Tax hikes, it seems, are back in vogue. At least in certain
quarters.
Congress has passed a budget resolution that would let them
raise taxes by as much as $2.7 trillion over the next 10 years. So
far, they've approved hiking taxes and fees by $98 billion.
Late last month, Rep. Charles Rangel (D-N.Y.), chairman of the
House Ways and Means Committee, upped the ante, unveiling what he
modestly termed "The Mother of All Tax Reforms." While Rangel
included several worthy tax reform ideas, his overall proposal is
actually "The Mother of All Tax Hikes."
Admirers of the plan pegged its cost at "only" about a trillion
dollars over 10 years. Republican staffers of Ways and Means
estimated the bill would actually hike taxes a whopping $3.5
trillion.
On a smaller scale, anti-war Reps. Obey (D-WI), Murtha (D-PA),
and McGovern (D-MA) have called for temporary surtax to finance the
war in Iraq. The idea recently got a boost in a Washington Examiner
commentary by Lawrence J. Haas, the former communications director
for Al Gore who now heads the Committee on the Present Danger.
Haas correctly notes that Obey, et al., "cynically sought to
stoke public opinion" against the war-not to further the war
effort. But he goes on to argue that their tax increase is a good
idea anyway. He makes three points to buttress his argument. All of
them are wrong.
Haas starts by citing the fact that, at current tax levels,
America will soon be unable to pay promised Social Security,
Medicare and Medicaid benefits. A significant tax increase would
"provide a huge down payment on which to build," he says.
Well, these "Big Three" entitlement programs are fiscally
unsustainable. That's a message that U.S. Comptroller General David
Walker has been preaching for well over a year.
But the problem isn't inadequate taxation; it's that Congress
has made extravagant benefit promises that the nation's taxpayers
can't afford to keep. Raising taxes won't solve the problem-it's
too big for that. And weakening the economy through higher taxes
surely is no path to a solution, either.
Haas next argues that a tax hike will free us from the clutches
of foreign investors. Noting that foreigners now hold about half
the debt issued by the U.S. Treasury, he quotes Benjamin Franklin:
"The borrower is a slave to the lender."
But there's another applicable adage: "When you owe the bank a
buck, the bank tells you what to do. When you owe the bank a
million bucks, you tell the bank what to do."
Folk wisdom aside, raising taxes would do nothing to force
foreigners to give up their U.S. debt holdings. That would require
sustained, large budget surpluses. Yet recent experience shows
Democrats and Republicans alike are eager to spend every dollar
they collect-and more.
Finally, Haas argues Americans will not maintain long-term
support for the war unless they pay for it now. A war surtax, he
suggests, will help build a necessary sense of "absolute urgency"
about the need to win. It's simply odd to argue that the only way
Americans will support winning a war is to charge them extra for
it.
What's illuminating about all these arguments is what's not
said. No mention of reforming entitlement programs to make them
sustainable. No mention of cutting spending to reduce the need to
sell debt to foreigners.
No mention of "sacrificing" for the war effort by foregoing less
essential expenditures-like highways to nowhere or federally funded
bike trails. In these omissions, Haas is following precisely the
path taken by the current Congress: no progress on entitlements, no
cutting spending, no sacrifice in setting priorities.
The government can afford current military operations (like Iraq
and Afghanistan), maintain a trained and ready force and modernize
to meet future security challenges if it commits to an ongoing
investment of 4 percent of its GDP-less than 0.1 percent more than
we spend today. Importantly, 4 percent of GDP is the average level
of defense spending for the post-World War II era.
Equally important, current tax revenues are also running at
normal modern-era levels: about 18.8 percent of GDP. The problem
isn't that we're not taxed enough to defend ourselves. It's that
Congress spends too much of our tax money on non-defense
programs.
America needs a strong economy to generate the tax revenues
essential to pay for our defense. Raising taxes dampens economic
growth and does nothing to rein in irresponsible spending. Lower
taxes and disciplined spending are a far better prescription for
keeping the nation safe, free, and prosperous.
James Jay
Carafano is Assistant Director in the Kathryn and
Shelby Cullom Davis Institute for International Studies and Senior
Research Fellow in the Douglas and Sarah Allison Center for Foreign
Policy Studies and J.D.
Foster is Norman B. Ture Senior Fellow in the Economics of
Fiscal Policy, Thomas A. Roe Institute for Economic Policy
Studies.