National Debt Ceiling: Are We There Yet?

(Jim Clark) – Democrats have drafted a sweeping debt-reduction plan that would slice $4 trillion from projected borrowing over the next decade, but leave untouched the expensive health and retirement programs.  The proposal would stabilize borrowing through sharp cuts at the Pentagon and other government agencies as well as $1 trillion in new taxes, primarily on corporations and families earning more than $1 million.  

Media pundits are ready to fault the GOP for refusing to go along.  “What’s wrong with a little compromise involving tax increases if Obama agrees to serious cuts to spending?” they ask.

The New York Times’ token Republican, David Brooks, takes it to an extreme.  He writes that anti-tax Republicans are behaving like “fanatics” . . . “who have no sense of moral decency.”  If Barack Obama’s “deal of the century” goes down, “Republican fanaticism” will be the cause.  It sounds as though David has been brainwashed by the New York City liberal establishment, none of whom seems to have ever taken a course in economics.

Let’s take a closer look at what’s on the table.  After dancing around the issues and emitting dire warnings, President Obama finally engaged in the negotiations regarding the August 2 deadline for a congressional vote to increase the maximum allowable national debt.  Obama’s offer:  We’ll cut spending if you approve tax increases on wealthy individuals and corporations.

There is universal agreement that two main entitlement programs, Medicare and Social Security, are leading this nation to insolvency.  The problem with Obama’s offer is that neither program is funded by corporate or individual income taxes.  Both are funded by payroll taxes and both would probably have gone bankrupt long ago if it weren’t for the millions of undocumented workers on business payrolls by virtue of phony Social Security cards.  These folks pay into the system and will never draw from it.  But Obama hasn’t suggested increasing Social Security or Medicare taxes, just increasing income taxes on the “wealthiest Americans.” 

Here’s where economics training would be helpful.  If you want to reduce or discourage an activity, tax it. 

Example: Corporation “A” has produced a certain earnings history for its investors.  If you increase its taxes, it must then look to cut other expenses to keep its earnings constant or its stock will decline in price.  In most cases, that would mean personnel layoffs and early retirement. 

Personnel reductions would reduce Medicare and Social Security taxes being paid to the government as well as personal income taxes formerly paid by those being removed from the workforce.  They, in turn, file for unemployment compensation and thus further drain government funds.

Imposing special taxes on high income earners is still more counterproductive.  Those with flexibility will simply move their assets to Grand Cayman or Switzerland.  For those who can’t invest abroad to avoid higher taxes, legal tax shelter schemes begin to look pretty good, thereby countering any increase in tax rates.

Note that you don’t have to raise tax rates to get the adverse economic effects of raising taxes. 

Obama’s easy money policies have caused commodities (gasoline, gold, food) to skyrocket.  Meanwhile, the government conceals the true rate of inflation by removing volatile items from their inflation index.  According to the Bureau of Labor Statistics there were approximately 2.4 million fewer Americans working in June 2011 than when Obama took office. 

 What’s the outlook? 

Last year, 235 Republican house candidates and many GOP senate candidates pledged not to raise taxes and were elected based on that pledge.  For the Democrats to come up with a trial balloon tax increase is not only dumb policy, it’s bad faith demagoguery.  

Ain’t gonna happen.

(Jim Clark is President of Republican Advocates, a vice chair of the Washoe County GOP and a member of the Nevada GOP Central Committee;  he can be reached at tahoesbjc@aol.com)