Recent statements from John McCain about the possibility of increasing payroll taxes seemed to suggest he was tiptoeing away from his no-new-taxes pledge. (He later repeated his earlier vow.)
People can make their own judgments about McCain’s fitness as a candidate, but from an economic policy point of view backing off the pledge reflects good sense. Blanket no-new-taxes pledges reflect an inane political fetish that has harmed our nation’s economy for 20 years.
The economic problems we face right now are not some random event. Nor are they due solely to years of monetary laxness by the Federal Reserve. They also stem in large part from fiscal policies of spend-and-borrow-abroad that inevitably result from the belief, unsupported by any reputable economic theory, that low taxes somehow trump all other policy considerations.
There’s nothing wrong with the idea of keeping taxes low, per se. Most economists across the philosophical and political spectrums agree that, in general, low taxes favor economic growth. Virtually all agree there are situations when lowering taxes is a sound policy choice.
Except for a lunatic fringe, however, economists don’t think lower taxes outweigh all other considerations — war or peace, boom or bust, deficit or surplus, inflation or deflation.
This is no time for ill-considered ideological rigidity.
The nation faces its most difficult economic challenges in 80 years. We have increased our gross national debt by 70 percent in the past eight years. An unprecedented fraction of that debt is now held by foreigners. The administration itself projects a half-trillion-dollar deficit for next year. The economy is slowing and the Fed struggles to juggle recession and unemployment. The dollar’s value is near record lows abroad. Our balance of payments remains unsustainably skewed.
These developments are not unrelated to simplistic anti-tax rhetoric. Government borrowing has contributed to a national savings rate that is near zero. We invest little in public infrastructure and not enough in private plants and equipment. Long-term productivity suffers. Fed-engineered money growth pumps consumption but creates asset bubbles.
We cannot solve these problems long term without putting federal government finance on a sustainable basis. And we cannot do that without increasing taxes or imposing spending cuts both parties rejected in the past. Would we rather repeal the Medicare drug benefit? Should we pull all U.S. forces back home to save money? Will we finally abolish all farm subsidies to make a small deficit reduction?
At this historic juncture, do we really want a candidate who swears not even to consider an important policy option for four years?
Great economies do not enter into decline because of factors beyond their control. They do so because their political systems generate self-destructive policies. In democracies those usually result from collective self-delusion. If we choose candidates based on the single issue of no tax increases, we deserve what we inevitably will get.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.