Heretofore, I haven’t dared go into the tax debate here on my blog. I was in general ledger accounting in a past life (many moons ago) and don’t remember it that well. But I think I can comment from a common sense economic perspective since that is fresh in my mind.
I don’t see any real reason to raise taxes and I’ll walk you through my logic on the matter. First, no matter the MTR, historical revenue collection has hovered around 18% of GDP. I’ve seen some charts somewhere and will try to dig them up, but most of them included the time period going all the way back to the mid 1960s. And we’ve had periods where the IRS was kinder and gentler, like since the mid 90s and times when revenue collection was rather brutal, both of which were included. With that in mind, it seems that the government can manufacture whatever kind of rosy, pie in the sky expectations it wants in discussions about raising taxes, but it doesn’t mean that boosts to revenue will ever appear unless the increase is very subtle.
Raising tax rates on top income earners, even if it would actually be collected, is only a drop in the bucket compared to the enormity of the gap between spending and revenue. It’s pretty simple math that can inform us that if government has revenues averaging ~18% of GDP, but habitually spends upwards of 22% of GDP, there will eventually be a problem. And that doesn’t account for unexpected revenue shortfalls that happen when the Fed wanders off the Humphrey-Hawkins reservation. In 2009-10, government revenue dipped to between 14% and 15% of GDP. That was a very bad haircut the Fed delivered while obsessing about inflation in the aftermath of the greatest plunge in nominal income since 1937. It reminds me of what James Tobin said about deeply regretting permanent loss of revenue; and I think the same can be said for average Joe in regard to permanent loss of expected income. It really is too bad that Obama didn’t pull power plays on the Fed to get constructive policy for a robust recovery underway. But I don’t see how that is anyone else’s problem. Citizens, rich and poor alike have been raped enough by government as a result of bad monetary policy and the fiscal effects of that doesn’t justify doing it more and harder to a minority of the population without even the courtesy of lube.
If we think that raising taxes while running tight monetary policy is the answer, we need look no farther than most European countries where austerity means higher taxes more than anything else for clues about how well that works. It’s one thing for the government to spend hand over fist when there aren’t any particular financial stresses, but it truly appears to be quite a terrible thing to come back and hound people for more taxes when no one has any money. It’s a really bad idea – consider Alexander Hamilton about the Whiskey Rebellion kind of bad.
Getting to the title of my post, I have only top level information about a conservative revolt against John Boehner and company as a result of removing fiscal conservatives from committee assignments and nudging the caucus toward caving on the tax issue. While I am only marginally on the side of mainstream conservatives, their hard line stance on not raising taxes is the right thing to do. They should reject doing stupid and unjustifiable things just because Obama wants it. Republicans should take the House into regular order, pass a deal that has NGDP targeting for the Fed in it that will guarantee increased revenue from increased economic activity and no ill effects from the so called “fiscal cliff, putting the ball in the Democrats’ court telling them if they want to do things that are not in the interest of the General Welfare, they can do it without the House.
Of course, that is my pie in the sky solution that will actually fix what’s broken. If you saw my “quotable quote” in the upper right of my page, you know why it’s pie in the sky. I don’t really expect Republicans to be that savvy, and that is likely why they lost more than they gained in the last election. I support getting rid of Boehner and snooty statists like Eric Cantor in hope of getting someone with their head screwed on a little tighter, nonetheless.