Should Taxes Be Raised?
An interesting question for me considering that I just got back from my tax preparers office (and it wasn’t fun this year), and one that Mark Schmitt answers in the affirmative. And as much as it pains me to say this, he may be right.
Everyone who looks at the numbers knows that taxes must go up. If we do nothing at all, the years 2007 through 2016 will bring deficits of $3.5 trillion outside of the surplus in Social Security. But doing nothing assumes that all the Bush tax cuts will be allowed to expire as scheduled in 2010 and subsequently. If the tax cuts are extended, and spending remains generally unchanged, the 10-year deficit will total $7.8 trillion. To balance the budget under these conditions would require cutting defense spending by 67 percent, Medicare by 54 percent, or every other program by a third, something that no one in politics has shown any willingness to do. The current path leads straight into a severe economic crisis.
Those are not nice numbers, and I’m assuming Schmitt has the numbers right.
The risk here is of putting too little on the table rather than too much. If the fight is just about extension of a particular tax provision, it will be hard to win. And if politicians aren’t willing to talk honestly about the magnitude of the changes necessary, the default will be excruciating: In a few years, we will enter a period of chronic crisis, scraping by each year with a painful series of budget gimmicks, fee increases, and disguised tax hikes—just enough to get by for the year before the dreary cycle begins again. After a few years, the public impression would be of a government that is constantly raising taxes, constantly cutting services, yet never solving either the fiscal crisis or other problems.
And if Schmitt is right about this, then this isn’t good either.
This brings me to a larger issue of rules vs. discretion, or using the terminology of the Nobel laureates Prescott and Kydland, time inconsistency. Discretionary policy–i.e. policy that is flexible and determined by politicians–is time inconsistent and this leads to sub-optimal outcomes. As such, policies that are determined by rules are preferable in that they are harder to change thus having a greater degree of “believability” by the public. A simple example of time inconsistency is a college course. The optimal policy at the begining of the semester is for the professor to announce a final that will make up the bulk of the final grade. Students, believing this policy, will study. But when the day of the final comes, given that the students have studied, the optimal solution is to cancel the final. The students have already studied and the professor doesn’t have to incur the cost of grading. A win-win situation. However, if the students are rational agents they will realize the professor will “deviate” from the announced optimal policy of giving the final and will not study. Thus the discretionary policy of leaving grading/testing up to the professor is not time consistent.
And the rules that are put in place do not have to be simple (although they could be). Policies that are based on a number of determinants could be fairly complicated and produce better results than discretionary policies. How does all of this tie into taxes, budgets and government spending? Well perhaps instead of letting politicians determine spending by proposing various type of legislation and then arguing over budgets, taxes and what not; suppose taxes and spending are determined by a rule and hence politicans have a fixed pot of money to spend and have to argue over how much goes to various programs? This might be a useful step in solving the problem of taxes and spending and the various obligations the country now faces. Of course, since it is something sensible and takes away the ability to engage in pork barrel spending form politicians I expect such an idea to go precisely nowhere.
In short our policies in this country are determined by short-sighted politicians who have trouble looking beyond the next election. Hence decisions made by politicians are constrained by each politicians next election. This is not the ideal recipe for good policy decisions.
Link via Greg Mankiw.
I think that part of the problem is that both parties have painted themselves into something of a corner. Republicans have successfully packaged themselves as the “cut taxes” party; they’ve also been pretty successful at packaging Democrats as the “tax and spend” party. “Party of fiscal irresponsibility”, which would certainly characterize the present situation, doesn’t have much of a ring to it.
I’m a little kinder than most: I think that a tax cut (or tax postponement, as some would have it) of some kind was a political necessity early in Bush’s term, as the country slid into recession. But IMO the tax cuts were the wrong kind and have lasted far longer than any reasonable purpose would warrant. But neither party wants to be the bearer of bad news.
At this point the Republicans really can’t afford to advocate eliminating the Bush tax cuts (postponements): it’s all they’ve got. The Democrats, eyes on 2008, don’t want to reinforce the notion that they’re always ready to raise taxes.
The profligacy of both parties goes without saying.
In short our policies in this country are determined by short-sighted politicians who have trouble looking beyond the next election.
And how does this differ from the typical corporation?
By problem is not with your attitude to government,
rather it is the unjustified assumption that the private sector does not make the same mistake.
“By problem is not with your attitude to government,
rather it is the unjustified assumption that the private sector does not make the same mistake”
I disagree. The problem is that people think that it is all the politicians fault, and not the fault of the people who elect them.
I don’t know, there are some who disagree, like The Skeptical Optimist.
How about cutting off whole arms of the government? Do we really need a hundreds of people managing Indian affairs? Retired railroad workers? The list is endless. So when I hear “we need to raise taxes” I hear someone who doesn’t see the vast waste that is going on a all levels of government.
I’m sure that some in the private sector make the same mistakes, the problem is that those that make such mistakes in the private sector can’t have as far reaching impact. Even something as huge as Eron pales in comparison to the problems with Mediare by at least an order of magnitude if not more.
Fersboo,
Any balanced budget will be short lived once the baby boomers retire in large enough numbers and Medicare expenditures start going up. Extend that graph out past 2009 and include Social Security and Medicare and it would be…not good.
I’ve been sort of baiting the Q and O guys with this. Their (in my perception) arrogant presumption of superior patriotism, support for the troops, and their so-called support for the war is contradicted by their unwillingness to face any hard facts or choices about the war: like how to pay for it.
It isn’t possible to eliminate categories of funding or to make enough across the board cuts to get us out of this mess. The idea that we could sustain a serious commitment to winning two wars while cutting taxes was supremely irresponsible.
Geez, let’s see here. The latest numbers say that the budget defecit is already less than half of what it has averaged since the 70’s and some economists are saying that the defecit could disappear entirely within a year!!!
Hell yeah, let’s go ahead and kill the golden goose by raising taxes. Sounds like the socialist thing to do.
Director Mitch, we could eliminate the entirety of the federal government other than the military, Medicare, and Social Security and it would still go into default.
Then the problem then isn’t with taxes, it’s with SS and Medicare. These programs need to be cut, eliminated, something. The problem is that any efforts to do something, anything, gets the democrats (and not a few republicans) running around with their hands over their ears shouting “there is no problem!”
If the solutions are government default, 50% taxes, or cutting these two programs, guess which one will happen? But this entry title was “Should Taxes be Raised”. Seemed to me it should be “Cutting SS and Medicare to Save the Budget”.
Laura; you make it sound as if when the democrats raise taxes, that those increased taxes are actually going to increase the amount of money coming into the coffers. Secondly, in a compound move, you assume that those increase revenues, will actually go to pay for the war. Wrong on both counts.
Why not just admit you’re trying to get us to lose the war by cutting off the funding? At least then you’ll have the advantage of being honest.
So, let’s say Congress raises taxes to “save” SS and/or Medicare. Wait 12-18 months and they will spend the increased revenue on some other entitlement not authorized by the Constitution and be back whining about needing even more money to save SS and Medicare.
The Democrats kept piling up “entitlements” to buy votes. You could theorize that they knew full well that the entrenched entitlements would force continual tax-raising to get to the Western European socialism that they want, BUT no, I don’t thnk they are that clever.
The Republicans, on the other hand, finally gave in and became “republicrats” and tried to buy votes, the same way, by handing out money.
They figured that when it came time to pay the piper, it would land in the Democrat’s lap.
Losing the Congress might just help that little fantasy come true.
What to do?
Raise taxes and kill off the economy, thus harming the most number of people.
Ruthlessly cut entitlements, harming a lesser number of people.
One BIG thing: Government employees (I never use the word worker, here)and their pension and medical obligations.
Take a blow-torch to the federal government (and their average $100k employee) and yhou save a few dollars AND show the rest of the country that the sacrifice is not totally lopsided – like it usually is.
Saying that someone is “trying to get us to lose the war” is childish,. You argue like someone is trying to take your toy away.
Republicans have been discussing budgets and taxes dishonestly for decades. The typical Republican line is to tell the voters that taxes need to be cut, that money is being wasted, but to also commit to supporting whatever the pork is for his/her district and whatever federal subsidies are popular in his/her district. The Republican then goes to Congress, cuts the taxes, and keeps right on delivering goodies to the folks back home. Republicans are the “cut taxes and keep on spending party”. Republican voters want government money for themselves but they want the funds to come out of someone else’s pocket.
Democrats, on the other hand are honest in their discussions of taxes and budgets. Democratic politicians say that people can’t get what they aren’t prepared to pay for. Democrats don’t promise to make cuts that no one wants and don’t lie that we can afford tax cuts that we can’t afford.
That’s why red states are more federally subsidized than blue ones: hypocritical Republican politicians and voters who want someone else’s federal tax dollars to be spent on them.
And add to it, all the war “supporters” who think that the war can be supported by magic.
That must be why Social Security has earned the moniker “the third rail” of politics.
That pretty much sums it up. The problem isn’t that there is waste, fraud, and abuse, but that the U.S. government is on a completely unsustainable growth path. We could cut out all of the waste, and it wouldn’t solve the long term fiscal imbalances.
50% tax rates or higher.
Nothing will happen until things have reached crisis levels.
Every other comment is pretty much just nonsensical.
Previous generations of conservatives realized that taxes had to match spending. But today’s conservatives are so vehemently against any and all taxes and so vehemently for spending that one would think they have an agenda to destroy America.
Liberals have remained grounded in reality knowing that the best fiscal policy it to raise enough money to pay for what the people say they want.
Diane C. Russell neatly sums up the problem
Until congress show spending restraint raising taxes
1. Does not fix the problem
2. Makes life more difficult for taxpayers
Bottom line: Until congress shows some spending restraint the best policy is to not raise taxes.
Or to put it another way: Until congress has sufficient fiscal restraint to stop subsidizing ADM by ending sugar tariffs and ethanol mandates they have no moral standing to ask for more money from individual tax payers.
No, laura. My COUNTRY.
That you get those two mixed up, explains much to me about why you don’t seem to understand the value of each.
I think you’re being a bit short sighted. Receipts are up –WAY UP–since the Bush tax cuts. A little thing called the laffler curve. What is needed is a whole scale reduction in wasteful government spending. No more free lunches for govt. workers or other unproductive members of our society. In the immortal words of Captain John Smith–“he who does not work, neither shall he eat.”
You mean the Laffer Curve, sorry we are not near the peak of the Laffer curve, and if anything to get to the peak we’d likely have to raise taxes.
TJIT,
Fine, but waiting to raise taxes simply means that when taxes are raised they will have to be higher. There is pretty much no easy way out of this mess. You can’t enforce fiscal restraint on the part of government that controls the purse strings, at least not with the current set of institutions. Eventually something will be done and the best guess is taxes will go up.
Oh and subsidizing ADM wouldn’t make a dent in the fiscal problems we face. As Dave Schuler pointed out, even if we eliminated everything save the military, Medicare and Social Security we’d still have a problem.
Steve,
We agree on the problem which is
The graph in this article by Robert Samuelson Illustrates the problem nicley. Entitlement spending was 22 percent of the budget in 1956, it was 60 percent of the budget in 2006. Defense spending was 60 percent of the budget in 1956, it was 20 percent of the budget in 2006.
The response of Bush and the appropriators to the bloating entitlement spending and the impending bankruptcy of social Security and Medicare was to pass the medicare prescription drug plan which worsens a bad situation.
Given those facts it should be obvious that the response of the spenders to increased revenue from higher taxes will be to spend all of the additional revenue and then spend even more. Thereby increasing future liabilities and making a bad budget situation worse. They have always done this and have never shown any fiscal restraint.
The spenders can get away with it because they can maintain the illusion that SS and Medicare are adequately funded.
Financial restraint will only be shown when they have to start using current revenues to pay for entitlement spending. At that point they won’t be able to pretend that entitlements are adequately funded.
Then and only then will there be any chance of responsibility (means testing, etc) being shown with entitlement spending.
Increasing taxes before then (for example reagan’s “fix” of social security by raising taxes) just kicks the can down the road and makes the current (economic slowdown because of increase taxes) and future (much larger but still bankrupt entitlement spending) financial destruction worse.
Cheers,
TJIT
Steve,
I realize ending the subsidies to ADM won’t fix the budget. Neither will cutting foreign spending, or increasing efficiency or any number of the usual ideas that are floated as painless fixes to the impending budget crisis.
The only thing that will fix the budget is reform of entitlement spending.
I use subsidies to ADM as a litmus test (budget turing test?)
A relatively small number of policies benfit ADM, chiefly ethanol mandates, sugar tariffs, and farm programs that lead to overproduction and cheap prices of their feedstocks (corn). These policies benefit only ADM and the corn growers. They increase costs to every food consumer in the US, and they cause economic destruction and human suffering in many parts of the third world.
If the spenders can’t stop funding something that benefits so few at the expense of so many the spenders clearly don’t have enough responsibility to be trusted with any new tax generated revenue.
They have failed the budget turing test.