The President’s Fiscal Commission: It’s a Start

Today POLITICO Arena asks

Will implementing President Obama’s Fiscal Commission recommendations require that everyone take a hit?

My response (with tax insights from Jagadeesh Gokhale):


President Obama’s Fiscal Commission Report offers a useful start in reducing our budget deficits and national debt, but it hardly goes far enough. As several of my Cato colleagues have just noted here, here, here, and here, the report recognizes, to its credit, that our corporate income tax structure puts U.S. corporations at a considerable competitive disadvantage against their foreign competitors. And the report keeps military spending cuts on the table, even if there is much more to be cut. Yet by proposing a reduction in government spending from 24.3 percent of GDP today to 21.8 percent over the next 15 years — total federal spending as recently as 2000 was just 18.4 percent of GDP — it plays the old Washington game of calling a slower increase than previously projected a “cut.”


As for taxes, this report should be read in the context of a powerful argument in last Friday’s Wall Street Journal to the effect that over the past six decades, tax revenues as a percentage of GDP have averaged just under 19 percent, regardless of the top marginal personal income tax rate or whether taxes were cut or raised. What this suggests is that low tax rates spur income growth to leave the government’s revenues undiminished over the long‐​term. High tax rates do the opposite. It doesn’t take a large leap of faith to believe that this effect would be stronger for those who earn more and pay more in taxes. Indeed, among high earners are the nation’s business leaders — innovators who create new products and jobs — who would respond positively to the growth opportunity provided by a stable, low‐​tax‐​rate environment. So those who believe that we help ourselves by more heavily taxing the rich need to ask themselves whether it might not be better to cut rates and keep them stable instead. Wouldn’t that promote a robust economy and lift all boats — with the government continuing to generate 19 percent in revenues?


None of this has anything to do, of course, with whether our current out‐​of‐​control federal government is constitutionally authorized to do all it is doing. But it’s a start toward returning the government to within its constitutional limits. Had those limits been respected — as the Framers understood, unlike New Deal progressives — we wouldn’t be in this mess.