Should Needed Spending Reductions Be “Balanced” With Tax Hikes?

Tax Hikes Won’t Work, Aren’t Needed

  • To close this year’s $1.4 trillion deficit through tax increases alone, individual and corporate rates would have to more than double overnight.
  • Even if all of the income of those earning more than $1 million were confiscated at a 100 percent marginal rate—with the unlikely assumption that taxpayers wouldn’t change their behavior—the federal deficit would still be at levels sharply above historic averages.
  • Even if current tax rates were extended for everyone, revenues are projected to return to historical norms by 2014. CBO projects that revenue will continue to rise above its historical average an additional 0.4 percent to 18.4 percent of GDP by 2021.

Spending Cuts Are Proven To Be More Successful At Deficit Reduction

  • Federal government spending, currently at 24.1 percent of GDP, is projected to remain stubbornly high—and far above the 40-year historical average of 20.8 percent. By 2035, 1 out of every 3 dollars of goods and services produced in this country will be consumed by the federal government.
  • Empirical evidence shows overwhelmingly that nations that reduce deficits through spending cuts are more successful in lowering debt and growing the economy than countries that rely on tax increases.
    • According to Harvard economist Alberto Alesina, spending cuts are much more effective than tax increases in stabilizing the debt and avoiding economic downturns. In fact, in several episodes, spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.
    • A Goldman Sachs report found that decisive budgetary adjustments that focused on reducing government spending have (i) been successful in correcting fiscal imbalances; (ii) typically boosted growth; and (iii) resulted in improved bond and equity market performance. Tax-driven fiscal adjustments, by contrast, typically fail to correct fiscal imbalances and are damaging to economic growth and competitiveness.

We Need A Budget With Real Balance—One That Shifts The Balance Of Power From Washington Back To The People