To get federal finances in order, conventional wisdom says we must both cut spending and “enhance revenues” (i.e., increase taxes). But conventional wisdom is dead wrong. The Congressional Budget Office says so.
Last week, the CBO reported that if Congress simply left taxes as they are today, tax revenues would return to normal levels -18 percent of the gross domestic product - in just six years … and keep growing after that. Eventually we would need to cut taxes to keep them from reaching an all-time high. [Note: In this scenario, tax rates stay the same for all taxpayers, middle-income families continue to escape the clutches of the alternative minimum tax, and other tax-reducing provisions now set to expire remain in effect.]
How is this possible? Through renewed economic growth. Once it takes hold, taxpayers earn more and move into higher tax brackets. At the same time, job creation rebounds, creating more taxpayers than before. And that combines to pour more and more money into the federal coffers.
President Obama remains adamant that any deal to raise the debt limit include tax increases. But the CBO report clearly shows that this is not necessary. Indeed, it indicates that this is exactly the wrong prescription, because the CBO data illustrate that Washington has a spending problem, not a tax problem.
The best way to raise tax revenue and lower the deficit is to spark rapid economic growth. As the president’s failed stimulus program has so painfully demonstrated, you can’t do that with a binge of public borrowing and spending. And you certainly can’t spark economic growth by raising taxes, especially in an already fragile recovery.
Instead, the president should get behind fundamental tax reform that would eliminate many of the “loopholes” he and his liberal allies love to lambast. But the purpose of eliminating loopholes shouldn’t be to raise taxes. The purpose should be to:
1) Simplify and rationalize tax policy (e.g., eliminate all energy subsidies, not just those for one type of energy) so that the feds aren’t playing favorites; and
2) Use the “savings” from eliminated loopholes to lower marginal tax rates.
Lower marginal rates encourage businesses and entrepreneurs to invest and take on prudent risk - the very activities that drive economic growth.
Liberals are quick to say that taxes are at their lowest levels since 1950. They imply that past tax cuts have driven receipts to new lows. But these are the same tax rates that, by 2007, were pouring revenues well above “normal” into the Treasury. What put the squeeze on revenues was the global financial meltdown, not “low” tax rates.
Today, a terrible recession and a worse-than-anemic recovery have repressed incomes and driven millions to the unemployment lines. With the American people clamoring for government to live within its means, proponents of Big Government are trying to convince them that it’s impossible to lower the deficit with spending cuts alone, that some tax increases are necessary in any “reasonable”plan.
But as the CBO report makes clear, higher taxes are a choice, not a mathematical necessity. And history shows that Congress rarely if ever uses revenue from tax increases to lower the deficit. Rather, it spends every “new” penny on new or expanded big-government programs.
In fact, the budget can be balanced in 10 years without raising taxes a dime. The Heritage Foundation explains how in its fiscal plan “Saving the American Dream” (www.savingthedream.org). We do it by revamping the tax code to encourage growth and reforming the Big 3 entitlements - Social Security, Medicare and Medicaid - so as to strengthen the social “safety net” while making them far more efficient.
Getting our fiscal house in order is all about the spending. Washington has spent us into this budget hole; it can’t tax its way out. The only solution is to cut spending and get the economy moving again. If the feds do that, they’ll be getting plenty of our money in the coming years.
Curtis Dubay is the Heritage Foundation’s senior tax policy analyst.
First appeared in The Washington Times