Why Higher Taxes Will Never Lead To The Desired Outcome

Keeping up with this week's theme on out-of-control federal spending…the traditional argument from our friends on the left about how to fix our debt and deficit problems is simply to tax the wealthiest people and corporations more. A lot more. The sky's the limit.  

But no tax hikes for the middle class. So long as the IRS squeezes the robber barons hard enough, all will be well with debt, deficits, and government spending (we could probably spend even more!).

Except…those numbers don't add up. As the Manhattan Institute's Brian Riedl writes, spending has outstripped the ability of even confiscatory taxation to cover all of Uncle Sam's bills:

Long-term tax rates will surely face increasing upward pressure from federal budget deficits projected to top 10% of GDP within the next three decades, as well as Washington's voracious appetite for additional spending. Such tax increases can—and should—begin with the wealthy. However, an aggressive package of new taxes on corporations and the wealthiest 1% or 2% of households could raise, at most, 2% of GDP in revenues—and likely far less, depending on the economic consequences of layering multiple new taxes on top of one another. America's tax code is more progressive than that of most of the developed world because Washington taxes corporations and upper-income families within the range of international-consensus rates—but taxes lower- and middle-income families at rates far below those of other nations. Most of America's income is earned by the non-wealthy, and, like Scandinavia and most of Europe, the U.S. will need to tax those families considerably to meet any ambitious revenue needs. Taxing the rich cannot even cover baseline deficits, much less finance the progressive spending agenda.

In other words, extracting every dime from “the rich” still won't stop the tide of red ink. The only way to come close to it is taxing everyone more. And as of now, there's no political drive, desire, or will to tax mom and pop.

What is the alternative? Riedl says it's old-fashioned economic growth:

A 1-percentage-point increase in the annual economic growth rate would save Washington $3.3 trillion over the decade. That is as much revenue as a 1% GDP tax increase but—unlike those tax hikes—also brings more jobs and higher incomes. On the flip side, a tax package that reduces annual economic growth rates by 1 percentage point would, in turn, reduce tax revenues by $3.3 trillion over the decade—likely canceling all static tax-revenue gains while also costing jobs and reducing incomes.

But this is just tax policy. And as good as a pro-growth tax policy can be for everyone (including government), there's the inescapable fact that spending must be reduced. And as I've written many times before, that means addressing entitlement – Social Security and Medicare.

These two items are off limits for the leading Team Red and Team Blue presidential candidates. They are a no-go for the majority in Congress, who would prefer to fight like cats over the (comparatively) little items in the budget, rather than tackle entitlements.

One day, perhaps far sooner than anyone in the political class, or many voters, for that matter, want to admit, the problem will get so big it can't be ignored – because servicing those entitlement checks will have taken money from every other program in the budget that isn't related to interest payments or defense.

We can act now, while there's still room to make choices and gradually implement changes. Or we can continue to pretend nothing is wrong, and allow the bond market to exercise its harsh, indiscriminate discipline on the whole thing.

The opinions expressed in this article are those of the author and do not necessarily reflect the positions of American Liberty News.

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