Too many conservatives getting it wrong on debt commission and taxes

Ryan Ellis President, Center for a Free Economy
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When the Simpson-Bowles Obama Commission “chairman’s mark” came out last week, there were far too many conservatives who were too quick to say nice things about it. Blinded by lower marginal tax rates and some entitlement reforms, they chose to ignore the fact that the plan is a ten-year tax hike of over $1 trillion, and would saddle taxpayers with a taxes-to-GDP ratio of 21 percent, the highest in American history. A week later, the Rivlin-Domenici commission released their report with a $500 billion tax hike. Americans for Tax Reform actually produced our own (balanced) budget plan that cuts spending and cuts taxes in a reasonable way. But it’s worth reflecting on what too many on the Right said about the “higher taxes” plans for almost-balanced budgets.

To be sure, many conservatives got the story correct: Dan Mitchell, Chris Edwards, Keith Hennessey, and Michael Cannon, to name a few. But many others expressed a willingness to raise taxes for the political equivalent of a handful of magic beans.

Let’s start with the conservative publication of record, National Review. In an editorial about Simpson-Bowles, the editors said that the net tax hikes are fine since the code is simpler and rates are lower (though obviously not low enough to make up for the tax increases). NR editor Rich Lowry thinks that a record tax burden of 21 percent of GDP is just fine since the deficit goes down and taxes might be even higher than that someday. Yugoslavia’s Tito took a stronger stand against the Soviets during the Cold War.

This was echoed by Jim Pethokoukis of Reuters who wrote that “taxes probably need to be raised to get Democrats in Congress to approve other deficit-reducing measures that involve cutting spending.” In fact, the only way spending cuts are ever really put on the table is if tax hikes are taken off of it. Politicians will always spend at least as much as the new taxes take in, so higher taxes actually lead away from spending restraint, not toward it. Prior bipartisan budget deals (especially the 1990 Andrews Air Force base deal where President George H.W. Bush broke his “read my lips” pledge) always featured fake spending cuts and real tax hikes. They still do every year in state governments across America.

Supply-side icon Larry Kudlow said that the report was “on the right track” despite a hike in the capital gains tax, mostly because he falsely thinks tax deductions and credits are the exact same thing as spending money on people. Actually, letting people keep their own money is very different than putting them on welfare. Josh Barro of the Manhattan Institute would disagree, viewing higher taxes as acceptable assuming you grew the welfare state at least as much.

There were some plaudits from the Right that were just silly. The College Republican National Committee all but endorsed the plan because it “fixes” Social Security (in a way which raises taxes on younger workers and provides no Social Security personal accounts). I’d like to haggle with them at their next yard sale if that’s the negotiating tactics they bring to the table.

Mostly, though, the support parade came from a series of over-educated and politically-naïve free market economists. Cato’s Jagadeesh Gokhale completely ignores the net tax hike, falsely calling it “reform.” Bush-era Social Security czar Chuck Blahous (as usual) is mostly concerned with the Social Security benefits and revenues lines crossing again into “actuarial balance,” and chooses to view the much higher taxes as acceptable collateral damage. Former Bush aides Greg Mankiw and Glenn Hubbard, as well as the Mercatus Center’s Arnold Kling, couldn’t contain their excitement over the net income tax hike with the inadequately-lower rates.

Some have put words in ATR’s mouth to describe our opposition to higher net taxes. Hubbard erects a straw man (that ATR believes that “there is no single activity that can face higher taxation”). This is completely untrue — revenue-neutral tax reform is very much supported by ATR, and our ideal tax system is a broad consumption base with a low, single rate. Veronique de Rugy implies that our opposition to Simpson-Bowles was on the grounds that it didn’t cut taxes (actually, it’s because the plan raises them).

Here’s the real story: come next Congress, 235 House members and 41 senators will have signed the Taxpayer Protection Pledge to their constituents. In so doing, they have bound themselves to oppose and vote against higher net income taxes. Thus, the commission plans revealed so far are simply dead in the water. Virtually no Republican could vote for them without admitting they were lying to their constituents about taxes. They are very capable of voting for tax reform, but that’s not what’s been proposed here.

What’s on the table is a tax hike that happens to lower marginal tax rates as part of the package. The fact these rate reductions occur in a net tax-hike context makes all the difference in the world.

ATR has proposed an alternative scenario using CBO numbers and common sense. Rather than raise taxes, let’s prevent tax hikes from happening in January. Furthermore, let’s repeal Obamacare and its tax hikes, as well as the Obama middle class promise-breaking tobacco tax hike of 2009. Let’s do some revenue-neutral corporate income tax reform which results in a broad base and a federal rate in the teens. The rate at which a majority of small business profits is taxed would remain at 35 percent. The capital gains and dividends tax would stay at 15 percent. The death tax would still be dead. The marriage penalty wouldn’t get worse, and the child tax credit wouldn’t be cut in half. Small firms could continue to write off capital purchases the first year, and larger companies could expense half the value. The AMT would not grow. The result would be a tax system that contributes to economic growth instead of retarding it.

On the spending side, we think voters called for the government to roll back the excessive spending of the Pelosi-Reid-Bush-Obama era. Our plan does this. All entitlement spending (besides Social Security and Medicare, which are better addressed in a long-term budget plan like Congressman Paul Ryan’s “American Roadmap”) is rolled back to 2008 levels and block-granted to the states (just like welfare in the 1990s). Discretionary spending is also brought back to the ancient past of 2008. Each is frozen indefinitely at these levels.

The result is a balanced budget by the middle of this decade, and surpluses after that. Federal tax revenues climb back up to their historical levels, and avoid the economy-crippling hikes of Simpson-Bowles and Rivlin-Domenici. Federal spending comes down to the level of taxation rather quickly. This is what conservatives should be for, not appeasement of big government. If the tea party and their election taught us anything, it’s that conservatives in Washington should use our knowledge and influence to change government, not accommodate ourselves to it.

Ryan Ellis is the Tax Policy Director at Americans for Tax Reform.