The debate over taxes has become somewhat confused since the recession reared its head. Discussions of how Congress should go about matching federal revenues to federal spending have been replaced with arguments over how much and how quickly to increase the budget deficit. Most economists agree that now is not the time for Congress to focus entirely on balancing the federal budget, but what exactly does that mean? Is any increase in the federal budget deficit a good thing right now? And if increasing the budget deficit is acceptable, should we stop worrying about whether anyone is paying their fair share of taxes?
Of course not. As a new paper from Citizens for Tax Justice explains, revenues should usually be raised to cover (at least roughly) government spending, and it should be raised in a progressive way. There are some exceptions for the unusual circumstances we face today, but they are limited.
For example, using deficit-financed government spending to boost the incomes of low-income families can lead to an immediate boost in consumption that helps businesses get through this downturn without being forced to lay off staff or shut down. This can help reduce the severity of a recession. This benefit could outweigh the costs of increasing the national debt, so long as any deficit-financed spending is temporary.
But if Congress turns to deficit-financed measures that mainly increase the incomes of the wealthy -- like reducing capital gains taxes -- the effects on the economy will be very minimal and will not justify the resulting increase in the federal budget deficit and national debt.
In the long-term, taxes must be raised to a level sufficient to pay for federal government services. That must mean repealing most of the Bush tax cuts (or perhaps allowing them to expire at the end of 2010).
There are some lawmakers who seem to think that repealing the Bush tax cuts would be detrimental to the economy. But this simply makes no sense. The economy thrived at the end of the Clinton years, when taxes were higher, and sank severely at the end of the Bush years, after 8 years of lower taxes. This should tell us that lower taxes, overall, are not the answer to saving the economy.