Do We Need to Raise Taxes?

At the New York Times Economix blog, Princeton Professor Uwe E. Reinhardt argues that higher taxes are necessary to restore the United States to fiscal health. He begins with a chart from the Brookings Institution showing that the federal budget deficit for the next ten years is almost exclusively a result of the 2001 and 2003 tax cuts and the lost revenue and increased demand for social services that resulted from the 2008 recession. He sees the 2001 and 2003 tax cuts as symptoms of a long-term willingness on the part of the American people to embrace tax cuts and new spending programs (Reinhardt notes the trillion-dollar Medicare prescription drug plan as an example of the later).

As a solution, he echoes the former conservative chair of the federal reserve Alan Greenspan who argues that to afford the government that most Americans now expect requires returning to 1990s-era tax rates, which would mean increasing taxes on all who pay income taxes. Such a solution is politically problematic as it violates President Obama's campaign promise not to raise income taxes on low and middle-income Americans and Republicans opposition to any tax increases.

Finally, Reinhardt notes that the United States is currently a low-tax nation by the standards of developed nations. The average nation in the Organization for Economic Co-operation and Development (OECD) collects 44.8% of GDP as tax revenue; the United States collects just 26.1% (although it must be admitted that in other wealthy countries, the government pays for healthcare and higher education: large expenses for most Americans). Finally he confronts the idea that higher taxes impede economic growth, charting economic growth by noting that over the past ten years, there has been little evidence for that idea suggested by a transnational comparison of wealthy countries (although there are many problems with using this as any sort of definitive proof of the relationship between tax rates and growth).

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