Why Spending Must be Cut

December 1, 2010 09:58

We cannot tax our way out of our current problem. WE MUST CUT GOVERNMENT SPENDING NOW AND DRASTICALLY!

The article below argues (correctly) why we cannot tax our way out of our deficit problem, at least not via an income tax. Two caveats must be added:

  1. During the timeframe shown on the chart, most of the country paid income tax. Today, about 47% of earners pay no income tax. That makes it even harder to raise taxes on the wealthy and expect them to pick up the necessary revenues. After all, when tax revenues go up, the wealthy rearrange their income so as to avoid taxes. The higher the tax rates the more that occurs. That is why, despite marginal tax rates that exceeded 90%, tax revenues generally were consistently below 20% of GDP.
  2. A national sales tax (VAT) presumably would push tax collections higher but at the cost of lower GDP. It will likely be tried, but should be desperately fought by citizens. It would doom the country to second or third-world economic status.

Ms. de Rugy is correct when she says we cannot tax our way out of our current problem. WE MUST CUT GOVERNMENT SPENDING NOW AND DRASTICALLY!~ Monty Pelerin

This chart by Mercatus Center Senior Research Fellow Veronique de Rugy shows the historical path of federal taxation as a percentage of GDP using the earliest records available from the Office of Management and Budget and top marginal tax rate data from the Tax Policy Center. From 1930 to 2010, tax revenue collection in the United States has never topped 20.9%, averaging 16.5% of GDP over these 80 years. This comes despite the drastic historical fluctuation in the rate of taxes on the wealthiest Americans. As we move toward debt reduction, it is critical to keep the long-term path of the United States in mind.

In recent years, spending, not revenues, has deviated from its historical path; spending must be addressed to rectify the budget.

Veronique de Rugy explains why we can’t tax our way out of the debt on Bloomberg TV:

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