Rope-A-Dope Debt-Ceiling Strategy Fails

The President’s Rope-A-Dope strategy has failed. President Obama tried to convince the Republican House Leadership that a fair deal would be to trade a reduction in spending, which given the nation’s burgeoning debt and deficit, should be the country’s first order of business, for increases in taxes, which, given the nation’s current economic malaise, should be the country’s last-resort order of business. President Obama knows the Speaker genuinely wants to reach a bi-partisan solution to the impending debt-ceiling crisis. Boehner, however, wasn’t buying the President’s offer to reduce future spending if only he would agree to more increases in taxes. That’s the “balanced approach” the President is selling and which Boehner, so far, sees through. It reminds us of the rope-a-dope strategy made famous by Muhammad Ali in the 1974 Rumble in the Jungle with George Foreman. Foreman was the big loser then and Boehner, had he yielded to White House pressure, would be the big loser now (and so would the country).

We are not anti-tax dogmatists. We simply believe tax policy can only be wisely considered in the context of a strong national pro-growth agenda. All of the Administration’s most positive projections for reducing the deficit and the national debt have been predicated on Pollyannaish growth projections that are meaningless (and worthless) to everyone in Washington with the apparent sole exception of the President’s speechwriters.

It’s a clever sleight of hand (or, perhaps, we should say sleight of tongue). The President talks about the need to raise revenue (who can argue with that) and demands an increase in tax rates (on higher earners) to achieve that goal, and if no one is paying attention, presto! He gets to increase taxes. What is so obviously needed is a substantial increase in economic growth, which would, of course, produce increased tax revenue. Fortunately, it seems Speaker Boehner was paying attention.

The nation’s GDP growth currently is sliding downward, now a paltry 1.8% when we were sold a stimulus program that was to produce nearly twice that rate of growth by now. Unemployment that was never supposed to reach 8.0% is now at 9.2%. If ever there was a time to keep more purchasing power in the hands of the people it is now. Half the country gets a complete pass on paying any income tax at all, to which the Administration’s response is to increase taxes on those who are already paying a disproportionate share of the freight. In fact, millions of tax filers get cash refunds on a portion of the taxes they didn’t pay. This is what the Administration calls a balanced approach to solving the budget crisis.

We are headed, according to the non-partisan Congressional Budget Office (CBO), to a debt to GDP ratio of over 100% within the decade. That is, according to best-selling economists, Carmen Reinhart (University of Maryland) and Kenneth Rogoff (Harvard University) patently anti growth. In just a few months (when Japan is scheduled to lower its corporate tax rate) we will have the highest corporate tax rates in the world. The Administration has carefully constructed an anti-business National Labor Relations Board, that is pursuing policies that seem determined to rival Putin’s anti-business purges in Russia. Obamacare is a mess. Over thirteen hundred temporary exemptions have already been accorded to American companies who would have had no choice but to drop employee health coverage or pass significantly higher costs onto their customers. The CBO has already re-calibrated its ten-year cost projections for Obamacare dramatically upward by over $100 billion (this for the program that the President pledged “would not add one dime to the deficit”). The federal deficit has surged over 250% from 2008 to the present, and the total interest on our debt (including the interest owed to the people when the government leaves a marker for the funds it takes from so-called dedicated trust funds such as Social Security) is greater than the combined budgets of just about all federal agencies but defense.

With the exception of those Republicans and those few lonely Democrats who understand that the people who sent them to Washington have very serious expectations about reining in federal spending, most of the congressional pontificating is little more than political theater. It is a chimera designed to pass the proverbial buck to another generation. The Administration’s Beltwayspeak defines reducing spending as spending at a reduced rate of increase sometime in the future, not cutting back on current expenditures.

The President has shown little inclination to pursue a strong pro-growth agenda, and without strong economic growth we simply cannot substantially alter the bleak outlook about which the CBO has warned. As we have written in prior essays, the President has, essentially, deep-sixed his own Debt and Deficit Reduction Commission’s recommendations because of its emphasis on growth through reduced tax rates on both individuals and corporations. Those recommendations were inconsistent with the President’s class warfare election strategy so they were ignored.

Economic data from both liberal and conservative sources show, rather conclusively, that tax rates are not necessarily the key to tax revenue. In fact, tax revenue has generally remained at between 18% and 20% of GDP regardless of the marginal tax rate levied. The last two years of World War Two were an exception as tax revenue as a percent of GDP nudged up over 20% and, of course, the current malaise has seen tax revenue dip down as a percent of GDP. This suggests to us (and many others) that increased economic growth should be our first order of business, not raising tax rates on the wealthy or anyone else. Data from the liberal-leaning Tax Policy Blog (as well as the IRS) show that the top 5.0% of taxpayers (those making over $200,000), on whom the President insists on increasing tax rates, already pay more of the total tax bill than the bottom 80.0% of tax filers.

We continue to hold hostage to unions, long-ago negotiated tax treaties that would significantly improve American exports. The President wants to increase taxes on capital gains, which simply would reduce taxable transactions and tax revenue from the gains on those deferred transactions. Frugal Americans who have, over a lifetime, value invested in the stock of American companies in order to build dividend income for their retirement years, face a tripling of the tax rate on their dividends under Obama’s plan to “tax the rich.” None of this makes sense for a nation that desperately needs to improve economic growth.

Lower tax rates do not guarantee higher tax revenue, just as higher tax rates do not guarantee higher tax revenue. But lower tax rates are almost always conducive to economic growth and sustained economic growth is essential to maintaining healthy tax revenues.

As stated earlier, we are not anti-tax dogmatists. We would support the elimination of most special interest federal tax schemes, including the wide array of deductions and credits designed to influence private and corporate citizen behavior if it were accompanied by a reduction in marginal rates, which would spur economic growth, which, in and by itself, should increase tax revenues. But we have major problems with increasing taxes on anyone without first focusing on policies to stimulate rather than retard economic growth.

Speaker Boehner apparently understands the difference between increases in tax rates and increases in tax revenue. Democrats in Congress last week have stated loudly and clearly that they will support no meaningful reform of Social Security, Medicare or Medicaid. Benefits, they insist, are not to be touched. Agreeing to increased taxes in return for non-specific promises to reduce future spending would have been a fool’s bargain – a rope-a-dope if ever there was one.

By Hal Gershowitz and Stephen Porter

.