During his brief media appearance on Monday responding to S&P’s downgrade of the U.S. credit rating and the subsequent stark market plunge, Pres. Barack Obama once again renewed his call for a “balanced approach” to debt reduction, combining modest entitlement reform with tax increases. This was the same formulation repeated endlessly by the president, Democrats in Congress, and much of the media throughout the recent negotiations over raising the debt ceiling.
But beyond raw ideology, there is no reason to believe that coupling tax hikes with spending cuts would solve our debt problems.
President Obama usually couches his call for tax hikes in terms of fairness. How, he asks, can we cut programs that help people without also asking the wealthy to “sacrifice” something as well? Setting aside the fact that this formulation establishes a false moral equivalence between givingless to people who have not earned it and takingmore from the people who have, this ignores the fact that the wealthy in America already pay a disproportionate share of taxes.
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The richest 1 percent of Americans earn 20 percent of all income in America but pay 38 percent of income taxes. The top 5 percent earn slightly more than one-third of U.S. income while paying nearly 59 percent of income taxes. At the same time, roughly half of Americans pay no federal income tax. One might suggest, therefore, that the wealthy already pay their fair share, and then some.
Of course other taxes, such as payroll taxes, property taxes, sales taxes, and the like, tend to be more regressive. But even if you include all types of federal, state, and local taxes, the wealthy pay a considerably higher proportion of taxes than their share of income would warrant.
Others less prone to moral posturing argue for including tax hikes along with spending reductions on the grounds that it is “impossible to balance the budget through cuts alone.” But the evidence strongly suggests that cutting spending alone may be the only way to really balance the budget. Indeed, by including tax hikes, we slow economic growth, thereby making it harder to balance the budget.
Simply look to those European countries today that have adopted such a “balanced” approach to debt reduction. Britain, Greece, Portugal, and Spain have all included major tax hikes as part of their austerity packages. The result across the board has been anemic economic growth and scant progress toward debt reduction. Britain, for instance, imposed a new 50 percent top income-tax rate, hiked the capital-gains tax rate from 18 percent to 28 percent, and increased the VAT rate from 17.5 percent to 20 percent. The result: During the first quarter of 2011, the British economy grew at just 0.5 percent, barely enough to offset the 0.5 percent decline during the last quarter of 2010.
Paul Krugman and others have argued that it was the spending cuts, not the tax hikes, that slowed economic growth. Others more plausibly have suggested that the continuing shocks that are buffeting the world economic system have reduced economic growth generally and made it difficult to judge the effectiveness of any particular policy or group of policies.
But the body of evidence from outside the current economic crisis tends to confirm the hypothesis that additional taxes would slow economic growth, making it harder to reduce the debt. For example, a study by Harvard economists Alberto Alesina and Silvia Ardagna looked at more than 100 debt-reduction efforts in 21 countries between 1970 and 2007. They found that a combination of spending cuts and revenue reductions was actually more likely to result in debt reduction than a combination of spending cuts and revenue increases.
History shows us that countries as divergent as Canada, Ireland, New Zealand, and Slovenia successfully reduced the size of their governments relative to their economies and lowered their debt burden substantially. They did so by controlling spending, not by raising taxes.
In this country, look to the end of World War II. The U.S. government cut spending by nearly two-thirds, from $84 billion in 1945 to just $39 billion in 1946. While the country ran a budget deficit of nearly 21 percent of GDP in 1945, it was running a surplus by 1947. At the time, many economists predicted that cuts of that magnitude would destroy the U.S. economy and bring about Depression-era levels of unemployment. Instead, civilian employment actually grew, and an era of economic expansion began that would last throughout the 1950s.
All this implies that we should find a way to cut spending. And that brings us back to President Obama’s press briefing. At the end of his remarks, the president once again laid out his plans for the future, and called for more spending: more spending on education, more spending on unemployment insurance, more spending for an infrastructure bank, more, more, more.
Perhaps that, and not a mythical “balance,” is what really lies behind his calls for higher taxes.
Let me start by saying I agree with almost everything Mr. Tanner has to say. That said, the comparisons of today to the late forties and fifties are becoming tiresome. A large part of the economic growth in the US post-war was the result of our untouched manufacturing base compared to the near-devastation in Europe. We were largely responsible for the rebuilding of an entire continent wrecked by the the largest war in human history. Unless Mr. Tanner (along with many others) is arguing for the destruction of Europe, and it's subsequent reconstruction, the comparison is utterly irrelevant.
MJGrossman - Your point is well taken. However, I hear the '40's and '50's argument far more often misused by those on the other side to argue that higher taxes on the "rich" have not been shown historically to hinder economic growth. I can't tell you how many times I have heard Deomcratic operatives go unchallenged when they say that the 90+% top marginal tax rates of the late '40's and '50's existed in the midst of a booming economy. The US economy had no choice but to boom in those years when it was the only one on earth with any physical capacity to produce anything....the tax rate argument in that case is even less relevant and yet is used far more often.
A balanced approach obviously refers to balancing the fortunes of the rich and poor, the privileged with the downtrodden, the citizenry with the illegals, the haves with the have nots, the friends of the Liberals with their enemies, the healthy with the healthier, and the sick with the sicker - all at the discretion of Big Govt.
And by balanced he means, ya know, punitive. Afterall, those who had it so good for so long have to suffer to make it truly balanced - unless your a Union or other Lefty who is privileged, then you get a waiver issued.
And to think that you can simply raise taxes to raise spending, you have to believe that tax hikes directly correlate to increased revenue. This, of course, requires immunity to evidence.
Obama spoke of modest entitlement reforms and new spending. And incresasing tax rates (not necessarily revenue). Translated to English, that is real increased spending justified by projected increased revenues. There is no proposal to reduce the deficit in the new speech.
How can you tell when Obama is trying to mislead you? When his Teleprompter is on.
Nice article, perfectly logical and 100% correct...but completely irrelevant.
I used to think that Jews were the perfect as they represent a small minority with many enjoying significant prosperity.
I was wrong; the ‘rich’ now make the best scapegoat. There is no racism associated with anti-richism. You can attack with impunity in the name of justice as the rights of the poor and downtrodden must prevail against the abusive filthy stealing rich monsters.
It’s all nonsense of course, but when the president tells the 50% who don’t pay taxes its not their fault, blame rests solely on the rich and their righteous just government will take from the rich to ensure the poor get their fair share...who are they to argue?
Liberals have been mobilized since the Russian revolution and the Democrats have been waging class ware since the 1960’s. Now they have an entire generation (or two) of troops proselytized and recruited during their long campaign. Their masses are highly susceptible to loud mouth tin pot demagogues like Al Gore (Global Warming is real!), John Kerry (we must censor the Tea Party because they are wrong and harmful and I am right and good), Al Sharpton (anti-white racism is the path to power).
They currently are waging an effective campaign to win the hearts and minds of Middle America.
Over the next two years if conservatives lose the engagement, liberal policies will truly collapse the economic system (we aint seen nothing yet).
Their policy will destroy the economy and then we risk succumbing to the nightmare when war of words devolves to war like violence in the streets (a staple in the pantheon of liberal tactics).
We could see ugliness on par with that of the Russian revolution with the same cursed results. Misery for all except the more equal than thou liberal elite who will finally have the vise like control over society they have been craving all these years.
Imagine a permanent like Soviet style system...only worse as there no longer will be a United States to eventually defeat it.
I'm with MJGossman here. The historical comparisons with the Nineteen Forties, Fifties, Dark Ages, always culminating in one imminent apocolypse or another are both tiresome and about as relevant as brother Camping's semiannual end of the world warnings. Oh for the days of Reagan Optimism!
@Mike - I really like your sentiment. There is only one baseline that makes sense: zero.
As you rightly imply, baseline budgeting as it is implemented, where the baseline increase is *always* greater than the rate of economic growth, constitutes a fiscal IED that is guaranteed to detonate. It's the math, not ideology.
"Setting aside the fact that this formulation establishes a false moral equivalence between giving less to people who have not earned it and taking more from the people who have..."
This wording is seductive, as it was once seductive (when the argument was first made) to hear advocacy of gay marriage using anti-miscegenation laws as an analogy.
The problem with Mr. Tanner's statement is that "people who have earned it" is an assertion, not a self-evident fact. A lot of these very high incomes haven't been earned in any sense in which we use that word in ordinary life. Beyond the strictly economic disproportion between the (often grotesque) size of the income and the effort exerted to grab it, it's also a fact that many of the grabbers have done nothing of value to God or man, and their "earning" is often totally disconnected real people and the economy that these real people live in.
There are several easy ways for this terribly oppressed class of highly-taxed people to reduce their burden: pay higher salaries to employees, charge lower prices for products and services, etc. These decisions would not only reduce their own burden, but would also increase the burden borne by everyone else. Its only the affluent who whine about their taxes. Most people would be delighted to enjoy a standard of living that would be accompanied by a bigger tax bill...
@Thomas Paulick - you write, "The problem with Mr. Tanner's statement is that "people who have earned it" is an assertion, not a self-evident fact."
Are you proposing to set yourself up as the High Arbiter of Just Earnings, or is it your intent to delegate that task to some government apparatchik? By what standard? Whats empowers you or anyone else to pass judgment upon what others earn?
What rubbish, sir. We have a wretched excess of looters looking high and low for perceived "unfairness", which they are only too happy to remedy, provided they keep a portion of the booty.
You and your ilk are welcome to go away and leave the rest of us alone.
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"When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it." -- Frederic Bastiat
Thomas Paulick, you state:
"Its only the affluent who whine about their taxes. Most people would be delighted to enjoy a standard of living that would be accompanied by a bigger tax bill..."
But I assure you that once they achieve that standard ( more and more difficult to do, btw)that is accompanied by the higher tax bill, they too will "whine" about their taxes.
Of course, those that pay taxes are considered "affluent". If 47% doesn't pay anything (payroll wise), then we are only 3% away from the "upper half" paying it all. At that point, anyone in the "upper half" is defined as "affluent".
Another way to say it, if only the affluent are paying taxes, is it any wonder that they are the ones complaining? Let's face it, folks driving Fords aren't complaining about a crummy Chrysler (nothing against Mopar, it's just an example).
One must constantly keep in mind that Obama and most democrats are mere demagogues. "Starts with T, and that rhymes with P and that stands for pool!" demagogues. What something sounds like is far more important than what it actually is.
Obama needed a weasel word to counter the "balanced budget" republican meme, so he needed a catch phrase with the word "balanced" in it. Simultaneously, he wants higher taxes. Now do we all understand the Obama process? We used the word "balance", and so did he? Why can't we all just come together?
And stupid people lap it up like thirsty dogs, and conservatives waste their breath endlessly battling chimeras, instead of just getting on with it.
Fools!
There is absolutely no doubt that the only sincere thing about Mr. Obama and the rest of the democrat party is their desire to spend money, maintain their hold on political power.
The democrats have absolutely no interest in controlling federal spending, and they are not serious about any of this.
It is revealing that Senator Reid appointed Senator John Kerry to the Sooper-Dooper Deficit Reduction Committee. Neal Boortz rightly observes that Kerry's presence on this committee is odd, since "The federal government cannot balance its budget by marrying rich widows."
We agree that returning to Clinton-era tax rates on the $250K+ households would subtract about $70 billion/yr from the deficit; that repealing the so-called "subsidies" to the oil companies would subtract about $4 billion/yr; and that changing private aircraft from a 5-yr to a 7-yr depreciation schedule would subtract $0.3 billion/yr. The total deficit reduction from all three measures would come to $74.3 billion/yr.
I say give it to them. Give the President and the Democrats their $74.3 billion/yr, and take the issue off the table. That amount is insignificant compared to the real problem: trillion dollar annual deficits as far as the eye can see. Expose the Left's class warfare propaganda for what it is. Force them to come face to face with the fact that spending is the problem. Compared to the benefits the Left gets from the political cover provided by Republican intransigence over this tiny sum, the $74.3 billion/yr cost of ripping off that cover is well worth it.
