Republicans haven’t made an effective case on taxes

boehner

With concern over the “fiscal cliff” growing, one thing has become painfully clear — Republicans are losing the debate in the eyes of the public. Some Republicans in Congress have abandoned the pledge they made to their constituents never to raise taxes and others haven’t effectively made the case as to why President Barack Obama’s tax proposal is a loser for the country.

Let’s get one thing clear on the “fiscal cliff” debate — this is not about a “balanced approach” to solving the deficit problem, despite what President Obama may say. The tax proposal that the White House is pushing would raise revenues by $1.6 trillion over the next 10 years ($160 billion per year), but, as J.D. Foster of the Heritage Foundation recently noted, the “national debt still goes up by about $7 trillion” in that budget window. In other words, our deficit problems are still there.

Based on the FY 2013 budget, the federal government will spend $3.803 trillion, or a little more than $10 billion a day. Putting that into perspective, raising taxes on just higher income earners — individuals earning $200,000+ and families bring in $250,000+ — would bring in around $80 billion per year, which is enough revenue to cover around eight days of federal spending. Warren Buffett’s “millionaires tax” would, if passed, bring in just under $5 billion per year, or less than a full day of government spending.

Another point is that President Obama has already raised taxes, but not many seem to be talking about it. When fully implemented, the Patient Protect and Affordable Care Act (or ObamaCare) will raise taxes by more than $500 billion over the next 10 years. Some of those tax hikes have already taken effect, but the bigger revenue generating hikes don’t come into effect until the beginning of next year or the following year. For example, in 2013, new taxes on investment income and medical device manufacturers will take effect. Those plus a Medicare payroll tax hike and other changes in current law, including reducing allowable deductions for health care expenses, will bring in $263.1 billion over 10 years.

We’re already seeing the effects of the pending medical device tax, as companies have been forced to layoff workers. In an op-ed at USA Today earlier this month, Quin Hillyer explained the ramifications:

The president’s health law imposes a 2.3% tax on all medical device sales. This doesn’t sound like much, but that’s misleading. The tax is not on profits, but on gross (total) receipts. For smaller device manufacturers with narrow profit margins, the tax could actually exceed their profits, pushing them into the red. Such is the case with companies known as ConMed (with possible job losses in swing states Colorado and Florida), Symmetry Medical (job centers in swing states Michigan and New Hampshire), and ultrasound pioneer Sinosite.

Some medical-device makers, such as Stryker (headquarters: Kalamazoo, Michigan) and Zimmer Holdings (job locations in Nevada, Minnesota, Ohio, and Pennsylvania), already have announced layoffs (1,000 and 450, respectively) as a result of the tax.

In all, some 43,000 jobs could be lost due to the tax, according to a widely-cited, but industry-funded study. Another report, out just two weeks ago, showed venture capital fleeing the medical device industry, presumably in response to the new ObamaCare tax. Such investment is down for the third straight quarter, to levels as low as in 2004.

Consider the affect of just the medical device tax alone for a moment and let’s circle back to President Obama’s “fiscal cliff” tax hike proposal. He wants $1.6 trillion in tax hikes on higher-income earners and to raise the capital gains tax. What impact do you think that will have on the economy? J.D. Foster explains:

Obama says that “according to economists,” keeping taxes from rising “will have the least positive impact on the economy.” Apparently, Obama continues to talk only to his economists and their fellow travelers.

Recall that these are the same economists who said that Obama’s 2009 stimulus would drive down the unemployment rate. It did not work. They are the same economists who told us the payroll tax holiday would create jobs. It did not work. They are close cousins, by the way, to the economists plying their trade in Europe, driving national unemployment rates above 25 percent in country after country while driving the continent toward another deep recession.

Of all the Bush tax cuts, the reductions in the top rates were not the least effective in strengthening the economy as Obama claims. In fact, they were the most effective because they struck at the very heart of the economic dynamic: incentives. Higher tax rates discourage entrepreneurship and risk taking. They discourage saving by those most capable of saving and, as even the Congressional Budget Office now admits, discourage work effort.

Higher tax rates have these effects because those who are subject to the rates can and do adjust their behavior—sometimes immediately, sometimes after a period. They then take fewer business risks, work fewer hours (or even retire), and save less.

Tax-hike advocates will no doubt once again claim that when they raised tax rates in 1993 under President Clinton, not only did warnings of a recession prove to be unfounded, but the economy subsequently boomed. In fact, though Clinton’s tax hikes didn’t trigger recession, they certainly took the wind out of the economy’s sails at a time when it should have come roaring back from recession. The famous Clinton boom did not follow the tax hikes. The subsequent boom came four years later after an anemic recovery, slow wage growth, and slow job growth. The famous Clinton boom followed the cut in the capital gains tax rate in 1997. Supporters of higher rates tend to skip over these inconvenient facts.

James Pethokoukis noted earlier this month that President Obama’s so-called “balanced approach” to the deficit is 73% tax hikes. That’s obviously very lopsided. Moreover, the talk of “balance” has new meaning when we look at the substance of the current “fiscal cliff” debate. As has been pointed out before, taxes are not the only thing on the table. The White House and Congress want to undo $1.2 trillion in automatic spending cuts scheduled to take place over the next 10 years, beginning in 2013. These cuts were part of the debt ceiling deal — the Budget Control Act — made last year. With that in mind, does anyone out there really think that whatever spending cuts are agreed to in the debate over the fiscal cliff will ever actually take place?

Republicans have to effectively begin to make a case for less government, but they have to shart shooting straight with Americans. No more hypocrisy on spending and they must actually explain why keeping tax rates down is a good thing for the economy.

 


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