The case for raising taxes to balance the U.S. budget

I am not sure who said it first in public debate, but it holds truer today than ever. “Everyone is entitled to their opinion, but no one is entitled to their own set of facts.”

Congress has engaged in a fight with itself and the president on the extension of the federal debt limit, a battle that would take the United States into uncharted territory. This flirtation with an unknown disaster has been resolved, but it is still important to shed more light on the debt crisis and the related federal budget crisis. There is a need to connect the dots between the resolution of these twin problems and what it means for minority business development and the general health of the U.S. and the global economies.  

Let me say clearly, that taxes are too low to support a federal government that even a rational Republican could endorse. Leaders calling themselves fiscal conservatives today would not be qualified to use that term in any period in our history except for the past 10 years. The only thing these “fiscal conservatives” have with true fiscal conservatives of the past is a desire for a balanced budget. I imagine that even Ronald Reagan, that icon of conservative presidential leadership, would cringe at the prospect of ideology trumping reason when it comes to jeopardizing the credit rating of the United States government. So what are the facts that should be the focus of this debate?

First and foremost, marginal tax rates on Americans are lower today than at any time. The table below lists the marginal tax rates for married couples filing jointly for incomes of $50,000 and $200,000 in 10 year increments beginning in 1961, 50 years ago.

Taxes have simply been lowered too much to support an effective government. It makes you wonder whether the real agenda of the fiscal conservatives is to knowingly bankrupt the federal government.  But if this is the goal, to what end?  

The only answer that makes any sense is that fiscal conservatives want to control a greater portion of the nation’s wealth than they already enjoy. The income distribution in the United States today is more unequal than the income distribution in Russia and Turkey and has gotten progressively worse since the 1970s. Between 1967 and 2008, average American households saw their incomes increase by only 25 percent. The incomes of the highest earning 5 percent increased by 68 percent, the incomes of the top 1 percent increased by 323 percent and the highest earning tenth of percent increased by a whopping 492 percent.

It is not a coincidence that during this time tax rates have declined dramatically and budget deficits and total debt have exploded. The bottom line that the fiscal conservatives and their antediluvian supporters ignore is that small cuts in marginal tax rates when tax rates are above 70 percent might be called for, but continuing to cut rates when rates are below 40 percent for the highest income earners is dangerous to the fiscal health of the government and the health of the economy. Since 2001, the combination of tax cuts and the explosion in military spending to fight questionable wars has resulted in converting a surplus in 2001 of $128 billion to the current deficit of $1.65 trillion. All the while, the total debt has increased in 10 short years from $5.8 trillion to more than $15.5 trillion, the largest 10 year increase ever.  

Yet, in the face of all of these facts, fiscal conservatives righteously believe and have gone so far as to pledge that they will not increase taxes. These pledgers are violating their constitutional responsibilities and are ignorant, or worse, as to the impact their folly is having on the economy. They fail to see that their actions are raising interest rates and making matters worse for the very people, small business owners, they purport to be supporting. An increase in debt interest of even 50 basis points (a half of 1 percent) translates into $150 billion more in interest payments on the federal debt, further increasing the deficit and debt.

Talk about the dog chasing its tail. What has not been addressed at all by these so-called supporters of small business is that a likely 1 percent increase in the prime rate would amount to a transfer of wealth from borrowers to lenders of over $60 billion per year. I fully expect interest rates to be 200 to 300 basis points higher by this time next year if taxes are not increased. From the perspective of a small business owner, whether taxes increase by $60 billion or your interest payments increase by $60 billion the immediate impact is the same. But even this is not fully correct. An increase in taxes closes the deficit gap, reduces income inequality and the damage inequality does to economic growth. It also puts downward pressure on interest rates and funds the government. On the other hand, an increase in interest payments transfers more wealth to lenders from borrowers, further worsening an already dangerously unequal distribution of income and wealth.

These things matter for minority businesses as much as they do for all businesses. It is enlightened self interest that should lead business owners to realize that enough is enough and we must fund the federal government. No fudging of the facts by conservatives will produce a result more beneficial to small businesses and households with modest incomes.

Dr. Fred McKinney is president and CEO of the Greater New England Minority Supplier Development Council.