Paul L. Caron

Friday, April 8, 2011

CSM: Why 'Taxes' is a Dirty Word

CSM Christian Science Monitor, Budget Stalemate: Why America Won't Raise Taxes:

Budget stalemate has many on Capitol Hill crunching numbers. With any new budget, taxes may be the real third rail of politics. Can the U.S. solve its fiscal woes without more revenue?

For generations, Republicans have resisted tax increases. As far back as the 1920s, conservative Treasury Secretary Andrew Mellon was arguing that "high rates of taxation do not necessarily mean large revenue to the government, and … more revenue may actually be obtained by lower rates."

But in recent years, the aversion to taxes has become more deeply ingrained. It is more than a policy preference, more than a tenet in a party platform. For many Republican officeholders, raising taxes is a subject they simply won't broach anymore – period. If there is a third rail of politics today, it might not be Social Security. It might be tax increases.

Raising more revenue is not a part of the negotiations going on over the current budget impasse in Washington that is bumping up against a Friday deadline. Nor are tax increases part of the 10-year budget blueprint released this week by Rep. Paul Ryan (R) of Wisconsin, which would cut nearly $6 trillion in spending over the next decade and reshape how Washington works. In fact, Mr. Ryan proposes lowering corporate and upper-income tax rates.

The antitax ethos has been shaped by both politics and principle. To tax opponents, the overall tax burden is still needlessly high – the US corporate tax rate, for example, is one of the highest in the industrialized world – suppressing the activity of businesses and individuals who would otherwise use those resources to stimulate the economy and create more jobs. They say higher taxes would just feed an already bloated government that is getting inexorably bigger by the day. As the nation once again grapples with staggering deficits and some $14 trillion in debt, the real problem, they insist, isn't a lack of revenue. It's too much government spending. ...

To critics, however, the refusal to even consider raising taxes is threatening the nation's financial future. Democrats and many independent analysts argue that the debt problem is just too big to be tackled through spending cuts alone, and that any eventual solution must involve higher revenues.

Yet budget negotiations of the sort George H.W. Bush presided over in the early '90s – in which Democrats pushed for higher taxes and Republicans pushed for spending cuts and they met somewhere in between – don't seem to exist anymore. Instead, lawmakers get locked into intractable standoffs in which they can agree on only a smattering of minor spending cuts, while putting off resolving the deeper economic problems. "We've sort of lost the capacity to raise taxes under any circumstances," says Joseph Thorndike, director of the Tax History Project at Tax Analysts, a nonprofit group in Falls Church, Va. "And as long as tax increases are off the table, then spending controls are off the table, too. There's no happy ending to this story."

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Ronald Reagan destroyed the psychological tax base of the United States. Using the Laffer Curve, a mythological account of the Kennedy tax cuts of the early 1960s, and a revisionist interpretation of the American Revolution, Reagan convinced his party, a good chunk of the so-called independent voters, and even some academics that cutting taxes would stimulate the economy, and that conversely, tax increases would hurt the economy. All false, but nevertheless well-packaged and sold to the American people like a GE lightbulb. If this republic is to survive, someone is going to have to stand up and tell the American people the hard truth. There is no free lunch. Tax cuts do not increase revenue. And most importantly of all, Jeffersonian-Reaganesque small government fantasies are slightly less useful than blacksmiths and coopers in the 21st Century.

Posted by: Publius Novus | Apr 12, 2011 6:50:09 AM

I'm old enough to remember the "budget negotiations of the sort George H.W. Bush presided over in the early '90s – in which Democrats pushed for higher taxes and Republicans pushed for spending cuts and they met somewhere in between." The only problem was that the end result was always the same: the tax increases took effect right away, and the spending cuts never took place. That is why Republicans today won't play that game.

Posted by: DBL2 | Apr 11, 2011 8:45:59 AM

The big issue of sustainability needs to be resolved first. Otherwise any concessions by either side hurt that side's position in the big issue. By analogy, you wouldn't buy a house piece by piece; you would lose negotiating leverage with every piece you buy.

Ryan's plan is one side's starting point for the big negotiation. The other side doesn't have a starting point yet. Until they have their own plan, nothing significant can happen other than a bond market crash.

Posted by: AMTbuff | Apr 8, 2011 3:45:25 PM