The Republican chairman of the House Budget Committee made news recently by announcing that if his party is serious about changing the fiscal path we are on, they'll have to consider raising taxes. Politics is about compromise, so the chairman is right. Every side must give a little. However, "putting taxes on the table" is not as simple a fix to our debt problems as some think.

Looking at recent Congressional Budget Office reports, one can have no doubts about the fiscal mess. Annual deficits of $2 trillion will soon be the norm. Interest payments on the debt will exceed both defense and Medicare spending this year and become the government's largest budget item. With no extra revenue available, the Treasury will have to borrow money to cover these expenses. Meanwhile, we're speeding toward a Social-Security-and-Medicare fiscal cliff that we've known of for decades, and we'll reach it in only a few years.

Talking about the need for a fiscal commission to address Washington's mountain of debt, the committee chair, Rep. Jodey Arrington (R–Texas), told Semafor, "The last time there was a fix to Social Security that addressed the solvency for 75 years, it was Ronald Reagan and Tip O'Neill, and it was bipartisan. It had revenue measures and it had program reforms. That's just the reality." He made these comments after some people warned that a fiscal commission is a gateway only to raising taxes.

I understand the worry. That's what the most recent deficit reduction commission tried to do. And while I don't believe this is what Arrington is planning, I offer a warning to the chair and to the future commission: If the goal is truly to improve our fiscal situation, as defined by reducing the ratio of debt to gross domestic product (GDP) or reducing projected gaps between revenue and spending, increasing tax revenue should be limited to the minimum politically possible.

For one thing, our deficits are the result of excessive promises made to special interests—mostly seniors in the form of entitlement spending—without any real plans to pay. The problem is constantly growing spending, not the lack of revenue and taxes. The common talking point from the left that rich people don't pay their fair share of taxes is a distraction. Not only is our tax system remarkably progressive, but there are not enough rich people to fleece to significantly reduce our future deficits.

Furthermore, the work of the late Harvard economist Alberto Alesina has established that the best way to successfully reduce the debt-to-GDP ratio is to implement a fiscal-adjustment package based mostly on spending reforms. A reform mostly geared toward tax increases will backfire as the move will slow the economy in the short and longer terms, causing it to ultimately fail to raise enough revenue to reduce the debt relative to GDP. Legislators, unfortunately, have made this mistake many times without learning any lesson—at least until the deal that was cut in 1997.

As a 2011 New York Times column by Catherine Rampell reminded us, until then, all deficit-reduction deals were very tax-heavy. What the article didn't mention is that they failed to reduce the deficit. What distinguishes the 1997 deal is that it cut both spending and taxes. The result was the first budget surplus in decades helped by a fast-growing economy. Now, this lesson doesn't mean that a fiscal commission must cut taxes, but it does caution against attempting to reduce the debt largely by raising taxes.

Another risk looms in the idea of a tax-and-spending compromise; that the tax increases will be implemented while the spending cuts won't. We have many examples of this pattern, but I'll recount just one: In 1982, President Ronald Reagan made a deal with Congress (the Tax Equity and Fiscal Responsibility Act) which would have raised $1 in revenue for every $3 in spending cuts.

There were tax hikes, indeed. But instead of spending cuts, Reagan got lots of spending increases. Remembering the story years later in Commentary magazine, Steven Hayward wrote, "By one calculation, the 1982 budget deal actually resulted in $1.14 of new spending for each extra tax dollar."

The moral of this story is that putting revenue on the table to reduce the debt has a bad track record. As such, the chairman, who I believe is serious about putting the U.S. on a better fiscal path, will have to be careful about whatever deal is made.

COPYRIGHT 2024 CREATORS.COM.

The post A Bipartisan Tax Hike Won't Fix This Deficit appeared first on Reason.com.

America is celebrated for its economic dynamism and ample and generously paid employment opportunities. It's a nation that attracts immigrants from around the world. Yet Americans are bummed, and have been for a while. They believe that life was better 40 years ago. And maybe it was on some fronts, but not economically.

Surveys repeatedly demonstrate that Americans view today's economy in a negative light. Seventy-six percent believe the country is going in the wrong direction. Some polls even show that young people believe they'll be denied the American dream. Now, that might turn out to be true if Congress continues spending like drunken sailors. But it certainly isn't true based on a look back in time. By nearly all economic measures, we're doing much better today than we were in the 1970s and 1980s—a time most nostalgic people revere as a great era.

In a recent article, economist Jeremy Horpedahl looked at generational wealth (all assets minus all debt) and how today's young people are faring compared to previous generations. His findings are surprising. After all the talk about how Millennials are the poorest or unluckiest generation yet, Horpedahl's data show them with dramatically more wealth than Gen Xers had at the same age. And this wealth continues to grow.

What about income? A new paper by the American Enterprise Institute's Kevin Corinth and Federal Reserve Board's Jeff Larrimore looks at income levels by generation in a variety of ways. They find that each of the past four generations had higher inflation-adjusted incomes than did the previous generation. Further, they find that this trend doesn't seem to be driven by women entering the workforce.

That last part matters because if you listen to progressives and New Right conservatives, you might get a different story: that today's higher incomes are only due to the fact that both parents must now work in order for a family to afford a middle-class lifestyle. They claim that supporting a family of four on one income, like many people did back in the '70s and '80s, is now impossible. Believing this claim understandably bums people out.

But it's not true. One of its many problems, in addition to the data evidence provided by Corinth and Larrimore, is that it mistakenly implies that single-income households were the norm. In fact, as early as 1978, 50 percent of married couples were dual earners and just 25.6 percent relied only on a husband's income. I also assume that there are more dual-income earners now than there were in the '80s. While this may in fact be true for married couples (61 percent of married parents are now dual-earners), because marriage itself has declined, single-earner families have become relatively more common.

Maybe the overall morosity on the economy has to do with the perception that it's more expensive to raise a family these days than it used to be. Another report by Angela Rachidi looks at whether the decline in marriage, fertility, and the increase in out-of-wedlock childbirths are the result of economic hardship. She finds that contrary to the prevailing narrative, "household and family-level income show growth in recent decades after accounting for taxes and transfers." Not only that, but "the costs of raising a family—including housing, childcare, and higher education costs—have not grown so substantially over the past several decades that they indicate an affordability crisis."

So, what exactly is bumming people out? We may find an answer in the 1984 Ronald Reagan campaign ad commonly known as "Morning in America." It begins with serene images of an idyllic American landscape waking up to a new day. It features visuals of people going to work, flags waving in front of homes, and ordinary families in peaceful settings. The narrator speaks over these images, detailing improvements in the American condition over the past four years, including job creation, economic growth, and national pride.

I believe this feeling is what people are nostalgic about. It seems that they are nostalgic about a time when America was more united and it was clearer what being American meant. Never mind that this nostalgia is often based on an incomplete and idealized memory of an era that, like ours, was not perfect.

This is a serious challenge that we need to figure out how to address. One thing that won't help, though, is to erroneously claim that people were economically better off back then and call on government to fix an imaginary problem.

COPYRIGHT 2024 CREATORS.COM.

The post The Economy Is Doing Way Better Than Many Believe appeared first on Reason.com.