Just Say No to Higher Taxes

Some of the less principled Republicans are starting to talk about agreeing to higher taxes on the "wealthy" in order to avoid the fiscal cliff.  This is just stupid.  First, it would be recessionary as higher taxes invariably reduce consumption.  Money that would be spent elsewhere is taken by the government and spent either inefficiently or just vanishes if it is used to reduce the deficit.   I know raising taxes on 2% of the population doesn't sound like much but they are responsible for ~30% of our national income so it would definitely have an impact on our economy. 

Second, these higher taxes, which will hurt our economy, will only fund the government for a total of 8 days!  We don't have a tax problem in the US (at least not on the wealthy, more on that below) we have a spending problem.  As I've written before, it would actually be impossible for us to raise taxes enough to close our deficit, it's just too big and the taxes necessary to close it would send us into a deep depression, depressing the tax revenues that were meant to increase.  We are also running out of time before we have a full blown sovereign debt crisis.  We are running out of available capital to buy our debt.  Either we make them now or we wait a few years and have to cut even deeper then.  Holding back will just mean that more baby boomers will have already retired and we will have even more debt on our shoulders.  Plus, it will be much easier to make the necessary cuts when interest rates on the 10 year treasury is below 2%, rather than above 10%.

Third, the problem with are tax revenues aren't that the wealthy "aren't paying their fair share", quite the opposite.  The top 5% and the top 20% are essentially giving up the same percentage of their income to the Federal government (income taxes + social security + medicare) as they did 30 years ago.  It's the bottom 80% who are paying historically low rates.  Check out this handy chart from the St. Louis Federal Reserve:

So just from a "fairness" angle, its the 80% who are shirking, not the top 2%.  Not that I think that anyone's taxes should go up.  I view most taxation as highway robbery, where the robber is an employee of the state.  Why exactly should my hard earned money go to people who may not even deserve it?  How have they earned it exactly?

So what should the Republicans do?  I think I agree with Pat Buchanan on this one:

Republicans are being told that they either vote for something they believe to be wrong and ruinous — or get something worse. Pay the ransom, fellas, Obama is demanding, or take the blame for a second recession.

Like the Panama Canal debate that made Ronald Reagan a hero, this is a defining moment. No GOP senator who agreed to the Carter-Torrijos treaty ever made it onto a national ticket.

What are the perils for Republicans who sign on to an Obama deal?

They will sever themselves permanently from much of the base of the party. While their votes may ensure that tax rates or revenues rise, they will have no assurance that the promised spending cuts will ever be made. Even Reagan fell victim to this bait-and-switch.

Then, if the tax hikes slow the economy, Republican collaborators will share the blame. Not only will they have gone back on their word, they will have damaged the recovery. What would be their argument for re-election?

If you believe higher tax rates or tax revenues would be like poisoning an already weak economy, why would you collaborate in administering that poison? Why not just say no?

Having lost the presidency and seats in both houses, Republicans should not partner with a president with whom they disagree on principle.

They should act as the loyal opposition in a parliamentary system whose duty it is to oppose, to offer an alternative agenda and to wait upon the success or failure of the government, as Labor is doing in Britain and the conservatives are doing in France.

What should Speaker John Boehner do?

Tell the president politely that America’s problem is not that we are taxed too little but that we spend too much — and the GOP will not sign on either to tax rate or tax revenue increases. For Republicans believe that would further injure the economy — especially an economy limping along at between 1 and 2 percent growth.

Then Boehner should depart the White House, go back up to the Hill and urge his Republican caucus to do two things.

Pass an extension of the Social Security payroll tax cut and block its automatic rise from 4.2 percent of wages to 6.2 percent. To raise that tax now and scoop off the discretionary income of most of America’s families in this anemic economy makes no sense economically or politically.

The House should then vote to extend the Bush tax cuts for another year, with a pledge to do tax reform — lowering tax rates in return for culling, cutting or capping deductions for the well-to-do in the new year.

Then let Harry Reid work his will. If the Senate votes to let Social Security taxes rise, let Harry and his party explain this to the middle class that gets hammered in January. If the Senate votes to let the Bush tax cuts lapse for those over $200,000, decide in the caucus whether to negotiate — or to go home for Christmas and New Year’s.

As for the automatic sequester that would impose $100 billion in cuts next year, half in defense, do nothing. Let it take effect. The budget has to be cut, and while these cuts are heavy on defense, the depth and mixture can be adjusted in the new year.

If Republicans walk away from tax negotiations with the White House, market investors, anticipating a sharp rise in tax rates on dividends, interest and capital gains next year, will start dumping stocks, bonds and investments to take advantage of the last year of lower taxes.

The market may tank. Let the party of high taxes explain it.