Cut Spending or Raise Taxes? Yes

After a bipartisan majority in Congress defeated an increase in the $14.3 trillion debt ceiling last week, Republicans offered Democrats a deal: Cut spending by the amount you want to raise the debt limit. Democrats of course insisted on increasing taxes and leaving alone popular but costly programs, particularly Medicare. Republicans, meanwhile, are prepared to support any domestic spending cut within reason as long as it doesn’t come with a tax hike.

In other words, even with a looming fiscal crisis, legislators continue fighting the tired partisan battles over whether to lower spending or increase taxes. They’re right not to raise the debt ceiling until they can find significant savings; America can’t keep recklessly accumulating debt. But Congress needs a solution to this mess forthwith and — sorry, party faithful — that solution must be a compromise.

It must be so for two reasons. First, no legislation will get anywhere with a Republican-controlled House, a Democrat-controlled Senate, and a Democratic White House unless it’s bipartisan. Second, while government spending must be limited, low taxes don’t help to do that. Yes, you read that right: “Starve-the-beast” doesn’t work and may backfire. The spending cuts conservatives rightly demand may depend on increasing the taxes conservatives rightly hate.

When taxes are low relative to spending, as the libertarian Cato Institute’s William Niskanen tells it, “you make government look cheaper than it would otherwise be.” No wonder the public largely opposes U.S. Rep. Paul Ryan’s proposal to voucherize Medicare, making it less expensive. Right now, Medicare isn’t forcing taxes up and therefore doesn’t feel expensive. Fixing the program before Medicare goes broke will take more foresight than American taxpayers now have. Some kind of tax increase could give them that foresight.

A tax hike’s main purpose shouldn’t be to raise revenue. Suppose we do as Obama wants and end George W. Bush’s tax cuts for those making at least $250,000. We’d bring about $80 billion annually into the Treasury. That’s not too exciting when the deficit is $1.6 trillion. Higher taxes will only help if they spread the pain of big government more evenly among the taxpayers, incentivizing opposition to overspending.

Instead of crudely taking more off the top of American taxpayers’ incomes, lawmakers could repeal inequitable income tax breaks for corporations and individuals and use some of the resulting revenue to lower tax rates. Erskine Bowles and Alan Simpson, in their report as co-chairs of President Obama’s fiscal commission, made a wise recommendation with regard to corporate taxes:

“Corporate tax reform should eliminate special subsidies for different industries. By eliminating business tax expenditures – currently more than 75 – the corporate tax rate can be significantly reduced while contributing to deficit reduction. A lower overall tax rate will improve American business competitiveness. Abolishing special subsidies will also create an even playing field for all businesses instead of artificially picking winners and losers.”

Personal income tax loopholes should also be closed. The Competitive Enterprise Institute’s Eli Lehrer describes the right approach to raising income taxes while making the system fairer:

“The mortgage interest, state/local tax, and health care deductions should and could fairly be considered broad-based features of the tax code. Efforts to limit, cap or repeal them should, for those who support lower taxes, be paired with efforts to cut rates elsewhere. After all, everyone pays some state or local tax, everyone needs health care, and almost everyone buys a home at some point. Elimination of these revenue expenditures will have the same consequence, roughly, as raising marginal rates.”

Then comes the easy part for small-government types like me: Cut, cut, cut government spending. Some kind of Ryan-like plan that reforms Medicare and cuts other domestic expenditures could help achieve this end, but everything should be on the table. The Cato Institute has outlined cuts to even defense spending totaling $1.2 trillion over 10 years. For conservatives, those would surely be the most controversial spending cuts, but the menu of options Cato proposes should at least be considered.

Our leaders must reach some compromise. A default on our debt, which becomes a possibility after Aug. 2, would be a disaster for our economy. Pushing the problem down the road by raising the debt ceiling without a long-term fiscal solvency plan can only worsen the problem. For the common good, all of the powerbrokers in Washington are going to have to give up some of what they want.