Discretionary spending for the 2012 federal budget is $1.24 trillion (budget, page 198); the deficit is $1.1 trillion (budget p. 171). A 90% cut in discretionary spending is, shall we say, rather unlikely. To balance the budget we need to raise taxes.
The money has already been spent. To balance the budget with spending cuts alone, we would need to build a time machine and somehow rig several hundred past elections in decades past to result in Libertarian victory. This is almost as unlikely as cutting discretionary spending by 90%. It’s time to raise some taxes.
Yes, there is also the option of entitlement reform. We could use a bit of entitlement reform. But most entitlement reforms are tax increases in disguise – retroactive tax increases. The working classes were supposedly buying retirement annuities and old age medical insurance with those FICA and Medicare taxes. Cut those benefits and those insurance payments become ex post facto taxes to the general treasury. (Yes, you can argue that those who made most of their contributions back when FICA taxes were too low. But it is rather late to get them to pay their fair share. Those whose careers began after FICA taxes went up under Reagan, however, did pay enough for their upcoming retirements. Reform their entitlements and you truly tax them retroactively.)
What about economic growth? After all, part of our deficit woes stem from the current recession. Growth is indeed good. It would increase tax revenues and get people off welfare and unemployment insurance. But in the long term, growth will also raise interest rates, and the national debt is now bigger than the GDP: $16.3 trillion vs. $15.1 trillion. Social Security obligations are also tied to wages; if economic growth raises wages, Social Security obligations go up as well. Speaking of Social Security, we should be pessimistic in our projections of future economic growth even with good economic policies. The Baby-Boomers are starting to retire! We need to tax those hippies before they switch from LSD to Geritol.
Tending the Golden Goose
The Supply Siders do make some good points. Tax people or businesses too much and you hurt the economy. But as I point out elsewhere, deficit spending hurts the economy. When banks buy Treasury notes instead of making business loans, businesses go under. Tax increases applied to reduce deficit spending could be a boon to businesses dependent on bank lines of credit.
But tax increases are also a burden to businesses. Given that we are in a recession, it behooves us to minimize this burden.
Taxes impose two burdens on businesses. First, they cost the money that gets sent to the government. This burden we must increase. There is a second burden, however, one we can decrease: the amount of paperwork needed to comply with our Byzantine tax code. If we raise taxes by closing loopholes, we can increase government revenues while adding minimal new burdens to business. We might even reduce the net cost of paying taxes.
We can also raise taxes by replacing burdensome regulations with Pigovian taxes. Instead of mandating scrubbers on smokestacks to fight acid rain, we could tax the pollutants themselves. Instead of our myriad alternative energy subsidies and regulations (such as CAFE), we could simply tax carbon based fossil fuels. Such taxes reduce paperwork burdens and harness market creativity; they also provide the government much needed revenue.
The Ideal Tax System
Along the way we shall explore what constitutes the ideal tax system. Should we tax income, consumption or property? Why? Which taxes best approximate fee for service government? Which are the easiest to calculate? Which are the most progressive?
But though we shall explore these big questions, our focus is on increasing federal revenue now. We are in a fiscal crisis. The quickest solutions start with tweaking the system we have today. For example, here is a flat tax idea that’s actually more progressive than what we have today.