Arguing against tax increases - tax revenue to reduce deficit or finance government spending

Arguing Against Tax Increases

Vice President and GOP presidential candidate George Bush promises voters that "I will not raise taxes--period." Massachusetts Governor and Democratic presidential nominee Michael Dukakis says he would raise taxes "only as a last resort."

Despite those statements, there is a growing expectation in Washington that the question of whether a tax increase is necessary to eliminate the federal budget deficit will be the top fiscal-policy issue for the new President and new Congress taking office in January.

The focal point of that expectation is the relatively unknown National Economic Commission, a bipartisan group created by the President and Congress to recommend ways to eliminate the budget deficit and maintain economic health.

The commission's report is due next March 31. Because of the political sensitivity of its agenda, it is keeping a deliberately low profile during the presidential campaign.

It has nevertheless become increasingly controversial because of the view of many people in business and government that it was created for the specific purpose of developing tax-increase proposals that Congress is reluctant to initiate itself.

While the lawmakers would have to vote on any tax boosts, past experience has shown that they are more comfortable doing so if voters perceive that the prime mover behind the boosts was an outside bipartisan panel.

Despite the economic commission's low visibility thus far, it is figuring in the early stages of the fiscal-policy debate.

Robert Strauss, the commission's Democratic cochairman, has said that deficit reduction through spending cuts is a good concept, "but there's no easy fat to trim."

That type of comment has fueled the widely held view that the panel's real purpose might be to provide protective cover for members of Congress bent on raising taxes next year.

The panel's critics include Bush, who bluntly refers to it as the "tax-raising commission."

But, as talk of tax increases proliferates, there are counterforces at work on behalf of the vast majority of business people who, polls show, are against any tax increases.

A major salvo has been fired on behalf of the antitax bloc by the U.S. Chamber of Commerce in a policy statement timed for the presidential campaign.

The Chamber's principal theme: Economic growth and spending restraints can shift the federal budget into surplus by 1993 without a tax increase.

Its position paper was written by Richard W. Rahn, Chamber vice president and chief economist. It was submitted to the Republican Platform Committee, will be presented to the National Economic Commission and will be available as a major weapon for organizations and individuals who will be fighting the antitax battle well into next year.

In its declaration, the Chamber said:

"As a result of strong economic growth and effective restraints on spending growth stemming from the Gramm-Rudman-Hollings deficit-reduction act, the federal budget is moving rapidly toward balance. ... Enough money will come in over the next five years without a tax increase to eliminate the deficit by instituting a fair freeze on spending that would fund Social Security fully, pay the necessary interest on the national debt and cover the inflation-induced cost increases in every other government program now on the books." (See chart.)

The "fair freeze" is based on a relatively conservative growth rate that, combined with the spending restraints, would produce a $2 billion federal surplus in 1993, compared with this year's estimated $154 billion deficit.

Outlays would be moderated by limiting percentage increases to the inflation rate for each year. Social Security benefits and interest on the national debt would be exempt from that limitation. The Congressional Budget Office now projects 1993 outlays at $1,396 billion. The inflation-rate cap would hold that figure to $1,324 billion.

In addition to growth-based increases, the federal government could strengthen its ability to eliminate the deficit without higher taxes through an intensive program of privatization, the Chamber said.

Through privatization, appropriate government functions, facilities and resources are turned over to the private sector.

The Chamber recommends consideration of proposals developed by the Privatization Task Force, a consortium of private-sector organizations committed to restraining the reach and growth of government.

In its policy statement, the Chamber contends that strong pressures for tax increases are based on myths regarding the size of the U.S. debt and its impact on interest rates and capital formation, the ability of tax increases to increase investment and reduce interest rates and the difficulty of deficit reduction through spending restraints.

The business federation makes these comments:

Budget Deficits. The myth is that the United States is "awash in debt" and that borrowing to service it is driving up interest rates. Relative to the size of the nation's output, however, it is an exaggeration to characterize the federal budget deficit as massive. In 1980, the deficit was $73.8 billion, which amounted to 2.8 percent of gross national product. This year, it will be $146 billion, or 3.1 percent of GNP, close to the 1980 level. Moreover, the deficit is now declining, assuring that the burden it places on the economy will diminish. And the debt of the total governmental sector--federal, state and local--is comparable with that of other industrial nations. The economic facts do not warrant continued hyperbole concerning the federal budget deficit.

Capital Formation. The myth is that closing the budget gap through higher taxes, rather than borrowing, will free more capital for private-sector investment, and interest rates will fall as the competition for available funds eases. That claim fails to recognize that higher tax rates reduce incentives to work and produce, thereby shrinking revenue collections. In addition, there is substantial evidence that any tax increase comes out of savings and thereby reduces the amount of capital available for private-sector investment. The myth also ignores the real source of the capital-formation problem--excessive govenment spending and tax policies that discourage investment. The best way to expand the investment pool is to reduce taxes on capital gains, which are now taxed as ordinary income. Lower rates have historically produced higher tax revenues because they encourage realization of capital gains, making money available for venture capital that finances the start or expansion of taxpaying businesses.

Excessive Tax Reduction. The myth is that the Reagan administration's tax cuts have been so deep that the level of spending cuts needed to eliminate the deficit would be unacceptable to the American people, and tax increases are unavoidable. The fact is that federal tax collections now represent 19.4 percent of gross national product, which is the same percentage that they represented before the deficit exploded in 1979. That explosion was the result of two fiscal phenomena--an acceleration in the rate of increase in federal spending, also beginning in 1979, and a revenue shortfall in the recession that ended in 1982. For the full 1980-86 period, revenues went up 9.5 percent a year but spending increased 11.3 percent. Since 1986, the annual growth rate in spending has dropped to 3.3 percent, while the revenue increase has stayed around 9.3 percent. The result has been a sharp drop in the deficit without the higher taxes now being advocated.

Unmet Needs. The myth is that govenment services, especially social programs, have been slashed over the past eight years, and that taxes must be raised to finance a vast backlog of unmet needs. Domestic spending has actually increased every year under the Reagan administration, but those who argue that it has not increased fast enough claim it has been cut.

A bottom-line question, the Chamber says, is whether Congress would use income from tax increases to reduce the deficit or to embark on new spending ventures.

While there is conflicting evidence on the point, the business group offers this response:

"What is indisputably true is that there is no evidence that Congress has used tax increases to reduce deficits, nor is there any reason to believe it is likely to change its behavior."

The business organization advances another basic argument against tax increases: Economic growth is inversely proportional to the tax burden. There is overwhelming empirical evidence, the Chamber points out, that as government takes a larger percentage of gross national product, there is more unemployment, a slower rise in real income and less progress in fighting poverty. Through unchecked tax increases, government can absorb so many resources that economic growth eventually falls to zero.

Citing U.S. fiscal policy since 1981, the Chamber concludes: "The record speaks for itself.

"Tax revenues have increased, and the deficit is shrinking. Because a tax increase is likely to be a vehicle for additional government spending rather than less, it is as likely to increase the deficit as it is to reduce the deficit. The major threat to continued economic expansion is increased government spending financed by higher taxes."

COPYRIGHT 1988 U.S. Chamber of Commerce
COPYRIGHT 2004 Gale Group