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LAMBRO: Remedial economics for Democrats
Raising taxes lowers federal revenue
President Obama and the Democrats still don't get it. They laid down their budget markers this week, seeking to impose nearly $1 trillion in new taxes on an economy that's still struggling to get back on its feet.
Squeezing even more money out of a weak economy whose growth was virtually zero in the last three months of 2012 -- and that forecasters say will grow by no more than 1 percent to 2 percent this year -- is the height of irresponsibility.
In his meetings this week with Republicans on Capitol Hill, Mr. Obama once again outlined the same tax demands he made in December for at least three-quarters-of-a-trillion dollars to, in part, replace the spending cuts forced by last month's sequester law. Senate Democrats want even more money taken out of the economy, about $1 trillion in "new taxes" over the next 10 years. Their plan, unveiled Wednesday, would add $5.2 trillion to the federal deficit over the coming decade.
House Republicans have proposed $4.6 trillion in future budget savings by repealing Obamacare and reforming entitlements, producing a budget surplus by 2023. The heart of the GOP's budget plan is an overhaul of a dysfunctional, wasteful, anti-growth tax code to end hundreds of special-interest exemptions, deductions and other costly loopholes -- from billions in corporate welfare to narrowly drawn giveaways to Hollywood moviemakers.
This would yield large amounts in new revenues to help offset reductions in the 35 percent corporate tax rate -- the highest in the industrialized world -- and other tax-cut incentives to spur job-creating capital investment and stronger economic growth.
Republican leaders say this must be part and parcel of any budget reforms. The White House and Senate Democrats want the higher tax revenues first and then the budget cuts. Sure. We've been down that road many times before, only to see spending and debt soar into ever-higher orbit.
Four years ago, the government was spending more than $3 trillion a year. Four years from now, Mr. Obama will leave office with annual expenditures of nearly $4 trillion.
I know I've sounded like a broken record on this issue, but boosting higher economic growth, in addition to cutting spending, is the critical element that's been missing from this budget debate. It gets scant attention from either side of the aisle.
"[G]iven the low probability that Congress will make deep cuts in spending, it's only through stronger economic growth and more tax revenues that the government is likely to make significant inroads in the $1 trillion budget deficit," writes economic analyst Diana Furchtgott-Roth, senior fellow at the Manhattan Institute.
Mr. Obama rarely talks about economic growth. It's not in his political vocabulary or in his economic policies, which have failed to reduce unemployment rates to more customary levels. His relentless, political mantra is to raise taxes to pay for his liberal vision of a larger and more costly cradle-to-grave welfare state.
He sold his flimflam ideas to enough voters in just a handful of swing states by appealing to America's sense of tax fairness, falsely charging that wealthy Americans were not paying their fair share. In fact, the top 20 percent of all income earners pay almost all of the income taxes.
Capitol Hill Democrats, as they have for decades, seem determined to snuff out what little growth is left in the economy with even higher tax rates than we have now.
Haven't we learned enough painful lessons from past tax increases that when you raise taxes on just about anything, it will ultimately bring in less revenue?
Remember the 10 percent luxury tax Democrats slapped on all boats costing more than $100,000 in 1991? Then-Senate Democratic Leader George J. Mitchell and Sen. Ted Kennedy, just like Mr. Obama, gleefully declared that rich yacht owners would finally be forced to pay their fair share. The higher tax was also levied on expensive cars, furs and private planes.
It turned out, though, that people bought a lot less of these luxury items, and the higher tax rates brought in far less revenue than was projected. Boat industries in Mr. Mitchell's home state of Maine and in Kennedy's Massachusetts were hit hard. Sales fell by 77 percent, and boat builders laid off 25,000 workers.
It wasn't long before the Democratic tax-hikers heard from angry, unemployed boat builders who weren't wealthy, and the taxes were repealed a few years later.
The Obama Democrats are hooked on their need for even more taxes to feed their growing addiction to ever-higher spending. Earlier this year, with strong Democratic support, Congress approved higher income and capital-gains taxes on Americans with incomes of more than $400,000.
The record shows, however, that whenever capital-gains taxes are raised, it brings in less revenue, not more, as investors tend to hold on to stocks and their other assets in order to avoid the larger tax bite. When the rate is cut, they tend to take advantage of the reduction and sell, boosting capital-gains tax revenues.
When President Clinton signed a GOP-passed capital-gains tax cut in 1997, lowering the tax from 28 percent to 20 percent, revenues grew by 18 percent.
"One of the worst things you can tax is capital formation," says Will McBride, chief economist at the nonpartisan Tax Foundation. "When you increase the capital-gains rate, you increase the tax on using equities to finance investing."
Raising taxes takes money out of the economy, which, in turn, means slower economic growth that results in higher deficits and more debt.
Mr. Obama and the Democrats are still selling their snake-oil tax remedies, but there are signs that the president is losing the public's trust on the economy, a Washington Post poll found this week.
He had held a large, 18-percentage point advantage over congressional Republicans on whom Americans trusted more to handle the economy. Now, it's a nearly even split -- 44 percent for the president and 40 percent for the GOP.
The debate over the budget is in its early stages, but the battle lines are tightly drawn on taxes. Mr. Obama has got all the new tax revenue he's going to get, say House GOP leaders. Any new money must come from tax reform that lowers tax rates to spur stronger economic growth.
Donald Lambro is a syndicated columnist and contributor to The Washington Times.
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