The Wisconsin Policy Research Institute

Higher Taxes are Inevitable

By Benjamin Artz

McCain wants to keep Bush’s tax cuts in place while Obama wants to decrease taxes for most but increase taxes for the wealthy. It seems that both candidates are conveniently forgetting the inevitable tide toward higher taxes in the not-so-distant future. Federal government spending made up 5.9% of GDP in 2000 and has risen to over 7% since. Although relatively small by historical standards, the size of the central government will most certainly continue to rise in the coming years for several reasons. And as Federal spending increases, so must taxes.

In the wake of bank and housing bail-outs, tax payers should pay close attention to how large the governmental assistance gets. After all, tax dollars will pay for the excessive sub-prime loans and reckless lending practices that are partly to blame for the current economic turmoil. Furthermore, it is possible the bail-outs are not over as it is not certain the credit crisis has hit bottom yet. Regardless, the government will no doubt spend resources on more financial regulation, further increasing the burden on tax payers.

Then, of course, there are the usual big expenditure culprits. The country is involved in two expensive wars with no immediate end in sight. Health care is becoming ever pricier just as the government is tending toward paying for everyone, not just retirees. Social security is projected to go bust by 2040 with tax payers still on the hook to pay for it. Finally the national debt itself is enormous, growing every year and costing the government over $400 billion a year in interest payments.

The unfortunate consequence of all of this must be higher taxes. The federal government has no other significant source of revenue. If it plans to get bigger and more involved through consumer bailouts and universal health care, it must tax more. And if consumers expect their income in the future to get taxed more, they will tend to spend less now in preparation. This saving will be good for the long-run economy, but bad for the short-run, since high taxes reduce economic activity by reducing consumption spending and therefore GDP.

The government must restrain its own spending so that taxes do not grow larger. It must not endeavor into paying for universal healthcare coverage. The government must be careful not to bailout every bank or homeowner hurt by the credit crisis. It must overhaul Social Security and Medicare, reducing its future burden. If the country indeed votes to allow the Federal government to reach ever larger scales, then the country must prepare to pay ever larger taxes. To maintain a grossly unbalanced budget for too long is to wish economic burden on the country for well beyond the next presidency.

-August 4, 2008

Higher Taxes are Inevitable

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