Raising Taxes Won’t Reduce the Deficit

With just weeks to go before America slides off the so-called Fiscal Cliff, many politicians and pundits argue that we must forge a “grand bargain” which includes tax increases and spending cuts. But now, two noted economists have crunched the numbers and conclude that Nobel-Prize-winning economist Milton Friedman was right when he said, “Politicians will always spend every penny of tax raised and whatever else they can get away with.”

Stephen Moore of the Wall Street Journal and Richard Vedder of Ohio University recently updated a study done for the congressional Joint Economic Committee in the late 1980s that found every dollar of new taxes led to more than a dollar of new spending by Congress.

Moore and Vedder “found that over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending. Politicians spend the money as fast as it comes in—and a little bit more.”

They looked at different time periods, used different data, altered other variables, and never once found that higher tax collections resulted in less government spending. These results completely counter the argument that we can solve our nation’s fiscal problems by combining spending cuts with tax increases.

The “grand bargain” isn’t such a bargain after all. The only way to cut spending…is to cut spending.

Steve Buckstein is founder and Senior Policy Analyst at Cascade Policy Institute, Oregon’s free market public policy research organization.

Learn more at cascadepolicy.org.

  • valley person

    Did they also conclude then when we cut taxes we therefore cut spending proportionately? And did they link tax rates to the deficit?

    Can they tell us why the last time we raised taxes we balanced the budget, and the last time we lowered taxes we raised the deficit?

    • jeannie

      VP, When you say, “the last time we raised taxes we balanced the budget,” to what are you referring?

      • 3H

        I believe he was referring to the Clinton budget. I could be wrong, though.

      • valley person

        Clinton Administration. That was the last time tax rates were raised.

        • jeannie

          Oh dear, I was afraid that’s what you meant. In fiscal year 2000 the deficit was at its lowest point of the Clinton years – 18 billion. At no time in the Clinton years was there a surplus. If you borrow money from trust funds to fill a budget hole, you’ve got to repay it at some point. My understanding is that they spent less than they borrowed and then called that a surplus. If you’re running a deficit, you don’t have a surplus.

          • HBguy

            Source? Most of the sources I’ve seen indicate there were surpluses in late Clinton term. Up to 200 Billion. I saw one person post on the internet that there was an 18 Billion dollar deficit that year, but there was no explanation. So….Source????

  • ardbeg

    Raising taxes ‘may’ or ‘may not’ reduce the deficit. That all depends on what the Congress does on the spending side. But, to argue for not raising taxes as a piece (part) of the solution is just plain stupid, and only republicans even try to make that argument. It’s one of the great LIES being told to Americans. Along with ‘China owns all the US debt’, and raising taxes on Job Creators will hurt the economy, and Social Security, Medicare and Medicaid will bankrupt the US economy. Even if it (raising taxes) does nothing to reduce our debt it may do something to reduce our income inequality, and it’s morally right. People who make more pay more. In the 70’s the average CEO made $45 dollars for each $1 made by workers. Today that number is $1,800 for every $1 made by employees. Tax cuts for the rich, financial deregulation, support for moving jobs
    overseas and union-busting have combined to make the rich richer and the poor poorer. The OC faithfull continually rail against public employees and their benefits, but they should also rail against low wages, outsourcing jobs and wall street deregulation. The average Walmart Department Manager! makes $11 an hour! Are you kidding me! $11 bucks an hour! Doing the simple math means at 30 hours a week (which is average) and 50 weeks a year-that’s a salary of $16,500. Even if they are getting 40 hours a week that’s only $22,000 a year before taxes! MY DOG CAN’T LIVE ON 22 A YEAR! So people like me pay for Walmart employees food stamps and government heath care. Keep drinking the kool aid Steve and keep pitching the ‘cut taxes’ mantra. How about we go back to the tax t=rate of the 50’s 60’s or 70’s?

    • jeannie

      In 1958 the top rate was 91%. Today it’s 35%. Yet the share of taxes paid by the wealthiest has remained the same. Deductions and tax credits matter! Back then, people made bad investments so they could show losses on their returns; actually very few in those days paid at that higher rate. Since then, the rates came down but many deductions were also removed, so the higher earners still pay roughly the same share. Meanwhile, the share paid by the bottom two-thirds of taxpayers has dropped significantly, so don’t be so eager to return to those glorious days. In 1958, even the lowest incomes paid at the 20% rate – there was no earned income tax credit, for example. I don’t understand the obsession with raising the rates, except that it lets politicians trick us into thinking they’re sticking it to the rich. They are doing no such thing.

      • David from Mill City

        And in 1958 the typical middle class family could survive on the income of a single bread winner. Starting during the Reagan Administration a rend started where the rich got richer and the middle and lower classes got poorer. It was then that it became necessary for both adults in a household to work to keep the family afloat. So if the rich to not wish to share the benefits of their economic success with the workers that helped make it possible then it is very reasonable to raise their taxes as to support the existence of social programs necessitated by the low wages and poor benefits they choose to compensate their workers with. As a wise man once said, ‘There is no such thing as a free lunch”

        • jeannie

          The rend started before Reagan due to rising inflation caused by the Fed and Nixon’s folly (“We’re all Keynesians now.”) Also in 1958: except for housing, most people paid cash for everything, medical care included. Today, some of the need for a second income is to pay off debt. The worst thing the middle class does to itself is to take out car loans instead of paying cash for a used vehicle until they can afford something nicer. The ironic thing is how much of that second income is needed to support the second earner: extra taxes, transportation, clothing, child care, convenience foods and eating out. There are still one-income families thriving on a poverty level income because they have useful household skills and a well-developed social network or extended family. At some point we have to stop blaming “the rich” for all our woes and take responsibility for our choices.

          • HBguy

            Jeannie. I think you are misinformed and I think you should check your facts perhaps. Just a couple of things here. Nixon never said what you claim Friedman did. Nixon said something similar. Maybe that’s not a big deal. But most importantly, it is absolutely true that the the great disparity in income growth between the higher and middle and lowed incomes started under Reagan. If you can get statistics that show otherwise, please provide.

  • David from Mill City

    To end the Federal Budget Deficit Congress needs to either raise taxes, cut programs or a combination of the two. On its face it appears to be a simple straight forward process. It is any thing but. Because there are a number of problems that complicate the situation.

    First Government can not provide the level of services it provided last year, this year at last years costs. The cost of providing these services goes up every year. And that is before the impacts of ever shifting demographics are factored in. Just to stay even in terms of the level of service provided, government needs to see an annual increase in revenues.

    Second, there are many items with high capital costs and long service lives that it makes good sense to build now and finance over time. For example when traffic loads show a need for a new bridge, the public benefit is much greater if the bridge is built now and paid off over twenty years then if the Government was to wait ten or fifteen years until it had accumulated enough money to pay cash for the project.

    Third, with few exceptions, most individual governmental programs, tax breaks or subsidies are such a small part of the total budget that at first glance it seems hardly worth going through the trouble of cutting it.

    The last and greatest problem is that every service, tax break, or subsidy government provides or permits has a constituency that supports it. A consistency that at least one had enough influence with Congress to at least get a majority vote from each house in favor of their proposal and the signature of the President. And as every successful politician knows you do not get elected by cutting popular programs. And almost every program is popular with somebody, and most of those that are not popular like the IRS or Congress are either essential or Constitutionally Mandated.

    And if these do not complicate the matter enough, to the mix you can add There is an additional problem of individuals making arguments, such as Mr. Buckstein has above, that because one approach has failed in the past that it should not be attempted again. For if that approach is taken there is no solution. As Congress, regardless of the Party in control, has repeatedly shown a reluctance or inability to balance the budget by eliminating programs.

    To reduce the annual budget deficit to the cost of those beneficial items with long service lives and large capital costs while also making meaningful debt reduction payments is going to require Congress and the President to do three things, raise revenues , eliminate programs and most importantly have a National Discussion over what the American Voter wants his government to do. A discussion with all governmental goals, policies, commitments and programs are included. A discussion that really needs to start with an examination of our Foreign and Defense Policies as they are the exclusive responsibility of the Federal Government and represent the single largest section of the Budget.

    There is of course on other approach, put this entire deficit discussion on the back burner and deal with the real crisis getting for America back to work at family wage jobs so it can return to consumption levels that support the economy. Which in turn would increase tax revenues and thus reduce the deficit.

    Third, with few exceptions, most individual governmental programs, tax breaks or subsidies are such a small part of the total budget that at first glance it seems hardly worth going through the trouble of cutting it.

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