November 13, 2007

November 13, 2007 | Commentary on Taxes

Higher taxes equal less security

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.

About the Author

J.D. Foster, Ph.D. Norman B. Ture Senior Fellow in the Economics of Fiscal Policy
Thomas A. Roe Institute for Economic Policy Studies

James Jay Carafano, Ph.D. Vice President for the Kathryn and Shelby Cullom Davis Institute for National Security and Foreign Policy, and the E. W. Richardson Fellow

First appeared in National Review Online