Fiscal cliff: Republicans on wrong track if they help Obama raise taxes on the rich

Higher taxes won’t much improve Washington’s finances and would likely wreck the economy. But as fiscal cliff talks intensify, a small group of Republican senators are prepared to help President Obama make the rich pay more – the facts notwithstanding.

Federal deficits are out of control – averaging $1.3 trillion over the last four years – but those are not the product of reckless Bush administration policies that must now be reversed, as Democrats relentlessly argue.

In 2007, the last year before the financial crisis, the deficit was only $161 billion – with the Bush tax cuts and the prescription drug plan for seniors in place and the wars in Afghanistan and Iraq at full tilt.

The economy has achieved some recovery – GDP is up about $1.8 trillion from pre-recession levels. But tax revenues are down and spending in 2013 will be up a whopping $1 trillion from fiscal year 2007.

To accelerate recovery, Mr. Obama and Congress temporarily cut payroll taxes by two percentage points and enhanced some other credits and deductions in the tax code. Letting those expire on Jan. 1 would slice some $214 billion off the deficit.

Of the additional spending since the start of the financial crisis, only $360 billion was needed to accommodate inflation. More than $666 billion is new spending, originally promoted as “temporary” to deal with the recession, but now settling in to become permanent.

Merely letting the payroll tax reduction and other temporary provisions championed by Obama lapse on Jan. 1 and returning federal spending to pre-recession levels would erase nearly $900 billion from the deficit. The Bush tax cuts need not be touched, at least not to solve today’s deficits.

The real problems are two-fold. Republicans such as Senators Saxby Chambliss, Lamar Alexander, and Lindsey Graham, who are prepared to validate Obama’s spending spree by increasing tax revenue, would like their constituents to believe they are fiscal conservatives, when it seems they really have no stomach to curb spending the nation can’t afford.

The nation has become dependent on big deficits to sustain even modest economic growth and keep unemployment from surging above 8 percent, because the Obama administration and Congress have not adequately addressed the structural problems that caused the recession and are now holding back growth:

• Unnecessary constraints on petroleum development in the Gulf of Mexico, off the Atlantic and Pacific Coasts, and in Alaska keep the nation woefully dependent on oil imports, despite an increase in onshore petroleum production in the lower 48 states.

• The US has competitiveness problems with China and other Asian juggernauts.

• The dysfunctions on Wall Street continue to starve small- and medium-sized businesses of the credit they need to expand.

Obama’s solution includes hiking taxes on the rich. But raising taxes on the wealthy by about $160 billion a year would hardly dent the deficit. And pushing up federal and state taxes paid by many small- and mid-sized businesses well above the 50 percent that many of them pay now would greatly impair jobs creation.

Ultimately, in negotiations to avert the fiscal cliff, conservative members of the GOP in the House will extract at least an equal amount of spending cuts as they cede in revenue increases. But cutting the deficit without other policies to boost growth will likely thrust the economy into a second recession. Tax receipts would then fall, and spending on programs like unemployment insurance and Medicaid would increase further – hardly a prescription for progress on the budget or jobs.

What Obama and his new friends among the GOP need to understand is that the answer to the debt crisis is fostering private sector growth – by developing more domestic oil resources, attacking Chinese mercantilism head on, and requiring Wall Street’s big banks to provide more credit to smaller and medium sized businesses and the community banks that service them.

This is the only real path to getting the country out of debt. Raising taxes on the rich is not the answer.

Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and a widely published columnist. Follow him on Twitter @pmorici1.