Debt ceiling impasse: Which party is right about taxes?
Debt ceiling pressures are mounting, as Republicans and Democrats both claim to have the right formula for closing the budget divide and raising the debt ceiling.
The chasm that separates Republicans and Democrats in budget talks seems tough to bridge: One party insists on tackling the federal debt problem without "job-killing tax hikes." The other says any "balanced" approach should include some tax increases, not just spending cuts.Skip to next paragraph
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The impasse has big consequences.
If the two sides can't bridge that divide, it may be difficult to reach a fiscal shape-up deal that also would raise the nation's debt ceiling, so that the Treasury doesn't become unable to pay the nation's bills starting in August.
Is one side right?
Both sides can muster some strong arguments, but the reality may be messier than either side lets on.
Many economists say that now is the wrong time to raise taxes, given the weak state of the economy and consumer finances. In that sense, a tax hike could be job-killing. But economists can point to periods in history where taxes have risen and the economy has grown just fine. America in the 1990s is one example.
Moreover, Obama and Democrats aren't pushing to raise new tax revenue this year or next, but in 2013 and beyond. And a key element of discussions has been reforming the tax code so that it becomes simpler, with fewer deductions and loopholes. Some economists say that could be a win-win scenario, in which the government gains more tax revenue while nominal tax rates remain low and economic growth is little-affected.
As to whether a "balanced" plan needs to have both spending cuts and tax-revenue increases, finance experts say that's more of a political position than an economic fact.
The economic reality is that, over time, the government's current fiscal course looks unsustainable. National debt is rising because of a persistent pattern of spending that grows faster than revenue.
"We all agree we need to bring our fiscal house in order," says Roberton Williams, a senior fellow at the Tax Policy Center, a non-partisan research group in Washington. "The question is when ... and what is the composition [of the fix]."
To people who generally see government programs as useful and worth keeping if possible, the optimal fix might include new tax revenue. To people who think government is too large, the desired fix would focus squarely on spending cuts.
"It really does come down to an argement about the size of government," Mr. Williams says.
Both sides have deeply held principles at stake.