Commentary: 'Cutting taxes' is no longer a solution
This article first appeared in the St. Louis Beacon, Feb. 27, 2009 - We've grown accustomed to our entitlements. Too bad we don't want to pay for them.
It seems that to get re-elected, Democrats utter the phrase "no tax increase." For Republicans, the mantra is "lower taxes." Unfortunately, this political pandering stands in stark contrast to reality. If we are not willing to reduce the coverage of programs such as Medicare or Social Security, taxes must rise to meet future funding needs.
Tax revenues (federal) are about 18 percent of gross domestic product (GDP). Based on the current tax structure, most forecasts project revenues to remain at about this level. That, of course, assumes that the economy returns to its long-term trend of growth.
When federal spending gets projected out into the future, it is anything but flat. Until the recent surge in spending and the economy's plunge, federal spending was about 20 percent of GDP. The Center on Budget and Policy Priorities projects spending to increase to 25 percent of GDP by 2025, and to more than 35 percent by mid-century. With tax revenues not growing, the result will be a massive, structural deficit.
How can we stave off this outcome? One answer is bite the bullet and cut future spending on entitlements. That's political suicide in an aging population.
Even the esteemed conservative Ronald Reagan wouldn't go there. Even though he cut taxes on income, he engineered one of the biggest tax increases to fund Social Security. It was camouflaged, but we are still paying for his decision.
Cutting spending won't work because we have become too accustomed to our handouts. Upcoming generations have come to expect a smooth ride.
In academics we see it as grades for effort. A study conducted by researchers at the University of California Irvine found that nearly two-thirds of students interviewed firmly believed that trying hard in class warranted at least a B. Try hard, live long and someone will take care of you.
We also have become accustomed to having someone else solve our problems. Referring to the current economic mess, New York Times columnist Paul Krugman asked the not-so rhetorical question "Who'll stop the pain?" His answer wasn't American ingenuity or gumption. His answer was more government intervention. Suppose he means the same government that gave us the response to Katrina?
Could we fund entitlements by cutting spending elsewhere? No, that requires prioritizing. As the wrangling over the stimulus package aptly demonstrated, setting well-defined and transparent priorities isn't in Washington's playbook.
But we are not much better. What's your preference? Better education for your children or more mass transit? More health care coverage for your aging parents or safer bridges? The economic pie is not unlimited. Not everyone will get everything they want. Mick Jagger was more prescient than anyone thought possible.
Public services, government programs to house and medicate the old and poor are not manna from heaven. If we collectively want more government in our lives -- and it seems we have voted that way -- then raising taxes is a must. Can't have it both ways. And while removing tax breaks for the wealthiest 2 percent of Americans is a nice populist gesture, it won't even put a dent in the problem.
President Obama, not candidate Obama, must initiate the tax-increase discussion soon. And when the conversation begins, Republicans and conservatives need to stop acting like petulant back-benchers.
Since many of them cast votes that created the imbalance between public programs and the revenues to pay for them, the least they can do is step forward with constructive solutions. And no, "cut taxes" is not an option.
Rik Hafer is distinguished research professor and chair of the Department of Economics and Finance and director of the Office of Economic Education and Business Research at Southern Illinois University Edwardsville.