Tax Forms 2

Reckless Spending is the Real Cause of America’s Fiscal Problem

Yesterday, Senator Lindsay Graham (R-SC) said on ABC that he would violate his pledge not to raise taxes in order to secure a deal to avert the so-called fiscal cliff.  He said he’d be willing to “raise revenue” by capping deductions, but not by raising tax rates.  The caveat is that he’ll violate the pledge “only if Democrats will do entitlement reform.”

Sen. Graham explains that he will  go back on his pledge “for the good of the country.” He doesn’t want us to end up like Greece.  To be sure, we share that sentiment.  However, if he has the good of the country in mind, his solution is misguided. 

It’s true; raising tax rates is not the answer, but neither is placing an arbitrary cap on deductions.  Why?  Both are oriented toward raising revenue.

In case you haven’t noticed, raising revenue in this country only ever leads to more, and more, and more… and more spending!  We clearly have a problem with spending money we don’t have (evinced by our $16 trillion debt.)

While some folks, like President Obama, may not think this is a big problem, it is.  That’s why we refer to it as a crisis.

Entitlement reform is sorely needed in this country.  Without real reform, entitlement spending will double by 2050.  The cost of Medicare, Medicaid, and Social Security, as well as Obamacare subsidies will be 19% of our entire GDP.  What does this escalation in spending lead to?  It inevitably leads to higher taxes, which will be a hard blow to younger workers, especially.

But again, tax hikes are not the answer; nor is capping deductions, which is just another way to soak “the rich.”

Heritage’s J.D. Foster explains what the central goal of tax reform is: a stronger economy.   He also explains:

The basic rule is that tax reform should be revenue neutral. The simple mantra is that the base must be expanded to become more economically neutral and that marginal tax rates must be lowered.”

On this point, conservatives and Republicans can agree, but some Republicans, like Sen. Graham think that we can raise revenue through deductions and that that will be great for the economy.  This is an erroneous assumption.

Foster explains:

The purpose of taxation is to raise revenues for the government to spend. The multitude of deductions, exemption, credits, and special rules in the federal income-tax law are sometimes characterized as “spending through the tax code.” In the current budget debates, this has led some to suggest that federal spending could be reduced by eliminating tax loopholes. In most instances this line of argument is deeply and fundamentally flawed, as there are few true examples of spending through the tax code, and many of these involve income-support payments to lower-income citizens. Thus, the only way to cut spending materially is to spend less.”

Raising revenues through deductions is a political sleight of hand.  It may work on an Excel spreadsheet, but it’s not a real solution to our fiscal problems.  Lawmakers from both sides of the political spectrum need to take time to fully understand the implications of the solutions they are suggesting.

It’s not good enough to simply throw ideas out because they sound nice.  These solutions have to actually work, too.  And raising revenue to solve our fiscal crisis won’t work.

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