The federal budget deficit threatens Michigan's economic prosperity, which is already lagging behind the national economy. Rather than addressing the real cause of the budget deficit--runaway federal spending--politicians in Washington think additional tax increases are the solution. The same Congress that seems blind when it comes time to find ways to control spending has the eyes of an eagle when looking for ways to lower your take-home pay.
Michigan taxpayers are already paying more than they get back. In 1986, Michigan taxpayers paid $27.7 billion in federal taxes, equal to 3.69 percent of the U.S. total. Michigan, in return, received $23.4 billion in federal outlays, equal to 2.82 percent of the U.S. total. If Michigan taxpayers paid no more in federal taxes than they got back, every family of four could receive a $1,892 tax cut.
Tax increases will not only take more resources from the productive sectors of Michigan's economy and jeopardize economic growth, they will do nothing to reduce the deficit. The Gramm-Rudman law sets the deficit targets, and legislators are unlikely to make deficits any larger than the targets allow. Raising taxes simply allows politicians to meet Gramm-Rudman's deficit targets at higher levels of federal spending.
Since 1980, government spending has increased almost 80 percent, nearly double the amount needed to keep pace with inflation. Although marginal tax rates have fallen, tax revenues have risen about 75 percent, also much faster than was needed to keep pace with inflation. The reason that the deficit will be higher in 1988 than it was in 1980 is because spending grew faster than taxes.
Contrary to popular belief, tax collections and spending have increased during the Reagan administration. Virtually all the "cuts" were simply reductions in increases. Spending has increased by an average of $59 billion annually. Defense spending has risen from $134 billion in 1980 to $290 billion in 1988. Non-defense spending has risen from $457 billion in 1980 to $766 billion in 1988.
As for taxes, President Reagan, much to his credit, has succeeded in bringing top tax rates down from 70 percent to 28 percent. But cutting tax rates is not the same as cutting taxes. The elimination of many deductions and exemptions, rising Social Security taxes, and huge business tax increases have resulted in rapidly growing government revenues. A record peacetime economic expansion and the creation of 16 million new jobs since 1982, of which 520,000 have been in Michigan , have also helped generate federal revenue.
Michigan citizens should be suspicious of further calls for tax increases. Taxes were raised in 1982, 1983, 1984, and 1987 as part of "deficit reduction" plans. A real deficit reduction plan must attack runaway federal spending. One solution would be an aggregate freeze on the amount of money politicians can spend. Unlike major new taxes, a spending freeze would not threaten economic expansion.
A freeze would limit government spending next year to the amount spent this year. For instance, if government spending is estimated to be $1.1 trillion this year,, next year's budget could not exceed $1.1 trillion. The freeze simply asks the government to do precisely what a family must do when it lives beyond its means: hold the line on spending.
Few people recognize how effective a spending freeze would be in reducing the deficit. According to figures published by the Congressional Budget Office, a spending freeze would lead to a budget surplus in just three years. The reason a spending freeze would work so well is because tax revenues are projected to increase about $73 billion yearly, primarily due to economic growth.
A spending freeze would not only meet all Gramm-Rudman deficit targets, it would balance the budget two years ahead of schedule. All this would happen by simply capping spending at its current level.
Spending on individual programs can rise or fall according to the wishes of Congress and the administration, as long as the overall spending level does not exceed the total cap. If Congress and the president wanted to increase spending for AIDS research, defense programs, or Social Security benefits, they would be free to do so, as long as they reduced spending in other areas to make up for it. That way, special interests would have to compete with each other, rather than ganging up on the taxpayer.
New taxes offer no solution to the deficit. Limits on spending, however, are the formula for continued economic growth, more jobs, and greater opportunity. A spending freeze is a fair and workable solution than would brighten Michigan's economic future.
Dan Witt is an adjunct scholar at The Mackinac Center for Public Policy and director of membership of Citizens for a Sound Economy. Permission is hereby granted to print or broadcast this article, in whole or in part, with appropriate credit given to the author and to The Mackinac Center.