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Capitol Ideas
Taxes Won’t Save Us
Chop-logic from Wonderland.
OVER THE YEARS I HAVE WRITTEN quite a few budget articles. Then I stopped because the readers stopped. Budget numbers are dull, and complications quickly multiply. Most people have a hard time keeping their family’s budget straight, let alone the federal government’s. That’s a pity, because America’s financial picture today is grave.
A thousand Internet commentators are predicting a crash (without saying when). In contrast, Democrats downplay the issue because they believe our problems can be solved by raising the tax burden on the rich. With class warfare his main preoccupation, President Obama seems obsessed by the idea that he has a golden opportunity to punish the productive. But if he gets his way, the budget picture may well go from bad to worse.
Here’s my one-paragraph sermon on budget basics. Tax rates are prices. Taxes are quantities. Yet they are frequently conflated, as in the phrases “tax cut” and “tax increase.” When tax rates are increased, what happens to revenues? The Congressional Budget Office assumes that they go up by the same proportion. But they don’t. Imagine you are running a money-losing department store, and everyone gives you the same advice: “Raise prices on your luxury goods!” So you do, and the rich shoppers go somewhere else. Now you are worse off. Prices higher, revenues lower. You have learned a lesson. When it comes to prices (or taxes), the rich can move, or move their money, or both.
Unfortunately, confused readers generally work to the advantage of liberals, whose permanent goal is to expand the power of government. As a rule, reporters draw attention to national budget problems only to persuade us that “more taxes” are needed. They mean more revenues, and they assume higher tax rates will produce them.
Spending cuts are equally misreported. Assume that $100 is being spent on some government program (think of it as $100 billion if you want to be more realistic). Now a “5 percent budget cut” is promised—but it’s not what you might imagine. Capitol Hill has 10-year budget projections already built in. So Congress has scheduled, let’s say, $110 (billion) for the same program next year (a 10 percent increase). Under a 5 percent cut, only $105 will be allocated to the program instead of the projected $110.
So in the end, spending has gone up from $100 to $105 and that’s a 5 percent cut. So it goes. Reporters who write these stories never tell you that a budget “cut” is almost always an increase that has been slightly reduced from an earlier “baseline.” In the end, only the budget wonks understand what’s going on.
That’s where vice presidential candidate Paul Ryan comes in. He has a better understanding of these things than any congressman I have ever met or heard of. (David Stockman was pretty good too, 32 years ago, until he became strangely radicalized.) What’s more, Ryan knows how to explain the issues so that non-experts know what he’s talking about.
You may have heard that we are facing a “fiscal cliff.” Many tax-rate increases and spending cuts are due to take effect unless Congress changes the law. Bush-era tax changes, some going back 10 years, and various others, will expire on December 31 if nothing is done. Tax rates on income, dividends, and capital gains will all go up in the new year; capital gains, for example, to 30 percent from the current 15 percent; dividends to 44 percent from 15 percent. Plus there will be a big increase in the death tax, known as an estate tax. (For a full list of the tax increases slated for next year, see Grover Norquist’s “Waiting for Taxmageddon,” TAS, July-August 2012.)
The CBO assumes no behavioral change in response to these tax hikes, which is like assuming that human targets won’t budge when a pistol is visibly aimed at them. The government assumption is that with these higher tax rates, $500 billion in new revenues will be collected. Spending cuts are also due to take effect, in a budget “sequester.” The defense budget in particular will take a big hit.
The combined effect of these changes is supposed to be a $600 billion deficit reduction. That’s another deceptive phrase, by the way—“deficit reduction.” The unwary assume it means a reduction in the budget when what it usually really means is that your taxes are going up. In 1990, President Bush (Sr.) called for “deficit reduction,” and he got what his aide Dick Darman wanted—a tax increase. That broke Bush’s “no new taxes” pledge and cost him the 1992 election.
Current government spending for 2012 is $3.8 trillion, and the deficit is said to be $1.3 trillion. So enactment of these fiscal changes will (supposedly) almost halve the current budget deficit. But don’t believe that. Meanwhile, estimates of government debt vary widely. A figure commonly given is $15.5 trillion. Former U.S. Comptroller David Walker puts the figure at $70 trillion— which counts promises made to seniors and pensioners— and growing by $10 million every minute. Economist Laurence Kotlikoff and columnist Scott Burns report a long-term “fiscal gap”—which they define as the “difference between projected future spending and revenue”—of $223 trillion. The key point: Debts are growing faster than revenues.
AS TO CURRENT NEWS, the most recent CBO assumption is that if Congress does nothing before January—so that we really do fall off the fiscal cliff—the combined effect of the rate increases and spending cuts will push us back into a recession in 2013. And that is quite plausible.
This summer, the GOP-controlled House did pass a bill postponing all impending tax increases for a full year, but Obama promised a veto. The Senate delayed most of these increases, except for individuals with incomes above $200,000 and for families over $250,000. That’s what Obama wants. The belief in Washington now—at the end of August—is that Congress will do nothing in October and even that the prevailing disagreement might persist, creating an impasse throughout the lame duck session.
Some Democrats, notably Sen. Patty Murray of Washington, have proclaimed their willingness to sail off the fiscal cliff. But others have warned that this could create great economic uncertainty before the election—hazardous for Obama. So it could be that Democrats will swallow their pride and move in October to postpone the fiscal cliff for everyone, for a full year. Markets would jump, and only the hard left would be indignant. Possibly Obama would join them, because punishing the rich seems to be his goal in life.
The familiar method of eroding government debt is by inflation. Germany did that in the early 1920s. Here, the Federal Reserve can buy government bonds with dollars created out of thin air. No one is charged with counterfeiting, and bank balance sheets are improved. But savers are punished because dollars become ever less valuable.
About the Author
Tom Bethell is a senior editor of The American Spectator and author of The Politically Incorrect Guide to Science, The Noblest Triumph: Property and Prosperity Through the Ages, and most recently Questioning Einstein: Is Relativity Necessary? (2009).
The Avenger| 10.30.12 @ 7:59AM
The President, and his party are economic illiterates. The idiot Paul Krugman is their hero while the brilliant Milton Friedman is their arch enemy.
Bill Hussein O'Stalin| 10.30.12 @ 8:21AM
Beautiful summation!
RJ| 10.31.12 @ 2:40AM
Yes, they are idiots, but there is also a lot of arsonist in them. Obama sees 1984 and Animal Farm as the objective.
Bill Hussein O'Stalin| 10.30.12 @ 8:21AM
Thanks for a great article.
Jacob McCandles| 10.30.12 @ 9:29AM
Best case scenario: Romney wins, senate goes GOP. Policy becomes tax reduction and economic growth. Without fundemental entitlement reform, even a boom won't save us from runaway debt and inflation. We desperately need to block grant and freeze all means tested programs and allow private options for Medicare.
Mike G| 10.30.12 @ 9:38AM
And we, the citizenry, need to start demanding spending cuts, not spending slowdowns.
buckeyeman| 10.30.12 @ 12:10PM
Even if Romney is elected and takes the action you suggest, our problem is not solved. We cannot "grow" our way out of the debt we have created. The only solution is SEVERE belt tightening - essentially the end of the welfare state. That will not happen.
RJ| 10.31.12 @ 2:43AM
It may very well not happen voluntarily, but the welfare state is unsustainable. There is no doubt that it will be reigned in; the question is what form it will take.
Gary B| 10.31.12 @ 5:30AM
What can't go on, won't go on.
Al Adab| 10.30.12 @ 9:36AM
In economics, as in all other policy matters, the Dem party is hopelessly deluded. Wishing does not make it so and often leads to dangerous decisions. "Facts" as John Adams said, " are stubborn things".
Who Knows?| 10.30.12 @ 11:17AM
“The belief in Washington now—at the end of August—is that Congress will do nothing in October.”
So, this article is two months old?
Anyway, I’m with you, Mr. Bethell---the true vast right wing “conspiracy” is the majority of Americans who are economically illiterate.
After reading Mark Helprin’s piece in yesterday’s WSJ, especially the analysis of China and the vital need for a large and a strong navy, along with other recent stuff, it’s become even more obvious that Americans are suicidally illiterate, when it comes to foreign policy.
Political AND economical dolts!
Mark Steyn is the man. And, maybe even he is too optimistic. America ALONE, given the state of our fat bodied and headed populace, is going to be able to withstand the onslaught of fanatical dictators, from Russia to China to Iran---I wonder.
While America slept---that’ll be the theme historians will examine, in the future, if this country even survives without becoming a satrap to some hardier country.
Why, the top dog of China is worth BILLIONS of dollars, and the 70 guys right below him seem to average a BILLION each! And, Algore has only managed to bilk America of 100 million dollars.
Even if Romney wins, without the Senate for at least 2 more years, welcome to Obamacare FOR REAL.
Bad has already gone to worse, and terrible is next for America---just rewards for previous stupidity.
RichTex| 10.30.12 @ 11:54AM
What to do about tax rates? How can we make everyone happy? Here’s my proposal:
First, if you were to poll Democrats as to their favorite president of the 20th Century, chances are pretty good that they would name Franklin Roosevelt. Ask Republicans the same question, and the answer would be Ronald Reagan (although I have my doubts about some of the RINOs in our midst).
Now, simply give everyone an alternative when they file their taxes. If they like Roosevelt, they have the option of paying under Roosevelt rates. Same with Reagan; they could choose to pay under Reagan rates. Remember at the time Roosevelt died in 1944, the rate on the top bracket, over $200,000, was 94%. At the time Reagan left office, the top bracket, over $155,780, was 28%, although there was a rate of 33% for those between $75,050 and that top amount. Of course, these figures are not adjusted for inflation, but then who caused the greatest inflation we’ve seen in the past century?
I would have the tax form ask the question in these words: “Of the following two presidents, which one do you prefer, Roosevelt [check Box 1(a)] or Reagan [check Box 1(b)].” Then when you’re down to calculating your taxes, you would be directed to the rate schedule depending on which box you had checked. Let’s then see how much liberals really like taxes when it comes to their own money.
Al Adab| 10.30.12 @ 2:00PM
You touch on the true underlying problem of our tax system. Tax rates. Why, by any imaginitive process, is one dollar treated differently than any other based solely on the volume or source? There is no distinction in reality between earned dollars and just as the law presumes to treat all individuals equally under law (which is why affirmative action is anathema), so the tax structure should treat all dollars equally. The entire concept of tax brackets violates the equal protection clause of the 14th.
JD| 10.30.12 @ 4:19PM
You demonstrate how thoroughly liberalism has infected even conservatives.
The idea that taxes should be a percentage of income is a liberal idea. It was never just. They conceived it to find a way to get the public to accept tax increases - by raising taxes only on the rich.
A true "flat" tax is not a flat rate, but a flat amount. It's each person paying the same amount, regardless of how hard it is for him to pay it. That is true fairness. Leftists will say that this is unfair, because some get more from government than others. Well, they would have the "some" be the poor, so that hardly justifies charging the rich more.
In any case, we believe everyone should get the same benefit from government, and should pay the same amount for it. This is essential fairness, which the Left fears so much that it calls it "regressive."
If stores charged different amounts for the same product depending on the wealth of the buyer, the injustice would be clear. Yet government does this, and even the nominal "Right" doesn't complain. This reinforces another great Leftist lie - the idea that government is "special" and different from other entities with which we do business. This lie feeds every other abuse the Left would have government commit.
Government services should benefit everyone equally, and we should each pay the same amount for them. Period. Anything else is the slippery slope to Statism.
RichTex| 10.30.12 @ 4:25PM
Some time ago, I wrote that I believe a graduated tax to be a violation of the equal protection clause, and I still hold to that proposition. If we could just get the courts to see it that way. In the meantime...
Al Adab| 10.30.12 @ 4:28PM
JD:
I think we are on the same page here. That is why the founders prohibit a tax on income. It was only with the birth of the Progressive Era that income tax become a reality. It was presented as a penalty on wealth and a redistribution scheme from the start. It is the income tax which supports the welfare state. Without it the entire edifice would (thankfully) collapse.
sylercider| 11.1.12 @ 1:08PM
JD, your idea of a "flat amount" tax is totally bizarre.
A society with a "flat amount" tax would fall apart immediately.
You think millionaires would leave a country with a high progressive tax? Well, what do you think the middle and lower class would do in your "flat amount" tax country?
sylercider| 11.1.12 @ 1:16PM
Let's make it simpler, RichTex: 'Who wants to pay no taxes at all?'.
I bet everyone, including myself, would raise their hands.
But, once you get down to the details, people start to understand that you can't get things for free.
Do you like having an interstate freeway system?
How about a well run electrical grid?
Do you enjoy being able to post comments on the internet?
Do you enjoy the relatively peaceful society we have?
Well, all of this was possible thanks to your, and my, taxes.
JD| 10.30.12 @ 4:10PM
"In the end, only the budget wonks understand what’s going on."
False. Budget wonks do not understand what's going on, or they wouldn't be complicit in it.
RJ| 10.31.12 @ 2:49AM
I have two major fears. First, that the US does not exercise the political will to get its finances in order. Second, that rising interest rates swamp the federal budget due to the amount of present debt. We need much better leadership than we have been getting.