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Wall Street Journal - Paul: The Real Danger From the Fiscal Cliff


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By Senator Rand Paul

Americans are told that they face a "fiscal cliff" if automatic federal spending cuts and tax increases occur at the end of the year. I'm not in favor of jumping off a cliff, but the logic of the supposed threat needs to be questioned.

The fiscal-cliff narrative assumes that spending cuts are bad for the economy. It follows, then, that more spending (and therefore more government debt) are good for the economy.

Didn't we try that with President Obama's trillion-dollar deficit-spending spree? You remember the stimulus-the one that created or "saved" American jobs at a cost of $400,000 per job. The one that left the unemployment rate over 8% for 43 consecutive months, the longest span since the Great Depression.

So is it good for the federal government to borrow more and spend more, or is it good for the economy to spend less and borrow less? These questions might need to be addressed before we wring our hands in despair at the possible fiscal cliff.

Now let's consider the assumption that raising taxes could lead to "taxmaggedon." The implication here is that raising taxes-that is, extracting and confiscating more income from workers and businesses-is harmful to the economy. I am easily persuaded of this truism. As Milton Friedman said, nobody spends someone else's money as frugally or as wisely as they spend their own.

But if raising taxes would lead us toward trouble, why would raising taxes only on some people ("the rich") not have some of the same harmful effect? Since the top 1% of income-earners pay about 40% of the income tax, raising taxes only on the 1% still significantly increases the tax burden on the private sector.

Any notion that it matters whom you tax is simply a parlor game played by the class-warfare crowd. There are only two repositories of money-the private sector (which efficiently distributes goods) and the public sector (which doesn't distribute anything well). No central planner possesses the omniscience to assign fairness. The only guide to fairness of distribution that I can imagine is the minute-by-minute vote of the most exacting and direct democracy ever known: the marketplace.

None of this is to say that we don't need government or that government doesn't strive to do good things. It is to say that government doesn't do anything very well, and that government should be limited-confined to those duties that absolutely can't or won't be done by the private sector.

When evaluating any government expenditure, legislators should be forced to acknowledge the "Bridge to Nowhere," the roughly 10,000 FEMA trailers bought but never delivered to Katrina victims, and the thousands of pounds of ice that never made it to New Orleans and required a new contract to have someone come melt it and dispose of it.

Apologists for big government say that we must raise taxes, that there simply isn't enough spending to cut. Maybe these legislators ought to look at the $100,000 that the State Department spent this year to send comedians to spread American culture in India (part of a $600 million program). Or the $2.6 million spent by the National Institutes of Health to teach Chinese prostitutes to drink responsibly. Or the $947,000 spent by NASA studying what type of food we should serve on Mars. Or the $100 billion ($115 billion last year) that is improperly spent across the federal government each year, according to the White House Office of Federal Financial Management.

Many Republicans are beginning to cave on the tax front. Some say to hell with the Taxpayer Protection Pledge they made to voters (drafted by Americans for Tax Reform) not to raise taxes. Some say they'll eliminate some undeserved loopholes. But the truth remains: If taking more money from the private sector is harmful, it doesn't matter whom you tax or what form the revenue increase takes. Taking more money out of the private sector is injurious to economic growth.

Where are the Republican calls for reducing revenue to government? Where are the calls for lowering taxes? If you want to stimulate the economy, leave more money in the economy. When Republicans give in on this argument, we doom not only the economy but our party as well.

Some Republicans are saying that if the tax rates expire, taxes will go up $2 trillion, so any increase in revenue less than $2 trillion is really a tax cut. I don't think that fuzzy Washington math will mollify the conservative grass roots.

Even for believers in wealth redistribution and big government, the facts militate against higher tax rates. As Stephen Moore recently pointed out on this page, in the 1920s, 1960s and again in the 1980s, lower tax rates increased the percentage of taxes paid by the wealthy. And the economy grew.

Any legislator considering capitulating on the Taxpayer Protection Pledge should remember that revenue is down now because of the recession and slow economic growth, not because of the lower tax rates that have been in place for almost a decade. Raising revenue by increasing rates or ending deductions won't spur the economy. It may even depress the meager economic growth we have and raise less tax revenue.

While there is no bigger believer than I am in a balanced-budget amendment, I don't want to balance a $5 trillion budget (which the Congressional Budget Office estimates we will have by 2020). I want to balance a budget that is limited in scope by the Constitution and limited in scope by the understanding that the private sector is more efficient than the public sector.

The Taxpayer Protection Pledge simply codifies what is incontrovertibly true. The economy and all individuals in it thrive when we are allowed to keep more of what we earn. If Republicans give up on that principle, we may as well disband the party.

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