FOR ALL the painstaking deliberation that goes into planning the federal budget, there’s only one side of fiscal policy that voters truly respond to en masse: those nasty little things called taxes. Nobody likes paying them, and no doubt politicians hate talking about them. Even in an extraordinary year such as this, with a mess on Wall Street and talk of temporarily nationalizing American banks, the bottom line is that citizens want to know what price tag they will bear.
Since this is a presidential election year, taxes have moved to the fore of political discussion. Both Sen. McCain and Sen. Obama have spent months crafting policies that will be sustainable and functional. Wait, did I say functional? I meant palatable, of course. Anyone running for public office these days understands that winning an election isn’t about finding long-term solutions to problems; it’s about giving the people what they want, right now.
The reason for this knee-jerk reaction to taxation is that it is perhaps one of the most fundamental economic interactions between government and civilian. Sure, people would like their elected officials to provide them with benefits such as job security, but most recognize this is an indirect responsibility of a government — if it is to be considered a responsibility at all. An administration presiding over a period of high unemployment is unfortunate; one that inflicts high taxes on its citizens is committing blasphemy.
With this in mind, it is understandable that neither candidate will be upfront about raising taxes, especially on the middle class. Yet the reality is that our government needs money badly, regardless of who is elected. For the Democrats the reason is obvious: They propose universal healthcare, better welfare benefits, federal investment in alternative energy research, etc. All of this will require a substantial amount of cash. Republicans (or at least true conservatives), on the other hand, argue that they can reduce the tax burden simply by cutting spending and waste. A noble goal, sure, except for one fatal flaw: At my last check, the U.S. was roughly $10,300,977,985,808.25 in debt. For those whose eyes just glazed over, as mine did, that number is about $10.3 trillion. I could write another column citing all the reasons why continuously deferring our financial obligations is toxic. Suffice it to say, officials have gotten comfortable with the idea of not having to pay for their follies. Perhaps the War in Iraq was absolutely necessary, and maybe giving health insurance to everyone is a great initiative. But isn’t it possible that people and politicians alike might be much more discerning if they knew the true cost of such measures? Unfortunately, that price almost certainly won’t be realized until our generation is the one paying it.
Just for fun, let’s pretend for a moment that either McCain or Obama had the gall, once in office, to enact some sensible fiscal policies. The need for reduced spending is clear, but what might the tax side of the equation look like? With the goal of maximizing revenue in mind, the typical gut reaction is to institute a major hike in rates, plain and simple. Two things complicate this picture though. The first is simply the intricacy of the tax code, due to the progressive marginal rate system and the plethora of credits offered. Raising taxes across the board would require a bit of playing around with the numbers if it was to be meaningful at all.
The second thing is a much bigger problem, and that is the Laffer Curve concept. As ECON 202 alumni can proudly recall, this little idea is pretty straightforward. Simply put, at a certain tax level, raising rates won’t increase revenue for the government. Generally this is because as income decreases relative to increased production (due to punitively high taxes), people and companies are less likely to do extra work. That means there is less income to tax, and as a result, of course, less is collected. Another consideration is that once taxation on the wealthiest Americans reaches a certain point, those with the money will find it expedient to hire accountants and attorneys to find tricks to downsize their bill. A similar Laffer effect occurs with raising the corporate income tax. Rather than just pay up, companies will often move operations to countries offering a more “hospitable” business environment.
Indeed, it’s all enough to make your head spin. It just goes to show that when Democrats disparage “tax cuts for the wealthy” or Republicans justify slashing rates by promising to cut spending, nothing is ever as cut and dry as they would have you believe. It would help everyone if policy advisors spent more time researching different methods to see which ones worked best and less time fine-tuning campaign messages. The catch is that such an approach won’t win any elections until we as a people say “enough is enough.” Securing our future depends on us holding our politicians to higher standards than we currently do.
Ross Lawrence is a Cavalier Daily associate editor. He can be reached at r.lawrence@cavalierdaily.com.
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