Why the GOP Is Right On Taxes

Congressional Republicans are standing firm on their principle that for every dollar of increase in the national debt limit, President Obama and the Democrats must agree to a dollar of spending cuts. That means if President Obama wants to increase the debt limit by $2 trillion to $3 trillion, then he will have to agree to $2 to $3 trillion in future spending cuts. But President Obama and the Democrats are insisting they won’t agree to any spending cuts unless the Republicans agree to tax increases.

Most people don’t know that sweeping tax increases have already been enacted in current law for 2013. In that year, all of the tax increases of ObamaCare go into effect, and the Bush tax cuts expire, which President Obama has refused to renew for singles making over $200,000 per year, and couples making over $250,000. Together, these job killing tax policies would sharply raise tax rates on the nation’s small businesses, job creators and investors for virtually every major federal tax.

The top two income tax rates would rise by nearly 20%, the capital gains tax rate would rise by nearly 60%, the tax on corporate dividends would nearly triple, the death tax would rise from the grave with a 55% top rate, and the Medicare payroll tax rate would increase by 62% for these taxpayers. This is on top of the current corporate tax rate of nearly 40% nationwide on average. Even Communist China has a 25% corporate tax rate, with the average in the socialist European Union below that.

In the current weak economy, this sweeping tax tsunami is more likely to cause revenues to decline rather than increase. Indeed, if these reckless tax increases cause a double dip recession, as I think they will, revenues would collapse, spending for public assistance would soar, and the deficit and national debt would skyrocket further. Working people would suffer the most, with unemployment spiraling up, and real wages after inflation spiraling down.

Under the budget passed by the Republican controlled House, federal taxes as a percent of GDP would return to their long term historical average since World War II. Any tax increases beyond that, as President Obama and the Democrats demand, would constitute a big government breakout threatening the world leading prosperity America has enjoyed over the last 65 years.

This shows that the deficit and debt is a spending problem, not a revenue problem. President Bush, with both Democrat and Republican Congresses, did lose control of spending during his presidency, as federal spending as a percent of GDP rose by one-seventh during his two terms.

But President Obama, once he got behind the steering wheel, accelerated madly in precisely the wrong direction, increasing federal spending by nearly one-third in his first three years, and proposing in his 2012 budget to increase it by nearly two-thirds more by 2021. Adding that on top of our exploding entitlements, which ObamaCare made worse by adopting or expanding three new entitlements, is how America’s Ticking Bankruptcy Bomb was lit, as I explain in my new book with the same title.

Even before President Obama was elected, official IRS data show that in 2007 the top 1% of income earners paid more in federal income taxes than the bottom 95% combined. Their share of the federal income tax burden was twice their share of national income. All of the above Obama tax increases would come on top of that.

That is why it is not economically feasible to even raise taxes on “the rich” further. Or indeed to raise federal taxes on anyone else. Economists call it "Hauser’s Law." Since World War II, with the top federal income tax rate as high as 91%, and as low as 28%, federal taxes as a percent of GDP remained stable near their long term historical average of 18.3% of GDP. That is yet another reason why we can’t solve America’s deficit and debt problem by raising taxes. The only answer is to get federal spending under control, down to its long term, postwar, historical average as well.

Peter Ferrara is the Senior Fellow for Entitlement and Budget Policy for the Heartland Institute, and a Senior Fellow for the Carleson Center for Public Policy. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under the first President Bush. He is the author of the new book "America’s Ticking Bankruptcy Bomb" (HarperCollins).