Mimsy Were the Borogoves

Editorials: Where I rant to the wall about politics. And sometimes the wall rants back.

How to raise taxes in a Tea Party world

Jerry Stratton, July 3, 2011

I saw a headline on memeorandum today from the New York Times that 2 Republicans Open Door to Increases in Revenue. As is often the case for the Times, the headline didn’t really match the article. The two republicans were Senators John McCain and John Cornyn, but they were clearly “opposed to any tax hikes”. What they’re open to is tax reform, mainly what Republicans like Congressman Paul Ryan have been calling for all along: removing special tax breaks in a revenue neutral manner to simplify our tax laws.

So if it’s revenue neutral, then how does it bring about “increases in revenue” as the headline said? Pretty simple, and it’s also what we did under Reagan: simplifying complex tax codes makes it easier for businesses to make money; when businesses make more money they pay more in taxes. In this context, “revenue neutral” doesn’t mean that the revenue remains the same, it means that the combined tax rate remains the same.

In other words, if the combined rate with the tax breaks is x%, and the tax breaks are removed, the base rate must be reduced by a similar amount so that, all things remaining equal, companies still pay x% and we haven’t lowered or raised taxes by making this change.

Because this is a neutral change, tax revenue won’t go down. But because it simplifies the tax code, profits—and thus the taxes on those profits—are likely to go up. All things haven’t remained equal: we’ve made it easier for companies to focus on their core business (and thus make more money and pay more taxes even though the rates are lower).

Cornyn and McCain did not say they were open to just plain raising taxes. Which is good, because Americans have learned that politicians who combine increased taxes with lower spending can’t be trusted: the tax increases are always real and the spending cuts rarely are. This year’s budget debacle proved it: almost all of the cuts occur in future budgets where they can be removed by future congresses.

If the Democrats (and Republicans) want to raise taxes along with cuts, they need to do so in a way that shows we can trust them: cut this year, and when we can see that the cuts are real and not just accounting tricks, raise temporary taxes next year. As long as the cuts remain real, they’ll have no problem renewing the tax increases year-by-year, because we’ll see that we can trust them.

When we cut spending below revenue and start paying down the debt, not only will we free up money that used to go toward paying interest, but I, at least, will be eager to increase taxes to more quickly pay down the debt, once I see that this is what the increased taxes are going toward!

The problem today is that history shows that raising taxes just increases the debt, because of all the accounting tricks used to spend money more than once. And increasing the debt increases the interest on the debt, making less money available for real needs.

Cut first. If we can cut spending below revenue, I’ll be happy to pay more taxes to start paying down the debt.

In response to Simple, obvious, and unobstructive: minimize the value-minus of taxes: There is no value-added in taxes, but we can minimize the loss of value.

  1. No corporation pays taxes ->