Jay Reding.com

You Can’t Squeeze Blood From A Turnip

E.J. Dionne does what Democrats love to do, except when running for public office: call for a massive increase in American taxes. Again, he demonstrates the fundamental flaws in the Democratic understanding of basic economics:

He’s right that a large share of any increase should hit those who enjoyed the biggest income gains over the last decade. But in the end, no politician (with the possible exception of libertarian Ron Paul) is willing to cut the budget enough to contain the deficit without a general tax increase down the road.

Every budget analyst knows this, and every politician knows that it’s far easier to bemoan deficits in the abstract than to risk spending cuts or tax increases that hurt sizeable groups of voters. “There are no more low-hanging fruit,” says Tom Kahn, the staff director for the House Budget Committee. “The low-hanging fruit have already been picked. Any tax increase or spending cut is going to trigger opposition from somewhere.”

In an ideal world, Obama would come right out and say we’ll need broad-based tax increases. But that would be suicidal right now. Witness the reaction to his effort to put a 28 percent ceiling on deductions. His proposal would affect only 1.2 percent of taxpayers, yet even that idea is about to die in Congress.

Dionne is correct in one aspect: just raising taxes on the “top 5 percent” isn’t going to do anything. President Obama could raise the top marginal tax rate to 99% and still never get nearly enough money to pay for his additional proposed spending, no less the entire federal deficit. The idea that raising the top marginal tax rate from 36% to 39% will be anything more than a tiny drop in the bucket compared to Obama’s radical spending plans is ridiculous. Even combining that with removing payroll tax caps, limiting deductions, etc., won’t nearly be enough.

So, is a broad tax increase the answer? Dionne suggests yes. But that answer is self-evidently incorrect. Exactly what is going to be accomplished by adding to the tax burden of the American people in the middle of a recession that is precipitously close to becoming a depression? Where is the average American member of the middle class going to get the extra money to pay off Uncle Sam’s never-ending appetites? People are already cutting back on their spending—raising taxes would cause them to cut back even more. When the economy is already having problems with paradox of thrift, why would policymakers try for a plan that would reduce consumer activity even more?

The root of this whole problem was bad policy. We let everyone get over-leveraged, homeowners, banks, and even the government. Now, instead of tightening their belts, our “leaders” in Washington D.C. are trying to find every inventive new way they can to spend even more money. Dionne is also right in that just nibbling away at the margin will not do it—we have to re-evaluate the massive and virtually uncontrolled growth of government.

Raising taxes and having government “invest” that money will not work. Government is subject to the political process, which virtually guarantees waste. If anyone thinks that Congress will rationally allocate money based on the national interest, then they have a fundamentally irrational faith in government unjustified by facts or common sense.

Raising taxes is simply not the answer. In a time when the American people are cutting back, losing their jobs, and losing their homes, it is grotesquely irresponsible for government to demand even more of their hard-earned money—they don’t have the money to give. The argument that somehow the government will spend its way out of this recession is completely unjustified. Those who think that we should follow the example of FDR had better hope the Europeans start slaughtering each other so we can bomb them to rubble and then help them rebuild—it was World War II and not the New Deal that finally ended the Great Depression. We do not have the ability to spend our way out of this—and all Dionne would have us do is feed the beast more.

What needs to be done? For one, we need to re-evaluate our view of what government does. Nearly all of our current problems can be traced to government intervention. Fannie Mae and Freddie Mac could cook their books because they (and everyone else) knew that they were “too big to fail” and if anything went wrong, Uncle Sam would bail them out. For all the talk about how it was deregulation that caused this mess, the reality is that the less heavily regulated industries are doing better than the most heavily regulated ones. The idea that banks were living in some kind of libertarian paradise and government wasn’t watching everything they did is completely wrong. The banking industry was, and is, heavily regulated. The problem was that the big players (Countrywide, for example) could “buy” Congress and get them to pass laws and rules favorable to them.

The answer is to make sure that this kind of capture can’t happen again. The best way to do that is to make sure that Congress can’t rewrite the rules to line their own pockets. That means not only tougher ethics reform in Congress, but also preventing Congress from being able to screw around with the nation’s economy. Everyone treats this as a demand problem—but it’s really a supply problem. If Congress could only do so much to regulate the industry, there would be no incentive for companies to spend billions on influence peddling. There would be no point to doing so—even if they wanted to, Congress couldn’t stack the deck in their favor.

That means restricting the power of government, except in making sure that companies act transparently. The government does have some need to interfere with the market, but what we are seeing now is when government substitutes the “wisdom” of someone like Tim Geithner for the judgment of the market—quite literally making Geithner the one who gets to make all the rules. Even if Geithner were an unqualified genius, this sort of concentration of power is dangerous.

What we need is less government, not more. What we need is the development of the private sector, not more reliance on government employment. What we need is less of a tax burden, not more. We need a government that does a few things and does them well, not a government that tries to do everything and ends up failing more often than not.

Dionne is wrong at the core of his argument—the level of government spending is unsustainable, and we can never raise taxes enough to cover the difference—and if we tried it would further depress the economy. We cannot keep hoping that the same top-down solutions will work. We cannot just assume that substantive entitlement reform is off the table.

This nation is at a crossroads. We can either continue to spend our way into bankruptcy or we can start looking at alternatives. Raising taxes only makes things worse. We cannot blindly put our faith in government, but must look back to the basics of what makes our economy strong: hard work, a government that promotes opportunity, and a government that is small but effective. The more we stray from those basics, the harder things will be in the future.

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