RALEIGH — If President Obama’s State of the Union Address proved one thing, it’s that spending is out of control. Even more evident in his collectivist rhetoric was a clear misunderstanding of what it will take to fix our budgetary woes. The president called for a freeze on spending while advocating increased financial support of education, rail transportation, and research, among other special initiatives. He offered far more examples of how he would spend rather than how he would save.
So how does the administration intend to make sense of this spend-to-save policy? Simply re-interpreting costs and revenue changes their math, and it all starts with its views on taxation.
One of the most popular tools in the government arsenal to control human behavior is taxation. If the government wants less of something like cigarette smoking or gasoline consumption, it taxes it. A tax on cigarettes presumably leads to less smoking, and the government says that is good. But, when the government advocates a tax on income that will work like any other tax, and reduce the incentive to earn income, they say the “tax to deter” rule doesn’t apply.
Rather than viewing the December tax cut extensions as a benefit to American citizens, the government calls the extension of rates a “cost” to the federal government. This argument takes focus away from earners generating wealth in the private sector, because a “cost” to the federal government is really a gain to earners. Moreover, if the federal government wasn’t spending billions more than it “earned” in tax revenue each month, an extension of the current tax rates would never provoke discussion of the “cost” of existing tax policy.
The initial approach to the tax bill debate was the Obama administration’s masterful attempt to couch the issue as an extension of mistaken Bush-era policy. The debate became focused on revenue alone and how the government must fund its ballooning debt. And, the underlying assumption was that Bush-era economics led us astray from an optimal tax rate.
Is this really the case? Were the tax rates that existed under the Clinton administration perfect and we are now suffering after those golden years? Should the American people pick some optimal level of personal spending and then hope their income matches up?
All talk about optimal tax rates and the extension of Bush tax cuts focuses the discussion solely on government revenue. Where is the debate over government spending as it relates to taxation? Rep. Paul Ryan, R-Wisc., briefly touched on the issue in the Republican response to the State of the Union by acknowledging the government’s tendency to control and tax too much.
Sadly, the president publicly came to the conclusion that the current tax rates were OK to keep because they were for the good of the country (and the good of his re-election). The reality is that the president believes that keeping taxes at the current rates will “cost” billions over the next few years. A tax rate has never cost the government a dime (apart from collection costs).
The recent tax bill marks the beginning of what is certain to be an ongoing debate as Congress moves through this session. Now that the current tax rates have been extended, House Speaker John Boehner and his colleagues should change the focus away from what rates will “cost” toward how federal spending can get in line with revenue.
Whether or not the current tax rates are extended, the federal government does not have an impending revenue problem; it has a spending problem.
Is this the year Congress finally will stop ignoring the truth about our ballooning budget crisis and come together to make hard decisions? In November 1973, Sen. Jesse Helms, backed by a small group of his conservative colleagues, offered a balanced budget amendment that was tabled by a 46-43 vote. Sadly, the same fiscally destructive tradition has been repeated each year as some version of a balanced budget amendment is offered with great fanfare, then rejected by the very people who have sworn to “faithfully discharge the duties of their office.”
Perhaps leaders and citizens alike will heed the advice of Ryan, chairman of the House Budget Committee. “Our debt is out of control,” he warned. “What was a fiscal challenge is now a fiscal crisis. We cannot deny it; instead we must, as Americans, confront it. … So hold all of us accountable.”
Government’s refusal to act will not change until Washington stops considering taxes as income. Voters, armed with the sage advice of economists, must voice their opinions. Change will come when informed voters demand it.
Peter Frank, Ph.D., is the first Jesse Helms Center Free Enterprise Fellow, and an associate professor of economics at Wingate University.