The politicians claim that they are negotiating about how best to reduce the deficit. That irks me because our fiscal problem is excessive government spending. Red ink is merely a symptom of that underlying problem.
But that’s a rhetorical gripe. My bigger concern is that politicians are prevaricating. They’re really talking about higher taxes in order to enable a bigger burden of government spending, not less red ink. I make this point in an interview on Fox Business Network.
This is the point where I often elaborate on issues raised in the interview, but let’s instead build on the discussion to look at policy and political reasons why the GOP should not surrender to Obama’s tax demands as part of fight over the fiscal cliff.
Here are the policy arguments against higher taxes.
1. There is no need for higher taxes since the budget can be balanced merely by restraining spending so that it grows 2.5 percent each year.
According to the most recent Congressional Budget Office fiscal estimate, the 2001 and 2003 tax cuts can be made permanent and red ink can be wiped out in just 10 years so long as politicians simply control the growth of federal spending so that outlays don’t grow faster than 2.5 percent each year. Other nations have shown that this type of spending restraint is very successful, while no nation has ever taxed its way to fiscal success.
2. Since the tax increases stick and the supposed spending cuts quickly evaporate, budget deals that raise taxes have a long history of failure.
Last year, in an article that was designed to browbeat Republicans for being unreasonable about tax hikes, a New York Times columnist inadvertently revealed that the only budget deal that actually led to a fiscal surplus was the 1997 agreement that lowered taxes instead of increasing them. None of the tax-hike budget deals ever resulted in a balanced budget.
3. America’s short-run fiscal problem is the result of too much government spending, not inadequate tax revenue.
Because of large spending increases during the Bush-Obama years, the burden of federal spending has doubled in just 11 years. This is why today’s fiscal numbers look so grim. Some argue that tax revenues are below their long-run average of 18 percent of GDP, but CBO estimates show that tax collections will be above the long-run average by the end of the decade even if all the 2001 and 2003 tax cuts are made permanent. And the White House recently admitted this was true as well.
4. America’s long-run fiscal problem is the result of too much government spending, not inadequate tax revenue.
In the absence of entitlement reform, the burden of federal spending will double, measured as a share of GDP, and the overall burden of government will exceed the levels that currently exist in every single European welfare state. Tax revenues also will climb as a share of GDP thanks to “real-bracket creep,” so there is no plausible argument that the long-run problem is inadequate revenue.
5. The European evidence shows that genuine spending cuts are the only effective way of solving a fiscal crisis.
Nations such as Italy, Greece, France, Spain, Ireland, Portugal, and the United Kingdom have imposed massive tax increases, yet their fiscal problems remain. Indeed, in some cases, these nations are in worse shape because the tax hikes contributed to anemic economic performances. Some of these countries have belatedly begun to trim their spending burdens, but generally by relying on transitory savings rather than permanent reductions in the obligations of the welfare state. The only relative success stories on the continent are Switzerland, which never got into trouble in the first place thanks to a spending cap, and the Baltic nations, which imposed genuine spending cuts when the crisis first began and now are reaping the rewards of that fiscal discipline.
And here are the political arguments against higher taxes.
1. With Republicans easily retaining control of the House of Representatives, the election was not a mandate to raise taxes.
Nobody argued that there was a mandate to raise taxes before the election, when Republicans controlled the House and Democrats controlled the White House and Senate, so how can there be a mandate to raise taxes today since the election didn’t change anything? Some assert that Obama has a mandate since he campaigned in favor of his soak-the-rich tax plan. That’s true, but House Republicans prevailed after campaigning against class-warfare taxes, so that’s a wash.
2. The GOP prevailed in the exact same tax battle back in 2010, before they controlled the House and when they had fewer seats in the Senate.
This is not the first fiscal cliff battle. The same fight took place at the end of 2010. At the time, Democrats has an overwhelming majority in the House and even stronger control of the Senate than they do today. But by holding firm and staying united, Republicans prevailed. If they lose today, when they have far more political power, it will be a damning indictment of their incompetence.
3. Acquiescing to tax hikes would set a tone of weakness for 2013 and 2014, much as the 2011 “shutdown fight” needlessly gave Obama the upper hand on fiscal battles in 2011 and 2012.
Back in early 2011, the GOP had a pivotal battle with Barack Obama over spending levels for the remainder of the fiscal year. Being a thoughtful guy, I gave them some unsolicited advice on how to prevail, explaining for National Review how Republicans basically won the shutdown fight of 1995-1996. Sadly, they didn’t take my advice and they wound up with a crummy deal. And that paved the way for subsequent defeats, such as the debt limit debacle that planted the seeds for the current tax-hike dilemma. The GOP needs to stop this carousel of capitulation. The fiscal cliff, while bad, is not as bad as a tax deal imposed on them by Obama.
4. If Republicans give up on taxes, they will get nothing in exchange.
I’ve actually written that I would accept higher taxes if we got some real fiscal reform to restrain the growth of government. There is zero chance, however, of any meaningful changes on the spending side of the fiscal ledger, such as program terminations or real entitlement reform. Heck, Obama even proposed more spending for additional Keynesian faux stimulus. Republicans will be laughingstocks if they get suckered…again.
5. Integrity matters, so politicians who promised the people that they wouldn’t raise taxes should honor those commitments.
I realize that it is silly to make an argument about honor and integrity when we’re discussing the actions of politicians, but I’m old fashioned. A promise should mean something. And even if promises don’t mean anything to these guys, they should remember that voters don’t like dishonesty.
I’m not terribly hopeful that any of my advice will be followed, so let’s close this post with some gallows humor.
This cartoon has the same message as the seven classics I posted over the weekend.
Simply stated, Republicans are caught between a rock and hard place, and it looks like taxpayers are going to get screwed.
But they do have a choice about whether their fingerprints should be on the screw.
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Republicans nor democrats get it. There are so many places to make cuts. But all I am hearing about is medicare. I know elderly people who live on $700 per month with maybe $30 in food stamps. & I am hearing that one of the cuts is their cost of living. I wished we could have one of the grannies receiving this amount in Soc. Security come & do a budget for Washington. They would know how & I do not believe they would need a tax increase to balance the budget, I am sure they could find a few pet projects that could be cut. What is wrong with our leaders in Washington?
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The wimp Republicans will give in like they always do.
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[…] been arguing against higher taxes because of my concerns that more revenue will simply lead to a bigger burden of government […]
[…] been arguing against higher taxes because of my concerns that more revenue will simply lead to a bigger burden of government […]
[…] been arguing against higher taxes because of my concerns that more revenue will simply lead to a bigger burden of government […]
What Obama and the Democrats did (and this really is kind of shady) was use the 2009 budget as a baseline and essentially move forward with it via a series of continuing resolutions. It’s kind of like wrecking your car and deciding afterwards that you really like spending an extra $25,000 a year and so you continue to do so in perpetuity.
Reblogged this on Litteken Economics.
The only way to pay for current spending levels by taxing only “the rich” would be to apply 50-60% income tax rates all the way down to 100k of income – AND hope for no Laffer Curve effects aAND no American worldwide competitiveness declines.
And this calculation that does not include the bourgeoning cost overruns of Obamacare, a behemoth and still budding motivational cancer entitlement, with the inevitable perverse side effects of encouraging people of all ages to supply less, or more relaxed (i.e. lower quality) labor to the overall economy, while America faces challenges from the three billion emerging world. These economic activity stifling costs, which will cause the USA to loose its top spot in worldwide competitiveness, go much deeper that the simple and obvious ObamaCare monetary cost overruns. But Obamacare, as an irreversible springboard to a full blown welfare state and irreversible path to decline is a story all in itself. Returning to the limits of financing even current levels of spending by only taxing the rich: It is impossible.
So for all practical purposes, the American people have voted for a future with VAT and other hidden taxes that will affect both rich, middle and poor, while, MORE IMPORTANTLY, economic growth descends to European levels and Americans start sliding down their world prosperity rankings at 3% per year (=5% average world growth minus the new reality of a more euro-like American 2% growth trendline). But that is not even where it ends. The second derivative of growth is also negative. Relative to the historical 3-3.5% American growth trendline, a 2% growth trendline will precipitate a deteriorating mood amongst the American public. As the European story repeatedly demonstrated time and again, that coming American somber mood will inevitably translate into mandates for more “government help” through the democratic polling process. With electoral demand present and a three hundred million population, an even newer generation of politicians willing to guide the voter moths to the light will certainly be found and brought to prominence.
These are the only equilibrium points of the welfare state, which Americans, for all practical purposes, have now chosen to join. And we are even talking about the relatively successful welfare states like Sweden and Denmark, not basket cases like Greece, Spain, Italy who are sliding down the world prosperity rankings at a full -5%, under near zero growth, or even negative growth — though the negative growth is only a temporary adjustment in my view. If there were other equilibrium points, one or another of the many European states would have discovered it and settled in it during the now four decade long European experimentation with welfare state incentives. At best, this equilibrium is an equilibrium of relentlessly compounding decline, growing at 2% per year in a world that aggregately grows by 5% — and thus sliding down the relative prosperity world rankings by 3% per year. A three percent perpetually compounding growth deficit WILL amount to significant decline in relative standard of living over 10-20-30 years, a transformation already evident in the somber resigned mood of European life and prospects. That is the future Americans are staring right in the eye and have irreversibly chosen, like the moth tragically flies to the light in great Hope.
But while apprehensive, both American left and right hold out some hope that this will not happen. Hope that somehow, human genes upon migrating to America have irreversibly mutated in a mere century or less (clearly a biological impossibility) and therefore hope that Americans possessing these unique American genes will maintain — even under the welfare state incentives — their legendary ambition, optimism, desire and expectation to one day excel. Or they simply do not understand the very simple arithmetic reality that a two percent growth trendline, in a world that is growing by five percent, means the deterministic slide into decline at a three percent relentlessly compounding yearly rate. Or they do understand it but simply don’t care. They only see a couple of years ahead and think that consequences are far enough out into the future and corrective action wil somhow be an option it it does not work out. As for the right, they have their own delusions, like a non negligible proportion of “conservatives” who believe that The Divine is ultimately on America’s side, so what can go wrong?
But by the time reality smashes these Hopes for both left and right, it will be too late. WAY too late for any one citizen group to take the first unilateral step towards withdrawing from the welfare state, where everyone is everyone else’s partial slave. You withdraw, you loose your slave but remain a slave to others. Nobody steps forward, decline continues under a severely sub-par low-motivation growth trendline.
Once sandwiched between America on the top and the rising emerging world at the bottom, and continuing their way to decline, Europeans must be partially consoled that America is finally stepping on the same low-motivation, low-growth banana peel. They do though seem to be still complaining that America is not killing its motivation and prosperity fast enough.
The western world lemmings that Americans have now decided to join, deserve every bit of the decline that is in store for them. Watching this unfold will be at least partially entertaining to me while I’m kept warm by the American furniture that HopNChange is burning, away and insulated from the rat-race of the “greedy”. If you decide to do the same, just make sure you secure a salvage boat for you and/or your kids — for when the furniture eventually runs out into a rather fast decline – sooner rather than later. OR…, if the left is ultimately right (no pun intended), continue living-on happily, in perpetuity, in a high growth happy America, while you enjoy and consume the work of others, some distant motivated highly capable greedy individuals, or the unexceptional work of less motivated mediocre people who coming together under mandatory collectivism perform Paul Krugman economic magic and prosper.
You decide what is wiser to do on a personal level. Cheer up! The future looks bright!!! The years of decline can be happy if you play your cards right and secure a life boat. Take it from an ex-European with some proportion of Greek blood. You find yourselves in the same environment as you are headed into, you WILL react the same way! Bye-bye America. American voter lemmings keep me warm with your furniture for a few more years.
http://hotair.com/archives/2012/12/06/just-a-reminder-this-is-a-spending-crisis-not-a-revenue-crisis/
Good piece putting the emphasis back on the real problem – spending!
Exactly! And if they decide to fight, they fight to the death! If you’re going to get the punishment, it better be worth it! Endure some short term blame but when things improve, you’ll get some of the credit. (Of course, they won’t get all of the credit. I cannot count how many times I hear how President Clinton created a surplus or how Clinton balanced the budget!)
Jason, I’m 100% with you on Door Number 1. The Republicans WILL get all the blame if they have any fingerprints on it at all. Let Obama own it – lock, stock, and barrel.
IMO, the Republicans have two options:
1. Give Obama what he wants, vote present and let him own it. When the economy tanks, the blame will be squarely on Obama. (Everything except the debt limit increase!)
2. If they don’t go with option 1, the GOP will get all the blame. If they’re going to get all the blame, then they should fight for everything they want since they are getting the blame. Why give in to Obama’s demands if you’re going to get blamed for all of the negative consequences?
I’d like to see immediate cuts to spending, but the GOP is stupid. They’ll probably agree to future cuts, that will quickly disappear. The only way you can capitulate on increasing the top tax rate is if you get immediate cuts, no increase to capital gains and a corp tax cut.
[…] Read More By Daniel Mitchell . […]
You talk about honesty, Dan. Why not use honest maths only, and convert all politicians’ budget numbers into real increases – which means comparing them with last year’s actual numbers.
Any company executives would get thrown in jail if they used such dishonest maths. If companies have to use generally accepted accounting principles, then shouldn’t politicians as well?
There are laws against dishonest company accounts, accountants and heads, shouldn’t they also be used against similarly dishonest government accounts and accountants…