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.
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.
Now let’s look at the moral argument against raising taxes. Why does the president want to increase America’s tax burden? You may think it’s just a way to increase revenues and reduce the deficit. But even the president knows he can’t solve the fiscal crisis by helping himself to bigger and bigger chunks of the income of America’s most successful people. Even if individuals earning more than $200,000 were taxed at a 100 percent marginal rate—and we confiscated their passports so they could not flee—the take would come to $1.27 trillion, or just 77 percent of this year’s deficit.
For the administration, it’s not about the money—as we have heard again and again, it’s about “fairness.” The president believes that we will be a better nation if we redistribute more money from those who have more to those who have less. How much more do we need to redistribute until our system is fair?
As you ponder this question, remember the facts: The wealthiest 5 percent of Americans already account for 59 percent of federal income taxes. Nearly half of our citizens pay no federal income taxes at all—yet two-thirds of us believe that everybody should at least pay something, even if just to remind ourselves that government isn’t free. The Tax Foundation reports that the percentage of Americans who are net takers from the tax system is nearing 70 percent.
If our system is not yet “fair,” what will make it so? If the top 5 percent paid 75 percent of the total? Or 95 percent? If they could, would it be ideal for the top 1 percent to carry all the rest of us so we could finally have a tax code that is “fair and balanced”?
This is not the America that our Founders believed in—nor a debate they would have conducted. They did not struggle to make America the nation of claimants we are rapidly becoming. They would not have recognized our current leaders’ definition of fairness in terms of forced redistribution. And they would most certainly not have agreed that the answer to rampant government overspending is to tax our citizens more.
To the Founders, fairness was a question of rewarding merit. Thomas Jefferson spoke of the need to guarantee to every citizen “a free exercise of his industry and the fruits acquired by it.” He even wrote to John Adams about their shared belief in “a natural aristocracy among men.” The basis of this hierarchy was not nobleness of birth but “virtue and talents.” Alexander Hamilton praised a community in which “each individual can find his proper element and call into activity the whole vigour of his nature.” And in the following century, Abraham Lincoln declared, “I don’t believe in a law to prevent a man from getting rich” but rather a law that will “allow the humblest man an equal chance to get rich with everybody else.”
Since the time of the Founders, America has not been a magnet for immigrants seeking a system that penalizes success to pay for largesse. Letters from my great-grandparents who came through Ellis Island suggest they were desperate to get to America to earn their success, not to get great government programs like “cash for clunkers.”
In the coming weeks and months, as the debt ceiling debate rages and new budget battles arise, we will hear more and more class-warfare rhetoric about corporate jets, miserly rich people, and the need for higher taxes. Free-enterprise advocates must be ready to make a three-part case. First, it is bad economics to tax our way out of the hole our government has dug for us. Second and more important, it betrays a lack of national moral fiber to say, in effect, “We are too weak to control our spending.” Third and most important of all, it is not “fair” in any traditional American understanding of the word to tax our way out of a spending problem.
Arthur C. Brooks is president of the American Enterprise Institute and author of The Battle: How the Fight Between Free Enterprise and Big Government Will Shape America’s Future.