When you hear the President talk about the need for a “balanced approach” to deficit reduction, he really means a combination of tax increases on the “rich” and modest if any real cuts in spending. There might be a few good ideas in his speech, but one thing is clear. Tax increases should not be a part of deficit reduction for 3 reasons:
1. Historically, per Hauser’s Law, tax revenues have always totaled approximately 19.5% of GDP, regardless of marginal tax rates. Hike the rates and people will earn less and/or hide more of their money. The Laffer curve warns that revenues can actually decline when rates are increased. If you want higher tax revenues, simplify and cut rates. Waging class warfare via the tax code is a recipe for weaker growth and lower government revenues. It might buy votes, but it destroys economies.
2. Raising tax rates to balance the budget—even if one assumes that tax increases will generate higher revenues—presupposes that the current level of government spending is not far out of line. But the current rate of spending is way too high. Washington should be forced to justify the essential need for the present level of spending in every government program from NPR and foreign aid to Social Security, Medicaid, Medicare, and even defense. A serious look at the spending side can solve the problem, if our politicians are willing to follow suit.
3. Any agreement to raise taxes and cut spending will just result in higher taxes. It always does. THE PROBLEM IS THE SPENDING. Washington is addicted to it, and no amount of tax revenues will satisfy its appetite.
Obama’s “tax the rich” card plays well with many voters who instinctively appreciate the notion that someone else is supposedly paying more for their government benefits. At some level, all of us need to break our addiction to the government largesse if this problem is ever to be resolved. My message to Congress is simple: CUT, CUT, and CUT.