The Deficit’s Dark Secret

Wednesday September 8th, 2010   •   Posted by Emily Skarbek at 5:37pm PDT   •  

DebtThe New York Times on Monday, columnist Peter Orszag addresses the important issue of the the unsustainable budget deficit problem and the current high unemployment. What Orszag suggests as a “compromise” neglects the heart of both problems.

Orszag suggests that “ideally only the middle-class tax cuts would be continued for now” but that doing so might politically require cutting the taxes of the top income bracket earners too. Such a political compromise, in Orszag’s mind, would be worth it.

Orszag’s article is interesting because it exposes the dark secret of the political economy of deficit spending.

The arguments put forth for cutting taxes for the middle class—stimulating consumer spending, creating a better investment climate, reducing uncertainty facing small businesses and entrepreneurs who are postpones hiring—are all are equally applicable to tax cuts for the families in the top income brackets. So why not cut taxes for everyone?

Like Orszag, many believe that discriminatory taxation is an acceptable position. But few realize that currently 46.9% of tax paying families pay ZERO federal taxes. This simply means that if the majority of voters receive benefits without incurring costs, they will demand more benefits. This dark secret goes a long way to understanding the fiscal situation America is currently in and why decreasing federal expenditures has to be part of the equation.

The unfortunate part of this dark secret is that people who support highly progressive taxation assume that the least well off in society benefit from this arrangement. Unfortunately the political system as it is now awards tax dollars to special interests and squeaky wheels. Becoming the loudest interests group in Washington takes a lot of money and resources, and as such, it means that the squeaky wheels are not the least well off in society.

I agree with Orszag—the fiscal trajectory is unsustainable. But lower taxes benefit everyone and critical reductions are going to have to come from the spending side to be effective.

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September 2010
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