Tax And Spend

The Bush tax cuts – of so much political sturm-und-drang – are finally set to expire at year-end. The Democrats, after years of railing in high dudgeon over the alleged iniquity of these tax cuts, are now engaged in a legislative effort to . . . extend them.

The only question is whether this will include the tax cuts for the richest Americans. You might think the Democrats at least wouldn’t do that. You might be wrong.

It looks like they can’t manage to pass anything without some Republican support, and Republicans don’t seem willing to support an extension that doesn’t cover all the tax cuts. My bet is that the Democrats will give in and agree to that, partly because they don’t have the political balls to raise anyone’s taxes right now.

In fairness, the landscape has changed, and in today’s weak economy it would be crazy to raise taxes. That the Dems can recognize this reality is reassuring, somewhat. Yet the real elephant in the room still seems invisible to the political class. Or they act as if it’s not there.

It’s that spending and revenue have gotten way out of whack, and it’s not just temporary. Even ending all Bush’s tax cuts wouldn’t remotely close the gap. And raising taxes high enough to bring deficits down to merely tolerable levels would strangle the economy. So, to paraphrase the anti-war folks, tax is not the answer. Government spending has outstripped what we can reasonably afford.

The problem isn’t only the federal government. Here in New York, with a massive budget deficit this year, and an even bigger hole looming next year, the current budget increases spending by 7%.

We can muddle along like this for a time, but it’s ultimately unsustainable. The day must come when government can’t borrow any more, because repayment will become doubtful, and/or it will have to just print money to pay the debts, destroying the value of the dollar. Oh – and all those guys like Bill McKibben who condemn economic growth? – such growth is our only possible pathway out of this hole.

You actually can’t blame politicians. As long as voters continue to reward pols who promise and deliver more, more, more, that’s what we’ll get. We’re like children with a credit card whose bill is paid by Daddy. Only, actually, it’s the other way ‘round. The bill will be paid by our children.

We’d better have lots of them.

2 Responses to “Tax And Spend”

  1. Lee Says:

    All the rangling between the Dems and the Repubs is about whether or not the top tax rate should go from 35% to 39.6%. In terms of percentage points, it is a rather small difference!

  2. Gregory Kipp Says:

    That comment at the end was quite amusing. Before the crash, I often remarked that both the government and consumers were acting like freshman college students with their first credit card. Will we ever learn that financing economic growth with unlimited expansion of debt doesn’t work?

    But I have a plan to help us out of this mess. This plan will allow us to keep all or most the Bush tax cuts, reduce the deficit, give a boost to the green energy economy, and help fight climate change. We can achieve all this by raising the federal gasoline tax.

    Now, I realize this will impact certain segments of the economy and households whose budgets are significantly affected by fuel costs. Indeed, to some extent, a gasoline tax would affect each and every one of us. But, with proper design and implementation, such a tax could bring a lot of benefits. It would help solve our federal budget problems to start with, and perhaps allow us to keep or lower income taxes. It would also provide a powerful incentive for our market economy to move towards green energy solutions; consumers and manufacturers would have a financial incentive to use more energy efficent products.

    With a gasoline tax, all this would be achieved while broadly spreading the “pain” across most segments of the economy, which seems an equitable way of sharing. I believe some pain is inevitable anyway, no matter what we do … because some hard choices will eventually have to be made to solve the budget crisis.

    A couple additional points are worth making about this tax plan. If the federal budget weren’t in such a dreadful mess, I would suggest most the proceeds from a gasoline tax go towards lowering income taxes even further. But with these huge deficits, one would have to work out the correct balance between deficit and income tax reductions.

    Transportation companies and others who are highly dependent on fuel could be made exempt from the gasoline tax, similar to the way farmers are currently exempt from fuel taxes. Various kinds of exemptions could potentially be granted, but I would want to limit exemptions to cases where it makes economic sense. In some cases you might want, as a policy matter, to enourage certain industries to move towards alternative energy sources.

    Taxing gasoline makes work trips more expensive for most commuters. Some of the proceeds from the gasoline tax should be devoted to providing efficient transportation alternatives. This can take many forms, such as tax incentives to buy/use fuel-efficient cars, tax credits for carpooling, or better public bus and rail services.

    A gasoline tax would be regressive — low income persons would pay a higher percentage of their income to the gas tax. A personal gas tax exemption deduction for low income filers might be warranted for federal income tax purposes. Other mitigating measures may be warranted.

    Not everyone is going to like this plan. But it seems like the type of common sense solution we need right now, if you ask me. And I think we can handle it. It wasn’t that long ago we had $4.00/gallon gasoline every day. And if we don’t do something to wean ourselves off foriegn oil, it’s going to happen again … maybe worse the next time.

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