More Cutting, Less Taxing

Posted: Apr 20, 2011 1:43 PM

Another Tax Day, another check to Uncle Sam. For at least one day out of the year, Americans are reminded -- often painfully -- how much government costs.

But is it as bad as it seems? No. It’s worse. What most Americans pay in income taxes can give them a distorted view of just how much government they’re paying for.

If policymakers didn’t engage in “deficit spending” -- i.e., borrowing money that taxpayers will have to pay back, with interest -- our tax bill this year would be much higher.

So how bad would it be if Washington billed us for what they’re spending? Let’s look at the numbers. In 2010, the government took in around $2.2 trillion in taxes. (The income tax accounts for less than half of that: $900 billion, to be specific.) And what did the government spend? Around $3.5 trillion.

You don’t need a calculator to realize that this doesn’t add up. The government is spending $1.3 trillion more than it takes in in taxes. Where does that extra money come from? It’s borrowed, of course. If the federal government tried to collect as much money as it spends, income-tax revenues would need to increase by about 150 percent. And since nearly half of all Americans pay no income taxes, those who do pay would see their tax bills skyrocket.

Say you’re a family of four earning $50,000 and taking the standard deduction. Your current tax bill of $766 would go up by almost $4,000. It’s worse if you’re making $75,000: The tax bill jumps from $4,500 to $13,500. And if you earn $100,000 … well, if you think a tax bill of $8,800 is bad, wait until you get one for $24,400.

Obviously, such tax hikes would amount to economic suicide. Politically, it would be laughable. But heaven forbid our elected officials curb their fiscal appetites. So they opt for the seemingly safe middle path of deficit spending.

I say “seemingly” because, like so many short-term solutions, this doesn’t solve the problem. In fact, it masks it (temporarily) and makes it worse. Like sweeping dirt under a rug, or hurriedly stuffing misplaced belongings into a closet, it can’t go on forever. Sooner or later, the bill must be paid. And however much it may hurt to cut spending now, it’s nothing compared to how painful it will be when we have to do it down the road.

Carrying such a load of debt also means we’re courting higher interest rates on our borrowing. “U.S. Lacks Credibility on Debt, Says IMF” reads a recent headline in the Financial Times. The International Monetary Fund, in what the paper calls “an unusually stern rebuke to its largest shareholder,” says the U.S. is “the only advanced economy to be increasing its underlying budget deficit in 2011, at a time when its economy was growing fast enough to reduce borrowing.”

Yet President Obama and many in Congress refuse to face reality. They’ll concede the need to cut spending … then trot out a figure that may sound large, but actually amounts to little more than a rounding error. Meanwhile, the entitlement programs that consume the bulk of our spending -- Social Security, Medicare and Medicaid -- remain virtually untouched.

Worse, President Obama is playing the old class-warfare card -- calling for, yes, increased taxes on the wealthiest Americans. Never mind that the top 1 percent of taxpayers already pay about 40 percent of the income tax burden, or that such tax hikes would discourage the very kind of job-creating investments that the top taxpayers are in a unique position to make. Some perspective is in order. “We don’t have a trillion-dollar debt because we haven’t taxed enough,” President Reagan once said. “We have a trillion-dollar debt because we spend too much.”

It’s truer now than it was then. It’s time to cut more, not tax more.

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