Democrats are unanimous in charging that the debt-reduction supercommittee collapsed because Republicans refused to raise taxes. Apparently, Republicans are in the thrall of one Grover Norquist, the anti-tax campaigner, whom Sen. John Kerry called “the 13th member of this committee without being there.” Senate Majority Leader Harry Reid helpfully suggested “maybe they should impeach Grover Norquist.”
With that, Norquist officially replaces the Koch brothers as the great malevolent manipulator that controls the republic by pulling unseen strings on behalf of the plutocracy.
Nice theory. Except for the following facts:
Sen. Tom Coburn last year signed on to the Simpson-Bowles tax reform that would have increased tax revenues by $1 trillion over a decade.
During the debt-ceiling talks, Speaker John Boehner agreed to an $800 billion revenue increase as part of a Grand Bargain.
Supercommittee member Pat Toomey, a Club for Growth Republican, proposed increasing tax revenues by $300 billion as part of $1.2 trillion in debt reduction.
Leading, very conservative Republicans proposing tax increases. So why does the myth of the Norquist-controlled anti-tax monolith persist? You might suggest cynicism and perversity. Let me offer a more benign explanation: thickheadedness. Democrats simply can’t tell the difference between tax revenues and tax rates.
In deficit reduction, all that matters is tax revenues. The holders of our national debt care not a whit what tax rates yield the money to pay them back. They care about the sum.
The Republican proposals raise revenues, despite lowering rates, by opening a gusher of new income for the Treasury in the form of loophole elimination. For example, the Toomey plan eliminates deductions by $300 billion more than the reduction in tax rates “cost.” Result: $300 billion in new revenues.
The Simpson-Bowles commission — appointed by President Obama and endorsed by Coburn — used the same formula. Its tax reform would lower tax rates at a “cost” of $1 trillion a year while eliminating loopholes that deprive the Treasury of $1.1 trillion a year. This would leave the Treasury with an excess — i.e., new tax revenues — of $100 billion a year, or $1 trillion over a decade.
Raising revenues through tax reform is better than simply raising rates, which Democrats insist upon with near religious fervor. It is more economically efficient because it eliminates credits, carve-outs, and deductions that grossly misallocate capital. And it is more fair because it is the rich who can afford not only the sharp lawyers and accountants who exploit loopholes but the lobbyists who create them in the first place.
Yet the Democrats, who flatter themselves as the party of fairness, are instead obsessed with raising tax rates on the rich as a sign of civic virtue. This is perverse in three ways:
(1) Raising rates gratuitously slows economic growth, i.e., expansion of the economic pie for everyone, by penalizing work and by retaining inefficiency-inducing loopholes.
(2) We’re talking pennies on the dollar. Obama’s coveted Bush-tax-cut repeal would yield the Treasury, at the very most, $80 billion a year — offsetting 2 cents on the dollar of government spending ($3.6 trillion).
(3) Hiking tax rates ignores the real drivers of debt, which, as Obama himself has acknowledged, are entitlements.