They now propose to raise $447 billion in income taxes over ten years to pay for something called the American Jobs Act. Their new stimulus program would be paid for with tax hikes on those earning in excess of $1 million. (Democrats propose 5% tax on millionaires)
Let's try a thought experiment. Why not do something really substantive rather than let Obama and his class warfare enthusiasts have all the fun? With a serious proposal, including tax hikes, we could begin to reduce the ~$100 billion monthly deficits that the politicians don't want to discuss.
So maybe we should just go ahead and agree to that $447 billion in new taxes on the rich, provided that we also reduce government spending by six or more times that amount.
In fact, we should do something on top of that. And something truly meaningful with respect to our future financial well being as a nation, too.
If we were to reinstitute all the "Clinton tax rates," as opposed to only those for the top 2% of earners, we could raise as much as another ~$3.5 trillion over the next ten years. That $3.5 trillion is represented in part by ~$700 billion for the Obama desired tax hikes on the "millionaires and billionaires" making more than $200 thousand each year. We then add to that another ~$2.8 trillion for the "middle class" tax rates which were in effect in the 1990s. {.7 + 2.8 = 3.5}
Starting with the $3.5 trillion in new taxes, then if we multiply that by six for spending reductions, we would arrive at a total of $24.5 trillion, including $21 trillion in spending cuts. That would go a long way toward repairing our current financial mess, and it's a serious proposal worth debating out in the open for all to see.
To be sure, nobody in Washington is proposing any such thing. In fact, Obama wants to "pay" for his jobs act proposal by taxing the rich another $447 billion over ten years and letting the future somehow take care of the real problems we have. He's running for re-election, you know. So are the rest of the politicians.
To be clear, adopting our president's tax-the-rich current non-serious populist sideshow proposal would have absolutely no effect on the $100 billion monthly deficits we now generate, let alone deal with the debt we've accumulated heretofore.
This all-too-common political approach tells us much about the difference between the way politicians look at problems and the way economists view the exact same things.
Politicians look at today's proposal and perhaps its consequences as far forward as the next election cycle. Economists look first at the future consequences of what is being proposed today.
What's the long term economic impact of doing what is being proposed by the president and his followers? There will be none other than political.
In the meantime, they propose by their inaction that we continue to spend $100 billion more each month than we have available to spend. We do that by borrowing an additional forty cents for each new dollar spent. It's crazy.
But the politicians don't want to talk about the long term fixes required. They just want to play "election" games.
Pogo says it's put up or shut up time for all concerned citizens. If we're not going to curtail unfunded entitlements, we need to raise taxes enough to pay for our welfare state of the future. It's as simple as that.
Besides, the logic of reducing spending and increasing taxes by a six to one ratio is straightforward. If we increased taxes by $3.5 trillion and reduced government spending by $21 trillion over ten years, we would achieve fiscal sanity as a country. In turn that would give people more confidence about the future of our America.
And that would be a great thing for all of us with the exception of the current elected officials, that is. And that's ok, too.
A serious effort to get our financial house in order would force a debate between implementing big tax increases and agreeing to reduced entitlement benefits in the future. {It would also lead to a debate on the need for reduced spending on our wasteful government run public education system as well.} That debate would be contentious, and politicians won't go beyond the negative ad sound bite stage of campaigning until forced to go there. I say let's force them to say what they want to do and not dwell on how bad their opponents' views are. And then let's vote.
The plain fact is that we need to do something meaningful to reduce our ongoing federal deficits and the resulting rapidly accumulating debt, and the sooner the better. Just about anything we do that's serious will require more taxation and fewer entitlements. The only question is how much of each and over how long a timeframe. Let's at least tilt things toward economic growth.
The Problem With 'No New Taxes' argues the case for new taxes combined with dramatically lower spending. In rejecting the position of no new taxes taken by all Republican candidates at a recent presidential debate, economics professor and conservative Tyler Cowen persuasively boils down the argument for more taxes combined with lower spending this way:
"Cutting $10 in spending for every $1 in tax increases would result in $9 in net tax reduction. That's because lower spending today means lower taxes tomorrow, and limiting the future path of government spending does limit future taxes, as Milton Friedman, the late Nobel laureate and conservative icon, so clearly explained. Promising never to raise taxes, without reaching a deal on spending, really means a high and rising commitment to future taxes."
I agree with Cowen that we should at least make an effort for a big compromise now. We should demand really large spending reductions for tax increases and by so doing, we'll take the populist tax the rich argument off the table. Then we can have a serious and necessary conversation.
And if President Obama and the populists don't have the good sense to accept such a grand compromise, which they won't, that would only help sensible people to argue the case for fiscal sanity in the 2012 election and beyond.
Mr. Cowen makes this need to tax more if we want to spend less point directly with respect to the Medicare situation:
"The problems with a no-new-taxes stance run deeper. Because it’s unlikely that spending cuts alone can balance the budget, politicians who espouse extreme antitax views often end up denying the scope of our long-run fiscal problems.
¶ The reality is that a mix of our aging population and rising health care costs will create acute budgetary pressures in about 10 years. If Medicare costs rise, say, 5 percent a year, such costs will roughly double in 14 years. Imagine that Congress freezes spending generally. Doing that for Medicare would, in essence, cut the size of the program in half over that period. Since the number of older Americans is rising, the per capita Medicare benefit would fall even more, with increasingly drastic results as the years pass.
¶ That’s politically unlikely, and insisting upon it, or refusing to acknowledge that this is what a spending freeze means, ends up as another way of running away from fiscal reform. Focusing on cutting discretionary spending, a common political tactic, isn’t enough to balance the books.
¶ Another conservative economist and Nobel laureate, James M. Buchanan, emeritus professor of economics at George Mason University, argues that deficit spending leads to yet more spending, and higher future taxes, compared with a pay-as-you-go approach. A move toward balancing the budget may mean some tax increases up front, he says, but future taxes as well as government spending will be lower than they would be otherwise.
¶ In other words, the current antitax strategies advocated by the Republican candidates are unlikely to lead to fiscally conservative ends."
Although lower tax rates are always preferable, all other things being equal, all other things aren't even close to equal today. So let's encourage our 'leaders' to lead. If they do, my guess is that it would act as a boost for our economy as confidence levels would improve immediately.
So unless we believe in the tooth fairy and that dramatic spending reductions, including those for entitlements, are possible without the need for accompanying tax hikes, it's time to get practical and take action.
Even if the real action won't take place until 2013.
Thanks. Bob.
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