Special Report

Good Day for a Fiscal Cliff Hanging

A lot of Washington types are betting their careers on tax increases.

By 11.28.12

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It seems like everyone is piling on my college friend Grover because they can't wait to abandon the tax pledge not to raise taxes that he sponsors, and that they took so gleefully when they were unknowns trying to break into politics.

It seems that way because any time any Republican does it he is lionized all over the Democrat party-controlled press. But Grover is right that it is just the usual handful of malcontent sell outs who always in their hearts think we (conservatives and Republicans) are wrong, in the celebrated phraseology of the late Joe Sobran.

Hence there he is, Sen. Lindsey Graham (R-SC), telling Democrat operatives on ABC's This Week, "The only pledge we should be making to each other is to avoid becoming Greece. And Republicans should put revenues on the table." He follows another frequent sellout Sen. Saxby Chambliss (R-GA), who also told the Democrat party press, "I care more about my country than I do about a 20 year old pledge." Both Graham and Chambliss are up in 2014, and I am certain Graham is already trying on suits to join the K Street lobbyist crowd in 2015. If he is really as smart as he thinks he is, as I will explain below.

It was Bill Kristol of the Weekly Standard who rang the alarm bell that it was time for the rats to start to flee what he sees as a sinking ship, saying, "The leadership of the Republican Party and the leadership of the conservative movement has to pull back, let people float new ideas. Let's have a serious debate. Don't scream and yell if one person says 'You know what? It won't kill the country if we raise taxes a little bit on millionaires.' It really won't, I don't think." Raising taxes is what passes for a new idea at the Weekly Standard?

So let's have Bill Kristol's serious debate. Let's talk about the fiscal cliff, ask why would we want to raise tax rates on job creators, and offer some actual new ideas.

The Fiscal Cliff and the Coming Crash of 2013
The rhetoric has already lost sight of what the term "fiscal cliff" describes. The talk in the Washington media is increasingly as if the "fiscal cliff" is all about the deficit, and the point is a tax-increasing budget deal to close the deficit. But the fiscal cliff refers to the economy falling off the cliff due to the fiscal policies of comprehensive tax rate increases and spending cuts (for Keynesians) already enacted into law to go into effect on January 1. We are not going to avoid that fiscal cliff by the Republicans caving in to those tax rate increases!!!! Eric Cantor call your office.

This column has been warning about the fiscal cliff impact on the economy for almost two years now. That was the point of my 2011 Encounter Broadside monograph, Obama and the Crash of 2013. Now even the Washington Establishment has awakened to the danger, but you heard it here first.

But let's be clear about exactly what the threat is, though we have explained it here before. Going into effect on January 1 are increases in the tax rates for virtually every major federal tax. That is primarily because the tax increases of Obamacare go into effect, and the Bush tax cuts expire, which President Obama refuses to renew for the nation's job creators, investors, and successful small businesses (the English translation of "the rich").

As a result, the top two federal income tax rates will jump by nearly 20%, the capital gains tax rate will soar by nearly 60%, the income tax rate on dividends will nearly triple, the Medicare payroll tax rate will explode by 62% for these disfavored taxpayers, and the death tax will rise from the grave with a 50% rate increase.

That is all on top of the corporate income tax, now featuring a top marginal rate of nearly 40% on average, counting state income taxes. That is now the highest in the world under President Obama, except for the socialist one party state of Cameroon. Even Communist China and Vladimir Putin's Russia have lower marginal corporate income tax rates, as do the social welfare states of the European Union, mostly at 25% or less.

American business is uncompetitive with this tax disadvantage. But under President Obama, no relief is in sight. Instead he continually barnstorms the country calling for still more tax increases. His Buffett Rule would raise the capital gains tax rate by 100% instead of nearly 60%. Now he is talking about a carbon tax, which would be in direct violation of his campaign promises not to raise taxes on the middle class "in any form."

Piled on top of these sweeping tax rate increases is the new avalanche of regulatory costs the Obama Administration is also preparing to dump on the economy next year. In addition to the assault on the coal industry, EPA and Interior are now preparing for totally unnecessary federal regulation of breakthrough oil and gas fracking, which had provided hope for salvation of the dying American economy. That will all end up sharply increasing energy costs for American industry, just when low natural gas prices indicated a possible new dawn for American manufacturing. The final shutdown of the Keystone Pipeline and other restrictions on oil production, and the Fed's long-term declining dollar, are going to mean more rising gas prices at the pump.

Over the next two years, the implementation of Obamacare will mean soaring health care costs for American business besides, if not outright chaos in the health care and insurance industries. Dodd-Frank and other assaults on American finance will constrain the essential business and consumer credit essential to any recovery.

Meanwhile, the Fed with its record low interest rates for a record period of time, and wanton fabrication of new money, is laying the groundwork for renewed, deadly, inflation/recession business cycles.

This is all why renewed recession next year is now so likely. But where is the leadership in Washington for renewed growth? These darkening, gathering clouds provide plenty of opportunities for Republicans to take the lead on growth, rather than falling in line as foot soldiers in Obama's war on the American economy.

It's the Economy, Stupid, Remember?
So far, Obamanomics has produced the worst recovery from a recession since the Great Depression. Why would we want to raise tax rates now on job creators, investors, and successful small businesses in this long weak and debilitated economy?

Well, it is not to ignite renewed growth. Every one of the Obamanomics tax rate increases mentioned above will only further decimate the economy, raising tax rates on the essential investment that creates jobs in particular. Even Keynesian economics concedes that.

The first step in solving the long-term entitlements crisis, and the long-term federal debt crisis, and to balancing the budget, is to restore booming economic growth. The deficit will only further increase rather than decrease without that. Senator Graham if you want to avoid America becoming Greece, the first step is renewed booming growth. So where is your leadership on that?

And it is not for purposes of fairness. Raising almost all income tax rates on the rich will not promote fairness, when the top 1% of income earners already pays 39% of all federal income taxes, while earning only 13% of the income, as the IRS and CBO both most recently report. That is a bigger share of the tax burden than the bottom 95% of income earners combined. The middle 20% of income earners, the true middle class, pays only 2.7% of all federal income taxes, while earning 15% of income, again according to the latest IRS/CBO data.

You want billionaires to pay the same tax rate as their secretaries? Then adopt the flat tax. Under the current tax code, CBO reports that the top 1% paid an average federal tax rate of 29% in the latest data. The middle 20% of income earners paid an average income tax rate of 11.1%. The bottom 20% of income earners paid an average tax rate of 1%. And that counts all federal taxes, not just income taxes.

And it is not to close the deficit. CBO estimates with its static analysis, assuming no change in behavior in response to the tax rate increases, that the total revenue raised from all of the above Obama socialist tax increases would cover just over 5% of the current deficit.

Career Suicide
This is where the career suicide comes in for all the tax increasers. When those tax rate increases result in less rather than more revenue, as they will in reality, the American people will be coming after the tax increasers, whether Democrat or Republican.

Over the last 45 years, every single time the capital gains tax rate has been increased, capital gains revenues have declined rather than increased. That began in 1968, when the capital gains tax rate was raised by 40% over the following 8 years, and capital gains revenue declined by 50%. When the rate was raised 40% in 1986, capital gains revenues declined by two-thirds over the next 5 years. Note, CBO got this wrong every time, just as they estimated a revenue increase for every capital gains rate increase over the last 45 years, rather than the revenue decline that actually resulted.

Similarly, when the tax rate on dividends was slashed in 2003, dividends paid, and the tax revenue from taxation of those dividends, soared. When that tax cut is reversed, that result will be reversed as well. Dividends paid, and the tax revenue resulting from those dividends, will collapse rather than increase.

And if all of Obama's tax rate increases plunge the economy back into recession, then total federal revenues will decline rather than increase, and the federal deficit and debt will rise further rather than fall. That is what happened the last time the Washington Establishment got its way with federal fiscal policy, in the 1990 budget deal under then President George H.W. Bush, when taxes were raised and spending supposedly cut. When the economy tipped into recession as a result, the deficit increased from $221 billion in 1990, to $269 billion in 1991, to $290 billion in 1992. Voters booted Bush out in the next election as a result.

When the revenues fall rather than rise, deficits and debt rise rather than fall, and the economy goes back into recession, after all the suffering and record deficits and debt we have just been through, the people this time are going to be looking for more than just voting the bums out in the next election. They are going to be coming for resignations, not just from office holders, but from media poohbahs that misled them as well. That is why foolish tax increase advocates today, who refuse to learn from history as well as sound economics, are betting their careers that those tax increases will work.

New Ideas
If Bill Kristol wants new ideas, then how about a special issue devoted to exploring what is needed for long overdue, renewed growth? Pro-growth tax reform, reducing individual and corporate rates in return for closing loopholes, is the only way to generate more revenues. How about publishing articles explaining that?

How about an article explaining the REINS Act, which would require major federal regulations to be approved by Congress to become effective, restoring our original Constitutional balance between the branches, as well as constraining counterproductive, excessive regulatory burdens?

How about an article explaining the price rule to guide the Fed's monetary policy, constraining the Fed to follow market prices for precious commodities in conducting its monetary policies. That would generate booming capital investment, which means booming jobs and wages for working people.

How about an article explaining entitlement reform based on expanding the enormously successful 1996 welfare block grant reforms of the old, New Deal, AFDC program to all federal means-tested entitlement programs, such as Medicaid and Food Stamps. That would enormously benefit the poor, as well as saving the taxpayers a fortune, and sharply reduce the deficit, just as the proven 1996 reforms did.

How about an article explaining why Paul Ryan's reformed Medicare would be better for seniors than Medicare under Obamacare? How about an article explaining how to achieve health care for all without Obamacare, at just a fraction of the entitlement cost of Obamacare? How's that for entitlement reform?

How about taking these arguments to the American people, in the next midterms if necessary, if the Democrats turn out to be true to their jackass mascot?

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About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.