No consensus on higher taxes, sorry

October 7, 2009

Republicans and conservatives — although the two are not one and the same –  need to face up to economic reality and embrace higher taxes. There is no other way to close America’s long-term budget deficit while also reforming healthcare and investing more in education and clean energy. 

Well, at least that’s the argument being made by supporters of the Obama administration, a view that has been crystallized in today’s column by David Leonhardt of The New York Times.

Leonhardt extensively quotes conservative economic analyst Bruce Bartlett (a proponent of raising taxes though a value-added tax) who says Republicans are no longer credible on economic policy. Yes, let’s talk about credibility and start with a few howlers by Leonhardt:

- “Most Democrats now acknowledge the central idea of supply-side economics: tax rates matter.” 
Have Democrats really conceded this point? Have they accepted that the Reagan supply-side tax cuts were necessary and productive? Doubtful.  President Obama, for instance, has stated that he doesn’t think the high, unindexed-for-inflation tax rates of the 1970s were a disincentive to work, savings and investment. He concedes only that they may have “distorted” investment decisions by encouraging people to seek out tax-sheltered activities. And the Obama tax cuts were typically Keynesian, short-term and consumer-demand focused.

- “Taxes are supposed to rise as a country grows richer.” 
Ah yes, Wagner’s Law, named after 19th century economist Adolf Wagner. Smart guy. Except that Americans decided to break Wagner’s Law starting in 1978 with the property tax revolt in California and deep cuts in the national capital gains tax rate, followed by the Reagan tax cuts. You might say that Laffer’s Law (as in Arthur Laffer) and the experience of the 1970s superseded Wagner’s Law by demonstrating that high taxes rates can choke economic growth and productivity.  And if even Wagner is right that richer societies demand more services, who says that government has to provide them? They can be privatized, as Indiana did with its toll road. And there is scant evidence that Americans desire higher taxes, as evidenced by recent election results in California  and little support for higher energy taxes.

- “But some basic arithmetic — the Medicare budget, projected to soar in coming decades — suggests taxes need to rise further, and history suggests that’s OK.” 
Or the government could cut spending. Pushing back the retirement age on Social Security and tweaking its benefits formula turns a $5 trillion present-value deficit into a surplus, for instance. That’s just one idea. It is not an incontestable reality that government spending cannot be reduced.    And as for the impact of tax increases on economic growth, let me quote a paper co-written by Christina Romer, chair of Obama’s Council of Economic Advisers: “Tax increases appear to have a very large, sustained, and highly significant negative impact on output … (and) tax cuts have very large and persistent positive output effects.”

- “One of the country’s two political parties has no answer to an enormous economic issue — the fact that the federal government cannot pay for its obligations.” 
Must have missed the memo on how Democratic healthcare reform solves America’s deficit problems since, at best, the various plans are only roughly deficit neutral over the next decade. Also, Democrats have recoiled at the idea of taxing healthcare plans to pay for expanded coverage, an idea that many economists also say is necessary to reduce overuse of premium medicine. And recall how Democrats harpooned Republican attempts to reform Social Security during the Bush administration, with many also refusing even to acknowledge that the system was in crisis.

Not that Republicans have much to crow about when it comes to spending. The GOP defense of out-of-control Medicare spending is completely political, as was the Bush administration’s decision to expand Medicare without paying for it.

But ultimately what tax-increase proponents fail to argue persuasively is why they believe that once government had access to greater revenue, it wouldn’t just spend the added dough? 
Moderate Democrats like Senator Mark Warner have made the case that without spending cuts and government reform, big tax increases are fantasy policy. That’s right. First cut spending, then raise taxes if necessary.

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