Reagan, Taxes, and Pragmatic Fiscal Policy

Bruce Bartlett wrote an article for Forbes.com back in February that is worth a read for all Republicans: http://www.forbes.com/2009/02/26/obama-budget-reagan-clinton-bush-opinions-columnists_higher_taxes.html?partner=links

I don't bring this up because I'm praising the Democratic Party for its decisions to end tax cuts for the wealthy. I bring this up because it aptly demonstrates that Republican and Democratic Presidents have raised taxes in the past, and that it has proven to be the right decision for the economy. This is completely contrary to the typical Republican's mindset, yet both Reagan and Bush, Sr., have shown that raising taxes can, in fact, have a positive effect on the economy.

Why is that? Taxes mean income for the country. When the country is making money, like a business, investors take notice. Foreign nations take note, and the country's bonds are more attractive as investment opportunities. Raising interest rates does the same thing, but that squelches lending and borrowing, which are needed for economic growth. Taxes, though, affect consumer spending habits; if taxes are too high, consumers have less income to purchase with, and aggregate demand falls. With no demand or lending, production decreases, and the country has a problem.

Reagan recognized this. After his historic tax cuts, he realized that he had cut too far, and that his policies, along with the high interest rates of the Fed (under Paul Volcker), made economic growth difficult. Bush, Sr.? With a war coming up, he had no choice but to raise taxes to get revenue to fund the initiative. These two leaders differ from Bush, Jr.: in the face of a massive deficit and low interest rates, he cut taxes, and then added to entitlement spending. Bush, Jr., followed the ideological approach to policies: the abandonment of practical, responsible fiscal policy in favor of pandering to voters and private political interests.

We are facing a crisis of spending. We are facing a crisis of investment. If the United States dollar is going to remain the currency of international exchange, the United States must demonstrate that its currency still means something, and that its bonds still have value. To do this, the United States must show that it will do what it must in order to increase its income (or reduce its deficit). The people of the world see the power elite and leisure class as images of "American" excess -- of over-consumption, over-payment, and over-indulgence. By rolling back the tax cuts to the wealthy, Reagan and Bush reversed the "bad press", and satisfied the worries of the (ironic) international elite and leisure class. Consequently, heading in that same direction is not necessarily irresponsible or undesirable.

The issue is whether this will have a negative impact on the average American. As far as I'm concerned, ending the tax cuts to those with an income of more than $250,000 will not affect the average American. We may even have a tax cut coming.

So why are Republicans up in arms? Methinks we are protesting too much.