Higher Taxes and Spending Cuts
Mike Rappaport
Tyler Cowen has an interesting column in the New York Times. First, the extent of the tax burden. Welcome back to the pre-Reagan era:
Consider the tax burden on high earners once the Bush administration’s tax cuts expire next year. Add up the federal, state, city and sales taxes for a lawyer in New York City who earns $300,000 a year. Depending on the circumstances, this individual could be facing marginal tax rates in the range of 60 percent. Higher income tax rates would discourage hard work and encourage tax avoidance, thereby defeating the purpose of the tax increases.
The obvious solution is spending cuts. But that's impossible you say. That's not necessarily true:
The received wisdom in the United States is that deep spending cuts are politically impossible. But a number of economically advanced countries, including Sweden, Finland, Canada and, most recently, Ireland, have cut their government budgets when needed.
Most relevant, perhaps, is Canada, which cut federal government spending by about 20 percent from 1992 to 1997. The Liberal Party, headed by Jean Chrétien as prime minister and Paul Martin as finance minister, led most of this shift. Prompted by the financial debacle in Mexico, Canadian leaders had the courage and the foresight to make those spending cuts before a fiscal crisis was upon them. In his book “In the Long Run We’re All Dead: The Canadian Turn to Fiscal Restraint,” Timothy Lewis describes Canada’s move from fiscal irresponsibility to a balanced budget — a history that helps explain why the country has managed the current global recession relatively well.
Spending cuts are possible. Canada cut federal spending by about 20 percent in 5 years. That is just amazing (although I want to see how they defined a cut). I long regarded Canada as a hopelessly left country, but I have to admit -- with Canada surpassing the US in economic freedom, cutting spending this amount, dealing with the recession so well -- that they have certain virtues.
That is how bad the Bush / Obama behavior has been. We now have to look up to Canada. Sheesh!
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