For decades Republicans accused Democrats of being the party of “tax and spend,” a derisive epithet employed most successfully by Ronald Reagan during his presidential campaign in 1980. Handily ousting incumbent Jimmy Carter, the Great Communicator promised to reduce taxes and spending and usher in an era of limited government. Conservative Republicans and Libertarians swooned.
Of course, all the world knows Reagan and the Republicans got it half right. Reagan cut the top tax bracket from 70% to 28%, and tax revenues — for those of you in West Palm Beach, revenue is money collected by a government — actually doubled during Reagan’s eight years. Sadly, government spending outpaced income during the 1980s as Reagan ran up record-setting deficits. The GOP became the party of “spend but don’t tax.” Republicans blamed Reagan’s red-ink on the arms race which successfully bankrupted the Soviet Union, winning the Cold War without a shot being fired, if you don’t count Korea, Vietnam, and a host of smaller dust ups.
Fiscal conservatives took heart in 2000 when George W. Bush’s victory put Republicans in control of both Houses of Congress and the White House for the first time since I Love Lucy hit the airwaves. Now we’d show the world what responsible, limited government looks like! Nearly eight years later, rank and file Republicans are shaking their heads; “W’s” deficits make Reagan’s look infinitesimal by comparison. President Bush has more than doubled the national debt during his tenure, and the red ink will spill over into the next administration no matter who wins in November. Now, the War on Terror is our excuse for Bush’s extravagant spending (there’s always something), but Medicare Part D — government subsidized drugs for seasoned citizens — No Child Left Behind, record-setting pork, and Bush’s refusal to veto a single bill for 6 years are the real culprits. Unfortunately, there is even more bad news on the horizon.
Incredibly, the nation may turn to the Democrats to straighten things out, a move akin to asking the fox to guard the hen house. According to the McClatchy Newspapers, “both Democratic presidential hopefuls are promising massive new spending without providing details on how they’d pay for it.” That Clinton’s and Obama’s message sounds good to at least half of American voters is one more reason logic and economics should become integral components of K-12 education. In fact, the attractiveness of resurgent tax and spend policies is the bitter legacy of 20+ years of Republican fiscal buffoonery.
Both Clinton and Obama are proposing at least $200 billion of additional annual federal outlays. Moreover, both promise to reduce federal tax on the middle class, a move that can only add to budget woes. Both candidates claim the new spending can be “paid for” by getting out of Iraq and taxing the rich. There are just a couple of problems with that approach.
One, expenditures in Iraq and Afghanistan are currently financed with borrowed money, mostly from China, Saudi Arabia, and Japan. Re-directing that money to domestic issues like health care, no doubt a more popular and arguably better use of the money, does not address the underlying problem of deficit spending. Moreover, absent a complete collapse of democracy in Iraq, America will have a significant military presence there for decades. Remember friends, we still have troops in Germany, Japan, and Korea. On the other hand, a terrorist takeover in Iraq could only lead to additional defense spending; the fanatics will follow us home.
Whatever happens in Iraq, the real flaw in the Democratic plan is to “soak the rich,” a group neither stupid nor impotent. When taxes go up, taxpayers exercise available options to accomplish a goal Democrats are ignorant of: tax avoidance. And, the rich have plenty of ways to protect their wealth, the most obvious being simply to move their money, investments, and commerce off-shore to locations exercising lower tax rates. That sort of financial maneuvering is precisely why tax rate increases never garner the expected amount of revenues, and conversely, why tax rate cuts always result in greater-than-expected tax revenues. Bear with a simple illustration.
Currently, the highest federal tax bracket is 35%. So, for every $100 of income above approximately $350,000 (the beginning point of the highest tax bracket), the feds get $35. Democrats believe an increase of 5% in the highest tax bracket will result in 5 additional dollars flowing into federal coffers: 40% of $100 equals $40. However, if the rich move just 15% of their financial activity off-shore, a 40% tax rate will pull in only $34 (40% of $85 equals $34). That’s how increasing tax rates can result in lower-than-expected tax revenues. Conversely, that’s why President Bush’s relatively modest tax rate cuts, reducing the top bracket from 39% to 35%, resulted in unexpected bushels of increasing tax revenue.
Ironically, the Reagan and Bush (43) years share a similar pattern. Decreasing tax rates produced large increases in tax revenues, squandered in both cases by profligate spending, allocations again in both cases attributed to defense concerns. However, the current version of Democratic tax and spend will not fix our budget nightmare either; the rich will not cooperate, and spending, already out of sight, is about to experience the “Boomer Boost” (you read it here first!) as the love generation begins to draw on Social Security and Medicare. Adding the Clinton/Obama proposals — universal health care and increases in tuition assistance, K-12 funding, science, transportation, child care, foreclosure assistance, and alternative fuel investments — regardless of their merits, will bust the country.
Given both party’s track records since 1933, average Americans have nowhere to look for help out of this wasteful quagmire. Nowhere, that is, except themselves, for people get the government they deserve.
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Posted by Jerry Pomeroy in Budgets, Campaign 2008, Politics, Video