The draft recommendations of the president’s commission on deficit reduction call for closing popular tax deductions, higher gas taxes and other revenue raisers to drive tax collections up to 21% of GDP from the historical norm of about 18.5%. Another plan, proposed last week by commission member and former Congressional Budget Office director Alice Rivlin, would impose a 6.5% national sales tax on consumers.
The claim here, echoed by endless purveyors of conventional wisdom in Washington, is that these added revenues””potentially a half-trillion dollars a year””will be used to reduce the $8 trillion to $10 trillion deficits in the coming decade. If history is any guide, however, that won’t happen. Instead, Congress will simply spend the money.
In the late 1980s, one of us, Richard Vedder, and Lowell Gallaway of Ohio University co-authored a often-cited research paper for the congressional Joint Economic Committee (known as the $1.58 study) that found that every new dollar of new taxes led to more than one dollar of new spending by Congress. Subsequent revisions of the study over the next decade found similar results.
A shame that the authors did not take a look back at the early 1920’s. Harding’s Secretary of Treasury Andrew Mellon studied falling tax revenues in the 1910’s and noted that tax collection declined from the “wealthy” every time rates went up. As a result, they cut rates [i]across the board[/i] which among other things caused tax revenues from the “wealthy” to triple and for real economic growth to explode. The economic engine of the ’20’s ran strong until the Fed put on the brakes by taking a huge slice out of the money supply.
RE: “Higher Taxes Won’t Reduce the Deficit”
WHO CARES!!!!????
The Rich need to have their wealth redistributed properly by the Dear Leaders in the State anyway, regardless of whether it does any actual good for the Collective.
Well, the problem with their thesis is that it doesn’t appear to be true. Look at this chart and see that the end-of-Clinton surplus was achieved both by cutting spending AND by raising revenues.
Actually, they’re wrong on several counts. Clinton did raise taxes in 1994. Inf fact, I wonder if they are lying.
What matters is not the generality about all taxes, but what sorts of taxes work. Some do, and some don’t. Taxes on the very rich actually do promote growth because they are encouraged to invest it rather than hoard it. I mean “very rich” not a typical business with much more modest revenues. At some point, the wealthy may need to make some sacrifices if they care about the long-term health of our democracy.
What of course brings greater wealth is growth. The question is – what fosters growth. The idea is that demand does. Currently businesses aren’t very good consumers. They aren’t buying very much. But if the government buys from businesses, that can foster busiensses to buy from other businesses. Then they all pay taxes, which means that there’s more money for the government to pay off the deficit.
If they are arguing that the government doesn’t want to pay of the deficit, then they may be right, but that’s the responsibility of both Republicans and Democrats. The Republicans controlled the government practically in its entirety for 2000-2006 and it they weren’t able to prevent 2008 from happening. All the profits that were gained at that time were lost in a matter of a few months.
Also I’m not sure if the government is in the business of “saving” money. It’s responsibility IS to spend – to allocate resources to defense, the judiciary, the congress, social security, and medicare: those things that rich countries and sophisticated economies generally have.
But the plain truth is that under Clinton there was growth, in part spurred by carefully selected taxes.