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The 'no-matter-what tax increase' no good

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POSTED: August 4, 2010 9:53 a.m.
White House economic adviser Christina Romer is off-message. Her offense is nearly as grave as that of White House spokesman Robert Gibbs, who let slip that Democrats are in danger of losing the House. Romer’s indiscretion is an academic paper arguing that tax increases kill growth ... just as the White House prepares to increase taxes.
Published with her husband in the June issue of The American Economic Review, Romer’s paper is complicated and nuanced, befitting the work of a serious academic economist. It surveys tax changes during the past few decades in widely varying circumstances. But here’s a crude, two-sentence takeaway: “Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by nearly 3 percent. The effect is highly significant.”
In recent congressional testimony, Federal Reserve Chairman Ben Bernanke warned against spending cuts or tax increases in this “unusually uncertain” economy. Democratic Sens. Kent Conrad, Evan Bayh and Ben Nelson are opposed to letting the tax increases expire next year on similar Keynesian grounds. They are all guilty of thinking about what’s best for the economy, when the rest of the Democrats are thinking about how best to punish the rich.
The rich don’t “deserve” the current tax rates, they’ll say, as if a top income tax rate of 35 percent rather than 39.6 percent is something that has to be earned. Of course, that’s impossible to do if being rich itself constitutes a status offense. There is no expiation from the stain of wealth, no matter how hard someone worked to get there, no matter how many people his business has hired, no matter how much he invests.
Never mind that higher marginal tax rates discourage work and investment. To see how taxes affect behavior, look no further than Massachusetts Sen. John Kerry’s $7 million, 76-foot yacht, which he happens to dock in Rhode Island, where he saves $500,000 in taxes.
The Democrats figure they can tag Republicans who oppose the expiration of the tax cuts as deficit-hypocrites, even after running up $1.47 trillion in red ink this year. In the recent fight over extending unemployment benefits, the GOP wanted to pay for them, while Democrats insisted on adding another $35 billion to the deficit, and prevailed. Despite the scorn they heap on the “Bush tax cuts,” Democrats want to extend the vast majority of them on the middle class, at a 10-year cost of $1.5 trillion.
Where to look for spending cuts to offset maintaining the Bush upper-end tax cuts? Unspent stimulus dollars and the other new spending that has hiked federal expenditures to 25 percent of GDP, the highest level since World War II. Thanks to President Barack Obama’s exemplary profligacy, we have been reminded that government spending is not a durable basis of growth. Even Treasury Secretary Timothy Geithner said just the other week that “we need to make that transition now to a recovery led by private investment.”
A tax increase is not the best way to start, as any reader of Christina Romer’s work knows.

Lowry is editor of the National Review.
 

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