Tax and Spend Impasse

Reading a rather cursory opinion piece this morning (calling for federal spending to be decreased) it occurred to me that there’s an interesting symmetry to what the more aggressive advocates of tax increases and spending cuts suggest:

The most passionate tax increase advocates frame their calls for tax increases in terms of some prior level of taxation: “We should roll back all the Bush tax cuts and return to the tax rates people payed under Clinton. We all remember the ’90′s; the world didn’t end when the top marginal tax rate was 39.6%” or “By golly, we should go back to the tax tables that were in force under that ‘socialist’ Eisenhower. 91% top marginal rate. That’ll teach those corporate fat cats to vote themselves bonuses.”

Similarly, when passionate spending cutters explain their plans, they tend to phrase it in terms of rolling back to a previous level of spending: “These ‘draconian’ cuts in fact only represent a return to 2006 spending levels. Did we starve in the streets then? Did the world end?”

Of course, those on the “tax” side do in fact tend to claim that the world would virtually end if government spending were reduced to 2006 levels. And those on the “cuts” side argue that jacking tax rates up to some level which people successfully survived in the past would present a sudden and un-needed shock to the recovering economy, and also encourage the government to put off it’s massive spending problems to some other not-so-distant day.

In point of fact, I’m not sure that “we survived this in the past” is a very good argument for some particular level of spending cut or tax increase. It’s certainly true that in 1996, people were used to 1996 tax rates, but that’s in part because they’d got to those tax rates gradually from where they’d been before. If we completely re-instituted the 1996 tax table, it would actually be the middle class that would be hit hardest — though to be fair advocates of “rolling back” the tax code typically only advocate raising the rates on “the rich” which is loosely defined as “people who make more than me”, not raising the bottom rate from 10% back to 15%, and the second and third brackets from 15% and 25% back to up to 28%.

Similarly, 2006 levels of spending felt comfortable to everyone at the time because they were higher than 2005 levels of spending. Going back to the 2006 level would be a nasty initial shock for some of those with federal jobs or being served by federal programs.

In reality, either cutting spending substantially or increasing taxes substantially would be a painful for a lot of people. The argument that a certain set of tax rates or level of federal spending existed in the past doesn’t really address this reality at all. it’s a bad argument. And given the complete train-wreck which is our country’s budget, we are going to have to brace ourselves and experience some pain regardless. (My personal preference runs primarily to spending cuts, though some tax changes or increases may be needed as well.)

7 Responses to Tax and Spend Impasse

  • The dilemma (or one of them) is that any plan to phase in spendings cuts or tax increases to lessen the shock is dependent upon our elected representatives actually abiding by the phase-in. Possible. But likely? Not when Democrats in the Senate are unable to find more than $10bn to cut in discretionary spending.

  • Aaron B. says:

    That’s the thing about government spending: every dollar goes into someone’s paycheck. (Some go into overseas paychecks, and that should stop, but that’s a tiny percentage of the whole and cutting it to zero wouldn’t change the problem.) Even the “waste and corruption” that they’re always promising to cut — every dollar of that goes to pay someone to be wasteful or corrupt. So every spending cut means someone somewhere takes home less money.

    But the debt-fueled money tree is running out, so now the battle will be over who takes home less. Government workers have made it clear that they don’t intend to share in the pain; and they write the rules, so it seems like a stacked deck. But they’re still outnumbered (barely) and the client class that they’ve teamed up with in the past may not sit quietly while its own benefits are cut to fund lavish pensions for others.

    It’s going to have to come from somewhere.

  • Phillip says:

    “Not when Democrats in the Senate are unable to find more than $10bn to cut in discretionary spending.”

    How can you say that. That is 0.28% of the 2011 budget. What are we going to do with only 99.72% of the budget? Imagine if I had to cut my personal spending that much.

  • That’s the thing about government spending: every dollar goes into someone’s paycheck.

    I suppose this is true in a certain sense, in that wherever money goes it arguably eventually ends up in someone’s paycheck, but it’s certainly not directly so.

    So, for instance, if the Feds did not subsidize sugar prices, it’s not necessarily the case that sugar farmers would end up out of work, they might simply raise prices, which would cascade through the economy, raise a lot of prices, result in some consumption re-adjustments, create a larger market for corn syrup, and mostly be absorbed without anyone in particular losing their jobs. More to the point, if jobs did get lost over it, it might be next to impossible to figure out who and how the chain of events had caused it.

    I don’t have the numbers handy, but to my understanding most federal money does not go directly to any particular federal worker’s salary.

  • Aaron B. says:

    It really doesn’t matter whether it’s direct or not. If the sugar farmer raises his prices because his subsidy got cut, that just means the dollar comes out of his customers’ pockets instead of his own. The point is, if the government stops spending on something, that’s money someone no longer gets. If it buys fewer fighter jets, that means fewer people get paid to build them. If it stops funding midnight basketball courts, someone no longer gets paid to build them.

    I also said “someone’s paycheck,” not “a federal worker’s paycheck.” The “client class” which will soon be in a conflict with the government worker class includes those sugar farmers, as well as SSI recipients, people who build munitions, etc. Whether they get a check directly from the US Treasury or not, they’re dependent to some extent on continued government spending, and they’ll vote (and perhaps assemble into angry mobs) accordingly.

    Don’t get me wrong; I’d cut federal spending to the bone, and in the long term we’d be better off. But it’s going to hurt in the short term, because we’ve become so dependent on it.

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