Will Higher Taxes Reduce the Deficit? Really???

A friend of mine in high school and college taught me a lesson about fiscally irresponsible people one day. Just to give you some idea about him: He was a big spender, ran up tons of credit card debt (among many other types of debt), and eventually declared bankruptcy. Anyway, back to the story. We were in college and went up north to go skiing. While there he saw a ski jacket that he simply had to have. But his credit cards were all maxed out already. So he called up one of his credit card companies. He said he had an emergency and needed to increase his credit card limit. His credit card company increased his credit limit by $500, over the phone. After he hung up he looked at me and he said that's $500 of "free money." The credit limit was bumped but his minimum payment stayed the same. I was incredulous that he looked at it that way.

This story is not an analogy for what I want to discuss in this blog post. But I tell the story because my friend's mindset reminds me of politicians. You give them an inch and they take a mile, without giving a second thought to the consequences of their actions.

So with that in mind, let's talk about taxes and deficits. There is a claim now that we can't "afford" tax cuts (as if it's the government's money, which is completely false as I've discussed before, most recently on November 13, 2010, How to be a RINO, courtesy of David Stockman). There is a belief that we need to raise taxes in order to balance the budget. Which is complete bullshit. The simple fact is that if we do raise taxes, politicians will actually raise spending MORE. That is, when they get the extra money they won't run a surplus to pay down the debt. They won't even bother to balance the budget. They will increase their spending faster than the increased taxes they collect.

From the Wall Street Journal:
"Higher Taxes Won't Reduce the Deficit" by Stephen Moore and Richard Vedder
http://online.wsj.com/article/SB10001424052748704648604575620502560925156.html

"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%."

"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."

"Politicians spend the money as fast as it comes in—and a little bit more."

"But no matter how we configured the data and no matter what variables we examined, higher tax collections never resulted in less spending."


Because the Wall Street Journal sometimes removes links, here is an article that references the WSJ article. This article also has some links to better ways to balance the budget. From Reuters:
"Should Republicans refuse any tax increases?" by James Pethokoukis
http://blogs.reuters.com/james-pethokoukis/2010/11/22/should-republicans-refuse-any-tax-increases/


Here is another link, for the same reason. From the American Enterprise Institute:
"Higher Taxes Won't Reduce the Deficit" by by Richard Vedder and Stephen Moore
http://www.aei.org/article/102802


Finally, some of Vedder's earlier work, from a report prepared for the 102nd Congress:
"Taxes and Deficits: New Evidence ('The $1.59 Study')" by Richard Vedder, Lowell Gallaway, and Christopher Frenze
http://www.house.gov/jec/fiscal/tx-grwth/159/159.htm

Look at the date on this study. It's from 1991. The more things change, the more they stay the same. Here is a portion of the Executive Summary:

"In recent years higher taxes have been repeatedly justified to reduce the Federal budget deficit. This strategy has been based on a self-styled 'pragmatic' approach, pragmatism being defined as what works. Concern about the effect of new taxes on the economy, or on the spending habits of public officials, was given short shrift by pragmatism. The crowning triumph of this strategy was the 1990 budget agreement, which raised taxes $160 billion, supposedly to reduce the deficit. However, the facts contained in this study and elsewhere show that Federal spending actually accelerated after the 1990 tax increases were enacted, and budget deficits have hit record levels. The only problem with this fiscal pragmatism is that it doesn't work.

"This stimulation of higher deficits by tax increases is not surprising. An earlier study by the same authors on the postwar years 1947-86 found that every $1.00 in new taxes generated $1.58 in new spending. Other research as well as practical knowledge about how Congress operates suggests the same general conclusion: new revenues will be spent on more or bigger programs rather than deficit reduction. The hemorrhaging of spending under the 1990 budget summit was predictable and in fact predicted by its Congressional opponents. The only mystery is how anyone could believe that Congress would not spend all of the new taxes, and then some."

I repeat: "The only problem with this fiscal pragmatism [raising taxes to reduce the deficit] is that it doesn't work. ... new revenues will be spent on more or bigger programs rather than deficit reduction."