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Tax Hikes Wrong Route to Take for Deficit Reduction Commission

Posted By Kathryn Nix On April 19, 2010 @ 7:00 pm In Economics | Comments Disabled

Entitlements Will Consume All Tax Revenues by 2052

Earlier this year, after Congress passed an increase in the debt ceiling, was deliberating over a trillion plus health care package, and the President’s Budget promised new record deficits, the American people started to see a worrisome trend that pushed fiscal responsibility to the forefront of the public’s priorities.  President Obama responded by creating the National Commission on Fiscal Responsibility and Reform, a bipartisan commission tasked with submitting a solution to the nation’s fiscal woes by the end of the year.  Problem solved, right?

Well, not quite.  The true success of the commission lies not in its very existence, nor in its ability to reduce the deficit, but rather in the very means by which it proposes to accomplish this.  An article in the New York Times [1] today lists several ways in which the commission could propose to reduce the deficit that would cause more harm than good:

  • Allowing the Bush tax cuts to expire.  This is an insufficient proposal to reverse out-of-control federal spending.  As John Harwood writes [1], “…even Democratic economists sympathetic to the administration insist that raising taxes on affluent Americans alone “won’t work and isn’t a good idea”, as Leonard E. Burman, a public affairs professor at Syracuse University, puts it.” 
  • New gas or carbon taxes. Taxes on necessary items such as gas hurt the economy by not only increasing the cost of transit, but also the cost of goods that require transportation.  As Heritage analyst Karen Campbell writes [2], increased gas prices caused by a gas or carbon tax would result in the loss of 586,000 jobs and cause total disposable personal income to drop by $532 billion. 
  • A value-added tax on goods and services. Adding a value-added tax [3] to the plethora of taxes Americans already pay would be disastrous for the economy.  Most countries in which this revenue raising device is employed show that the tax rises with time, and does not curb federal spending or borrowing.  85 Senators recently agreed [4] that this tax would be detrimental for America’s low-income families and the economy at large. 

If the President’s commission focuses only on tax increases, its proposal will not only fail to adequately address Washington’s major spending problem, but will also spell disaster for economic recovery and future prosperity.  To be successful, controlling the deficit should focus primarily on reforming the three big-ticket entitlement programs:  Medicare, Medicaid, and Social Security.

Unfortunately, serious consideration of major entitlement reform is unlikely to happen. The President set a goal of reducing the deficit to 3 percent of Gross Domestic Product within a decade.  While entitlement reform is crucial, the benefits would be long-term, so pursuing this politically difficult path to reform would serve no political purpose for President Obama.

A successful commission [5] would propose systemic reforms to all three major entitlement programs [6], including sticking to a long-term sustainable budget.  Implementing serious budget process reform [7] would require active participation by Congress in setting federal spending, putting more pressure on lawmakers to act responsibly.  Reining in federal spending can be done, but increasing taxes alone would not only be ineffective, but would also have major ramifications for the U.S. economy.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/04/19/tax-hikes-wrong-route-to-take-for-deficit-reduction-commission/

URLs in this post:

[1] article in the New York Times: http://thecaucus.blogs.nytimes.com/2010/04/18/reduction-is-theme-of-presidents-next-act/?scp=1&sq=reduction%20is%20theme&st=cse

[2] As Heritage analyst Karen Campbell writes: http://www.heritage.org/Research/Reports/2008/07/How-Rising-Gas-Prices-Hurt-American-Households

[3] value-added tax: http://www.foundry.org/2010/04/15/europe%e2%80%99s-record-shows-vat-is-no-solution-to-debt/

[4] agreed: http://www.foundry.org/2010/04/15/mccain-throws-down-the-vat-gauntlet

[5] successful commission: http://www.heritage.org/Research/Reports/2009/11/Bipartisan-Entitlement-Commission-Needed-to-Control-Spending-and-Debt

[6] reforms to all three major entitlement programs: http://www.heritage.org/Research/Reports/2008/03/Taking-Back-our-Fiscal-Future

[7] budget process reform: http://www.heritage.org/Research/Reports/2009/01/Any-Stimulus-Legislation-Must-Include-Budget-Reforms-to-Address-Long-Term-Challenges

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