Papal Economics 101: President of the Vatican Bank Condemns Raising Taxes (and Explains Why) in L’OR

Vatican Bank President Ettore Gotti Tedeschi

We’re going to be hearing a lot about raising taxes this year and next, and especially about the need to raise taxes on “the rich” in order to force them to pay their “fair share.”

That’s because the American public has woken up to the fact that our government has been outspending itself at a furious pace — and now the debt has come due.

There are two broad solutions to America’s outstanding debt (which already exceeds 14,000,000,000,000 dollars) and America’s annual budget deficits: reduce the size of government or increase how much tax revenue it takes in. Broadly speaking, Republicans favor the former, and Democrats the latter.

Which solution (or combination of solutions) does Catholic social teaching favor? You’ll be hearing plenty about that, too. But the President of the Vatican Bank Ettore Gotti Tedeschi has already pointed us in the right direction, in his brilliant (and mercifully short) editorial for the L’Osseratore Romano (L’OR), the Vatican’s “official” newspaper.

I put “official” in quotation marks because I’ve been careful to point out in the past that the opinions expressed in L’OR do not represent the official position of the Church. Instead, we are to evaluate them by their merits. Nonetheless, I’m very pleased to see that they published this excellent editorial, because this will force liberal Catholics to decide if they actually do feel free to dissent from L’OR when it contradicts their political views. They certainly have spent a good deal of time trying to claim L’OR’s mantle when they perceived it as favoring their political persuasions.

But let’s get to the good stuff: Europe is facing a(n even) worse budget crisis than we are. Europe’s bloated socialist governments have amassed (even) more debt than us, and their over-regulated businesses have (even) less economic output than ours. This means that what’s in store for our near future is already happening there.

I’m going to quote Tedeshchi’s argument in reverse, because after reading his essay carefully I realized he actually writes in reverse – therefore his argument makes more sense “backwards”:

Further forms of taxation would not be synonymous with solidarity but only with greater public spending and, perhaps, a higher debt and more widespread poverty. High taxes penalize saving, generate distrust in the ability to stimulate recovery, hit families and prevent the formation of new ones, as well as creating uncertainty and precariousness in employment. In short, they lay the foundations for another phase of unsustainable development.

First point: increasing taxation by transferring wealth from people, families and businesses to government bureaucracy violates both subsidiarity and solidarity. Economies are built on people who can know with certainty that they will harvest the fruit of their labors — excessive taxation kills this dynamic which focuses creativity and rewards industry. If we want to “stimulate” the economy how can we do so successfully when we constantly deplete it through taxation?

During a prolonged crisis, inheritance taxes, new forms of taxation or similar alternatives reduce or wipe out resources for investments, discouraging the trust of investors, penalizing the cost of the public debt and the possibilities of its renewal at its expiration. In this context, imposing taxes on property and on income is equivalent to a suicidal anti-subsidiarity of the state to the citizen. Those who legally possess assets, on which they have paid the proper taxes, have contributed to creating wealth and, thanks precisely to these assets, continue to produce them with investments and consumption.

Second point: money held in private is not “static” — it is a dynamic force that when spent and invested truly stimulates more production and the creation of new wealth. It is precisely having wealth and “excess” that allows people and businesses to give from that wealth to invest in creating more of it. It is therefore anti-subsidiarity to take what is held by local entities (e.g. individuals, families, businesses) and give it to a centralized authority (the federal government, in this case). This principle does not rule out all taxation, of course, because there are some legitimate roles served by centralized government (see: The Constitution) — but it does rule out over-taxation, especially when taxes go to federal programs and mandates that can frankly be administered better by local, immediate entities (such as private charities, hospitals, etc).

Without a true strategy for growth – which moreover is in contradiction to the tax levy itself – taxation in all its forms only permits further growth in public spending, inevitable if economic interventions are to be permitted in the absence of development. At a time like this, growth is obtained solely by the appropriate use of the available resources in order  to benefit businesses that create wealth and sustainable employment, pay their taxes and thereby make absorption of the debt possible.

Third point: growth is the key concept. Without economic growth there is no government, because there is no economy to sustain its expenses. Governments don’t make money: businesses and people do, the market does. And taxation, raising taxes, and acquiring private property all serve to inhibit growth. Some taxation can be sustained, over-taxation ultimately cannot. And if America and Europe are ever going to climb their way out of the fiscal hole they find themselves in, it will be growth that drags us out, not taxes.

In this, the aim of both Democrats and Republicans should be shared: if Democrats want government to provide social services and the “safety net”, they must allow Republicans to pass (and in cases like Obamacare, repeal) laws that are preventing growth from continuing and increasing, because it is actually economic growth that is keeping the whole engine of government spending running in the first place.

Think about these three core concepts (1. over-taxation violates subsidiarity and solidarity 2. private wealth in fact serves the common good 3. economic growth is the key to recovery) as politicians and parties argue for your vote next November. Ask yourself if it makes sense to tax more the very engine that is fueling government spending, if it wise for government to spend money that private citizens have saved, and if taking money out of the economy can do anything except make it smaller and more anemic.

And while you are at it, read Mr. Tedeschi’s article again. I know I will.

UPDATE — Readers have asked what Mr. Tedeshchi was responding to. I believe he was commenting on a recent Italian proposal to raise taxes on high earners (sound familiar?). Of course, the principles he outlines apply not just to Italy or the European Union. Italy has dropped the proposal, according to the AFP:

Italy dropped Monday a proposal for a levy on high earners approved by the cabinet earlier this month as part of an austerity package aimed at calming the markets by balancing the budget before 2013.

… The temporary tax would have been five percent on revenues of more than 90,000 euros a year and 10 percent on revenues of more than 150,000 euros.

… Italy has one of the highest debt levels in the world and a low growth rate.

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81 thoughts on “Papal Economics 101: President of the Vatican Bank Condemns Raising Taxes (and Explains Why) in L’OR

  1. MikeM says:

    I’m against raising taxes in the US right now, but it’s worth pointing out that Europe and the United States have very different tax structures. In once sense, America’s tax system is already more “progressive,” with the government collecting virtually no income taxes from the larger part of the population. At the same time, we don’t have anywhere near the confiscatory tax rates that many European countries have and engage in somewhat less “wealth redistribution.”

    It’s nearly undeniable that European tax rates are sufficiently high to stifle economic activity, and that they might even result in less revenue, anyway. It’s less clear that that’s true in the United States.

  2. Revert Al says:

    Good, Thomas.

    I’m waiting for the Distributivists to hit the combox
    clamoring for redistribution of property.. by some
    pie in the sky means or other.

    1. Jim says:

      Revert – It sounds like you have a misunderstanding of distributism which is based on Catholic Social Teaching The main principle of distributism is the widest possible ownership of the means of production. It has nothing to do with seizing property and redistributing it.

      “We can speak of socializing only when the subject character of society is ensured, that is to say, when on the basis of his work each person is fully entitled to consider himself a part-owner of the great workbench at which he is working with every one else.” – Pope John Paul II – Laborem Exercens

      Bishop Sheen on Cooperative Ownership

      http://www.youtube.com/watch?v=MCM0i2jz2N8

      Here is a perfect real world example of how cooperative ownership can flourish where crony capitalism fails

      Making Use of Employees’ Talents

      Editor’s note: On Wednesday’s NewsHour, Paul revisits a Missouri manufacturer that in this era of “too big to fail” has proven small enough to succeed. Part of the secret to its success? Prizing employees’ innovation alongside their efficiency. In this Web exclusive video, Jack Stack, the founder of Springfield Remanufacturing, tells Paul how he came to believe in management that prizes the talents of employees.

      http://www.pbs.org/wgbh/pages/frontline/video/flv/generic.html?s=news01s3ee3q87f

      Manufacturer Goes Small in Era of ‘Too Big to Fail’

      http://www.pbs.org/newshour/bb/business/jan-june10/makingsense_04-28.html

      A perfect opportunity to exercise it would have been with the auto bankruptcies. Instead of giving the UNION ownership – they should have given it to the employees.

  3. Philip says:

    George Bush lowered Americas tax rates a decade ago to the lowest rates that they have seen since 1900. How has the economy performed during that time. I’d like to challenge the writer. Which government programs would you recommend be cut? Military spending, social security, medicare? And why exactly should working class Americans continue to pay higher taxes than millionaires and billionaires? Is that justice? As for the position of the Vatican paper, their position seems obvious. If we have stable governments that are able to provide for the needs of the citizens, people are less likely to be dependent on the Church for it’s “charity” and it’s hold over us diminishes. Substantially. Their statement is little more than self preservation.

    1. Thomas Peters says:

      Philip – considering your argument is that the Church is trying to continue it’s “monopoly” on helping people, and you would prefer to see government take that over, I think we can know where you are coming from. Interesting that you also completely support what I would identify as the Democrat party line on how to fix the economy. Hmm — revealing.

      1. Philip says:

        I didnt say that. I asked you to tell us what government programs you would cut, which you didn’t. Maybe we could start by cutting funding to the “Catholic Charities.” They receive government funding to the tune of a billion dollars a year. If the Vatican TRULY believes in reduced government spending, I’m sure they would welcome the oportunity to show us how it’s done. I’m sure you agree.

        1. Thomas Peters says:

          actually it seems that Catholic Charities is one of the most efficient destinations for federal grants. But as a die-hard liberal, I’m sure you’re against means testing.

          1. Patrice says:

            Please provide proof of that satement because I work in DC child welfare and that’s patetly untrue here.

          2. Whitney says:

            The government, if it had any clue what it was doing, would give 100% of discretionary money to Catholic Charities. As Thomas noted, it is the most efficient destination for charity to help people while promoting Catholic ideals. Taxes could finally help the people who need it, and money would stay away from pro-abort, pro-gay, anti-family groups who don’t deserve an ounce of attention or aid.

          3. Philip says:

            I think it would be impossible to quantify this statement. What I did find is that “Catholic Charities” is less efficient than the American Red Cross. The Red Cross spends 91% on their funds on actual programs (taking out overhead, fundraising, etc) while Catholic Charities only spends 83% of their budget on the actual programs they run. A disproportionate amount of their budget goes to Admin (at almost 12%). I think that blows your argument out of the water.

          4. Thomas Peters says:

            Philip – and how much of tax revenue goes to actual programs as opposed to overhead/admin? I’d love for you to dig up that stat for me (hint: it blows your argument out of the water).

          5. Philip says:

            Please respond. You claimed that Catholic Charities was “one of the most efficient destinations for federal grants”. In reality, “Catholic Charities” spends well over twice as much on administration than the American Red Cross. So your statement is not true. Did you actually have figures to back up that statement when you posted it, or did you just make up facts?

          6. Thomas Peters says:

            Philip – my statement makes perfect sense because I believe Catholic Charities spends money more efficiently than most federal programs. That’s why I challenged you to show me the average overhead/admin of federal agencies. Do you just spout off or do you respond to rational arguments?

          7. Philip says:

            Actually you said “Catholic Charities is one of the most “efficient destinations for federal GRANTS.” I compared two organizations that receive federal GRANTS and found that Catholic Charities was actually less efficient. You did not say “Catholic Charities was a more efficient organization than the federal government,” which again is untrue. Medicare spends less than 2% of funds on overhead. Catholic Charities spends 17%.

          8. Thomas Peters says:

            Philip – can you provide documentation for all these figures? I’m happy to look at them.

          9. Philip says:

            Actually I can. Before I provide my sources, I’d like to know if you had any figures to back up your original statement or was it just propaganda that you posted as fact without even bothering to check if it was true or did you know it was false and post it anyway? This is the third time I’ve asked this simple question and it seems like a relatively benign request. Any blogger that makes a statement of such a simple fact should have a reliable source for the information. It would seem you owe me the courtesy of ACTUALLY answering one of my questions before I answer yours.

          10. patrice says:

            I don’t know about anyone else, but I’m still waiting with baited breath to see the data you had on the Catholic Charities when you said that they were one of the most “efficient destinations for federal grants”. That seems pretty specific, but you’ve refused to answer the question which has been posed on numerous occasions.

          11. Thomas Peters says:

            I stand by my claim that a dollar given to catholic charities will more immediately help people than a dollar taken by the U.S. government in taxes. I’m happy to see the economic proof contravening that, but I haven’t seen anyone provide that yet. I’m not refusing to answer anything. I’m refusing to waste time proving points that haven’t been contravened with evidence yet.

          12. patrice says:

            LOL. That wasn’t your original claim at all. Once again, I’ll ask the question. Where is your proof of your statement? I think it’s a reasonable question to ask a blogger to quantify when he makes a statement.

          13. patrice says:

            Charity Navigator appears to be the independent rating organization that’s readily available to the public. Here’s the page for Catholic Charities (national): http://www.charitynavigator.org/index.cfm?bay=search.summary&orgid=10656
            Here’s the American Red Cross: http://www.charitynavigator.org/index.cfm?bay=search.summary&orgid=3277
            According to this independent site it appears that Catholic Charities spends about 85% of their funding on actual programs while the American Red Cross spends 92% on actual programs. American Red Cross is much more efficient than Catholic Charities.

          14. MikeM says:

            Philip, the overhead numbers are a red herring. Medicare is a check-writing organization. Catholic Charities does things like run schools for the disabled. Obviously there’s less overhead associated with the former. That doesn’t mean that, when all is said and done, the beneficiary of the money gets more from a medicare dollar than from a Catholic Charities dollar. There are intermediaries between the medicare administrators and the patient that also take a cut of the money, and one would have to assess how well the money’s spent to really judge the efficacy of the respective programs.

          15. Thomas Peters says:

            good points, Mike.

          16. Patrice says:

            That’s simply not true at all Mike. The numbers I gave are for Catholic Charities USA, which does NOT provide adoption services. They do things like provide food for the needy and help with disaster relief, much like the American Red Cross. Adoption services are provided by groups like “Catholic Charities of DC”, “Catholic Charities of Milwaukee”, etc. These are all independent local “Catholic Charities” that are completely separate from each other and have no relationship with “Catholic Charities USA” either. So, the comparison between “Catholic Charities USA and the American Red Cross is indeed “Apples to Apples”, and Catholic Charities is indeed far less efficient than the American Red Cross is in performing the same services.

          17. MikeM says:

            I was replying to Philip’s comment re: Medicare. As for the American Red Cross, they are a very well administered organization. Really, no two charities can be compared as “Apples to Apples” with regards to overhead costs, though. The Charity Navigator ratings are the best attempt at such a comparison that I know of, and the American Red Cross and CCUSA have virtually identical ratings (though, to be fair, they give the American Red Cross the edge by a couple tenths of a point on their hundred point scale).

          18. Sharon says:

            Maybe one website reports that Red Cross overhead is less however, shouldn’t we also ethically and morally be concerned with who Red Cross partners with? I ran across a site that claims that Red Cross has partnered with the International Planned Parenthood Federation and they are listed on a United Nations Population Fund roster http://www.all.org/article/index/id/MjQyMg

      2. teej says:

        And you, thomas, seem to support what I would identify as the Republican Pary line to fix the economy.. it is apparently a wash between you and Philip.

    2. Nathan says:

      Other than the little recession at the start of President Bush’s first term, the economy did quite well. As for your questions of what needs to be cut? The things that are killing us: namely, entitlements and defense. As a person who works on American security matters, few doubt that a 5-10% cut to the Pentagon couldn’t be managed without sacrificing national interests. Raise the age of Medicare and Social Security. I’m pretty certain that, here in my late 20s, I’ve got ample time to prepare to work another 3-5 years. Means test for Social Security. The fixes are obvious. And for the notion that the rich don’t pay their fair share, the richest 10% of Americans pay for 55% of our government. Just sayin’. Meanwhile, our corporate tax rates are the highest in the industrialized world and, beholden to investors, companies shift overseas to make the bottom line better. The focus on the bottom line over people is something Pope Benedict has recently objected to, but if you lower corporate tax rates, populists will scream the government is looking out for the big corporations first. And I chuckle at the idea that the Church uses its “charity” to maintain a hold over us. That’s why all the non-Catholics who utilize Catholic Charities are flocking to our pews, right? Good grief.

      1. Philip says:

        Actually Americas CORPORATE tax rates are ranked at the lowest when compared to other industrialized nations. You have to look at the taxes collected. GE had incredible profits last year and paid no federal tax due to subsidies and loopholes.

        1. Nathan says:

          Ahhh, the ol’ GE example. The New York Times botched their reporting, and to be fair, with help from a less than forthcoming GE. Nevertheless, from an article you can find on sites such as the Washington Post and Huffington Post: “Did GE get a $3.2 billion tax refund? No. Did GE pay U.S. income taxes in 2010? Yes, it paid estimated taxes for 2010, and also made payments for previous years. Think of it as your having paid withholding taxes on your salary in 2010, and sending the IRS a check on April 15, 2010, covering your balance owed for 2009.” Moving on. (For the record, seeing how others have weighed in on your comment, I never use the Like/Dislike feature of this site.)

          1. patrice says:

            The CEO said that GE “expect[ed] to have a small U.S. income tax liability for 2010″. Just because they paid estimated taxes through 2010, doesn’t mean that they didn’t get a tax refund at the end of the year that refunded those payments. In 2008 GE’s effective tax rate was 5.3%; in 2007 it was 15%. Any estimated tax payments it made in 2010 would have been based on 2009′s tax returns, which clearly is likely to have been well below the marginal U.S. corporate rate of 35%. GE may not have paid “zero” taxes, but claiming that they are clearly paying much less than I, or any other American family, is paying.

        2. Amanda says:

          Philip, last I heard as of April America has the highest Corporate tax rate in the world. Japan used to be the highest, but lowered it do to some internal economic issues that they are trying to fix…along with a lack of people coming into the workforce, but that is a whole other discussion. Peace and Joy! Amanda

    3. Whitney says:

      Well Philip, for those of us who aren’t Democrat welfare queens completely dependent on the government for everything, things have been going quite well. You may have heard in the liberal media that during the recession, the “rich got richer” and everyone else got poorer. After sifting through the liberal bias of the media, you’ll note that responsible people used the tax cuts to their benefit, while liberals whined and wailed that their government “entitlements” were being cut – how unfair, no one to spoon feed them or change them anymore! The rich got richer because they worked hard. The poor stayed poor because they only reach for what government will bend down to give them. This is why the Catholic Church should be the prime benefactor of the world. They will give charity, but to those who deserve it.

      1. greg smith says:

        But Whitney, didn’t our Lord help those who, by the standards of the day, didn’t “deserve it?” ~ Pax ~ Greg

        1. Michael F says:

          Greg: didn’t he also (in a parable) take from the man who had 1 talent, because he had done nothing with it, and give it to the man who had 10?

    4. Philip says:

      I’m not sure what point you are trying to make about the tax rate and economy. I mean we had our highest tax rates ever during the Great Depression, and that clearly didn’t help our economy out. So I would think tax rate and economy, while play a role in each other…not a role people can truly figure out until after the fact.

      1. Philip says:

        The above comment is not mine. Any idiot can go to Wikipedia and see that the government lowered the highest tax rate in 1924 from 46% to 25% and THAT led to the Great Depression in 1929. So, lowering tax rates leads to economic depression based on this (overly) simplistic view.

        1. Joe M says:

          A few points: A) The US Effective Corporate Tax Rate is amongst the highest in the world: http://www.cato.org/pubs/tbb/tbb_1008-50.pdf B) Comparing the efficiency of charities based on admin costs only makes sense if the two charities are administering the same services. For example, who thinks that dropping off a box of food takes the same amount of administrative attention as adopting a child to a family?

          1. patrice says:

            Last time I checked, Catholic Charities USA (the national branch that was evaluated above) wasn’t in the adoption business. They provide aid and food to needy families as well as disaster assistance – simliar services to the American Red Cross. It’s very confusing, but the Catholic Charities that provide adoption services are actually completely seperate organizations with their own funding. You can see that the local branches of Catholic Charites, the ones that do provide adoption services, have been evaluated seperately at Charity Navigator. Their scores do in fact show what you indicate – there is much more overhead and administration for the local groups than the national organization due to the services that they provide.

          2. Joe M says:

            Thank you patrice. I’m not sure why the groups are analyzed differently in your link. But, it appears that the adoption group and services group are one in the same. I think that this calls into question whether or not your link is counting adoption service costs with both names. Even if they were two different organizations, I think you would still be incorrect that the two organizations do the same things. The American Red Cross provides blood and disaster relief. Catholic Charities USA provides disaster relief, disaster case management, scholarships and other financial benefits, anti-poverty efforts, programs on race/diversity, human trafficking, immigration, family and housing. — I don’t think that your comparison has any merit at all since what Catholic Charities USA does is completely different and significantly more complex than what the American Red Cross does.

  4. Steve says:

    Does anyone know if this is written with regards to European taxation, American taxation, or just taxation in general?

    The reason I ask is because there is a very large difference in the relative tax rates of socialist European nations and ours.

    1. Thomas Peters says:

      I believe it refers directly to proposals in the EU to increase the tax rate, specifically a proposal in Italy to increase taxes on high earners (sound familiar?): http://www.breitbart.com/article.php?id=CNG.f17dd620575edb02954a7f8f0971f63b.4c1&show_article=1

      so while it applies more to EU than here, the argument is universal, I would argue.

      1. Teej says:

        Thomas, the author of the editorial you site explicitly states the opposite: “The public debts contracted by various countries were not produced in comparable contexts so it is impossible to make a similar analysis of them.”

        1. Thomas Peters says:

          Teej – he’s simply saying we got to the debt in different ways. What is universal is his proposed solutions to get out of the debt. Easy enough.

          1. Teej says:

            I would disagree with that… part of the overall analysis is what solution is going to work given the different contexts at play. A deeper problem at play with your claim, Thomas, is that your one size solution fits all moves economic analysis out of the realm of prudential judgment and into the realm of absolutes, is an analytical error. Cut spending and taxes! That is the ONLY solution overlooks the multiplicity of variables that come into play regarding the health of an economy.

    2. Whitney says:

      If 0bama has his way, there won’t be a tax difference between the socialist regimes of Old Europe and this country. Whether taxation is European, American, or wherever, increasing it automatically makes you more socialist, and there’s rarely ever any going back. This is why we need to fight any tax increase, no matter how small, no matter what the circumstances are.

  5. Nathan says:

    I’m a staunch fiscal conservative, but if this is a reflection of the official Vatican line, I’d remind everyone how mad people were when the same paper essentially said to chill out on President Obama giving a commencement speech at Notre Dame. That position wasn’t followed by many American Catholics. I would presume that would be one of the instances Tom refers to in his post. But if that editorial wasn’t to be taken seriously as an official position, there’s no reason to take this one seriously, either. It’s my understanding that Cardinal Bertone has the final say on editorials, particularly of this nature, so I don’t see how more politically liberal Catholics could embrace the Obama editorial and reject this one or how more politically conservative Catholics would embrace this one after rejecting the former. No one can have it both ways.

    1. Thomas Peters says:

      One can’t have it both ways if what takes L’OR to have authority simply because it’s L’OR. If you believe it has authority based on the quality of the argument, you can respect good articles it publishes and dismiss the bad ones. That’s not having it both ways, that’s discerning and distinguishing the good from the bad.

      1. Nathan says:

        I would argue that in these more politically sensitive cases, where the Secretary of State is said to exercise final say on editorials, “good” and “bad” are subjective based on which side of the aisle you’d sit.

  6. Brian C says:

    “There are two broad solutions to America’s outstanding debt (which already exceeds 14,000,000,000,000 dollars) and America’s annual budget deficits: reduce the size of government or increase how much tax revenue it takes in.”

    Wrong. You can do a combination of both. And we should.

    1. Thomas Peters says:

      obviously you *can* do a combination of both. but why *should* you, when the former spurs growth and the latter inhibits it?

      1. teej says:

        Single variable analyses, particularly within a context of something complex as the economy, rarely if ever work. This rhetoric: Raise taxes, kill the economy; lower taxes and the economy will bloom like a thousand rose bushes is such an analysis. Yes, high taxes can dramatically slow the economy, but that obviously doesn’t mean cut the tax rate to 0 (contra Whitney below), which would have a slew of pernicious effects. So, the question it seems is, what exactly constitutes “excessive taxation?” I admit, it is not clear to me. Just as I have no ideological commitment to raising for the sake of it I also don’t take seriously the Club for Growth, “don’t ever raise taxes, or else”, ideology either. My guess, and I could be wrong, is that the tax rates in most of Europe are considerably higher than those in the United States. Are both excessively high? Just Europe? Why one but not the other? What other factors are at play that also play into the economic analysis? Point is I don’t think that the solution is quite as clear or as easy it is made out to be in the above analysis.

    2. Whitney says:

      Brian, the ideal situation is no taxes at all. Your (liberal, sadly) solution moves farther away from that ideal. Why on earth would we want to go in the wrong direction? Stealing the rich’s well-deserved, well-earned money does nothing to further society.

    3. Richard A says:

      I will grossly oversimplify for the sake of the argument. Let us suppose the Congress passes, and the president signs, a package of bills that cuts spending by $7 trillion and raises $7 trillion in taxes. Two things happen (Note: these two things have ALWAYS happened whenever we’ve had a mix of tax hikes and spending cuts).
      1) Congress later decides, since we’re raising $7 trillion more in revenue, we don’t need to cut the $7 trillion as much. So much of the spending gets restored.
      2) the $7 trillion does not materialize, because more people are motivated to find ways not to pay the extra in taxes. Congress’ economic models always ignore the possiblity that people’s spending and investment decisions are completely unaffected by the prospect of higher taxation.

      1. patrice says:

        The CBO actaully does anticipate changes when reviewing laws. They aren’t as stupid as you think. Also, you fail to note that under Clinton tax increases were passed that took in way more money than was ever estimated. The truth of the matter is that I am far too busy to decide if I should move my IRA to a Roth account of vice versa in order to save $100 in taxes. So are most other Americans.

        1. Joe M says:

          patrice. Thank you for bringing up the Clinton administration. You may recall that Republicans wrote massive entitlement reform that Clinton signed during that time. That’s what Republicans are calling for again and the Democrats resisting. If only Obama and the current set of Democrats would be as wise.

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