Whether President Obama and congressional Republicans can work out a deal to let the government to borrow even more (!) money seems to hang on whether the latter will go for increased in tax revenues.
Following the zigzagging negotiations isn’t easy. First the aim was a short-term deal. Then both sides decided to go for a big package: $4 trillion in deficit reduction over ten years. That broke down when Obama said a quarter or a third of that amount should come from new revenues.
When I hear about ten-year budget deals, I first divide the aggregate number by ten so I see how little is at stake each year. I also want to know if the spending reduction is real or phony. Chris Edwards of the Cato Institute says most cuts are likely to be accounting tricks. For example, Edwards shows how the Iraq/Afghanistan war budget could be “reduced” $1 trillion without cutting a penny. (Hint: Start by pretending that the budget will increase by the inflation rate in the future, then recognize that eventually troops will be withdrawn. Voila!)
I also remind myself that no Congress can bind a future Congress. Would you bet a substantial sum on a congressional promise to reduce the deficit over ten years? I didn’t think so. Even if Obama is reelected, he wouldn’t be in office for the last four years of the period.
Skepticism is justified. In the 1980s another deal was struck that supposedly would deliver $3 in spending cuts for every $1 in new revenue. Know what happened? That’s right.
No Good Tax
There are so many reasons why the government should not raise taxes or otherwise collect more revenue – even if only from “the rich” — it’s not funny. The first reason is moral. As one my predecessors at The Freeman, Frank Chodorov, used to say: “Taxation is robbery.” Chodorov winds up his article this way: “There cannot be a good tax nor a just one; every tax rests its case on compulsion.” It is sad that most self-styled lovers of humanity embrace a money-raising system grounded in the threat of physical force — violence — against people who themselves have not used force. Our moral progress in many areas cannot be doubted, nevertheless overall it has been uneven.
The presumption against taxes holds even in a corporatist economy, where fortunes are made through the political, as opposed to the economic, means. The way to end illicit gains through government intervention is to abolish the privileges. It makes no sense to continue the privileges and then tax away some of the proceeds. That merely compounds the power of government by giving it more discretion.
This argument also holds if the new revenues are to come from ending tax deductions and credits rather than raising or imposing new taxes. A plain vanilla tax system is bad enough; one that gives rulers the power to reward and punish the economic activities of their choice is worse. Yet selectively ending exemptions while leaving others in place is not true reform. Obama and the other would-be revenue raisers pretend they want to clean up the tax code by getting rid of “loopholes” but we know that’s not true. If they were serious, they’d be targeting all such exemptions not just those that make for populist-sound bites. What about all that special tax treatment for “green” technologies that Obama favors?
Spending versus Not Taxing
In recent days politicians and commentators have repeatedly said there is no difference between government’s spending money and abstaining from taxing some forms of income. But that could be true only if the government owned all income. Leaving money in someone’s pocket — even if it is done arbitrarily — is not a form of spending, however manipulative it is. But it serves the rulers’ interest to claim otherwise because it lets them say that to end an exemption is to cut spending.
Among other reasons for saying no to new taxes is that even if you think the government should have new revenues to deal with the debt, the politicians can’t be trusted to use it that way. They are much more likely to find new ways to spend the money. It’s happened many times before because that’s the nature of the system. Politicians, like real people, respond to incentives.
Here’s another reason: There aren’t enough rich people to make a big difference.
Obama has often expressed his wish to raises taxes on couples making more than $250,000. But as Kevin D. Williamson of National Review points out, there’s not enough money in that group to fix the budget.
The 2012 deficit is forecast to hit $1.1 trillion under Obama’s budget. (Thanks, Mr. President!) Spread that deficit over all the households in Club 250K and you have to jack up their taxes by an average of $500,000. Which you simply can’t do, since a lot of them don’t have $500,000 in income to seize: Most of them are making $250,000 to $450,000 and paying about half in taxes already.
Okay, how about those making a million a year or more? That won’t work either.
Only 0.2 percent of U.S. households have incomes that high, meaning that there’s only about 200,000 of them. And like Club 250K, Club 1 is bottom-heavy: There are a lot more $1 million men than there are $6 million men. And there are a whole heck of a lot more $6 million men than there are $60 million men.
You want to tax Club 1 to get rid of the deficit, you have to hit each of those 200,000 households with an average tax hike — not an average tax bill, but tax increase — of $6 million. And a lot of those Club 1 households don’t have $6 million in income to start with, much less $6 million left after the taxes they’re already paying.
Let’s face it, as Walter Williams notes, with government spending about $10 billion a day, even confiscating the incomes and wealth of the rich and the profits of the Fortune 500 just wouldn’t get very far. It assumes, contrary to experience, that the rich will be stationary targets rather than find ways to shelter income, even moving it offshore. In the postwar period, federal revenues have remained remarkably steady as a percentage of GDP regardless of tax rates.
There’s an unsettling message buried in all this. A big-spending government will have to stick it to the middle class. That’s where the money is. But it won’t fix the deficit. According to National Review‘s Williamson:
The Bush “tax cuts for the rich” cost the Treasury about $800 billion in forgone revenue; the Bush tax cuts for the middle class cost trillions — 2.2 of them, to be precise.
Repealing all of those Bush tax cuts, for rich and middle class alike, gets you about $3 trillion — over ten years. The deficit is running from a third to almost half that every year.
So the only way back away from the brink is to cut spending — by eliminating missions wholesale. But politicians don’t really want to cut spending. Hence, the problem.