Higher taxes better than higher debt

American workers got an unpleasant surprise this month when they received their first paychecks of 2013. The typical full-time worker, who earns about $40,145 a year, found that his two-week paycheck was $30 lighter than his last check of 2012. The lost money is the result of tax increases contained in the Jan. 1 agreement between Congress and the White House to avoid the "fiscal cliff," a package of spending cuts and tax increases intended to reduce the federal budget deficit. Though $30 doesn't sound like much, it's unwelcome for households that continue to struggle in this long-stagnant economy.

Under the agreement, all workers were hit with a higher Social Security payroll tax. Wealthier households also felt the bite of higher income taxes. At year's end, some taxpayers will face a higher capital gains tax, limits on their use of deductions and credits, and a higher estate tax.

Federal lawmakers justify the tax increases as necessary to improve the nation's fiscal health. They note that the higher taxes fall mainly on high-income households and claim the agreement "protects" and "strengthens" the middle class. But as workers lament their lost pay, they should know the agreement does little to put the nation's finances in order.

Despite the higher taxes, this year's budget deficit will approach $1 trillion. To erase that would require a tax increase almost five times larger than the one implemented by the fiscal cliff deal. Even if that increase fell mainly on the rich, as the fiscal cliff deal does, the typical full-time worker would still need to pay an additional $145 in taxes on each paycheck this year. Another $60 per paycheck would be needed to shore up Social Security and Medicare's Hospital Insurance program for the long term — and that amount would have to increase in future years. Much more would be needed to firm up the rest of Medicare.

Neither Congress nor the White House wants such a massive tax increase. But they will borrow to spend government money as if they had all those taxes in hand, and make legislative promises to spend even more in the future. In recent years, the federal government has borrowed at a record pace — $5.8 trillion in the last four years alone.

In special cases, government borrowing is appropriate: Think of the war bonds that were used to finance the American military in World War II. But even if we deem the Afghanistan and Iraq wars, anti-terrorism efforts, and the 2009 fiscal stimulus to all be "special cases," most of the $10.7 trillion the federal government has borrowed over the past 12 years has simply been a maneuver to pay its everyday bills without raising taxes.

Call this maneuver "fiscal illusion," because it allows Democrats and Republicans to provide big government at a discounted price — for now, anyway. Sooner or later, the bill will come due. At that time, when the debt has become our children's and grandchildren's problem, it'll be too late to ask the questions we need to ask now: Is all of this government worth the cost? And if so, then why aren't we paying it now?

I'm a libertarian; I favor smaller government and lower taxes because I believe they give people more freedom to live the lives they believe are best. But whether you're a supporter of more government or less, we should all agree that each generation should pay for the government it receives. To do otherwise is to refuse to pay our fair share of our government's cost, and instead foist a large part of that cost onto our children and grandchildren.

Perhaps this new tax squeeze will prove a blessing. Now that we've had a small taste of the cost of our nation's fiscal irresponsibility, we may decide not to continue our reckless ways. Sadly, it's more likely that the opposite will happen and America will further mortgage its children's future so that we can have more discount-rate government today.

Thomas Firey is a senior fellow with the Maryland Public Policy Institute. His email is tfirey@mdpolicy.org.

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