Raising Taxes

Posted on Jul 13 2011 - 1:00am by Harrison

Republicans are being cast as the bad guys (no surprise) regarding the debt limit debate.  People are forgetting the fact that in 2010 when Democrats controlled both houses of Congress they didn’t pass a budget.  The mid-term elections were upon them and they didn’t want to act responsibly and pass a budget while they had a majority in the House and in the Senate.

Then, Democrats stalled by saying they would wait until the bi-partisan debt commission issued its findings in December of 2010.  The “findings” were ignored.

Republicans ran on a George H.W. Bushesque “Read my lips no new taxes” pledge and thus tied their hands upon taking office January 20, 2011.  Were Republicans to vote for higher taxes, they would be crucified in the press and by voters so they backed themselves into a corner.

But it doesn’t change the fact that the Democrats, once again, shirked their responsibilities by not passing a budget when they had the chance.

Basic economics tell us that in order to mute demand for something you increase the price of that good or service either by raising its price or by increasing the tax on it.  Thus, the converse is true that lower prices and taxes help spur demand.  Why else would the Government subsidize things like electric cars or hybrids or try and tax carbon to lower its useage?

Here’s what President Obama said in 2009:

The last thing you want to do is raise taxes in the middle of a recession, because that would just suck up, take more demand out of the economy and put businesses in a further hole.

But the other day it was a different story:

In a 75-minute meeting Sunday night, President Obama once again demanded that more than $1 trillion in tax increases be part of any deficit reduction package attached to a vote on the debt ceiling. In the session, Obama rejected a Republican proposal to seek $2.5 trillion in spending cuts and reforms, and insisted on higher taxes on businesses and wealthy individuals.

Here’s what Walter Heller, President John F. Kennedy’s Chairman of the Council of Economic Advisers said when he testified before Congress in 1977 about his boss’ massive tax reduction plan which became law after he was assassinated:

What happened to the tax cut in 1965 is difficult to pin down, but insofar as we are able to isolate it, it did seem to have a tremendously stimulative effect, a multiplied effect on the economy. It was the major factor that led to our running a $3 billion surplus by the middle of 1965 before escalation in Vietnam struck us. It was a $12 billion tax cut, which would be about $33 or $34 billion in today’s terms, and within one year the revenues into the Federal Treasury were already above what they had been before the tax cut.

Some may point out that the Kennedy tax cut doesn’t count because the top rate was 90% and was cut to 70% (still extremely high) but if we look at the next major tax cut, enacted during the Reagan administration, we see a similar pattern:

Prior to the tax cut, the economy was choking on high inflation, high Interest rates, and high unemployment. All three of these economic bellwethers dropped sharply after the tax cuts. The unemployment rate, which peaked at 9.7 percent in 1982, began a steady decline, reaching 7.0 percent by 1986 and 5.3 percent when Reagan left office in January 1989.

The most controversial portion of Reagan’s tax revolution was reducing the highest marginal income tax rate from 70 percent (when he took office in 1981) to 28 percent in 1988. However, Internal Revenue Service data reveal that tax collections from the wealthy, as measured by personal income taxes paid by top percentile earners, increased between 1980 and 1988–despite significantly lower tax rates.

We could point out a similar thing occurred after the Harding-Coolidge tax cuts but you’re either a believer in you keeping your money or in the Government keeping your money to do with as it pleases.

We’ve been hearing that the sky is going to fall if the debt limit wasn’t raised.  Well, it’s been two months since the country reached its debt limit on May 16th and the world has not come to an end, has it?  For some reason, August 2nd was given as the “drop dead date” until the country would actually begin to default on its obligations.  I’ve heard so many disastrous proclamations coming from Washington for so long about so many different topics that I’m not even sure I believe this date.

But we would not even be having this conversation had the Democrats not allowed things to reach this point.  What that party has done to the country is inject fiscal uncertainty into the air and, it seems, they have scared off the people who could turn things around (small businesses):

Almost two-thirds—64%—of small-business executives surveyed said they weren’t expecting to add to their payrolls in the next year and another 12% planned to cut jobs, according to a U.S. Chamber of Commerce report to be released Monday. Just 19% said they would expand their work forces.

While I understand why so many Republicans in the House signed the no taxes pledge, they did tie their hands leaving them little negotiating room with a president who has showed nothing but love of Big Government and contempt for businesses.

This was a poor tactical decision as they put themselves on the line.  One could say either Republicans are playing politics as much as the Democrats are or that they’re taking a principled stand on behalf of the American public trying to keep more of their money away from the Government.

The way out of this will be for Republicans to agree to raise the debt limit without new taxes while forcing Democrats to cut spending.  This will allow both sides to walk away from this deadlock even if it is the Democrats would will come out slightly behind.

In the end, however, it is simply straightening deck chairs on the Titanic as Entitlements will eat the U.S. budget alive:

Image: MontesMed.com

9 Comments so far. Feel free to join this conversation.

  1. LD Jackson July 13, 2011 at 3:00 AM -

    I have been thinking the same thing, Harrison. President Obama and the Democrats are doing nothing but playing scare tactics. That’s why he said yesterday that Social Security checks may not go out on August 3, because the money may not be in the coffers.

    I really wish the media would stand up and point out how the Democrats were dragging their feet during the two years they had control of Congress. Not holding my breath on that one.

    Good post.

  2. Steve Dennis July 13, 2011 at 3:26 AM -

    You made a point that people need to remember; it was the Democrats who were afraid to pass a budget before the election in the first place. We wouldn’t be in this situation if Democrats acted responsibly (although I doubt their budget would have been responsible) instead of playing politics with the budget.

  3. Jack Camwell July 13, 2011 at 5:38 AM -

    Well, I think ending tax subsidies is a good compromise, and ending subsidies is not the same as raising taxes.

    We also have to remember that demand for each type of product is different in terms of elasticity. There are some products on which a raise in prices will have little effect on the demand. Gasoline, for example, will see very little decrease in demand from a price hike. People will grumble, but they need their gas to function in society.

  4. dean July 13, 2011 at 8:34 AM -

    Harrison, that graph illustrates a historical trend that no matter the tax rate, the receipts from taxes never strays to far from that 20% line. We need entitlement reform but we also need to grow the economy; two things that are a seemingly impossible task with the current administration.

  5. sharon smith July 13, 2011 at 9:30 AM -

    According to Fox, 10% of American taxpayers are paying 75% of the taxes in this country. Ouch! I have a feeling the 10% they are refering to are ordinary citizens such as ourselves, not the uber rich who hide their money in foundations, which are huge tax deductions. Mosquito nets in Papua New Guinea would make a great tax deductible foundation.

    • Harrison July 13, 2011 at 10:32 AM -

      Yes, that number sounds about right. But hey, let’s squeeze them more, right?

      • sharon smith July 13, 2011 at 11:58 AM -

        Right! Let’s hope our Generation X can afford college for our children.

  6. Don E. Chute July 13, 2011 at 12:33 PM -



  7. Matt July 13, 2011 at 7:05 PM -

    While they may have “ties their hands,” the real issue is that no matter what they agree to as far as taxes, the Democrats will quickly forget any spending cuts that they offer in return. They have done it before, they will do it again.