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Not Taking Other People’s Money

Isn’t that the morally decent thing to do?

Jul 18, 2011, Vol. 16, No. 41 • By ARTHUR C. BROOKS
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The problem with socialists, according to Margaret Thatcher, is that “they always run out of other people’s money.” We haven’t hit that point just yet, but we have hit our nation’s legal credit limit of $14.3 trillion. To avoid defaulting on our loans, policymakers must raise that limit.

Running away with the money

For many Americans, this is absurd and humiliating: The richest country in the history of the world is teetering on bankruptcy because our government can’t stop itself from spending, like a loathsome celebrity blaming bad behavior on some dubious new addiction. No surprise, then, that more than 60 percent of Americans believe Congress should not raise the federal debt ceiling, according to a recent CBS News poll. This does not mean they want to see America default, of course. Rather, it indicates a strong popular will to see our government stop its ruinous spending.

Many politicians agree with this sentiment, but understand that refusing to raise the limit would create more problems than it would solve. So they look for other solutions, such as the Republican idea to tie support for an increase in the debt ceiling to equal decreases in public spending. As fair and prudent as this might sound, the president disagrees, insisting that we must raise taxes as well if he is to agree to any cuts. As he said in his remarks two weeks ago, “You can’t reduce the deficit .  .  . without having some revenue in the mix.” Technically, of course, you can reduce the deficit without raising taxes; he simply doesn’t want to. 

This has become a recurring theme in all recent budget fights. The government’s vast deficits stimulate calls to cut spending from the right, which are met by calls to raise taxes from the left. The left’s argument is almost always accompanied by the claim that cutting spending is anti-poor, and advocates for cuts are simply tools of the selfish wealthy who resent having to pay their share. According to New York Times columnist Paul Krugman, the “angry rich,” as he calls them, are “wallowing in self-pity and self-righteousness.” 

The president talks in moral terms about the need to raise taxes. It is, he claims, a matter of basic fairness. “There’s nothing serious about a plan that claims to reduce the deficit by spending a trillion dollars on tax cuts for millionaires and billionaires,” President Obama said of the House Republican budget on April 13. And in his town hall meeting a week later, he called for a tax code that is “fair and simple” and for spending cuts that are “fair” and require shared responsibility. The message, then, is clear: Americans who don’t think we should cut the deficit by increasing taxes aren’t just guilty of bad math—their morals are shabby too.

For the most part, tax increase opponents have been dumbfounded by the charge. They believe they are right in opposing new taxes but have been unable to coherently counter the allegation that wanting citizens to be able to hold onto their hard-earned money makes them morally degenerate. Tax opponents, then, must arm themselves with both practical and moral arguments.

First, the practical argument. How have we gotten to this fiscal state in our nation? Most of us will say because of overspending by the federal government. This profligacy did not begin with the Obama administration, to be sure. Republicans and Democrats alike have been all too willing to spend vast amounts of other people’s money, often exhibiting their greatest bipartisanship on this point.

The practical answer to this problem involves common sense. What do most of America’s families do when they find they are overspending? They don’t send the kids out to get part-time jobs in order to increase family revenues—they cut back on their spending. Why? Because that’s what works to solve the problem.

The government can learn from families. In fact, the data show that when countries are trying to find their way out of a debt crisis, the more they rely on tax increases as opposed to spending cuts, the more likely they are to fail. My colleagues Kevin Hassett, Andrew Biggs, and Matt Jensen studied 21 developed countries that have attempted fiscal consolidation over the last 37 years. Some succeeded and returned to economic health; -others failed.

On average, failed attempts to close budget gaps relied 53 percent on tax increases and 47 percent on spending cuts. Successful consolidations averaged 85 percent spending cuts and 15 percent tax increases. Some of the most successful financial comebacks—like Finland’s in the late 1990s—involved more than 100 percent spending cuts, so that taxes could be lowered. The spending cuts by the successful countries centered on entitlements and government personnel.

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