Do We Really Need to Raise Taxes to Close the Deficit?

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I think the first part of this James Capretta analysis cited by Reihan is basically right:

For starters, it completely recasts the struggle between the political parties. Everyone knows that what the president and his allies really want to do is raise taxes. They might agree to some tinkering around the margins on entitlements for show. But in their heart of hearts they believe the solution is higher rates of taxation.

The problem is they don't have the guts to say so in public. They know that's the surest way to permanent minority status. And so they are hoping for a more indirect route to their goal, using guile to lure gullible Republicans (see here) into agreeing to their approach without ever having to sell it to a tax-averse electorate.

The Ryan plan blows this kind of plotting by Democrats to smithereens. There's no tax increase in the Ryan plan, and there's no debt crisis. What's required is far-reaching entitlement reform and serious spending discipline. By staking out that position, Ryan and his comrades have improved their leverage immensely. There's no need to agree to tax hikes to solve the budget problem. What's needed is for Democrats to get serious about spending reform, as Ryan has.

Democrats have been hoping that some way, somehow, they were going to get to close the budget deficit with nothing beyond symbolic tinkering with entitlements, and maybe some deep defense cuts.  The Ryan plan is basically attempting to flush Democrats into the open: force them to embrace the fairly massive tax hikes that would be necessary to achieve even medium-term balance.

But I don't think that it's correct that Democrats simply need to outline their own spending cuts.  First, it would be equally true to say that the GOP simply needs to start outlining its preferred tax hikes, except for the fact that they really don't want to.  Obviously the budget problems get a lot easier to solve if we assume that one side simply capitulates to the other side's demands, but this is not a very helpful starting assumption.

Moreover, while the problems would get easier to solve if the Democrats (or the Republicans) simply capitulated, they still wouldn't be easy.  There's the little matter of voters to worry about. To a first approximation, every single voter who is benefitting from a government program right now not only wants to continue benefitting, but believes they have a moral right to do so.  Meanwhile, almost everyone believes that they simply can't get by if the government hikes their taxes by more than token amounts. (The only people I have heard angling for a tax hike on themselves are me and er, a bunch of billionaires.)

Republicans have been arguing that historically, federal tax revenues have averaged under 20% of GDP, no matter what the marginal tax rates--so we should assume, as Ryan does, that they will never go above 20% of GDP.  This analysis strikes me as very confused.  It's an empirical regularity, not a law, and what it really tells us is that high marginal tax rates have historically been paired with much more generous deductions, which kept the effective tax rates relatively low.  This is, to be sure, something that both liberals and conservatives who wish to talk about historical tax trends should note more often than they do--but it does not translate into an iron law about tax rates in the future.

I think this does tell us something about long-term political resistance to higher taxes--I think it will be much higher than Democrats are expecting.  But we already know that long-term resistance to the alternatives--deep cuts to entitlements--is also pretty formidable.  That is the context in which future effective tax rates are going to be set.

If the GOP really believes that they can get to anything close to a sustainable budget without raising taxes at least a little bit, then they are spending too much time reading their own press releases, and far too little time talking to voters outside of their tea party base.  I think it's probably possible to do more, on balance, with spending cuts than with tax hikes--but not all. Mathematically, it's certainly possible--but politically, it isn't.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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