Why the House Republicans are right to oppose tax increases
By D.J. McGuire | Monday, July 18th, 2011 | History, Policy, PoliticsAs the latest attempt to preserve the sovereign debt bubble resolve the debt-ceiling issue careens toward its conclusion, the pundits, experts, et al are lamenting the refusal of the Republican majority in the House of Representatives to accept tax increases as part of any debt-ceiling/deficit-reduction deal. The arguments aimed at the GOP have only two problems: history and economics.
Yes, that’s harsh, but it’s also true. Here’s why.
History: This may surprise folks, but permanent tax increases after World War II are actually less than three decades old. Much of the 1940, 1950s, 1960s, and 1970s involved tax reductions, tax shifts, and a slew of temporary tax increases. The first sturctural tax increase since FDR came from none other than Ronald Reagan in 1982. Eight years later, George H. W. Bush agreed to another one. The last of the three came courtesy of Bill Clinton in 1993 (only one, Reagan, dealt with a split Congress, the other two had Congresses wholly controlled by the Democrats).
Reagan and Bush’s tax increases are repeatedly cited as the hallmarks of bipartisanship, reason, and common sense. The deficits of the time paled in comparison to our current trillion-dollar-figures (our budget didn’t hit 1T until 1987), but they were considered big back then, and Reagan himself – followed by his VP and anointed heir – swallowed hard and accepted some tax increases in order to reduce the deficit. That’s the story everyone sees, reads, and hears.
Here’s the part they missed: within three years of each tax hike, the deficit rose to record levels. Funny how that epilogue gets cut from the story.
The 1993 tax hike, meanwhile extended the post-recession “slowth” (think what we’re experiencing now) for another three years. Only by 1996 did the economy recover to a pre-recession state. The next year, Clinton and the Republican Congress agreed to the second of four major tax cuts in thirty years (1981, 2001, and 2003 being the other three) and the only one to be accompanied by spending cuts. The next four years saw the only federal budget surpluses in four decades.
So how did tax increase lead to record deficits two out of three times while a tax cut preceded a surplus boomlet? That goes to the economics. First off, we need to realize the importance the economy has on tax revenue. I did a quick regression on revenue and economic growth since Fiscal Year 1983 (when Reagan’s tax hike took effect), and I found that for each % of GDP growth in Year X, revenue rose 0.38% of GDP in Year X+1. That means a policy that reduces GDP growth by a 1% would in the current economy cost Washington $759 billion in revenue over the next ten years. So clearly, the economy has a tremendous effect on the federal revenues.
The question becomes how best to go forward from there. In the Old Keynesian model, tax increases are always better than spending cuts, because the tax multiplier is by theory lower than the government spending multiplier. However, those multipliers are coming into serious question these days. Numerous economists are putting the “multiplier” at less than 1 (making it an actual divider) and some even have it at zero. Thus, spending hikes have been found to be less effective – and spending cuts less damaging – than previously believed.
Meanwhile, on the tax side of the ledger, the supply-side revolution has forced economists to see both sides of the agreggate economy (instead of relentlessly focusing on demand, as Keynesians do). Tax reductions done properly can increase capital, and thus grow the economy without inflationary pressures by increasing aggregate supply. Thus any effect on aggregate demand that comes from spending reductions is counter by demand and supply increases from the tax cuts. Thus the economy can grow while government shrinks and the budget balance is initially unaffected, and the resulting growth can lead to increased revenue.
In certain cases, that increased revenue could cover some spending increases, or even the initial lost revenue from the tax cuts (thus was born the tax-cuts-pay-for-themselves argument, which was meant only for certain tax rate reductions by themselves, but ended up being used to hide spending hikes along with tax reductions).
Unfortunately, only once was this tax-and-spending-cut model adopted: in 1997. That surpluses followed for four years should have made its superiority clear. Sadly, it did not.
In fact, the lack of spending cuts is the where history and economics come together to explain why opposing tax increases now is the right idea – the spending cuts promised in 1982 and 1990 never materialized, while the reductions for 1993 were replaced in 1995 by the Republican Congress’ own plans to balance the budget and the eventual 1997 deal.
So, to recap, tax increases have been tried three times in 30 years: twice, they led to broken spending-cut promises and record deficits, and the third set of reductions were scrapped by a new Congress (albeit in favor of other cuts). Meanwhile the tax cuts of 1981 were followed by the 1982 hike, and the 2001-3 set of reductions came with massive spending hikes that at the time were records.
The one time spending reductions without tax increases were enacted, they actually came to fruition and led to our only budget surpluses since 1970. That should be the lesson learned today. Unfortunately, it appears that, for now, only the House Republicans have learned it.
Cross-posted to the right-wing liberal
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Former candidate for Board of Supervisors in Spotsylvania, current blogger, economics teacher, and long-rumored windbag. There are two causes closest to the heart: steering the country away from the social democratic nonsense that is sinking Europe, and convincing the rest of the "rightosphere" that the NBA really is a joy to watch.
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37 Responses to "Why the House Republicans are right to oppose tax increases"
I think you are missing the point. Obama said he would Transform the economy. He didn’t say he would Grow the economy. I’ve talked to enough leftists to know that economic growth is not on their top ten agenda although when pressed they pay lip service to it. Do you see leftists bemoaning slow growth in socialist countries? Dems assume that 51% of the public can be bought by someone else’s money. They will make sure they don’t pay too much by maintaining good connections with the government. It has worked in many places so why not here?
We need to reduce the amount we’re spending, that’s obvious.
However, as I’ve asked here before, and have yet to receive a reasonable response (at least that I can remember), where are you going to make those cuts? Specifically, what programs, departments, offices, etc. are you going to cut to balance the budget.
The problem here is that the right isn’t willing to compromise. So let’s say you get what you want, just like Minnesota, and spell out what should be cut and how you’re going to balance the budget.
When you realize that it’s just not possible without pissing off nearly everyone in the country – come back to the table.
Whoah? Did I miss something? Since when is cutting subsidies for big oil and yachts and private jets a “tax increase?”
Did anyone, either party, any time, mention raising tax rates on normal people? If so, I surely missed it.
I’ve said this before, and I’ll say it again (though nobody seems to be listening). This is like saying when a local bond issue is paid off, and then going back to the voters to borrow on it again and calling it a “no tax increase” when in fact it is a “no tax decrease.” I.e, if the bond is paid off and not renewed for some new & improved program, your taxes would go down. I know, this the opposite scenario, but its the same argument in reverse. “Oh, if we take away that tax subsidy for our rich friends, you are raising taxes!” No, we are just saying it’s paid off. Subsidies are meant to stimulate a particular industry, not subidize it forever at taxpayer expense. Would someone please tell me what the frigging problem is here?
I don’t understand how the TEA party got shackled with this when it is a Republicans who are pushing back on on closing tax loopholes. For what it is worth, I can’t speak for them, but I’m pretty sure most TEA party people are totally on board with getting rid of tax loopholes so long as it is neutral in terms of increasing taxes overall. Anybody feel differently about that ? It would be hard to find a tax loophole I would not be in favor of getting rid of, including some very popular ones such as the mortgage interest deduction and various educational tax credits, why should single people have to pay for married people to have a house and put their kids through school, they wanted a family, let them pay for it themselves. The tax code needs to be flattened, what does the TEA party care if it starts with oil subsides or something Democrats want to keep, have to start somewhere. I just don’t understand how this became a “Tea party won’t let moderate Republicans make a deal” narrative when oil subsidies and stuff like that is all Republican stuff. I don’t think many TEA party people were marching to make sure that oil companies keep their subsidies, call me crazy.
TOR complains “where are you going to make those cuts? Specifically, what programs, departments, offices, etc. are you going to cut to balance the budget. ”
Across the board cuts. Everything. Then grow the economy with regulation reduction. We can’t pay for everything no matter how high we raise taxes. Do you understand that? States seem to be managing it except your beloved Blue states that can’t compromise because they are Leftists.
Tor says “The problem here is that the right isn’t willing to compromise.”
What baloney. The Leftists won’t compromise because govt is their religion. Obama proposed $2 billion cut in $1.6 trillion deficit. He will never cut. Don’t give me more baloney about $4 trillion. It will never happen. Conservatives have been burned repeatedly with Dems lying about budget cuts that never happen. Temporary is right. Conservatives would love to end loopholes for a flatter tax. It was Dems who signed on to Reagan’s tax reform (28% top rate) which was regarded bipartisanly as the best tax package passed in the post war era despite a number of negative features. Its the Dems that love loopholes. You know the reason why don’t you?
You are too intelligent to be playing these rhetorical games. You seem young. If so you are the one going to be stuck with the bill. Please look up the economic figures. It’s fine to have your own spending priorities within a balanced budget. That was what politics used to be about. Not now.
I do have to credit the President with one thing, and that is that he sure knows how to say some total bull#$%& with a bold face. I mean seriously, anybody that could spend trillions and drive the deficit to heights undreamed of and then turn right around and look the American public in the eye and tell them that he is all about cutting spending is an artist, and you have to give him credit.
Obama is using the Chewbacca defense like no President ever has, to quote Ellis Weiner, the Chewbacca defense is when “someone says something so patently nonsensical that the listener’s brain shuts down completely”.
The President has said so much nonsense lately that it has left most rational people so confused that they don’t even know how to respond to it.
From South Park …
Cochran: … ladies and gentleman of this supposed jury, I have one final thing I want you to consider. Ladies and gentleman, this is Chewbacca. Chewbacca is a Wookiee from the planet Kashyyyk. But Chewbacca lives on planet Endor. Now think about it; that does not make any sense!
Gerald Broflovski: Damn it! … He’s using the Chewbacca defense!
Cochran: Why would a Wookiee, an 8-foot-tall Wookiee, want to live on Endor, with a bunch of 2-foot-tall Ewoks? That does not make sense! But more important, you have to ask yourself: What does this have to do with this case? Nothing. Ladies and gentlemen, it has nothing to do with this case! It does not make sense! Look at me. I’m a lawyer defending a major record company, and I’m talkin’ about Chewbacca! Does that make sense? Ladies and gentlemen, I am not making any sense! None of this makes sense! And so you have to remember, when you’re in that jury room deliberatin’ and conjugatin’ the Emancipation Proclamation, does it make sense? No! Ladies and gentlemen of this supposed jury, it does not make sense! If Chewbacca lives on Endor, you must acquit! The defense rests.
“What we’ve got here is… failure to communicate.”
Republicans are losing the propaganda war.Need to regroup and try again. Florida Sen. Marco Rubio seems to be able to get the message across.
The federal government helped fund a study that examined what effect a gay man’s penis size has on his sex life and general well-being.
http://www.foxnews.com/politics/2011/07/18/nih-backed-study-examined-effects-penis-size-in-gay-community/?test=latestnews
Barry and the demos have the money to pay for critical studies like this but no money to pay our debts or senior citizens next month. Fails the smell test to me.
D.J.-One difference between what’s proposed now and the tax increases in the Reagan and Bush administrations — these are paired with spending cuts. Spending cuts that are larger than the tax increases. That wasn’t the case for the Reagan and Bush tax hikes (or the Clinton increase, if I’m recalling correctly, there were some budget cuts in the Clinton administration, but they came later).
I am going to go back to DJ’s original article about the impact of taxes on the economy.
Here is how I see it:
Lowering taxes is good and will lead to a balanced budget. If we lower taxes to zero we’ll have a robust economy and the greatest tax revenue even though the tax rates would be zero and there would be NO revenue to pay for the costs of government.
Get a grip, get honest and stop living in dreamland. Honest debate is encouraged, however subversives who are trying to destroy our nation and the American Way need to be opposed.
I think I need to identify that portions of the previous post were intended to be sarcastic. I think I need to identify this because some people do not seem to understand sarcasm.
Little David, in the other direction, if you raised taxes to 100% nobody would work and the government’s revenue would be zero as well, but that doesn’t prove that raising taxes is a bad idea any more than your example proves that lowering taxes is a bad idea. There is a sweet spot in between 0% and 100%, of course, the trick is figuring out where it is and which direction to move the tax rate if your goal is to maximize revenues for the government.
That said, I don’t think maximizing revenue should be our goal. People aren’t sheep to be shorn for the benefit of maximum government, they are people, I vote we leave them alone and let them live their lives in peace.
I think raising taxes on the increased wealth of the wealthy to provide for the increased number of poor is fair.
If the wealthy are going to continue to benefit, they should pay for their benefits. Hard work should pay off like it should. But when the work is no longer available?
The wealthy keep getting wealthier and think that the majority will live with the scraps. When enough of us join the unemployment lines it will become politically correct to throw rocks at the passing limousines.
LD,
Now you are starting to sound like the morons over at Blue Virginia, complete with the class warfare rhetoric. Get a grip and look at the facts, not according to Fox News but IRS.gov:
-the top 1% of taxpayers pay more income tax than the bottom 95% combined.
-the top 5% of taxpayers pay 60% of the total Federal income tax revenue.
-47% of all earners pay zero income tax with the bottom brackets receiving an earned income credit above and beyond the refund of any withheld taxes.
And don’t bother with the retort that people who pay no income tax pay regressive taxes disproportionate to their income, such as sales tax, gasoline tax, and communications taxes. Show me a family with only one car, only one TV without cable premium channels, without a cell phone for everyone in the household, and who doesn’t eat out weekly or buy frozen convenience foods in the supermarket and I will should you a family that pays regressive taxes disproportionate to their income. Anyone else can afford those taxes.
So now we are treated to the spectacle of the President playing Cantor/Boehner/Rigell like a violin; they look like idiots engaging in political theater, while the President welcomes a bi-partisan initiative emerging from the Senate that does basically what the President said could be done; that is, cut expenditure growth, increase revenue, stimulate the economy, and reduce debt in ten years by $4 trillion dollars or so from what would be the case if nothing is done. These republicans are being made to look like the amateurs they really are, in need of seasoning, intelligence, and competence. They play, while the President and serious legislators work on real solutions. We sure know how investors feel as the market had it best day this year. It is like shooting goldfish in a pond; these republicans are just not ready for prime time. Thank goodness.
Mike,
You left out the rainbows and unicorns. And, BTW, how is this “bipartisan initiative” going cut $4T without reducing Social Security benefits or Medicare B/D payouts? Remember, this is the same crowd that promised us that $787B in porkulus spending would cap unemployment at 8% and start creating millions of jobs in 2010.
Well actually, it is going to reform SS and Medicare, and it will reduce tax rates as well. That is what happens when tax credits in the form of corporate and individual tax breaks are eliminated, so tax rates can come down. The Gang of Six and the President are of the same mind; this can be done, it will reassure bondholders and credit agencies, it will keep us on the path to recovery, and most importantly in the short run, it will avoid default, recession, high unemployment, and higher costs for debt service.
Hisroc,
Sales taxes and all the other fees that tax the poor at the same rate are not what I would necessarily call regressive, I would just say they do not qualify for being progressive. A progressive tax code is part of the American Way.
I wish to point out that I am not in favor of just increasing taxes on the wealthy, I am actually in favor of going back to the tax rates we had under the Clinton administration, the last time we had a balanced budget. This would involve an increase on both the middle class as well as the upper class compared to the rates they now pay.
HisRoc wrote,”
-the top 1% of taxpayers pay more income tax than the bottom 95% combined.
-the top 5% of taxpayers pay 60% of the total Federal income tax revenue.
-47% of all earners pay zero income tax with the bottom brackets receiving an earned income credit above and beyond the refund of any withheld taxes.”
It’s also instructive to do the math and see what kind of private sector income you would have to make just to get the same benefits as a person who receives food stamps and other government assistance, it will astound you if you’ve never seen the numbers.
The basics assuming 40 years old, no interest, 60% overhead rate, 42% tax rate, immediate annuity, etc, is that for every $100.00/month you receive in benefit you’d have to earn approximately $140,000.
Food stamps pay $200.00/month (conservatively), you do the math.
@val,
“Across the board cuts. Everything.”
– I’ve said that on here many times before, but if you call anyone in Congress they won’t vote for that. So we’re back to cutting programs, offices, etc. And you (nor anyone else here) has offered a single thing they’d cut. To make it more challenging, find something they’d cut that would get overall support by both parties. Best of luck to you val.
@HR,
Just a couple of questions/comments for you.
“the top 1% of taxpayers pay more income tax than the bottom 95% combined.”
– Without being able to compare this to the overall income of each of those categories that fact has no validity. If the top 1% combined generate more income than the bottom 95% combined then they should be paying more in income tax (without progressive taxation). Without knowing that, this statement means nothing.
“the top 5% of taxpayers pay 60% of the total Federal income tax revenue.”
– Again, if the top 5% are generating 60% of the total income then the the next then they should be paying more taxes (even without progressive taxation). We need to know the overall income of each of those categories for your statement to make any sense of have validity.
“47% of all earners pay zero income tax with the bottom brackets receiving an earned income credit above and beyond the refund of any withheld taxes.”
– This shouldn’t be the case. Everyone should have a vested interest in our country and pay taxes. I am a fan of progressive taxation; however, I don’t think anyone shouldn’t be paying any taxes.
@LD
That’s the hardest thing for readers of this blog to swallow: “Clinton administration, the last time we had a balanced budget.” but you forgot that it was the last time we paid down the debt. Now, wait for all the excuses…
ToR,
Once again, your ignorance of the subject matter astonishes me.
The marginal tax rate for the first earnings up to $8,500 is 10%. The marginal tax bracket for the next earnings up to $34,000 is 15%. The top two brackets are for earnings above $174,400 at 33% and above $379,150 at 35%.
Therefore, someone who earns $100,000 pays $22,372 in income tax, or 22.3%. The person earning $1M pays $327,314 in income tax or 32.7%. The same person earning $5M pays $1.7M in income tax or 35%. By the time you get to the top 1% and the top 5%, they are paying more than the bottom 95% and 60% of all Federal income tax revenue, respectively. The problem is that the leftists “soak the rich” tax politicians would make earning more than $100,000 a disencentive as each dollar earned over that amount would be worth less and less in disposal income. The result would be capital accumulation aversion, as in the former Soviet Union, or massive tax evasion, as in present day Greece where the top marginal tax rate is 50%. Either way, the country goes bankrupt.
This is not rocket science. Ya got that now, bunky?
TOR,
That’s the hardest thing for leftists of this blog to swallow: The Clinton administration, the last time we had a balanced budget because those dirty Repubs in Congress wouldn’t give him any money. How you conveniently forgot that it was the Republicans who forced Clinton to do it not the other way around. Now if they had only followed their own good example under Bush43. However Clinton had nothing to do with the budget restraint except for the political wisdom to not fight it. A wisdom that Obama and fellow travelers posting here can’t seem to acquire.
HisROC
In my experience leftists can’t comprehend the difference between “statutory” tax rates and “effective” tax rates. When I raise this topic with them they look at me baffled or like I’m spouting nonsense. Of course the next minute they are huddling with their tax lawyers to figure out every loophole to avoid taxes. “But that’s perfectly legal” they protest indignantly. So is lobbying for more loopholes. But they know that statutory tax rates are commandments that the hoi polloi will obey. They just know.
valentinus,
I reject your entire thesis that liberal Democrats are tax cheats. If that were true then Democratic leaders such as Tom Daschle, Tim Geithner, and Charley Rangel would be well-known as tax evaders. Oops. Nevermind.
How about the crystal-clean Clinton administration? They certainly didn’t have tax cheats, except for Zoe Baird, Bobby Ray Inman, William Kennedy III, and Ron Brown. Oh, dear.
Need we go back to the Carter Administration and talk about the First Bubba’s tax problems?
Yeah, you’re right. Democrats don’t mind raising taxes because they don’t think that they will have to pay them.
valentinus,
I will give the Republicans in Congress at the time some of the credit for the balanced budget which we arrived at during the Clinton administration. But Clinton himself deserves a large measure of the credit because there were large budgetary battles back then that Clinton eventually ended up winning, both in the court of public opinion and in the legislation he eventually signed into law.
Now, what happened after Clinton left office? We got a Republican by the name of George Dubyah Bush in the Oval Office, we got his tax cuts and we have not had a balanced budget since then.
@ HR
The statistic you’ve quoted might be right. I never said it was wrong. What I said, and you’ve failed to recognize, is that without comparison to the other number, you’re statement has no validity. Walk down the hall and ask your CFO – see what he tells you.
To clarify for you, the top 1% should be paying more than the bottom 95% if they generate more income than the bottom 95%. Never said that was the case, but without knowing the total income of the top 1% and total income of the bottom 95% then you have no validity.
Either way, I’m for progressive taxation. And in that spirit HR, name a couple countries who tax code you would agree with.
@ val,
Let me get this straight, you want to go back to the Clinton Era tax rates, am I understanding you correctly? Oh, and what were those rates; how do they compare to now?
ToR,
I don’t suffer fools. As we used to say in Statistics class, it is intuitively obvious. If you can’t see it, then look up the numbers yourself on IRS.gov. It just ain’t that hard, unless you want to make it so just to debate the facts. I’ll bet that you would argue with a stop sign.
My confidence that a deal will get done is now very high. Why? Grover Norquist, in an editorial in the NYT, gave his permission, that’s why. Now frankly, that is sickening to me that one unelected head of a non profit association, whose close friend Jack Abramoff is in prison for schemes he did, would have that much power on behalf of elected republicans, but that is just the way it is. Now the road is clear for a deal to be announced as republicans have been tacitly informed that he won’t put a target on their back if they vote for the deal which, because there are more expenditure cuts than revenue increases, does not raise net taxes. If that is the way it has to be to avert fiscal disaster, then so be it.
Mike,
Grover Norquist has back tracked on the position you read about. Since stating it would be OK to allow the George Dubyah Bush tax cuts to expire he has retreated back to ideological purity.
LD, the editorial piece I mention appeared in today’s NYT so I think that is the latest from Norquist on this topic.
Mike,
Can you provide a link? I went searching for it but I am not sure exactly which editorial you are speaking about.
Here is a link where yet again a clarification is provided:
http://www.huffingtonpost.com/2011/07/22/grover-norquist-clarifies_n_906582.html
Op-Ed Contributor – NYT
Read My Lips: No New Taxes
By GROVER G. NORQUIST
Published: July 21, 2011
Mike,
Thanks, with that help I was able to find it. For anyone interested, here is the link:
http://www.nytimes.com/2011/07/22/opinion/22Norquist.html?_r=1&scp=1&sq=Oped%20norquist&st=cse
I do not see how this helps very much to resolve the debt limit problem.
Yes, I understand your point, but politicos never tacitly reverse position; they always spend six paragraphs stating why their past position is correct, but in the last paragraph, read closely and between the lines, it is clear that he is indicating he will not put a target on the back of those who have negotiated this outline of a settlement. I believe that is because he is the ultimate political animal; feeling the ground shift under his feet, he could sense that if he remained adamant, and the deal went through as it will, he would lose face, authority, and access.
The way I see it Norquist will still not agree to any revenue increases right now. He might agree to some revenue increases that might happen some time in the future which he could still oppose when the time came. He still wants to drown the baby in the bathtub.
Stunning: “I think raising taxes on the increased wealth of the wealthy to provide for the increased number of poor is fair.”
Fair? To who? Fair to the people that earned their money or fair to the people taking money away from people who earned it when they did nothing to earn the money they are taking?
Fair?
Really?
Reid Greenum,
Fair to the majority of voters.
Since the income tax was first implemented we have always had a progressive tax system. I call it the American Way.
I am stunned that you expect the increasing numbers of poor to sit back and not vote. Perhaps you libertarians have a plan to deal with that as well?
An honest politician is usually a contradiction in terms.. http://www.mrctv.org/node/103077
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