The Corner

Raising Taxes on Everyone

I was on Up with Chris Hayes yesterday morning to talk about the fiscal cliff and the states’ budget crisis. I have to say, I really enjoyed the show. I thought Chris Hayes was a really thoughtful host, and the format of his show allows for real conversations between people who do not agree on everything (or even on most things). Joining me on the show were Governor Dan Malloy of Connecticut; Elizabeth Pearson of the Roosevelt Institute;Dedrick Muhammed of the NAACP, whose company I really enjoyed; and economist Bruce Bartlett joined us remotely from DC. 

We talked a lot about raising revenue, of course. As you know, I would rather talk about restraining the growth of spending, since I believe that the path to prosperity requires a smaller government. I also find it incredibly unfair to continue kicking the fiscal can down the road, letting our children deal with the consequences. But I thought Hayes was really interesting on the issue of taxes. In his introduction, he made a point that you don’t hear often on MSNBC or on the left in general: While taxes will likely go up on the top income earners soon, taxes will also need to go up on everyone else next.

He is right (even though our rationale for why it may be is probably different). In my opinion, the problem with the fiscal-cliff debate has been that no one is acknowledging the fact that there is no way out of raising taxes on everyone eventually unless Congress gets serious about addressing our long-term fiscal problem, by restraining spending. As Kevin Williamson noted last week:

The so-called fiscal cliff is one installment in a series of manufactured crises, the purpose of which is to provide the political establishment with small problems it can solve or pretend to solve while steadfastly refusing to address the much thornier problem of the long-term non-sustainability of U.S. public finances. 

For the last four years, the federal government has spent at least $1 trillion more than what it collects in revenue. Though tax collection has increased in the last two years, the government faces a growing debt problem due to the growth in programs like Medicare. Yet many in Washington cling to the idea that we can “fix this problem” by raising taxes on the top earners only in exchange for ridiculously small, often phony, savings.

I can guarantee that this plan won’t work. If it’s implemented, the country will remain in the red for the foreseeable future. Then Washington is likely to once again look for more revenue rather deal with its spending problem. That’s when taxes will go up for everyone. (In that context, there is a case to be made that we might as well go off the fiscal cliff now, because at least that will force the sequester cuts and avoid wasting time on pretending to address our debt problem with soak-the-rich schemes.)

In his intro, Hayes also mentioned this interesting, and yet often overlooked, fact about the U.S. tax system: The U.S. generally has lower taxes than European countries but our overall federal tax system is unusually progressive. By contrast to the U.S. federal government, like it or not, European governments are raising lots of revenue from low-income people to pay for the services provided to them, as this article in The Economist clearly explains. The result is more revenue but also more government (and still some deficits). Americans like to think they are very different from Europeans. They claim to prefer smaller government and lower taxes. But what they’ve got instead is lots of spending that most taxpayers would rather not pay for. 

This, by the way, is why I thought the Bush years were so toxic. Cutting taxes while increasing spending dramatically — Bush increased real spending by 60 percent, as opposed to Clinton’s increase of 12.5 percent — is a recipe for large deficits leading more taxes later or certainly intense pressure to raise taxes. My colleagues Matt Mitchell and Andrea Castillo have a new paper on this issue that I highly recommend for those considering the current debate. This mentality persists today: We are faced with large deficits but many lawmakers still aren’t serious about restraining spending, choosing instead to retreat behind a debate over the tax treatment of high-income earners.

With a few exceptions, no one seems ready to tell the American people how much taxes will have to go up to satisfy the endless spending appetite of Washington. This weekend, Mark Steyn gave us an idea of what that tax bill would look like. He writes:

A couple of years back, Andrew Biggs of the American Enterprise Institute calculated that, if Washington were to increase every single tax by 30 percent, it would be enough to balance the books — in 25 years. If you were to raise taxes by 50 percent, it would be enough to fund our entitlement liabilities — just our current ones, not our future liabilities, which would require further increases. This is the scale of course correction needed.

So if the American people don’t want to pay that much in taxes, then Congress must restrain the growth of spending. 

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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