There is a so-called fiscal cliff that is coming on January 1, 2013 that is being widely discussed. I have written on this before and I will probably hammer home this point another 10 times before the year is over. There is a widespread myth being spread that must be extinguished.
This fiscal cliff is a combination of increased taxes and spending cuts. There are many taxes starting or going higher. These include federal income taxes, Social Security payroll taxes, and new taxes from Obamacare. The spending cuts are supposed to go into effect as a result of a “deal” that was made last year to increase the debt limit.
Tax increases and spending cuts are being lumped together. They are both seen as steps to lower the deficits. They are both seen as bad for economic growth. The first point about deficits may or may not be true. The second point about economic growth is false. Although the so-called spending cuts would be tiny in comparison to the overall budget, it must be stressed that spending cuts and higher taxes are completely different.
First, tax increases will not necessarily lead to a smaller deficit. This is based on static scoring. It is assuming that no human behavior is altered as a result of the tax increases. It is assuming that it will not affect economic growth. Art Laffer, while not original in his thoughts, was correct that higher marginal tax rates can lead to lower government tax collections.
Second, we need massive cuts in government spending (much bigger than what is proposed). This is the road to economic growth and a higher standard of living. We need savings and capital investment. We don’t need the government spending and misallocating resources on a grand scale. While there might be some short-term pain for certain people with government spending cuts, it would be a net benefit overall for society. It would be less resources being misallocated.
Third, narrowing the budget deficit should not be the main goal for libertarians. The main goal should be to lower total spending as much as possible. This is what matters the most. If total federal spending were one-tenth of what it is today, then we wouldn’t need to argue too much over taxes and deficits. A $400 billion budget would be easily funded with some minor excise taxes.
Politicians and the mainstream media are framing this debate in their own terms. I constantly hear people saying something like, “we all agree that we need some kind of combination of spending cuts and increased government revenue.” It is not really government revenue. They are not selling anything, except perhaps a load of garbage coming out of their mouths. It is government tax collections. And “we” do not all agree. They think it is a compromise for them to steal more from us and spend less of what they steal. I see that as greater theft, not as compromise.
The federal government alone (not counting state and local governments) spends about one quarter of GDP. In other words, the federal government spends 25% of our yearly earnings. And this doesn’t even consider all of the damage they do with that spending and with all of the regulations that are enforced. At what point is it enough? It seems like marginal tax rates could be 80% and you would still have some leftists saying that the rich need to pay their fair share.
This whole tax the rich thing gets tiresome. Of course, the middle class and lower class are getting hit harder, but it’s not for a lack of taxing the rich. It is because the government doles out favors to those with connections and then throws the leftover peanuts to its voting constituents. The answer is not to tax more. The answer is for the government to spend less, which means a drastic reduction in its size and scope.
In conclusion, libertarians should be quick to point out the difference between spending cuts and tax increases. Any proposal to cut spending or cut taxes should be supported by libertarians. Any proposal to increase spending or increase taxes should be opposed by libertarians. I would like to see a fiscal cliff where government spending is cut dramatically. Unfortunately, we are still a few years away from that.