- Published on Wednesday, 27 May 2009 05:00
- Written by Investor's Business Daily
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Fiscal Policy: Given the number of new tax ideas making the rounds, you'd think we were in a rip-roaring expansion. But we're not, and new taxes are exactly the wrong thing to be proposing.
In addition to kicking up taxes on the so-called wealthy, various members of the current administration seem to have lots of new ideas for separating Americans from their money.
Ezekiel Emanuel, brother of Rahm Emanuel, President Obama's top aide, is health care adviser to Obama's budget director, Peter Orszag. He wants a 10% value-added tax (VAT), similar to the European Union's, to "pay" for health care reform.
It's called value-added, but it's really value subtracted - a tax imposed on each level of production, from raw goods to consumers.
In Congress, meanwhile, Democrats are pushing for an Internet tax and a cap-and-trade tax on energy use. They want more money. What better way than to tax something people now use for free?
No question, if current spending plans remain in place, the federal government will need a lot more money.
Over the last 40 years, federal spending as a share of GDP has averaged about 20%. The current Democratic leadership will push that to at least 22% of GDP - and likely much higher. That will mark a permanent expansion in the size of federal government with a concomitant shrinking of your wallet. Taxes are already budgeted to rise by $1.1 trillion by 2019. But they want more.
The problem is, all this tax hiking while still in a recession will tank the economy and make any eventual recovery a weak one.
This isn't a matter of conjecture. As we've noted before, President Obama's chief economic adviser, Christina Romer, even authored one of the biggest long-term studies on tax hikes' economic effects. It found that, going back to 1947, a 1% rise in taxes results in roughly a 2% to 3% drop in GDP growth.
Given this knowledge, why are tax hikes on anyone's agenda? Why not tax cuts, which boost growth and revenue?
Go back to Ronald Reagan's first years in office to see how it works. At the time, deficits were growing, inflation was 12% a year, and interest rates stood at 21%. Even Reagan's closest advisers told the newly elected president he'd have to raise taxes.
But luckily Reagan was schooled in economics before the Keynesian revolution and knew better. He cut spending and slashed taxes 25% across the board, dropping the then-70% top tax rate ultimately to 28%. He also lowered taxes on capital.
Predictably, the media and Keynesian-trained economists forecast disaster. Instead, the economy boomed. Not only did unemployment plunge, but household wealth exploded by $17 trillion - more wealth creation in one decade than in the previous 200 years.
And contrary to popular myth, federal revenues surged - by 25%, or $262 billion, from 1982 to 1989 after adjusting for inflation.
A VAT, by contrast, would be a political and economic disaster.
In Europe, it has been used as a piggy bank by profligate politicians, who keep raising the VAT whenever they run short of cash. It also has made the cost of living in Europe extraordinarily high when compared with the U.S. Is that what Americans really want?
As our own IBD/TIPP Poll shows the VAT is already highly unpopular with voters. Of those queried, 73% said they would oppose a VAT to boost federal revenues. And it's opposed by Democrats, Republicans and independents alike.
Yet we're told by the Washington Post on Wednesday that the White House and Congress are taking a "fresh look" at the VAT.
Well, politicians beware: Supporting a VAT may endanger your job in 2010. The public won't forgive such foolishness.
When President Obama says "we are out of money," Democrats immediately think "tax hike." For our economy to thrive and grow, they should be thinking about cutting both taxes and spending.