"It profits me but little that a vigilant authority always protects the tranquillity of my pleasures and constantly averts all dangers from my path, without my care or concern, if this same authority is the absolute master of my liberty and my life."

--Alexis de Tocqueville, Democracy in America

Monday, April 11, 2011

Cutting Spending or Raising Taxes - A Thought Experiment

Congressman Paul Ryan of Wisconsin has laid out a real proposal to move toward fiscal sanity through spending cuts that run to trillions of dollars over the next 10 years.   The Democrats like Chuck Schumer (or, as I like to call him, the "Great Satan") oppose the plan, and call the proposed cuts "extreme" or "draconian" or "heartless."   Fine.   We must presume, though, that Democrats are not in favor of fiscal insanity, so they must want to do something else.   The something else can only be... raising taxes on everyone.    If you won't cut expenses, you have to raise revenues; if you can't raise revenues, you'll have to cut expenses.   Q.E.F'n.D.  

So, no matter what they say, you better believe the Democrats are in favor of raising taxes.   To be sure, they will say they only want to tax the rich, to make the rich pay their "fair share," whatever that means.    As everyone who has spent any time at all with the numbers can tell you, the rich already pay the lion's share of taxes.  (The Top 10%, with adjusted gross incomes over $113,000, paid 70% of all federal income taxes in 2008.)  You can't tax them much more.  

So they're going to have to raise taxes on everyone else too.   Assuming that they mean income taxes, exactly how much are they talking about?

Well, last year the federal government brought in approximately $2.2 trillion in total revenues, of which approximately 53% (around $1.15 trillion) and around 37% (about $800 billion) in Social Security taxes.   So, without putting to fine a point on it, if you wanted to close the budget deficit of $1.6 trillion simply by raising taxes, you'd likely have to come close to doubling everyone's taxes, and not just income tax, but also their Social Security tax. 

Anybody think the Democrats will be honest about what the alternative they are proposing really entails?    I didn't think so.  

And this, of course, begs the question.... wouldn't doubling everyone's tax rates crash the economy in a New York minute?   Of course it would.   So, while you might think that if at current tax rates we raise $2.2 trillion, if we doubled them we'd raise $4.4 trillion and have a surplus, the truth is that raising tax rates that high might actually result in lower revenues, as small businesses stop hiring, people with the ability to control how much they earn stop working as hard, being disincentivized, people stop spending discretionary income that they don't have anymore (because they government confiscated it), etc.   The economy is not static, it's dynamic, and you can't just raise tax rates to raise a proportionate amount of revenue.  

There is no realistic alternative to the types of spending cuts Paul Ryan has proposed.   We either become adults, and soon, or we are driving off a cliff.

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