Tax Increases On The Menu

Democrats Not Shying Away From Tax Talk (washingtonpost.com)
If the Democrats think they can tax us into prosperity they’re mistaken. They’ll also have a tough time selling tax increases as a way of spurring the economy. The only real way to sell that is to claim it will lower interest rates by reducing the deficit, but interest rates are near a forty-year low and they will go up eventually in any case.

I agree with the idea that the government should pay for the programs it creates, but most of these Democrats have already spent the money they would get from any increase by promising more health spending, universal day care and any other number of programs. In short, I think they’re lying when they say they are after fiscal discipline.

Republicans, inexplicably, have failed in this area as well with the drug benefit for Medicare. Apparently robbing the Democrats of an issue is more important than fiscal responsibility.

The deficit has more to do with three things: a slow economy, increases in defense spending and increases in spending on homeland security.

Regarding the economy, the reason it is sluggish is a lack of business investment. Increasing taxes won’t fix that. Remember the “Year 2000 Bug” that never materialized? Companies spent hundreds-of-billions of dollars upgrading and replacing systems to avoid that problem and the investments are still in use. Will tax increases make these new systems obsolete and therefore restart business investment? No. Companies spent billions on internet-related investments, like laying cables for bandwidth, much of which is not in use. Supply has outstripped demand. Will tax increases increase demand for unused bandwidth? No.

If I were going to sell tax increases I would do it as reform instead. Our current tax system places a huge burden on the economy in compliance costs alone, estimated at $200 billion annually. Tax simplification that increases revenue could be sold.

Outright replacement of the existing system would probably be difficult to sell, but it’s desirable. Lawrence Summers, President of Harvard and former Treasury Secretary under Clinton, once remarked that we wouldn’t have a value-added tax in this country until Democrats realized it would raise gobs of revenue and Republicans realized that it hurt the poor. The quote is hilarious and very accurate. [By the way, if anyone can find that exact quote and provide a link I would appreciate it.]

I wouldn’t embrace a VAT as a replacement for the existing system, but I would embrace a transaction tax, which is similar, that could be set as low as .6% (six-tenths of one percent) on each transaction and would replace all of the revenue provided by the existing system and could raise additional revenue while minimizing — not eliminating — the burden on the economy. I’ve discussed it in more detail here for those who are interested.

Democratic presidential candidates are following the politically risky strategy of embracing tax increases as key parts of their economic agendas, hoping to make mounting federal deficits and President Bush’s economic stewardship major issues in the 2004 campaign.

When Bush signed his third tax cut into law last month, the legislation was supposed to put Democratic candidates in a political bind. They could no longer say they favored delaying or canceling future tax cuts, because the legislation put those planned cuts into law immediately.

But the candidates have shown little reluctance to reverse tax cuts already in force. Although they couch it as “rolling back” Bush’s tax policies, virtually all the major Democratic candidates say they would raise taxes on some or all of those who pay income tax. The proposals range from repealing all the tax cuts enacted in the past three years to raising taxes only on the wealthiest Americans.

“Most Americans would gladly pay the same taxes they paid under President Bill Clinton if they could just get the Clinton economy back,” said former Vermont governor Howard Dean, one of the leaders in the race for the Democratic presidential nomination. “People are not stupid out there.”

Dean’s implication with that last statement is that tax increases would bring back the economy of the late 1990’s. Patently false. One of my favorite Winston Churchill quotes is: For a nation to try to tax itself into prosperity is like a man standing in a bucket trying to lift himself up by the handle. He was right. We could, however, reform our way into long-term prosperity and actually pay for the programs that Congress authorizes.

By way of cutting government we could begin with eliminating corporate welfare, estimated at around $125 billion annually.

We could also abandon that Medicare drug benefit before it ever gets enacted. But that would require the Republicans to grow a spine.

UPDATE: There’s another WaPo article on the split within the Democratic Party with the DLC fighting against the leftward drift. See Below.
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