Saturday, December 10, 2011

A Call For True Fiscal Conservatism (or Why Taxes Must Be Raise For ALL Americans)

As a fiscal conservative, my ideal is a government that imposes a modest tax burden that is sufficient to match or exceed public expenditures. But, if we are unable to stem the expansion of the size and scope of the state, true fiscal conservatives must accept the need for increased government revenue. And with the federal government so deep in a fiscal abyss, any responsible politician has to accept the need for significant revenue increases. The problem is that our political elites is now divided between Republicans who cannot publicly acknowledge this reality and Democrats who by and large treat the issue of tax hikes as a cheap political tool.

In the last year, diatribes against the "rich" who "do not pay their fair share" have become increasingly common. In principle, I am not opposed to increasing taxes on the wealthy, however when we look at the evidence, it becomes clear that this is little more than catharsis, employed by politicians to rile and rally their base. To start off with, the top 10% of income earners enjoy 45% of national wealth, but pay approximately 70% of all taxes. So, the numbers do not support the premise that the wealthy do not pay their "fair share" of taxes. But, the pertinent question remains: will substantially raising taxes on top earners address our pressing fiscal crisis, or is this another example of cheap political grandstanding?

The New York Times published an article extolling the need to raise taxes on the wealthy as a means to address the $15.47 Trillion Dollar National Debt, noting that rescinding the Bush Tax Cuts on those earning more than a million dollars would generate an estimated $700 Billion in revenue over the course of 10 years. At a first glance this sounds impressive, however when we crunch the numbers we see that this would only equal a 4.25% reduction in the $1.645 Trillion yearly federal deficit and would not even begin to pay down the debt. However if we were to allow the Bush Tax Cut to expire for All Americans, including the middle class and poor, over a decade, revenues would increase by $3.7 Trillion. On a yearly basis this would equal $370 billion, which would come to a 22.5% reduction in the deficit

What are the policy implication of these figures? First, calls to squeeze the rich may be emotionally appealing to the economically illiterate, but from the point of debt reduction, it is largely meaningless. Those serious about using revenue generation as an element in a debt reduction plan would call for the repeal of the Bush Tax cuts for All Americans, including the 47% of Americans who do not pay federal taxes.. To reiterate our previous point, rolling back the Bush Tax Cuts for just the wealthy would only generate $70 billion per year in additional revenue, but when we include all Americans it surges to $370 billion. Thus we arrive at the first fundamental problem: any candidate who called for broad tax hikes on the middle class would lose almost conservatives and liberal support.

The second policy implication is that the growth in debt is mostly driven by excessive spending, not by revenue short falls. Case in point, rolling back all of the Bush Tax cuts would only reduce the deficit by $370 billion (22.5%), which means that to achieve a balanced budget, the remaining 1.275 Trillion (77.5%), would have to be come from sharp spending cuts. But, the Obama Administration is only willing to cut $1.1 trillion over the next decade ($110 billion a year), which may sound impressive, but it allows for a yearly deficit of 1.165 Trillion!  And most Republican proposals are scarcely better.

 Thus we arrive at the second fundamental problem: any candidate proposing sufficient spending cuts would be reduced to a pariah among media elites and most voters. Those who promoted military cuts would incur the wrath of neo-conservatives and those who called for significant entitlement reforms would be vilified by liberals. The only remedy is aggressive spending cuts and only then the repeal of the Bush Tax Cuts, because few politicians would resist the temptation of directing increased revenues towards expanding their programs of choice, rather than true deficit reduction. Tax hikes will be a necessary element of any serious debt reduction plan, but until we cease electing so many Democrats and Republicans of such low moral and intellectual caliber, we can expect tax hikes to be continue their role as a cheap political tool. 

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