The Democratic Party’s fiscal awakening

Sven Larson Contributor
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President Reagan once said, “I’m not worried about the [budget] deficit. It is big enough to take care of itself.” While this was obviously a joke, Reagan did have a good common-sense understanding of the economy. To him, the real world and the real people who populate it were what mattered. He understood that economic growth and full employment would elevate the economy out of the shadow of government debt.

Reagan cut taxes and put his faith in the American consumer and entrepreneur to fix the economy. President Obama takes a completely different approach to the federal debt. Where Reagan let Americans keep more of their hard-earned money, Obama stalwartly demands higher taxes. Apparently ignoring the signals sent by voters in 2010, he even claims that Americans actually want him to raise taxes in order to reduce the deficit and solve the debt crisis.

Thanks to inflation and the expiration of the Bush tax cuts, he may not have to. The Office of Management and Budget predicts that federal income tax revenues will increase by 13 percent per year between 2011 and 2016, the largest five-year revenue increase since the Carter era. Back then, a combination of inflation and ridiculous marginal taxes sent millions of Americans into the territory of confiscatory taxation. That combination also drove the economy into the ditch.

It is easy to draw the conclusion that Obama is expecting inflation and higher income taxes to do the deficit-reduction job for him. Perhaps the president’s tentative challengers in 2012 should take that issue to the American people and ask them, plainly and simply: “Can you afford higher taxes?”

The overwhelming majority would say no, and those who say yes would be invited to voluntarily write an extra check to the IRS.

But the understanding of the merits of fiscal conservatism is no longer limited to Republicans. There is a fiscal awakening under way in the ranks of state-level Democrats. Recently, California Governor Jerry Brown, a Democrat, struck a deal with the Democrat-run state legislature to start closing the budget gap without any net increase in the tax burden on the California economy.

Governor Brown is joined by another Democratic governor, Andrew Cuomo of New York. In December, right after he was elected, Cuomo criticized the Democratic-dominated New York Legislature for kicking the budget deficit can down the road. Since then he has pursued spending cuts and managed to pull together a budget that closed a $10 billion deficit without raising taxes.

Cuomo has also managed to create a cap on property tax increases. Inspired by California’s classic Proposition 13, the Cuomo cap limits property tax increases to 2 percent per year or the rate of inflation, whichever is lower. To get support from the Democratic Party in New York, which is virtually run by the teachers’ union, he had to include an exception for increases to pay for teachers’ benefits. The cap was nevertheless a small victory for fiscal conservatism in a state where “tax and spend” has been a legislative credo for decades.

The only ones who would be surprised by this growing interest in fiscal conservatism among Democrats are the party’s leaders in Washington, D.C. The more they refuse to acknowledge the dire condition of the nation’s economy, the more isolated they will look. As for the president, he can hunker in the bunker and stick to his tax-increase agenda all he wants. Once fiscal conservatism gains enough momentum in his own party, he will make himself irrelevant.

Sven R. Larson is a research fellow with Wyoming Liberty Group, a free-market think tank. He has written two books and numerous research papers and articles about economic policy, state budgets, health reform and the welfare state. He is often interviewed by TV, radio and newspapers on his topics of expertise.