Some lawmakers, led by Senate Budget Committee chair Patty Murray (D–WA), are seeking to raise taxes in the budget conference to replace the modest spending reductions referred to as sequestration. They say that spending cuts hurt growth and jobs.
If they are truly concerned about the economy and Americans’ opportunities, their approach is misguided for a number of reasons.
Based on new research by Heritage economist Salim Furth, PhD, here are just three reasons why replacing sequestration spending cuts with tax increases is a really bad idea:
- Tax increases hurt economic growth and jobs. At a recent Heritage symposium on European austerity, three economists from Harvard University, the International Monetary Fund, and the American Enterprise Institute all acknowledged that tax increases can cause deep and immediate economic losses. Had the $85 billion in sequestration spending reductions in 2013 been replaced with tax increases, the estimated costs for the economy range from $57 billion in output and 320,000 jobs to $240 billion in output and 1.3 million jobs. That would have been a sizable loss for a still struggling economy.
- Replacing tax increases with spending cuts is better for economic growth and jobs. The payroll, Obamacare, and fiscal cliff tax increases add up to more than $3 trillion over the next decade. In contrast, the sequestration spending cuts would reduce spending over that same period by a little over $1 trillion. According to Furth’s analysis for 2013, had Congress implemented more spending cuts instead of raising taxes, “the economy would have generated from $130 billion to $520 billion more in [gross domestic product] by the end of 2014 and added between 700,000 and 2.9 million jobs.” The long-run benefits from cutting bloated government spending are even greater, as the resources no longer squandered by bureaucrats are put to work much more efficiently by private individuals and businesses.
- A tax-and-spend approach is a recipe for economic stagnation. Politicians suggesting that part of the sequestration spending cuts be replaced with tax increases are simply asking to “tax and spend.” They argue that the deficit-reduction goals would be accomplished either way. But too much government spending and too high taxes hurt economic performance. Reducing the deficit with a massive tax increase rather than by limiting spending is a recipe for economic stagnation. The long-term health of the economy depends on limiting the size and scope of the government.
Congress can restore needed defense capabilities without breaching the Budget Control Act’s reasonable spending limits in the process. There are myriad government programs where Congress can save money to allocate toward greater priorities.
In order to succeed, lawmakers should heed a few principles necessary for a good outcome. Raising taxes is not one of them.