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Money Talks

By Dr. Gregg Dimkoff
Professor, Grand Valley State University
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That the U.S. Congress is dysfunctional is not newsworthy: It has been obvious to most taxpayers for years.

Consider:

• The national debt has doubled during the past seven years.
• Most proposed austerity measures to reduce the debt’s rate of increase have been accounting gimmicks and they fall far short of making meaningful reductions.
• Two or three debt time bombs — the Social Security trusts, Medicare and perhaps ObamaCare — are ticking away on their ways to wreaking havoc on the economy within a generation.

Yet Congress does not seem to being doing much to help us. Rather, it appears our politicians are more interested in scoring points against one another.

There is a strong incentive for Republicans, just waiting until next year’s elections, to block any proposals coming from Democrats. From their prospective, there could be a Republican president supported by a Republican-controlled House and Senate. Then they can push through their own agenda.

On the other side of the coin, Democrats, fearing the above scenario, seem to be tossing out proposals appealing to many voters, but without a snowball’s chance in hell of Congressional approval and only the slimmest hope for making meaningful improvements in economic growth.

Increases in income taxes are an especially contentious issue between the two political parties. President Obama talks about taxing millionaires and billionaires just a little more. That appeals to most voters.

Yet the Republicans make it clear they will block any proposal to raise taxes. It comes down to a basic point: Jobs aren’t created by taking money from one group of citizens and giving it to another. Taxes don’t create growth, and if there is anything the economy needs right now, it’s jobs and growth. Democrats argue high income earners should pay more as a matter of fairness.

Republicans continue fighting higher income taxes because the proposed tax on millionaires has been creeping into the middle class. Most of President Obama’s proposals raise taxes on individual filers whose adjusted gross income exceeds $200,000, and joint filers with incomes in excess of $250,000. That’s a long way from millionaires and billionaires.

The tax would hit many small business owners — and small businesses are a major job creation generator — and strike deeply into the middle class.

There’s another important issue about taxes besides fairness and pitting citizens against citizens. It has to do with not trusting Congress. Most taxpayers want progress toward reducing the national debt. In other words, they want federal budget surpluses. Unless there’s a surplus, there cannot be debt reduction.

A surplus is possible, but the resulting pain would be widespread. As a consequence of several serendipitous events, the U.S. did experience three consecutive years of budget surpluses during the Clinton presidency.

Beginning in 1998, the surplus was $68 billion. It increased to $123 billion the following year and peaked at $230 billion in 2000. In total, the surplus was $422 billion.

But the total federal debt absolutely did not decrease during those years. The debt amounted to $5.4 trillion when surpluses began and ended up at $5.7 trillion three years later. In spite of more than $400 billion of surpluses, total federal debt increased by about $300 billion.

The Clinton surplus years contain a warning: Raising taxes to reduce the national debt may not work.

Beltway politicians don’t have a good track record when it comes to using extra tax money to pay down debt. Usually they spend it on pet projects, hoping to curry favor with voters. One of the most significant arguments against raising taxes — even if the increase affects only high-income earners — is the inability of politicians to keep their hands off that money.

Washington politicians behave like spending addicts. Give them more money raised from higher taxes, and they will spend it like addicts.

That’s not surprising: Many individuals behave the same way. The financial advice for those who overspend is not to “just earn more” either because they cannot or because they will spend the excess. Rather, the better solution to an individual’s budget shortfall is to cut spending.

The same holds true at the federal government level.

Further, beginning students in Economics 101 learn a no-brainer early in the course: Raising taxes hurts economic growth. That’s true even if taxes come from billionaires. With the unemployment rate stuck around 9 percent (and much higher if the people who have given up looking for work are included), now certainly isn’t the time to slap higher taxes on the economy.

Unfortunately, both higher taxes and spending cuts hurt economic growth, at least in the short run. Congress should do neither until the economy strengthens enough to lower the unemployment rate significantly.

About the best we can hope from Washington over the next year is adherence to the Hippocratic Oath: “First, do no harm.”

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