Taxes: 'Heresies of the Obvious'

Former Florida Governor Jeb Bush recently came to D.C. and testified before the House Budget Committee, chaired by Paul Ryan. At The Washington Post, Michael Gerson instructs us:

Bush has naturally gotten more attention for his departures from Republican orthodoxy. Most are heresies of the obvious. Bush would accept a theoretical deficit reduction package that includes $1 in tax increases for every $10 in spending cuts. So would any responsible public official, no matter what he or she feels compelled to say in a primary debate.

Midway through the hearing (at about the 01:05:30 point in the C-SPAN video) Mr. Bush says: "If you could bring to me a majority of people to say that we're going to have $10 of spending cuts for $1 of revenue enhancement, put me in coach."

If Congress would actually cut spending by $10 for every $1 of tax hike, then put me in coach, too, heretical though that may be. But such a deficit reduction deal is entirely "theoretical," as Gerson suggests. The 10-to-1 scenario goes back to the August 2011 Republican presidential debate in Iowa (transcript) on Fox News when moderator Bret Baier asked:

BAIER: Well, I'm going to ask a question to everyone here on the stage. Say you had a deal, a real spending cuts deal, 10 to one, as -- as Byron said, spending cuts to tax increases.

Speaker, you're already shaking your head.

But who on this stage would walk away from that deal?

Can you raise your hand if you feel so strongly about not raising taxes, you'd walk away on the 10 to one deal?

All the GOP candidates promptly raised their hands, which garnered enthusiastic applause from the audience. (Baier's question comes about 45 minutes into the video, and it's worth starting the video right there just to see why Speaker Gingrich was shaking his head.)

But this 10-to-1 deficit reduction deal is not just "theoretical," it's complete fantasy. Such deals have been struck with Democrats in the not-too-distant past and the promised spending cuts never materialized. Americans for Tax Reform President Grover Norquist forcefully pointed this out on Fox Business:

When they promised Reagan 3-to-1 and cheated him, when they promised Bush 2-to-1 and cheated him, 10-to-1 is even more made-up than 2-to-1 and 3-to-1. And we know that the Democrats want to raise taxes ... to spend the money [video].

But what would a 10-to-1 deficit reduction deal entail? Since the estimated deficit for fiscal 2012 is $1.32T (Table 1.1, Historical Tables), a 10-to-1 deficit reduction would mean Congress would have to cut spending by $1.2T and raise tax receipts by $120B. That $120B in tax hikes is equal to raising 2012 individual income tax revenue (estimated at $1.16T in Table 2.1) by a shade over 10 percent. If the average effective rate for individual income taxes were 11 percent (as it was in 2009), then the I.R.S. could get an extra 10 percent of revenue by hiking everyone's effective tax rates by 1.1 percent or thereabouts. (Would it be heretical to ask if that's too onerous?)

So in a 10-1 deficit reduction deal, the tax hike part is the easy part. The hard part is the spending cuts of $1.2T. Such a reduction would mean that Congress would have to spend $3B less than it did in fiscal 2005 (Table 1.1). Congress could cut "discretionary" spending to the bone and still not be close to getting enough spending cuts to satisfy a 10-to-1 deal. To satisfy the deal, Congress would be forced to cut "mandatory" spending -- entitlements.

At the risk of being cast into Outer Darkness by my conservative brethren, I'd like to float a tax heresy of my own: the "payroll tax holiday" should end. However, as Deroy Murdock writes in The Washington Times: "Having returned to the American people 2 percentage points of their Social Security taxes, Congress probably never will have the nerve to take this away." But they should take it away. That's because the "holiday" is blowing a hole in the budget, and the hole happens to be about the size of the $120B tax hike in our 10-to-1 deficit reduction deal.

But the problem with raising taxes right now is that the economy is very delicate; some fear the slightest nudge could put us right back into recession. Raising taxes by 2 percent or even 1.1 percent might be enough of a nudge. That's why in 2010 President Obama extended the "Bush tax rates" and should do so again. (Obama continues to rail against the "Bush tax rates" as being the cause of all our woes even though they are now the "Obama tax rates.")

The federal government's fiscal problem is not low revenue. At no time during Obama's term and during the Great Recession has total federal tax revenue gone below $2T. Total federal tax revenue under Obama is second only to that under Bush. The federal government's fiscal problem is spending.

Grover Norquist is exactly right: Democrats want to raise taxes not to balance the budget, but for new spending and new programs. And Democrats are going to offer precious little help in cutting spending to knock down the deficit. After all, Democrats have run trillion-dollar deficits for four years now and have cut nothing.

(I'd mention another tax heresy but I'm already in trouble for unregenerate Pelagianism.)

Jon N. Hall is a programmer/analyst from Kansas City.

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