TAX NEWS - June 2010

US Tax: Tax cutting our way out of debt – and other fairy tales

There appears little question but that the GOP is poised to pick up a number of seats in both the House and Senate in November, confirming what we already know to be true– the nation is tacking to the right.

Nobody should be surprised. Current estimates indicate that the national debt will exceed the nation's GDP as soon as 2012 while those who remain a bit more hopeful don't expect this watershed event to take place until 2016.

Either way, this is dismal news and something very much on the public's mind as they contemplate the mid-term elections.

While this veering to the right is particularly disappointing to those who expected the dawning of a new progressive era with the election of Barack Obama, the fact remains that it's pretty tough to engage in progressive government programs when a large chunk of every dollar that comes in has to go to paying interest expenses on a huge debt.

But here's the thing – while voters may be willing to express their desire to get the national debt moving in a better direction at the ballot box, I cannot help but wonder if they are anywhere near being prepared to accept the austerity that comes with a debt reduction.

Pulling the voting lever in favor of the GOP is easy. Sacrificing to bail out the country's dismal financial circumstances is something entirely different.

In an article by Jeffrey Sachs, professor of economics at Columbia, entitled "Obama in Chains", Sachs writes:

Policy paralysis around the US federal budget may be playing the biggest role of all in America's incipient governance crisis. The US public is rabidly opposed to paying higher taxes, yet the trend level of taxation (at around 18% of national income) is not sufficient to pay for the core functions of government. As a result, the US government now fails to provide adequately for basic public services such as modern infrastructure (fast rail, improved waste treatment, broadband), renewable energy to fight climate change, decent schools, and health-care financing for those who cannot afford it.

Powerful resistance to higher taxes, coupled with a growing list of urgent unmet needs, has led to chronic under-performance by the US government and an increasingly dangerous level of budget deficits and government debt.

We all know the arguments presented in favor of tax cuts as the best way to spur economic growth which, in turn, are to pour money into government coffers as the natural by-product of economic good times. Yet, given the nation's track record, do we really believe that cutting taxes is the way to solving our serious debt problem – or is it simply a dodge intended to give ideological credibility to the basic human instinct to try and hold on to every dollar earned?

While proponents of tax cutting look to Ronald Reagan as the touchstone for the benefits of 'trickle down economics', whereby lower taxes puts more money in the hands of the wealthy that can be invested in new and expanded businesses which can hire more and more people who will as a result pay more taxes, there is little to support the idea that this actually works.

What tax cut proponents tend to leave out of the Reagan story is the fact that he did, ultimately, find it necessary to raise taxes – as did his successors, George H.W. Bush and Bill Clinton.

Everyone remembers Reagan's 1981 tax cuts. His admirers are less likely to tout the tax hikes he accepted as the 1981 recession and his own tax cuts began to unravel his long-term fiscal picture–a large tax increase on business in 1982, higher payroll taxes enacted in 1983 and higher energy taxes in 1984. A decade later, when a serious recession and higher spending began to upend the fiscal outlook again, the first President Bush similarly raised taxes on higher-income people in 1991; Bill Clinton doubled down and raised them again in 1993." -- Via Forbes

Another detail that is often lost on those battling to keep taxes down at all costs is a recognition that we are actually paying some of the lowest tax rates in our nation's history – yes, you read that correctly.

As recently as 1963, the top rate on federal income taxes was a whopping 91%. By the time Reagan became president, the maximum rate was down to 70%.

During Reagan's term, the maximum tax rate was reduced from 70% to 28%, a number that went up to 31% during the H.W. Bush years. The arrival of Bill Clinton saw the maximum tax rate rise to 39.6% only to be reduced by W. to 35%, which is where things currently stand.

So, while we may not like paying these taxes, it is appropriate to keep in mind that our federal income tax rates remain near the historic lows. It is also worth noting that each period of tax cutting has been followed by some serious recessions – hardly the results promised by the concept of trickle down, tax cutting economics.

This being the case, history would appear to be telling us that cutting taxes does not produce the desired economic effect. And if cutting taxes doesn't solve our problems, it seems reasonable to accept that raising our taxes is likely the only way out of the box.

But raising taxes means real sacrifice – and sacrifice is something that modern day America does not take in stride. At a time when we find ourselves in two wars – wars that have become the longest and among the most costly in American history- we continue to enjoy the personal benefits of the Bush tax cuts.

But all fun comes at a cost. While I've certainly enjoyed paying less taxes this past decade, I know that I'm not going to be all that happy with the inevitable pay-back that is coming when we are swamped by our national debt.

Logic and history tell us that if you are going to fight long expensive wars, there must be sacrifice to support the effort. And yet, with the exception of our soldiers and their families, Americans have not been called upon to accept such a sacrifice. Why?

Because Americans no longer are willing to sacrifice even when it is obvious that it is required.

It is absolutely true that government needs to operate more efficiently with our money and make some real budgetary cuts if, for no other reason, only to obviate the hue and cry that will inevitably come when raising taxes is no longer just an option but a necessity. It is also true that sacrifice must be shared amongst all Americans, not only the rich, not only the poor and not only the middle class.

But if anyone thinks that we can find our way out of our current financial mess by simply cutting, a rude awakening awaits in the very near future.

Expect everyone to make the same old arguments. The wealthy will argue that leaving more money in their pockets will create jobs – all evidence to the contrary. Those with lower incomes will argue that the rich should bear the brunt of higher taxes, ignoring the fact that the top 10% of earners already pay over 71% of the nation's tax bill.

Like it or not, if we continue to look for a way to push the responsibility on someone else, we are all going down together.

There was a time when Democrats swept into power by promising "a chicken in every pot and a car in every driveway." Today's version of promissory politics comes with the GOP who tells us that we can tax cut our way out of debt when they know very well that it is not really possible. Yes, it is a popular message. Telling people they can keep more of their money and the country will get healthier is a winning message at the ballot box but one that any rational person who is not burying their head in the sand, knows cannot be true.

When you get into debt trouble at home, do you spend more money in the belief that "you have to spend money to make money", convincing yourself that borrowing and spending more will somehow dig you out of trouble? I don't think so. And just as this thinking doesn't work at home, it also doesn't work on a national scale.

Americans have to decide it they are ready to stand up to our escalating problems or continue to fool themselves into believing that years of living on borrowed money can be resolved by paying less taxes. If you're still into this fantasy, you'll be voting GOP this November. However, if you have finally realized that you are being sold a bill of goods that cannot possibly work, look for a candidate willing to offer a plan to bail us out of this disaster…even if it hurts.

Finding honest canddates is no easy chore. But the more you know – the easier it is to force candidates into the truth. So do yourself and the rest of the nation a favor. Instead of taking the ideological easy way out this year, do your homework and force your candidates to take an honest position. If they promise you that we can bail out the debt by cutting taxes, call them on it. If they tell you that we can keep government spending going up and solve the national debt, call them on that too.

Politicians tell you what you want to hear. Tell them you want to hear the truth. Tell them you want to hear real solutions, even the painful ones. Tell them that if  they keep trying to snow you with their B.S., you're staying home on election day. Lazy voters are something this country can no longer afford.