century temperance movements. He and the ATR put fierce pressure on politicians at every level of government to sign the “taxpayer protection pledge”, a promise to oppose any increase in the marginal tax rate on individuals and firms. No fewer than 237 House members and 41 senators have done so. The aim of the association is to reduce the power of government by making taxes “simpler, flatter, more visible, and lower than they are today”. You might think such an organisation would jump at the chance to eliminate a distortion as gratuitous as the ethanol subsidy.

You might think so, but you would be wrong. That is because, in Mr Norquist’s book, taking away a tax break has an iniquitous corollary. Ending the ethanol credit will increase federal tax revenues and so make available to the government money that can be spent on other things. And since government spending is the underlying evil on which Mr Norquist believes all policy should focus, the tax break for ethanol (and other such credits, loopholes and distortions) must not be eliminated unless the extra revenue they will put in federal coffers is taken out again in the form of an equal tax cut somewhere else. After all, he told the Washington Post last month, “The goal is to reduce the size and scope of government spending, not to focus on the deficit.”

Herein lies the great difference between the philosophies of Mr Norquist and Senator Coburn. The former is a sworn enemy of government spending. The latter would like to cut taxes and shrink the state, but cares most about the need to cut the deficit. He thinks the Norquist position is dotty. “By opposing my amendment”, he told the ATR, “you are defending wasteful spending and a de facto tax increase on every American. Ethanol subsidies are a spending programme placed in the tax code that increases the burden of government, keeps tax rates artificially high, and forces consumers to pay more for fuel and energy.”

Tax reductio ad absurdum

Senator Coburn has the better of this argument. Even the Wall Street Journal, one of Mr Norquist’s admirers, said in an editorial this week that the compelling taxpayer interest in this case is to end a policy that is “driving up the cost of food and fuel with no benefit for the environment or American energy security.”

But the significance of the quarrel goes well beyond ethanol. Bruce Bartlett, a former adviser to Ronald Reagan, laments the fact that Senator Coburn is one of too few Republicans who understand the need for higher revenues and not just spending cuts. To tame the deficit by cuts alone would require such deep ones that the Republicans could not hope to pass them without winning back the White House and a filibuster-proof majority of fiscal hawks in the Senate. And it might not happen even in that impossible event. When the Republicans last had full control, in the 2000s, they cut nothing except taxes, and added to entitlements.

At its best America is open-minded and pragmatic. These qualities will be needed in abundance if its political class is to rescue it from its burden of debt. Some mix of spending cuts and tax rises is inevitable. So it is encouraging that a conservative such as Senator Coburn is willing to work with Democrats and take on the fiscal fundamentalists of the ATR. Then again, the senator is not seeking re-election. Very few other Republicans in the Senate, to say nothing of the tea-party-beholden freshmen in the House, will find pragmatism on taxes so easy to contemplate