Taxes Need to be Part of the Equation

Between 2003 and 2008 we had positive quarterly growth between near 0% and over 6%.  The period also was marked by a long period of strong growth between the end of 2003 and end of 2006.  Yet during that time, we increased our spending rate by more than a percent, when the responsible fiscal policy would have been to decrease spending and/or increase taxes.   Revenues as a percent of GDP did rise about 2%, which had the deficit slowly decreasing, but this is after it was created from surpluses.  If the Republicans wanted to act on ideology, and make government systemically smaller, that was the time to do it.

Now, we need all the bullets we can muster because the investment community is all over our budget woes.  Our deficit and debt as a percentage of GNP are too high and an effective plan is warranted.  We are in a tight spot.  If the US cuts a ton of spending up front, bond investors will worry that the decreased cash in the economy will stall a fragile recovery.  

Unfortunately, we also have long-term confidence concerns.  Our government’s credibility when it comes to sticking to tough decisions is, well, mixed.  Treasuries investors don’t like mixed.  They like the AAA rating and historic impeccability.   So if Congress puts all cuts off until later, the lack of trust could cause the government (and consumers) to pay increased interest rates, which would make even deeper cuts necessary.

There is reason to believe that putting taxes into the mix offers a better way out of our fix (hey, that rhymes). There is a stimulative difference between what a billionaire and the middle class do with a dollar earned.  The billionaire is likely to invest some, if not all, of that dollar.  This raises asset prices, which has some benefit, but a lot of that accrues to already wealthy individuals or retirement plans where that money doesn’t get spent.  But the person from the middle class likely spends most or all of that dollar, so it goes directly to a business that employs people.  The only way to get at billionaires is through taxes, where the working class is more exposed to spending cuts.

Our taxation policies with corporations also offer some opportunities.  We have numerous loopholes in the books that encourage corporations to leave money overseas, and similarly we tax the repatriation of foreign earnings, which also encourages overseas investments.  Modification of these codes may have less of a near-term impact on our economy as some spending cuts, but they are off the table.  

These are only two examples, but it serves my point, which is to say that the no tax stance of Republicans is ideology run amok.  It’s like being anti-war while we’re being invaded.  I strongly encourage Republicans to recognize that at this point, US citizens would applaud the bravery in taking a detour off a very reckless path.