Better Budget Math
James Pethokoukis is a blogger and columnist for Reuters, where he focuses on economic issues. He also appears frequently on CNBC and is a former editor at U.S. News & World Report. Pethokoukis is a fierce critic of both high taxes and budget deficits, so we asked him to list three reasons the government can't tax its way out of a fiscal crisis.
1 Voters won't go for it. The Obama- GOP tax deal showed Americans are skeptical of raising taxes on anyone—even the "rich"—and sending more dough to a wasteful government. Another data point: Last November voters in blue-state Washington resoundingly rejected a measure to start taxing the wealthiest 1 percent.
2 The tax-hike math doesn't work. The U.S. economy couldn't survive a doubling of its tax burden. But according to the Congressional Budget Office, that's just what would have to happen to balance the federal budget by 2035 without cutting spending.
3 "Slash and tax" doesn't work either. Just ask the Irish and Greeks. Don't listen to the IMF. Since 1980 almost every nation that has tried to escape its debt trap by raising taxes and cutting spending has failed. Growth slows too much, reducing revenue. A 2009 study by Harvard University's Alberto Alesina and Silvia Ardagna highlights a better path. After examining four decades of austerity plans, they conclude that "those based upon spending cuts and no tax increases are more likely to reduce…debt over GDP ratios than those based upon tax increases." In short: Cut spending and keep taxes low.