Contra Brookings, Tax Increases Won't Shrink the Debt

The Tax Policy Center, a Washington think tank affiliated with the Brookings Institution and the Urban Institute, has released a paper exploring options to deal with budget deficits. To no one’s surprise, the paper recommends higher taxes as the best way to reduce the deficit.

According to its website, the Tax Policy Center believes that we have a deficit problem because our “revenue falls far short of spending needs,” not because the government spends too much. As such, it is not shocking that the group believes tax increases are the best solution to our fiscal problems.

The TPC said it researched “dozens of international efforts” to address budget deficits going back decades in numerous OECD countries, and admitted that the consensus finding was that spending cuts were far less damaging to economic growth than tax increases and much more effective in reducing deficits. Deficit reduction efforts, they wrote, “appear to reduce GDP less when they are expenditure-based than tax-based,” according to their review of the economic research. In other words, tax increases were not the solution.

Yet despite these studies, the TPC recommends disregarding the evidence and raising taxes. They argue that the U.S. is actually a low-tax country, and that tax increases would not be too harmful to the economy.

The Tax Foundation has looked at the same research of international efforts to reduce deficits, and come to the opposite conclusion. They have issued a number of reports showing that multiple efforts in OECD countries to reduce the deficits with tax increases have failed, reducing investment and growth, and not deficits.

One study of 17 OECD countries over 30 years showed that attempts to reduce deficits by raising tax rates have consistently reduced economic growth and not deficits. Another study of OECD countries found that almost all fiscal reforms based on tax increases, especially higher individual and corporate tax rates, were followed by “prolonged and deep recessions.”

A European Central Bank analysis of EU countries also found that tax increases failed to reduce deficits and generally proved damaging to economic growth. What’s more, the analysis found that deficit reduction plans which paired spending cuts with tax cuts, particularly cuts in the top marginal rate and the corporate tax rate, had the most successful deficit reduction results by increasing economic growth.

As we have seen repeatedly in the U.S., tax increases fuel more spending, slow economic growth, and increase deficits and debt. While taxes have increased ten-fold since 1980 to $5 trillion, spending has increased twelve-fold to $7 trillion, and deficits and debt continue to grow.

We do not have a revenue problem. Our taxes are not too low. We do not have deficits because tax revenue falls short of our spending needs. As study after study has shown, raising taxes will only lead to more spending, slower growth, and larger deficits and debt.