News Flash: The Purpose of Taxes Is to Pay for Government

Apr 13, 2012 | Taxes| Other Spending

Matt Miller and Ezra Klein wrote op-eds on Wednesday with a very similar message: neither party is doing themselves or the country any favor with their tax positions. Republican insistence on no new taxes and Democratic insistence on concentrating tax increases on a very small sliver of the population may force some outcomes that neither party will like.

First, Miller discusses taxes in the context of the demographic shift that is currently under way and will accelerate in the coming years. He quotes former CBO director and CRFB board member Dan Crippen in 2008 as saying that taxes would likely need to be at 22 percent of GDP to pay for the government we'd have by then (i.e. experiencing a huge enrollment increase in the retirement programs). In the case of Democrats, Miller notes:

But raising taxes on the top, while an important part of a fiscal fix, won’t suffice to fund the boomers, shrink the deficit and pay for fresh investments in R&D, infrastructure and education. Acknowledging this fact doesn’t help Democrats win elections, however. And President Obama wants to keep (for this term, at least) his vote-winning promise not to raise taxes on any but the top.

Klein's piece similarly talks about how the tax debate between the two sides is over a "sliver of territory" between not raising taxes on anyone and not raising taxes on almost anyone. Similar to Miller, he notes that taking either position will be difficult with the demographic shift that will force taxes to go somewhat above their historical average to keep debt under control. In reality, Klein argues, the parties should take positions that allow them to meet their priorities in a reasonable manner. He cites transportation spending as a past example:

We used to have a straightforward way to fund infrastructure in this country: the federal gas tax. In 1956, President Dwight Eisenhower raised the tax from 1.5 cents a gallon to 3 cents to help pay for the creation of the interstate highway system. In 1959, he increased it from 3 cents to 4 cents. In 1982, President Ronald Reagan raised the gas tax to 9 cents. In 1990, President George H.W. Bush raised it to 14 cents, with half of the increase going to reduce the deficit. In 1993, President Bill Clinton raised it to 18.4 cents.

In other words, from 1956 to 1993, there was a bipartisan consensus on the federal gasoline tax: Both parties agreed that it occasionally needed to be raised in order to help pay for the nation’s infrastructure. But since 2000, there has been a bipartisan consensus against raising the federal gasoline tax.

However, with the current tax positions, that sort of thinking has disappeared; in other words, the connection between what tax system the parties want and what system they need to fund their priorities has been severed. If both parties do not change their positions significantly, he argues, they could face some adverse outcomes: Republicans may end up forcing Democrats to push through tax increases on the rich on a partisan basis, while Democrats may be forced to accept unpleasant spending cuts if they concentrate on raising revenue from only the rich.

These two op-eds make a great point that is missing in the current debate: taxes pay for government. The political realm must re-gain sight of that, figure out what level of government services we should be providing, and raise enough revenue to do so.