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FOSTER: Feel-good tax hikes are bad economic policy

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ANALYSIS/OPINION:

"What I'm not going to do is extend the Bush tax cuts for the wealthiest 2 percent that we cannot afford and according to economists will have the least positive impact on the economy."

So proclaimed President Obama in his first post-election news conference.

Far worse than the statement's inelegant phrasing is its content. Much of it is patently wrong. So let's unpack it, starting with the assertion that we can't afford not to raise taxes on the wealthiest 2 percent.

The president's dead-on-arrival 2012 budget proposal (it attracted not even one Democratic vote) would raise $835.6 billion in revenues over 10 years by letting some of the Bush tax cuts expire for taxpayers with incomes above $250,000. For the sake of argument, let's ignore the damage this would do to the economy. Instead, we'll assume (1) the higher rates would raise that much money and (2) all of the proposal's never-gonna-happen spending cuts and other budget gimmicks actually happened.

Even by the president's own projections, publicly held federal debt would still increase by $7.7 trillion over the next decade. Without the tax increase, the debt would increase by $8.5 trillion. Put another way, Mr. Obama's prized tax hike trims his projected deficit by less than 10 percent.

Clearly, Mr. Obama's tax hike, the centerpiece of his budget proposals, is essentially meaningless for reducing the budget deficit. The demand to raise taxes on "the wealthy" reflects his vision of social justice, not rational economics or budget policy. If the president were truly concerned about the deficit, his budget proposal would focus on what's causing the deficits: excess spending and a weak economy. Yet he proposes higher spending.

And what about the claim that, "according to economists," eschewing tax hikes for the wealthiest "will have the least positive impact on the economy?" Apparently, Mr. Obama talks only to the same economic advisers he's been heeding the last four years.

These same economists told us the 2009 stimulus would drive down the unemployment rate. It didn't. They told us the payroll tax holiday would create jobs. It didn't. Now, they tell us, raising taxes won't hurt the economy. Three strikes and you're out.

Far from being irrelevant, of all the Bush-era tax cuts, the reductions in the top rates are the most effective for boosting economic growth because they strike at the very heart of the economic dynamic — incentives. Higher tax rates discourage entrepreneurship and risk-taking. They discourage work effort by the nation's most productive citizens and saving by those most capable of saving.

The well-to-do are sensitive to tax rates precisely because they have the greatest capacity to adjust their behavior, to take fewer business risks, to work fewer hours or retire, to save less because they already have accumulated wealth.

With metaphysical certainty, raising tax rates will slow the economy. Whether it produces a recession or not depends on how weak the economy is as it faces this new headwind. Hopefully, the economy will be strong enough to take the hit — if it occurs — and keep growing.

A great irony in American economic policy is the liberal belief that tax policy changes behavior only when they want it to change behavior. Thus, they embrace a carbon tax, because it will create incentives for businesses to move away from carbon-producing activities.

But when it comes to raising taxes on small-business owners and investors — the real job creators — they would have us believe it would induce no meaningful change in behavior. Soaking the rich, it seems, is a consequence-free indulgence.

The nation cannot afford to continue its current spending spree — much less amp it up as the president proposes. The nation's workers cannot afford the additional upward pressure on unemployment that would follow a hike in tax rates. And it certainly can not do so based on a policy of envy and spite.

J.D. Foster is the Norman B. Ture Senior Fellow in the Economics of Fiscal Policy at the Heritage Foundation (heritage.org).

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