Republicans trading economic growth for tax hikes

boehner

If you’ve followed the “fiscal cliff” debate, then you know that it has kicked up a debate over taxes that Republicans should win. But rather than make the case for less taxes and for entitlement reform, House Speaker John Boehner has shown a willingness to raise tax revenues, though he refuses to support raising tax rates.

But the prospect of Republicans backing increased tax revenues has caused a substantial rift with fiscal conservatives in Congress, many of whom feel that the GOP is risking economic growth and job creation by taking more money of the economy:

In order to get one with President Barack Obama — who has refused to cut a deal until Republicans agree to increase tax rates on the wealthy — the GOP may have to go even further on taxes, a prospect that could prompt a full-scale party rebellion.

“That’s a big gulp,” Senate Minority Whip Jon Kyl (R-Ariz.) said of the $800 billion in new taxes, which did not include a tax rate increase. “As long as we’re not talking about rates, there may be a way to accomplish it.”

Asked about the concerns from conservatives, Kyl said: “They are right it would hurt job creation. Absolutely right. Well, that’s the question — what is the least, worst alternative? And I don’t know what the answer to that question is at this point.”

In a counteroffer to the White House on Monday, Boehner and his leadership team proposed $800 billion in new taxes over the next decade, saying the new revenue would come from higher tax receipts, rather than through economic growth, as many conservatives demand. In the plan — which was endorsed by Majority Leader Eric Cantor (R-Va.), the rest of the leadership team and Rep. Paul Ryan (R-Wis.) — the Republicans said they would not raise marginal tax rates, including on the top 2 percent of wage earners.
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“Higher taxes is exactly the wrong thing to do,” Kentucky Sen. Rand Paul, the tea party leader, said after leaving a party lunch. “It’s not what we stand for as Republicans.”

“If you take $800 billion out of the productive sector of our economy, you’re going to harm economic growth,” said Sen. Ron Johnson (R-Wis.). “I got real concerns with that.”

Rep. Jim Jordan of Ohio, outgoing head of the conservative Republican Study Committee, said the Boehner proposal is better than the White House plan, but said his leadership’s plan is “not conducive to economic growth, and I’m not for it,” a concern he said “lots of members” are echoing.

These feelings are exactly why fiscally conservative members of the House, where Republicans hold a majority and leadership is desparately trying to rally the troops for a deal with the White House, are being punished. These fiscally conservative members are explaining a basic rule of economics. When money is taken out of the private economy, there is less money for investment and hiring new workers. Government doesn’t spend money as efficently as the private sector and, as we saw with the 2009 stimulus bill, doesn’t create jobs.

Sure, let’s eliminate loopholes to broaden the tax base, but let’s use the new revenue to finance lower tax rates. That’s sound economic policy.

And even if Congress goes along with the White House, giving them what they want on tax hikes, Michael Barone notes that the larger fiscal issues facing the United States — entitlement programs with trillions in unfunded liabilties — will still go broke because the tax hikes will not be nearly enough to fund shortfalls:

 

House Republicans argue, by reforming the entitlements. Obama has given lip service to this idea — but has offered no specifics.

He seems to be paying attention to those Democrats who oppose any changes in entitlements. Just raise taxes, they seem to say, and entitlements can keep rising as scheduled.

The problem is that, as historian Paul Rahe wrote earlier this year, “We no longer have the resources to support the entitlement state. We can certainly raise taxes, as President Obama and the Democrats intend to do, but that does not mean that in the long run we will take in more revenue — and it is massively increased revenue that the entitlement state needs.”

Rahe seems to have history on his side. To see why, take a look at the Economic Report of the President 2012, Appendix B, Table B-79, on page 412, which shows federal receipts — the technical term for revenues — and outlays as a percentage of gross domestic product for every year from 1939 to 2011, with estimates for 2012 and 2013.

Over that period of nearly three-quarters of a century, federal receipts have never exceeded 20.9 percent of gross domestic product. That was the number for the war year 1944.

The highest number since was the 20.6 percent of GDP in 2000, the climax of the dotcom boom. In the Obama years, federal receipts have hovered at 15 percent of GDP.

That’s just because tax rates are too low, Obama backers reply. Just raise the rates on high earners and the problem will be solved.

Actually, high earners don’t make enough money to close the current budget deficit. You’d need to raise taxes on middle-income earners too.
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According to a Congressional Research Service study, the effective income tax rate on the top 0.01 percent of earners in the days of nominal 91 percent tax rates was only 45 percent. Others have pegged it at 31 percent.

In the 1970s, when the top rate on wage and salary income was 50 percent and 70 percent on investment income, high earners spent much of their time and energy seeking tax shelters. The animal spirits of capitalists, to use John Maynard Keynes’ term, were directed less at productive investment and more at tax avoidance.

But don’t European nations extract more in taxes from their citizens? Yes, but through consumption taxes like the value-added tax. But those taxes tend to be regressive, and in this country, sales taxes have been the province of states and localities.

 

Barack Obama and the Democrats may well get higher tax rates. But it’s not likely that high tax rates can ever generate enough revenue to fund unreformed entitlement programs.

 

Barone notes that the current debate is over the proper role of government. Republicans are losing that, not because the limited government doesn’t work, but because they have yet to make a real case for it — either because they don’t really believe it or because they’re so caught up in making a deal they have forgotten it.

 
 


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