Taxing our Way to Balancing the Budget?
I just thought I'd pose the question: Does anyone around here believe we can tax our way to prosperity? Strike that. Does anyone believe we can tax our way out of our national debt crisis?
This is hardly a facetious question, since Barack Obama obviously has made this a central component of his budgetary plan (I use the term "plan" loosely, because, as so often is the case, he really doesn't have anything specific enough to be called a plan).
There are several reasons I believe we cannot solve our debt crisis through tax increases. 1) Taxes are not a zero-sum game; you will not increase revenue commensurate with increases in taxes. 2) Increasing marginal tax rates, especially on the highest income producers, will reduce the tax base and deter economic growth (this point overlaps with the 1st point). But if you're unfamiliar with the numbers you'd be surprised at just how much our increase in deficit is due to the recession, which in turn, is exacerbated by overspending and over-taxing -- the government crowding out the private sector and smothering the engines of real economic growth. 3) Even if you gain revenues in the short run or beyond, history proves that the government will always increase spending when there is more revenue. 4) Even if I'm all wet about the 1st three, we are in such astronomical debt that even substantial increases in taxes will not come close to closing the gap. Our long-term problem, as we all know, is the unfunded entitlements issue. We can't remedy these without serious restructuring of these programs -- $88 trillion in unfunded liabilities will not be retired by balancing yearly budgets or even with mild surpluses.
Despite all this, Obama's only significant proposals are to 1) tax the **** out of the rich (plays well with his base and stokes class warfare for dependency class votes), but does nothing to solve the problem it purports to address, and 2) cause his IPAB (super-bureaucratic panel) to make top down, one-size fits all decisions on health care, which cannot possibly contain costs and thus contribute to solving the debt problem without major rationing. Such major rationing, ironically, entirely defeats the stated impetus for Obamacare in the first place, i.e., increasing access to care. Obamacare and IPAB will see to it that just the opposite occurs.
Bottom line -- Obama isn't serious about solving this debt crisis -- and that means he must be defeated -- can't be merely worked with, can't compromise with him. He has to be defeated.
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Re: Taxing our Way to Balancing the Budget?
I'm not defending the idea, but just asking: Didn't Bill Clinton cut the deficit by raising taxes?
Re: Taxing our Way to Balancing the Budget?
I think he benefitted greatly from the Gingrich-driven spending cuts, but there will always be debate about this era... Let others weigh in on that. Regardless of that, I reiterate the major point of my post: we are talking gargantuan debt on top of humongous debt with the $88 trillion unfunded liabilities. Little annual surpluses -- even big ones won't touch our overall problem.
Edited on Apr 21, 2011 at 3:44pmRe: Taxing our Way to Balancing the Budget?
I read a great treatment of this issue by Meghan McArdle today. The relevant portions:
Edited on Apr 21, 2011 at 3:43pmRe: Taxing our Way to Balancing the Budget?
I agree David. I think Clinton also benefitted from the tech bubble and a bump from the cold war ending.
And I think you are spot on with #3 - even if we produce more revenue with a tax increase, they're going to spend it anyway.
I ponder where we might be on the Laffer Curve right now. Would a tax cut even generate enough money to cover the spending we are doing right now?
Aug '10
Re: Taxing our Way to Balancing the Budget?
Diane Ellis, Ed.
I read a great treatment of this issue by Meghan McArdle today. The relevant portions:
Edited on Apr 21 at 03:43 pm
Apr 21 at 3:42pm
Exactly right, Diane. It's appalling that these facts are almost never mentioned. We MUST have serious CUTS. The tax system MUST BE OVERHAULED.
Re: Taxing our Way to Balancing the Budget?
Not even close based on looking at the numbers. Nor would entirely eliminating non-defense discretionary spending, as Paul Ryan has said. There has to be major structural entitlement reform, and Obama still chooses to demagogue and offer smoke and mirrors rather than real reform. The only real reform that I can see, would be rationing via -- dare I say it -- oh, let's just call them "health care decision making panels."
Re: Taxing our Way to Balancing the Budget?
Very interesting Diane. I wonder if there is any way a government can fuel asset value. My gut tells me no. Damand would need to rise, and as Richard Epstein pointed out here yesterday, stimulus only creates a temporary bubble.
The market is going to have to cure itself.
Edited on Apr 21, 2011 at 3:55pmRe: Taxing our Way to Balancing the Budget?
Your point, David, is well taken. There seems to be a limit to the percentage of the GDP that the government can take -- which is roughly at 19%. If it tries to take more, it simply inhibits economic activity, and it ends up taking in fewer dollars but roughly the same percentage of the whole. Obama's ambitions presuppose the government's capacity to take in ca. 23-25% of the GDP. If he wins in 2012 and gets his way thereafter, we will be on our way to demonstrating the hard way that what cannot be achieved won't be achieved.
Dec '10
Re: Taxing our Way to Balancing the Budget?
Come rain or shine, revenue comes in at around 18 to 19 % of GDP, max (with fleeting exceptions. There is no way to get more than that, without going at the middle class, hard, as those in the upper brackets are few and can simply reduce effort.
We spend 40 % more than we take in in revenue, now. Plus we have approximately $150 trilllion in unfunded Medicare/Social Security coming due during the next generation, or so. Who are we going to tax to pay for that spending? The Chinese?
Not me. I went Galt two years ago and I only earn just enough to barely get by, ( $3.47 was tough, for me.) I will keep doing that, until things substantially change. I would rather spend my time feeding chickens and building fences than working long hours to have a third of my income withheld to spend on Cowboy Poetry, or propping up bad businesses.
We can get rid of Obama, but we can't get rid of his supporting bureaucracies, nor the vast pool of professional congressional staffers that live in and around D.C., and ensure that government grows. All we can do is starve them out.
Jun '10
Re: Taxing our Way to Balancing the Budget?
Excellent points by all. I've said it before and I'll say it again. Governments and politicians got us into this mess. It is they that must get us out. Governments (state, local, and federal) must shrink themselves FIRST. Social Security, Medicare, and Medicaid must restructure to a mathematically sustainable formula FIRST. If they did that, I would stand in line to write a check to reduce our debt and voluntarily reduce my medicare and social security benefits. But the governments never sacrifice. They just keep growing and taking. Raising taxes first will only allow governments to spend more. And they will.
Oct '10
Re: Taxing our Way to Balancing the Budget?
In aviation, you can always trade altitude for airspeed and vice versa (albeit with some losses). The unit in which this sum is measured is energy, and when you have too little, you're going into the ground, no matter how skilled or clever a pilot you may be.
This is where I believe the U.S. is today. All it takes is for the interest on the public debt (which has moved to shorter and shorter terms, and hence become more sensitive to short-term fluctuations) to return from present levels to their long term median for debt service costs to explode, which can set off a "debt spiral" of increasing deficits, higher interest rates, greater debt service costs, downgraded bond ratings, and around and around we go. It has happened many times before, but not to the world's foremost reserve currency. We are in uncharted waters here.
Here is a very dark view of what I fear may be the best case scenario. I sincerely hope I am wrong, but I see little evidence to the contrary.
Dec '10
Re: Taxing our Way to Balancing the Budget?
Perhaps Obama thinks he can force people to work as hard or harder under higher tax rates as they do under lower ones. After all, his NLRB believes it can force a private corporation to do business in a place with untenable labor conditions -- as though the notion of the corporation simply refusing to do business in a money-losing environment is unthinkable and outside the realm of possibility.
The fundamental question becomes: in the world Obama is building for us, do we still have private property rights and the right to offer our labor only to employers who offer us acceptable terms? Or does the Federal government assert the right to direct us to furnish capital and labor to its favored purposes?
Apr '11
Re: Taxing our Way to Balancing the Budget?
Even if you could apply sky-high tax rates to the so-called 'rich' without depressing economic activity, that still won't generate anything like enough revenue to fix our fiscal mess. The Democrats know this - but fixing the economy and creating broad prosperity through economic growth isn't their objective. Social justice is the objective, even if that means turning the US into Cuba. I was interested to read Reagan's autobiography recently, and noted that when he was elected governor of California, he inherited a huge mess left behind by the outgoing tax-and-spend Democrat administration. In the near term, he did indeed raise taxes to close the budget gap. However, he *also* reduced spending, regulation and the size of the state government. When he'd returned the state budget to surplus, he returned that surplus to the taxpayers in the form of tax reductions and refunds. He did this four times dying his 8 years in office. Tellingly, this act was denounced by the Democrat legislature as a 'reckless misuse of public funds' - which tells you all you need to know about their perception of whose money it was.
Oct '10
Re: Taxing our Way to Balancing the Budget?
Revenue is at 14% of GDP; spending is at 24%. That means the deficit can benefit from raising taxes by 5% of GDP (back to 19%) and cutting spending by 4% of GDP.
So of course tax hikes can help. The problem like you said David, is taxing only the wealthy will raise little revenue (Obama's estimate was, what, ~70 billion a year? Not a whole lot). Ultimately tax hikes are borne mostly by middle-class people--that's where most of the money is; the rich are simply too few in number. Remember, Clinton's tax hikes for the wealthy were purely symbolic; he cut the capital gains tax. We got more revenue because of the stock boom and economic growth, not higher tax rates per se.
I say, let's cut out a few deductions, and leave it at that. Economic growth + deduction cutting (and expiration of temporary tax cuts) will get revenue back to 19% within 1-2 years (depending on what the final plan looks like). Spending also has to come down significantly (the crowding-out effect is very real, especially when financed by debt).
Oct '10
Re: Taxing our Way to Balancing the Budget?
John Walker:This is where I believe the U.S. is today. All it takes is for the interest on the public debt (which has moved to shorter and shorter terms, and hence become more sensitive to short-term fluctuations) to return from present levels to their long term median for debt service costs to explode, which can set off a "debt spiral" of increasing deficits, higher interest rates, greater debt service costs, downgraded bond ratings, and around and around we go. It has happened many times before, but not to the world's foremost reserve currency. We are in uncharted waters here.
Here is a very dark view of what I fear may be the best case scenario. I sincerely hope I am wrong, but I see little evidence to the contrary. · Apr 21 at 4:29pm
Well, I don't know if this is truly unprecedented. I mean, we did have balance of payments problems in the late 60s, culminating in the Nixon gold shock.
The traditional solution is inflating away the debt, while extorting rent from savers through financial repression. But since we didn't do that in the 90s I think there is still hope.
Mar '11
Re: Taxing our Way to Balancing the Budget?
I agree with Paul Ryan - we have a spending problem, not a (lack of) tax problem.
All we need is a good candidate to defeat Mr Obama... I was reading about the good people of Wisconsin asking, begging, with quivering voice, Mr Ryan to run - what is it gonna take?
Or are we gonna have Trump? He would do at a pinch, but can't we do better?
Aug '10
Re: Taxing our Way to Balancing the Budget?
I think the president needs to be asked two pointed questions:
If we can call spending federal money investments, why isn't it also true that raising taxes is dis-investing in productive resources?
and
OK, for the sake of argument, we accept your blended approach. We ignore history and assume that raising taxes simply increases federal revenue with no negative consequences, and that we can cut half the deficit through taxes. What 800 billion in spending will you cut for the other half of the blended approach, not in ten years, but now? If you are serious, you can't simply try to pin all the negative consequences of not spending on the Ryan plan.
Nov '10
Re: Taxing our Way to Balancing the Budget?
I have yet to see anyone compellingly refute Kevin Williamson's numbers: To eliminate the debt we need to either raise taxes on everyone by 88% or cut the entire federal government (including defense and entitlements) by 1/3. I think it's safe to say that neither of these scenarios is realistic, however appealing the latter may be to the Ricochetois.
That said, David's third point is a legitimate concern, which is why I think tax hikes need to be taken off the table temporarily. We need a good faith effort to cut and/or reform as much as possible, and a similar good faith pledge that increased revenues (David's first point is surely correct, but even a multiplier as low as .5 is better than nothing) will be used exclusively for debt reduction before tax hikes are even mentioned. Said pledge should ideally be inserted into the tax bill itself along with a statement that tax rates will be returned to pre-crisis levels as soon as the debt is paid.