Tuesday, August 03, 2010

Deficits and Tax Hikes

Hold onto your wallet - the let is suddenly worried about the deficit. Their solution? Raise taxes. Fareed Zakaria just wrote a column complaining that 1) the Bush tax cuts are responsible for today's deficit, 2) Americans are undertaxed. Zakaria doesn't want President Obama to roll back taxes on just the rich. He wants all of us to pay more.

The Bush deficit has become a rallying point for the Democrats and an easy excuse for the Obama deficit. Is this fair? Or even accurate? Obama insists that he inherited a deficit of $1.3 trillion and is only responsible for pushing it to $1.4 trillion. Dick Morris takes issue with those figures pointing out that a big chunk of the Bush deficit was caused by the TARP. Since most of the TARP was repaid, that part should not count the same as regular spending. Under that measure, Obama doubled the deficit.

Another issue here is that the Bush years were not "a decade of spiraling deficits" as a White House adviser called them. They were fairly moderate until the economy collapsed. Look at the graph in this article from The New Republic (hardly a Bush backer). Bush's deficits averaged 2% of the GDP while the average deficit since 1970 has been 2.6% GDP. Compared with everyone except Clinton (with a Republican Congress), Bush's deficits showed fiscal restraint. And this was with tax cuts, two wars, and a recession early in the decade. Obama and his supporters prefer to look only at the surplus when Bush took office and the deficit when he left and ignore everything in-between (or pretend that it was a straight line).

Zakaria echoes the current Democratic party line by implying that the only reason that we have a deficit now is because of tax cuts that were passed years ago. This argument falls apart when you look at the actual Bush deficits. How can the tax cuts be causing such huge deficits now when they did not at the height of military spending on the two wars?

Zakaria's other point is that we are undertaxed. This has been a common message from the left for months - that other countries have higher tax rates therefore we are not paying our fair share. There are opposing viewpoints. Here is one that points out that we would have to raise taxes on the rich to confiscatory levels in order to reduce, but not eliminate, the deficit. Note that this column was written in response to a statement by Hillary Clinton in May.

Here is an old but still relevant piece (as far back as 2007, Nancy Pelosi was saying that we are undertaxed). It points out that the total tax burden under Clinton was at a historic high. Here is a piece from a couple of months ago that averages taxes differently. This calculates the tax burden on a per-person basis. This calculation puts the US in the middle of the pack.

There are other problems with the undertaxed claim. We have one of the world's highest corporate taxes. We also get fewer government services than most other countries. Once you figure in additional costs like insurance then the difference vanishes.

This brings us to the real issue. The Democrats still hope to make over America to be more like European socialist governments. That means increasing taxes, leveling earnings, and nationalizing many services that are currently offered privately. As an example, the Democrats still hope to revive the public option for insurance.

That is what this talk about. The Democrats are not interested in reducing the deficit. They want to expand government. A few days ago I complained about a column where Fromma Harrop proposed raising taxes in order to reduce the size of government. My argument is that, absent a balanced budget amendment to the Constitution, this would just encourage government growth. The same is true for Zakaria's column. The current administration has not shown the slightest fiscal restraint. Giving them more taxes to work with will not produce a mid-life conversion to limited government. It will only enable them to spend more.

Not that this would bother Zakaria or Harrop or E. J. Dionne, or Hillary Clinton, all of whom have raised the undertaxed claim. They have a long record of wanting expanded government. Remember this any time you see someone use the word "undertaxed" and ask if this is someone who would like to see the government expanded?

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