Democrats' Spending Plans: Budget Packages or Packs of Lies?

Last week Senate Democrats passed a budget resolution that would balance the federal budget by 2012 — without raising taxes and still adding billions in new spending.  In a perverse way this makes sense given that it is also leftists who invented and promote “new math.”  But give the tax-hikers in Congress more credit than that: They are very practiced liars.

Of course they wouldn’t want to list that fact in the accomplishments section of their biographies and résumés, but they know that deceit is the only way to square their avaricious intent with the unwillingness of the public to bear still heavier burdens for congressional excesses.

In their budget resolution, Senate Democrats propose eliminating tax loopholes, shutting down tax shelters, and closing the “tax gap” (the guesstimated revenue loss from underreporting of income) to offset increased funding for education, health care, and transportation projects.  In addition, their resolution calls for a two-year cap on the number of tax-filers subject to the Alternative Minimum Tax.  But will the revenue enhancements be enough to fatten the budget and compensate for reduced AMT collections, all without driving up the deficit?

In a recent piece, columnist and Cato Institute economist Alan Reynolds wrote about the facts behind the cheerily-decorated façade of budget proposals from the Democrats who not only promise red ink-free government bloat, but maintain that massive spending increases will lead to surpluses.  This is like a weight-loss program that claims, “Stuff your face with hamburgers morning, noon, and night — and watch the pounds melt away!”  No one would believe that, nor should anyone put faith in the Democrats’ assurances of legislative miracles.  Even the New York Times is unconvinced.  Last week the paper ran a story on the Democrats’ budget proposal titled: “Senate Democrats Offer Spending Plan, but No Way to Pay for it.”

As Reynolds notes, congressional Democrats are intent on closing certain loopholes (i.e., eliminating tax credits) only to create brand new ones that would benefit different constituencies (college students and certain low income individuals among them).  The Democrats’ own “pay-go” rules, however, would require the new credits to be offset by raising money (or, heaven forbid, reducing spending) elsewhere in the budget.

Reducing the tax gap, which the Internal Revenue Service claims to be about $300 billion a year, is easier said than done.  Realistically, efforts to do so would be difficult, expensive, and deeply unpopular with Americans who would not at all appreciate the IRS’s heavy-handed compliance methods.  Consequently, that option is not practical but chimerical, and won’t provide nearly enough revenue to counterbalance the credits and AMT reform (let alone finance a flurry of new spending to boot).  By itself, the two-year AMT freeze will result in $200 billion of lost revenue.  Assuming that these Democrats are arithmetically-proficient, they know that spending more than what’s available won’t lead to fiscal health.

If the Democrats take their cue from the Third Way think-tank in D.C. that Reynolds cites in his column, they will propose tax increases by way of semantic sleight. The strategy will be to dub tax hikes as “offsets.”  Top marginal income tax rates will be boosted and dividend and capital gains rates will shoot back up to pre-2003 levels.

Assuming that income levels, dividend payouts, and capital gains would not change, increasing the federal government’s share of them would pad the United States Treasury’s coffers.  But of course they would change, and in a downward direction because the incentives for earning income, paying dividends, and making (and reporting) capital gains would be reduced.  Tax-hikers never grasp this theory of tax policy, which is mostly a matter of effecting incentives in order to obtain satisfactory outcomes (or at least prevent perverse ones).  Instead, they are concerned only with where the money goes.

Observing that the Democrats’ “offsets” would raise a scant $6 billion a year, Reynolds posits that soaking “a few rich people cannot possibly be what really motivates so many Democrats’ impulse to raise the highest, most economically destructive tax rates.”  He doesn’t offer up a theory as to what does, but many political observers would agree that these statist urges are not prompted by money for its own sake, but because of the power that money gives to those who control it.

Accordingly, it would seem that the tax-and-spend crowd sees budgetary imbalance, in either direction, as an opportunity.  Surpluses are used for new government spending, while deficits are exploited as reasons for more taxes.  Both ways, the government’s presence in American life increases.

The Democrats cloak their budget plans in a flimsy mantle of fiscal responsibility, but the soundness of the proposals depends solely on the goal that is being sought.  If government growth is the aim, the Democrats’ budget could not be more sensible, both in terms of means and message.  But if the preservation and expansion of freedom is the object of good government, their scheme fails in both letter and spirit.