Don't Give in to Tax Hikes


Don't Give in to Tax Hikes

Dec 5, 2011 2 min read

Former Norman B. Ture Senior Fellow in the Economics of Fiscal Policy

J.D. served as the Norman B. Ture Senior Fellow in Economics of Fiscal Policy

The solution to our unsustainable budget deficits? Many media outlets and liberals, both in and out of Congress, say it must include higher taxes.

Worse, they’re pushing the more economically damaging ones.

Conservatives oppose higher taxes, especially those that would do the economy the most harm, a fact leading the opposition to near apoplexy. Are conservatives just stubborn, just stupid, or do they have a case? In fact, the case is open and shut against tax hikes.

The deficit for 2011 was $1.3 trillion, or about 8.9 percent of Gross Domestic Product. From 2009 through 2011 the combined deficits were $4 trillion, and projections for 2012 are not at all encouraging. To put these figures into perspective, the average deficit in the post-war era is about 2 percent of GDP.

Argument one against higher taxes is the economy. Economic growth is the most powerful engine for deficit reduction. According to the president’s own budget analysis, a sustained one percentage point increase in real economic growth would cut the budget deficit by $3.2 trillion over the next 10 years.

Tax increases weaken growth, and some more than others. President Obama favors those that would do the most damage — higher tax rates on investors, savers and small businesses. From a liberal’s soak-the-rich perspective, raising the top tax rates might make sense at full employment. But advocating higher tax rates in the face of high unemployment is bizarre.

Note to liberals: Conservatives really don’t care about the rich. The rich can take care of themselves. Conservatives care about freedom. And they care about those who seek to use the opportunities afforded them by this great nation, combined with their own hard work and talents, and the freedom to apply them to become wealthy.

And even more, conservatives care about the processes leading to wealth creation, which also lead to more jobs and higher incomes for everyone else. Liberals want to separate the taxation of the wealthy from the processes that lead to wealth and job creation. The economy just doesn’t work that way. Sorry, guys.

Argument two against higher taxes: even in the long run, the problem with future budget deficits is not a dearth of revenues, but a surfeit of spending. Federal revenues in normal times average about 18.5 percent of our economy. Revenues are deeply depressed today due to the recession and useless tax stimulus such as the payroll tax holiday, but they’ll recover as the economy recovers.

In contrast, while spending is traditionally around 20 percent of the economy today it stands at 24.3 percent. It will really take off as soon as Social Security and Medicare spending soar.

There could be a basis for a real debate if the economy was near full employment and spending had been pared back to its historical share of the economy. This would leave the budget deficit share close to the traditional 2 percent. We could then have a healthy debate about whether to balance the budget for good by cutting spending further.

But until spending is brought back in line, conservatives will and should continue to refuse to raise taxes and weaken the economy further.

J.D. Foster is a senior fellow at The Heritage Foundation.

First appeared in The Savannah Morning News