Why Raising Taxes On Any American, Rich Or Poor, Is Still A Stupid Idea - Part 1

Many times we have reviewed how the Washington political class wastes hundreds of billions dollars a year through waste, fraud, criminal activity, inefficiencies and redundancies. This annual obscene waste of taxpayer wealth is the main driver behind our $15 TRILLION national debt level, a level that is quickly driving the country into financial insolvency. We have also showed that raising taxes on rich Americans, no matter how large those tax increases are, up to and including the confiscation of all of the wealth of America's richest citizens, would have minimal effect on that national debt.

But there are additional reasons not to raise taxes on any American including our richest citizens, reasons and nonpartisan economic studies that have already been completed and which were summarized in the an article written by Veronique de Rugy. Her article appeared appeared in the November, 2011 issue of Reason magazine. The article was titled: "Upgrading The U.S.A. - How To Fix The Country's Debt To GDP Ratio."

Recall that we discussed our country's debt to GDP ratio earlier this week in our December 12, 2011 post. At that time, with our national debt breaking through the $15 TRILLION level, we estimated our debt to GDP ratio to be about 103%, believed to be the first time in our history that the country owed more in debt than it produced annually in goods and services. We also estimated that within two short years, under Obama's proposed budgets in the near future, the U.S. debt to GDP ratio would be about 120%, comparable to the crumbling financial situation in Italy today.

This article reviews a number of detailed, university-based and other economic studies that reviewed the best ways for countries to get their debt load under control. These studies represent analyses of actual historic events, not economic theories and economic models built by some economist somewhere, detached from the reality of a nation's actual debt situation.

The first study cited in the article involves two Harvard economists, Alberto Alesina and Silvia Ardagna and a paper they published two years ago for the National Bureau of Economic Research. They reviewed in detail 107 efforts by 21 developed nations to reduce their national debt from 1970 to 2007. Again, these are actual results, not theoretical economic models and forecasts.

They found that several nations were quite successful in bringing down their too high national debt levels including  Austria (2005), Finland (2005), and Sweden (1997 - 2004). When considering all of the nations that were studied, the authors of the paper concluded that nations who focused on reducing spending were far more successful in significantly bringing down their debt to GDP ratio than nations that relied more heavily on raising taxes than reducing spending.

A similar study executed by the American Enterprise Institute, done by Andrew Biggs, Kevin Hassett, and Matthew Jensen, looked at more than 100 cases in which countries took steps to bring down their national debt levels. They defined successes as those situations where the debt to GDP ratio was reduced by at least 4.5% within three years after the effort began.

Their conclusions after studying the 100 nations were the same as the Harvard study: "Countries that addressed their budget shortfalls through reduced spending were far more likely to reduce their debt than countries whose budget balancing strategies depended upon higher taxes." They found that on average, the typical failure to reduce a nation's debt relied on 53% tax increases and 47% spending cuts while, on average, the countries that successfully reduced their debt load relied on 85% spending cuts and 15% tax hikes.

A third effort in this area, this one also from 2010, confirms these findings that spending cuts are far more effective in avoiding a national debt crisis than raising taxes. This effort comes from two University of California - Berkeley economists, David Romer and Christina Romer. As a side note, recall that Christina Romer is the former chairwoman of President Obama's Council of Economic Advisers, i.e. she probably does not have Tea Party or Republican Party leanings.

The Romer study concluded that increasing taxes by 1% of GDP, targeted to reducing a nation's debt load, actually reduces GDP by 3%, worsening the debt to GDP ratio and making a country's economic picture worse. The Harvard study authors agree that both their work and Romers' work, while taking substantially different analysis approaches, result in the same conclusion: raising taxes is not as effective in reducing the debt to GDP ratio than reducing spending.

Three different, detailed studies based on actual, real world results, the same conclusions: spending cuts are much more effective in getting national debt crises under control than raising taxes. The American Enterprise Institute study went on to analyze what types of spending cuts are most effective in solving a debt crisis. They found that reducing entitlement spending and reducing the the size of what they call the government wage bill, i.e. reduce the number of government employees, provide the best payback for getting debt under control.

Contrast these findings with what many in the inane political class, specifically President Obama, wants to do or have already done:

1. A primary reason the Congressional Super Committee failed is because the Democrats on that committee, with Obama's backing, insisted on a "balanced" approach to reducing our nation's debt, i.e. raise taxes the same amount as reducing spending. We now know, based on detailed empirical data and analysis by the experts listed above, that this is a sure fire formula for failure.
2. Since he became President, Obama has allowed the Federal civilian payroll to increase by more than 200,000 employees, making it, by far, the largest Federal government workforce in the history of the country, exactly the opposite of what is recommended by the American Enterprise Institute findings listed above.
3. No politician has had the courage to address the needed reduction in spending on entitlement programs such as Social Security and Medicare, one of the most important ways to get a debt crises under control.

Maybe they should have read some of the recommended steps put forth in "Love My Country, Loathe My Government:"

• Step 1 - reduce spending across the Federal government bureaucracy by 10% a year for five years by using attrition, reducing inefficiencies, reducing fraud, eliminating redundancies, and temrinaiitng poorly performing departments..
• Steps 10, 11, 12 - three steps needed to get Social Security spending under control by changing the funding parameters, raising the retirement age (with hardship exceptions), and not providing payments to those Americans that have over $3 million in wealth at their disposal for retirement.
• Step 39 - impose term limits so that we possibly get politicians into office that have the brains and the courage to do what is likely to work rather than what is likely to most get them reelected.

Anything else is just plan stupid.




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http://www.cato.org/
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http://www.repealamendment/