Should Republicans refuse any tax increases?

November 22, 2010

Steve Moore and Richard Vedder think raising tax revenue in exchange for spending cuts is a mug’s game (via WSJ):

In the late 1980s, one of us, Richard Vedder, and Lowell Gallaway of Ohio University co-authored a often-cited research paper for the congressional Joint Economic Committee (known as the $1.58 study) that found that every new dollar of new taxes led to more than one dollar of new spending by Congress. Subsequent revisions of the study over the next decade found similar results.

We’ve updated the research. Using standard statistical analyses that introduce variables to control for business-cycle fluctuations, wars and inflation, we found that over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending. Politicians spend the money as fast as it comes in—and a little bit more.

We also looked at different time periods (e.g., 1947-2009 vs. 1959-2009), different financial data (fiscal year federal budget data, as well as calendar year National Income and Product Account data from the Bureau of Economic Analysis), different lag structures (e.g., relating taxes one year to spending change the following year to allow for the time it takes bureaucracies to spend money), different control variables, etc. The alternative models produce different estimates of the tax-spend relationship—between $1.05 and $1.81. But no matter how we configured the data and no matter what variables we examined, higher tax collections never resulted in less spending.

Well, certainly the budget can be brought into balance without tax increases. Americans for Tax Reform does it over the short term (5-7 years) by pretty much freezing spending (at 2008 levels) for everything but Medicare and Social Security. So, too, Rep. Paul Ryan with his Roadmap for America’s Future. But what about the politics? Does this assume no compromise with Democrats? If compromise is needed, what do the Rs offer? Defense cuts? But perhaps the solution is to offer a more pro-growth tax system with restructured entitlements. More revenue from more growth + less social insurance spending.

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I (and I think many others) have no problems with tax breaks for small business because they really do drive jobs in America. What really rubs a lot of people the wrong way is tax breaks for multi-national mega-corps that have no interest in supporting America or growing in America – to them the grass is greener in emerging markets like BRIC countries and they want to put their profits to work there. Maybe some kind of tax-credit for healthcare on new employees (and partial for existing employees) could be worked out?… that would help stem the big complaint I hear from small businesses.

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