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Morning Bell: In Debt Limit Debate, Higher Taxes Aren't the Answer

Posted By Mike Brownfield On July 7, 2011 @ 9:59 am In Economics | Comments Disabled

Republican congressional leaders will meet [1] in the White House today with their Democratic counterparts and President Obama in an effort to reach an agreement on the debt ceiling. Reports are sketchy as to whether they will succumb to arm-twisting by the White House, amplified in the media [1], to cut a deal in which “everyone has to give a little”—or fill your preferred cliché. It is thus an appropriate time to remind everyone that Americans have already given all they can, especially to the IRS, and, no, it isn’t time to raise taxes—on the contrary, it’s time for politicians to curb their spending habits.

But just in case dire warnings about defaulting on the debt don’t work and the Republican leadership holds its ground today, a small team of Treasury officials [2] along with friends of the White House are carving out a Plan B ploy [3] to borrow more money on its own authority. It is based, to be charitable to its originators, on a dangerously flawed reading of the 14th Amendment.

The core issue that has Washington in a deadlock is the $14.3 trillion federal debt ceiling—Congress either has to borrow more money to pay its bills, cut spending, or raise taxes—the last option being so unpopular that even its liberal proponents call it by another name: “revenue enhancements.” President Barack Obama would have you believe [4] that the problem is one of priorities, that Republicans are fighting for “tax breaks for millionaires and billionaires, or for hedge fund managers and corporate jet owners, or for oil and gas companies pulling in huge profits without our help,” while he’s fighting for things like college scholarships, Medicare for seniors and cancer research.

But don’t get dragged into Obama’s rhetorical labyrinth. Spending is the problem; low revenue is not. The trouble is that President Obama wants to keep borrowing, taxing, and spending as far as the eye can see. And that’s no way to solve the problem. Heritage’s Emily Goff explains [5]:

The historical average for federal spending is 20.3 percent of GDP, but spending will reach 24.7 percent by the end of this year and continue to climb from there.

By mid-century, funding the federal government under current policy will consume more than half the U.S. economy [6]. Meanwhile, tax revenues will return to their historical average by the end of the decade and then continue to rise.

Republican leadership should be very careful not to lose their grip on the tax issue. An overhaul of the tax code is long overdue, and it should be revenue neutral and growth oriented. The Wall Street Journal reported yesterday [7] that House Majority Leader Eric Cantor (R-VA) has opened the door to a possible tax compromise that would “endorse ending some business tax breaks targeted by Democrats if they also agreed to renew other business-backed tax benefits.” According to Cantor [7]:

I have said from day one, we are not for tax hikes on the American people or businesses, and if the president wants to talk loopholes, we’ll be glad to talk loopholes. We are not for any proposal that increases taxes, and any type of discussion should be coupled with offsetting tax cuts somewhere else.

If the strategy of “closing loopholes” entails taxes targeted at industries that don’t fall under the President’s favor—particularly oil companies—the American people may be the ultimate losers if offsetting tax cuts don’t occur. In the case of oil companies, these tax hikes will take money that companies would otherwise invest in new drilling and cleaner technologies, so the consumers and the environment both suffer. Companies don’t pay taxes; companies collect taxes.

And at any rate cherry-picking tax hikes here and there is a short-term fix that doesn’t get to the root of the problem—spending. Getting debt under control is vital. Even the International Monetary Fund has warned [8] the United States that it must reduce its debt or face serious economic consequences. Without action, the national debt could eventually reach a staggering 344 percent of GDP [9] by mid-century.

Nor is this the time to balance the budget with defense cuts. Heritage Foundation President Ed Feulner writes [10] that the military is already suffering from lack of funding and that drastic cuts should not be on the table:

[W]e’ve been living for a while now off past military buildups. But things wear out. Equipment breaks down, and it can be patched up only so many times before it’s unable to do the job it’s meant to do . . . When we cut too deeply, as we did during President Carter’s time in office, we degrade our ability to defend ourselves.

If charting a course of tax hikes and defense cuts is wrongheaded, President Obama’s Plan B in the debt ceiling debate is disastrous. Heritage’s Andrew Grossman writes [11]:

All of a sudden, politicians who have never cared much for constitutional fidelity are citing [12] a little-known section of the Fourteenth Amendment as grounds for President Obama to evade the congressionally-imposed debt ceiling.  Their goal is to punt on spending reductions that would be part of any debt-ceiling deal and are essential to putting the budget in order.

Their argument, which is based on a creatively devious misreading of the 14th Amendment, would constitute unilateral action by the President to borrow money with no congressional authorization—tantamount to an unconstitutional usurpation of Article I legislative power.

And today, there are other reports that suggest [1] that Social Security and Medicare reform is back on the table. This is all the more reason that lawmakers and the American public should have at least a full 72 hours to review any deal, given the complexity of the issues being negotiated.

Washington is at a crossroads. On the one hand, Congress could cave in to the President’s demands, raising taxes in the short run while dodging the nation’s long-term spending problems. Such actions will be neither forgiven nor forgotten. On the other hand, the President stands ready to violate the Constitution in order to achieve his ends irrespective of the will of the American people.

In the debt limit debate, the reality is that the U.S. government will not default. The President and the Democrats have just about admitted as such by talking about “all the government obligations” being equally important. In other words, they know that our creditors—those who hold our debt—will get paid no matter what.  Not raising the debt ceiling means only that the government will be forced to cut spending elsewhere. And cutting spending is the only remedy to America’s long-term fiscal crisis.

Quick Hits:

  • The founder of Pakistan’s nuclear bomb program says he personally transferred $3 million in bribes [13] from North Korea in exchange for sharing of technical know-how and equipment with North Korean scientists.
  • Expect oil prices to shoot higher in 2012 [14]. Analysts at Goldman Sachs say oil supply will be “critically tight” next year.
  • Citing an international treaty, President Obama, the State Department, and Mexico have asked for a stay of execution [15] for a Mexican national convicted in 1995 in the brutal raping and murder of a teenage girl in Texas.
  • The Department of Homeland Security has warned airlines of the threat of “implanted bombs” [16] used by terrorist groups. And that could lead to additional security measures.
  • VIDEO: Actor Gary Sinise of Forrest Gump and CSI:NY fame says 9/11 inspired him to support America’s military. Watch the exclusive Heritage interview. [17]

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

URL to article: http://blog.heritage.org/2011/07/07/morning-bell-in-debt-limit-debate-higher-taxes-arent-the-answer/

URLs in this post:

[1] will meet: http://www.washingtonpost.com/business/economy/in-debt-talks-obama-offers-social-security-cuts/2011/07/06/gIQA2sFO1H_story.html?hpid=z1

[2] a small team of Treasury officials: http://www.reuters.com/article/2011/07/07/us-usa-debt-exclusive-idUSTRE7660GE20110707

[3] Plan B ploy: http://www.foundry.org/2011/07/06/the-lefts-desperate-devious-and-dangerous-14th-amendment-ploy/

[4] would have you believe: http://www.whitehouse.gov/the-press-office/2011/07/02/weekly-address-cutting-deficit-and-creating-jobs

[5] Emily Goff explains: http://www.foundry.org/2011/07/06/battle-of-the-charts-spending-is-the-problem-no-doubt-about-it/

[6] more than half the U.S. economy: http://www.heritage.org/budgetchartbook/entitlements-consume-economy

[7] reported yesterday: http://online.wsj.com/article/SB10001424052702303365804576430084150752882.html?mod=WSJ_hp_LEFTTopStories

[8] International Monetary Fund has warned: http://www.washingtonpost.com/wp-dyn/content/article/2011/01/27/AR2011012707593.html

[9] 344 percent of GDP: http://www.foundry.org/2011/06/30/chart-of-the-week-national-debt-set-to-skyrocket/

[10] writes: http://www.washingtontimes.com/news/2011/jun/27/obamas-illusory-peace-dividend/

[11] writes: http://www.foundry.org/2011/07/01/no-the-president-can%E2%80%99t-violate-the-debt-ceiling/

[12] are citing: http://www.huffingtonpost.com/2011/06/28/14th-amendment-debt-ceiling-unconstitutional-democrats_n_886442.html

[13] personally transferred $3 million in bribes: http://www.washingtonpost.com/world/national-security/pakistans-nuclear-bomb-maker-says-north-korea-paid-bribes-for-know-how/2010/11/12/gIQAZ1kH1H_story.html?hpid=z1

[14] higher in 2012: http://online.wsj.com/article/SB10001424052702303365804576431424080978068.html?mod=WSJ_hp_LEFTTopStories

[15] stay of execution: http://www.foxnews.com/us/2011/07/06/mexican-national-inmate-on-death-row-creates-international-stir/

[16] threat of “implanted bombs”: http://www.bbc.co.uk/news/world-us-canada-14061884

[17] Watch the exclusive Heritage interview.: http://www.foundry.org/2011/07/06/video-gary-sinise-says-911-inspired-him-to-support-americas-military/

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