Paulo Roberto de Almeida
The Problem With ‘No New Taxes’
By TYLER COWEN
The New York Times, October 1 2011
IN a debate in August, Republican presidential candidates were asked whether they would support a budget deal that bundled $10 of spending cuts for every $1 of tax increases. All said no. They rejected any deal that involved raising taxes.
Curiously, though, if this approach actually were to become government policy, it would have a surprising effect: it would surely lead to higher rather than lower taxes.
Consider the example more closely. Cutting $10 in spending for every $1 in tax increases would result in $9 in net tax reduction. That’s because lower spending today means lower taxes tomorrow, and limiting the future path of government spending does limit future taxes, as Milton Friedman, the late Nobel laureate and conservative icon, so clearly explained. Promising never to raise taxes, without reaching a deal on spending, really means a high and rising commitment to future taxes.
Furthermore, this refusal to contemplate a tax increase — which I’d characterize as an extreme Republican stance — has brought what seems to be an extreme Democratic response: President Obama’s latest budget plan is moving away from entitlement reform and embracing multiple tax increases on the wealthy. We may be left with no good fiscal options.
The problems with a no-new-taxes stance run deeper. Because it’s unlikely that spending cuts alone can balance the budget, politicians who espouse extreme antitax views often end up denying the scope of our long-run fiscal problems.
The reality is that a mix of our aging population and rising health care costs will create acute budgetary pressures in about 10 years. If Medicare costs rise, say, 5 percent a year, such costs will roughly double in 14 years. Imagine that Congress freezes spending generally. Doing that for Medicare would, in essence, cut the size of the program in half over that period. Since the number of older Americans is rising, the per capita Medicare benefit would fall even more, with increasingly drastic results as the years pass.
That’s politically unlikely, and insisting upon it, or refusing to acknowledge that this is what a spending freeze means, ends up as another way of running away from fiscal reform. Focusing on cutting discretionary spending, a common political tactic, isn’t enough to balance the books.
Another conservative economist and Nobel laureate, James M. Buchanan, emeritus professor of economics at George Mason University, argues that deficit spending leads to yet more spending, and higher future taxes, compared with a pay-as-you-go approach. A move toward balancing the budget may mean some tax increases up front, he says, but future taxes as well as government spending will be lower than they would be otherwise.
In other words, the current antitax strategies advocated by the Republican candidates are unlikely to lead to fiscally conservative ends.
Conservatives may distrust the idea of making a grand fiscal bargain with President Obama. Some may believe that the balance of political influence is shifting in their favor anyhow. Yet from a 10-to-1 starting point, or even from 6-to-1 (one of the deals rumored to be on the table a few months ago) the bargain cannot improve all that much more in favor of spending cuts over taxes. Refusing such a bargain also requires an extreme estimate of how much American public opinion will swing in the conservatives’ direction. Keep in mind, too, that once Republican politicians are in power, they are often less keen to cut spending.
Of course, it may be rational to worry that a grand fiscal bargain isn’t much of a bargain at all. A prudent deal may postpone much of the spending reductions until the economy picks up. Perhaps we’ll end up getting the tax increases up front, and the promised spending reductions will never materialize. Congress may break its word and not make those cuts in future years, or maybe a national emergency — real or fabricated — will bring a completely new fiscal plan. Even so, it’s hard to see the harm in having tried to reach a deal, and taxes will eventually go up in any case, because they must.
What’s more, a vote for a grand fiscal bargain, in which both Republicans and Democrats have at least once endorsed a common vision of reducing entitlement spending, would increase the chance that reform would stick.
The more cynical interpretation of the Republican candidates’ stance on taxes is that they are signaling loyalty to a cause, or simply marketing themselves to voters, rather than acting in good faith. It could be that candidates are more worried about having to publicly endorse tax increases than they are about the tax increases themselves. If that’s true, it is all the more reason to watch out for our pocketbooks; it means that the candidates are protecting themselves rather than the taxpayers.
The final lesson is this: Many professed fiscal conservatives still find it necessary to pander to voter illusions that only a modicum of fiscal adjustment is needed. That’s an indication of how far we are from true fiscal conservatism, but also a sign of how much it is needed.
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