The fiscal cliff debate has centered on talk of raising taxes on high-income Americans. The silence on spending cuts has been deafening.
On Monday, as if on cue, came investor Warren Buffett’s rehashed—albeit flat-out wrong—proposal to raise taxes on the wealthy. Even though the Obama Administration has said both sides must make tough choices and put everything on the table, it has embarked on a photo-op-studded campaign for tax hikes. The irony is befuddling.
Washington has a spending problem, not a tax revenue problem. Spending is well above its historical average level and is projected to remain high over the next decade. It gets worse thereafter, as entitlement programs and net interest costs send total spending soaring to 43 percent of the economy, up from 23 percent today. Meanwhile, tax revenues are projected to return to their historical level as the economy recovers and more Americans return to work.
The Obama proposal to reduce the deficit by taxing the wealthy would kick the legs out from under a struggling economy by hurting the very job creators and investors that the economy needs most right now. According to a study by Ernst and Young, 710,000 fewer jobs would be created in the long run—that on top of the 12.3 million Americans out of work today.
Taxing the wealthy to solve the fiscal cliff crisis and reduce the deficit just won’t work. Trying to close the 2035 deficit through the top two tax rates, for example, would mean raising those rates to 159 percent and 166 percent. Setting aside the economic damage that would ensue, notice anything odd? That’s right: Those rates are mathematically impossible. (continues below chart)
Because that policy is unworkable, taxes would necessarily have to be raised across the board and kept high in perpetuity to pay for the projected increases in federal spending. That translates into a more than twofold increase of all tax rates, not just the highest one. (continues below chart)
Even though no one is proposing to solve our fiscal problems solely through tax increases, no one—especially the President—is talking seriously about necessary spending cuts. White House press secretary Jay Carney recently pulled Social Security off the negotiation table, saying it should be discussed “as part of a separate track.” Senator Dick Durbin (D–IL) stated Tuesday that Medicare and Medicaid reforms should not be part of the fiscal cliff solution. Perhaps it would be news to Carney and Durbin that the main entitlement programs made the top four federal spending categories in 2012 and that delaying reforms will make decisions down the road more unpalatable.
The President and lawmakers who constantly dodge opportunities to discuss and propose entitlement program reforms fail to acknowledge that spending on the major entitlements is untenable.
No amount of tax increases can pay for the projected entitlement program spending increases. Entitlement program reforms must be on the table if we are to ever get our debt and deficits under control. It is time to reframe the fiscal cliff debate and focus on how to cut spending.