Having Your Cake and Eating It Too

by Lowell L. Kalapa, Tax Foundation of Hawaii

With less than a week left for the White House and Congressional negotiators to come to some sort of compromise, it is time to put all of this debate into perspective.

How did we, as a nation, get to this point in the road where there isn’t enough money to run the country and that taxes need to be raised? Yes, on one side, our elected officials will argue that it was all those “Bush tax cuts” that got us into trouble. On the other side, elected officials argue that it was all the spending and creation of entitlements that got us into trouble. What they seem to miss is that none of these “shortfalls” could have happened without either the White House proposing them and Congress agreeing to adopt them. So to a large degree, both Congress and the White House are responsible for the financial pickle in which we find ourselves.

While middle-class and rich taxpayers enjoyed the “tax cuts,” we clamored for more and more services and benefits from the federal government. Not only that, beneficiaries of the Social Security and Medicare programs demanded increased cost-of-living allowances and additional benefits from the health program. At the same time, lawmakers “borrowed” from the Social Security system such that there were less and less reserves to invest and to earn returns to cover the benefits. This all happened when at the same time actuaries warned that with a shrinking workforce, there are less contributors to the system than there are beneficiaries.

The situation was further exacerbated during the past couple of years when both the White House and Congress bought into the idea that a payroll tax cut would put more money into consumers’ hands that would then be spent to stimulate the economy. But instead of stimulating the economy, it merely shortchanged the Social Security system in the long-term as it meant less funds to invest and earn returns to pay future benefits.

So while taxpayers, both middle income and rich, enjoyed the windfall of the “Bush tax cuts,” they also enjoyed the endless list of benefits and services Congressional officials provided as they approved program after program over the past twelve years. In all honesty, no elected official can truly say they didn’t see it coming as they regularly increased the debt ceiling over the same period of time. Where did they think they were going to get the money to pay for all of the programs they were approving? Did lawmakers really think that the economy was suddenly going to take off and all sorts of taxes would be generated? Did they ever think of putting away funds for a “rainy day” like Katrina and Sandy?

White House officials would “prefer” to raise taxes on the rich, after all there are far less rich people than the vast middle-class taxpayers. So it makes more political sense to pander to the vast majority of votes than it does to stick it to the few rich taxpayers. Since most people don’t think of themselves as being “rich,” this would seem to make far more sense at the ballot box. The problem is that when and until the vast majority of American taxpayers realize that there is no free lunch, they will continue to demand more. More programs, more services, more, more, more is the mantra that got us in trouble.

Budget officials estimate that if the “tax the rich strategy” isn’t the cornerstone of the compromise plan, every American family will see their tax bill rise by $2,200 on average. No doubt many will consider that pure heresy. How can we ask middle-income families to pay even more in taxes? Well, folks, that is the question: Are you willing to pay $2,200 more in taxes to keep the status quo?

And if not, what services and programs are taxpayers willing to give up? When and until taxpayers realize that there is a bottom to the barrel, they will clamor for more and more. Sure, there can be more government, but it comes at a price. That price is the health of the nation’s and our state’s economy. We have already seen the consequences as we watch countries like Greece, Spain, Italy and Portugal struggle with their debt and national economies.

So with the nation headed for the fiscal cliff, the solution must be a combination of tax increases as well as spending reductions. Taxpayers must be told that those federal programs and services come at a price and that we can no longer ignore that cost by merely passing the tab on to “rich taxpayers.” Finally, elected officials must learn how to say no to constituent demands. That money they like to hand out is not free, it comes from us as taxpayers.

- 30 -