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The Fundamental Failures of the “Balanced Approach.”

The left has recently popularized the concept of the “Balanced Approach,” where tax hikes and spending cuts are combined to reduce the national debt. President Obama proposed a budget that would include vaguely defined spending cuts, but would also include $1 trillion+ in new taxes through the ending of subsidies and in new taxes on wealthy Americans and small businesses. In fact, most Americans (56%, according to Rasmussen) support the “Balanced Approach.” Why wouldn’t they? “Balanced” sounds so reasonable, so compromising. Why, it’s downright civil.

It’s also downright wrong. (More after the jump)

The thinking behind this proposal is based on figures from a number of sources that indicate that the wealthiest 5% of American own approximately 35% of American wealth. In fact, there is video of Michael Moore sharing his thoughts on wealth distribution to a union rioters in Madison, Wisconsin. To his thinking, the government has absolute authority to simply take the money away from Americans to finance its debt. Moore rails against the “top 1%” who have “transferred, in the greatest heist in history, from the workers and consumers to the banks and the portfolios of the uber-rich.” Moore likes that 1% number. He quotes it often. Probably because if he were talking about the top 5% of U.S. earners, he’d be including himself.

Tax hikes are always popular in polls… provided that they’re applied to an income higher than that of the person being polled.

There are several flaws with a plan that assumes that we can tax our way out of debt. The first and most glaring is that there simply isn’t enough money to tax for it to make any difference. Even if the government simply seized the total income, a 100% tax on every American making over $200,000, it would only amount to $1.89 trillion. That’s just shy of 13% of the current national debt, which is growing every day. And let’s keep in mind that we’re talking about $200,000 in nominal terms, as the President suggests, not as percentage of income. In Indianapolis, that’s an incredible income. In southern California, $200k doesn’t get you nearly as far. Hardly the “fair tax” the left claims to call for.

Further, it’s worth noting that the current tax system is wildly un-fair… in favor of those in the lower income brackets. Those top 5% of Americans control 63.5% of the wealth. But they also pay 59% of the federal taxes. That might sound unfair, until you look at the two most important numbers in that sentence. 5% of Americans pay 59% of the federal taxes. That means that each member of that top 5%  pays, not only their own “fair” share, but the fair shares of fifty-eight other people. Those numbers seem even less fair when you look at the lower end of the spectrum and discover that the bottom 50% of Americans paid only 2.7% of total federal taxes in 2008 (the most recent year for which data was available.)

Of course, we also have to question the effectiveness of a plan that would seek to tax our way out of debt. Historically, this model has consistently failed. Several European nations (including the UK, Greece, Portugal and Spain) adopted this liberal  “balanced approach” in the face of crippling debt with some small spending cuts such as raising the retirement age, but also with enormously increased taxes. The result has been extremely weak economic growth. The best example is in the UK, who raised the income tax rate cap to 50%, raised capital gains tax by 10% (from 18 to 28%), and boosted the VAT from 17.5 to 20% (that’s Value Added Tax, I add the link because we don’t even have that tax in the U.S, you may not be familiar with it.)  Despite these massive tax hikes that the left are demanding in the U.S., the United Kingdom saw only .5% growth in the first quarter of 2011.

A recently published study (Large changes in fiscal policy: taxes versus spending.) by Harvard University economists Alberto Alesina and Silvia Ardagna examined 21 countries efforts at debt reduction between 1970 and 2007. Their conclusion:

We examine the evidence on episodes of large stances in fiscal policy,
both in cases of fiscal stimuli and in that of fiscal adjustments in OECD
countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more
likely to increase growth than those based upon spending increases. As for
fiscal adjustments those based upon spending cuts and no tax increases are
more likely to reduce deficits and debt over GDP ratios than those based upon
tax increases. In addition, adjustments on the spending side rather than on
the tax side are less likely to create recessions. We confirm these results with
simple regression analysis.

The study found that those countries such as Canada, New Zealand, Ireland, and Slovenia, that made cuts to spending and taxes saw the best growth and the highest level of deficit elimination. New Zealand eliminated it’s deficit in the 1990’s with a four-year-spending increase freeze. Canada also implemented a five-year spending increase freeze (adjusted only for inflation, amounting to an average of 1% per year spending increases) between 1992 and 1997 that completely erased their deficit. Ireland, in the late 1980’s, slashed it’s deficits by ten percentage points of GDP by freezing spending increases for four years. Finally, let’s look here at home, to the 1990’s, when the U.S.  federal government balanced the budget under the tenure of President Bill Clinton. Democrats point to this achievement as evidence that they are the true fiscal leaders, but ignore the real lesson of the 90’s, that the balanced budget was achieved by limiting spending growth to only 2.9% (on average) annually.

The beauty of this? None of these countries even cut spending. All they had to do was to slow or stop increasing the spending. According to Dr. Dan Mitchell, senior fellow at the libertarian think tank the Cato Institute:

…revenues are expected to grow (because of factors such as inflation, more population, and economic expansion) by more than 7 percent each year. Balancing the budget is simple so long as politicians increase spending at a slower rate. If they freeze the budget, we almost balance the budget by 2017. If federal spending is capped so it grows 1 percent each year, the budget is balanced in 2019. And if the crowd in Washington can limit spending growth to about 2 percent each year, red ink almost disappears in just 10 years.

Of course, all of this ignores the very basic flaw in the “tax us out of recession” philosophy. And that is that it’s based on the belief that the government simply has the right and the authority to take our money away from us, the people, to cover it’s own exorbitant habits. Leaders in Washington, and false prophets in Wisconsin (and elsewhere) have a large portion of the population forgetting that the authority of the government is derived from the consent of the governed. And the governed doesn’t have to let them take their property. It’s been tried before… it ended badly.

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4 Responses to “The Fundamental Failures of the “Balanced Approach.””

  1. Paul C. says:

    What is wrong with the termination of subsidies? Subsidies aren't the reduction of tax as suggested above. Subsidies are a direct transfer of tax dollars from taxpayers to special interests. They unduly complicate the tax code, make the tax code unfair and arbitrary, and every subsidy provided by the U.S. govt. means that other, less favored taxpayers (without a lobbyist) have an increased tax burden. Republicans, fans of limited government, are supposed to be against using the tax code for wealth transfer payments, not support them.

  2. Evan Shearin says:

    I don't I said that anything was wrong with eliminating susidies. In fact, it would have to be a major part of cutting out of control government spending.

    • Paul C. says:

      I interpreted your comment to suggest that you considered the ending of subsidies to be equivalent to new taxes, considerig you grouped subsidies in with truly new taxes in your $1 trillion amount. Perhaps that is what not what you meant, but that is how it could be interpreted.

      BTW, the continuation of subsidies is the official position of ATR and Grover Norquist, and is also implicit in the Americans for Tax Reform pledge, which is signed by the vast majority of Republican elected officials in Congress.

  3. […] course, we also have to question the effectiveness of a plan that would seek to tax our way out of Debt. Historically, this model has consistently failed. Several European nations (including the UK, […]

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