Tax Increases Won't Cure Federal Deficit by Veronique de Rugy
Veronique de Rugy is a fiscal policy analyst with the Cato Institute.
President Bush's critics say tax cuts are unreasonable because the Congressional Budget Office projects a 10-year deficit of $1.8 trillion. Instead, those critics want to raise taxes, arguing that it will balance the budget. Both President Hoover and President Roosevelt tried such a plan in the 1930s. It failed then. And such a policy today will fail again. A key problem in trying to balance the budget with tax increases is that higher taxes fuel more spending. As Milton Friedman has said, "Raise taxes by enough to eliminate the existing deficit and spending will go up to restore the tolerable deficit Another reason why tax hikes don't balance the budget is because the hikes contract the tax base by reducing economic growth and spurring greater tax avoidance. As a result, the government gains only a fraction of the revenues it hopes to receive.
After the 1929 market crash, a sharp monetary contraction pushed the economy into the Great Depression. Overnight, everyone forgot how effective the large tax cuts implemented by Treasury Secretary Andrew Mellon were in restoring economic growth and how, in turn, deficits had disappeared. Obsessed about deficits, Hoover had raised individual tax rates at all income levels -- the top rate rose from 25 percent to 63 percent. Following Hoover, Roosevelt signed into law a series of tax increases. At the bottom end, personal exemptions were reduced and an earned income credit was eliminated. At the top end, the highest marginal rate was increased to 79 percent in 1936. Interestingly, while the federal budget was balanced throughout the 1920s, the tax increases of the 1930s coincided with increasingly large deficits. On the campaign trail in 1932, Roosevelt noted: "For over two years our federal government has experienced unprecedented deficits, in spite of increased taxes." Yet, much like Gov. Davis today, Roosevelt decided to increase taxes more. He found out that a tripling of tax revenues did not balance the budget because the deficit soared from $2.2 billion in 1932 to $2.9 billion in 1940. It should be clear that raising taxes to balance a budget is like drinking a six-pack to cure a hangover!!!!