Financial Transparency Coalition

We heard a lot about taxes in the first presidential debate last night. In fact, it largely dominated the first forty-five minutes in what amounted to a ridiculously-long-back-and-forth-that-silent-Jim-Lehrer-couldn’t-seem-to-interrupt. But that’s not a bad thing. It’s an important issue. It’s a defining issue. And it’s one that says a lot about the candidates, their values…and their grip on reality.

Before we talk about the debate, though, let’s start with some politics and some economics. Last week, when former California Governor Arnold Schwarzenegger went on the Daily Show, Jon Stewart pointed out that his state is an interesting example of the effect democracy has on deficits. Essentially, everyone wants this government service or that government service, but doesn’t want to pay for any of them. As Stewart puts it: “it’s the perfect symbol for the problem we have in this country between getting the services we want while convincing people they do have to pay for them.”

In California, the people get to vote directly on both services and taxes, but on a federal level we vote on those issues indirectly, by voting for a candidate.

For that reason, it is incredibly unpopular in America for politicians to advocate raising taxes (unless they are someone else’s taxes) or cutting services (unless they are somebody else’s services). The problem is, given that it’s also become popular to advocate cutting the federal government’s budget deficit, the three cannot exist simultaneously. That is, in the most simple mathematical terms, in order to cut the deficit, you either need to raise taxes or cut services, or both. Let’s call that Fiscal Policy 101.

While neither of them said so, last night Governor Romney and President Obama showed they, too, have been drinking the tax cut Kool-Aid. And, to varying degrees, it showed both of them are willing to play into the mirage of deficit-cutting, across-the-board tax breaks, that aren’t paired with deep, Depression-inducing spending cuts.

Let’s talk about the President first. In the debate President Obama stated he supports, and has implemented in his four years in office, tax breaks for the vast majority of Americans. In the debate, Obama also reiterated his promised to cut the deficit by $4 trillion, by raising revenues by $1 for every $2.50 in spending cuts. The timing here is a bit fuzzy because about half of that $4 trillion comes from spending cuts the legislature already enacted last year. As the Associated Press Fact Check points out, if you take those cuts away, “Obama’s $2.50/$1 ratio of spending cuts to tax increases shifts significantly more in the direction of tax increases.” We’ll call that fuzzy math.

But when it comes to perpetuating tax cut / deficit myths, last night Romney really took the cake. Romney claims he can reduce income taxes, but keep them revenue neutral by closing loopholes for top earners, without shifting the burden to the middle class. In his reply, Obama repeatedly cited a paper by the Tax Policy Center, which shows that the math of this plan just doesn’t add up. And while there are papers that get a different mathematical result with different assumptions—the basic finding of the Tax Policy Center’s analysis has held under the intense scrutiny of America’s economists.

Romney made one additional point in the debate last night that is important to the overly-simplified Fiscal Policy 101. It’s called economic growth and it’s one way that the politicians can literally let’s us have our cake and eat it, too. When the economy grows, workers earn more money and, while taxes may remain the same on a percentage basis, they owe more dollars to the government because of higher incomes. With economic growth, we can tax people the same (or less) and pay for the same (or more) level of government services.

The pill of economic growth seemed to be just what the doctor ordered last night. Romney claimed that his tax plan would induce so much economic growth, it would offset his tax cuts. As he put it so succinctly, “there’s nothing better for getting us to a balanced budget than having more people working, earning more money, paying more taxes.”

And while Romney was forthcoming on a lot of numbers last night, he wasn’t specific on just how much economic growth we’d need to make his math work. In recent weeks, however, his experts have predicted his policies would stimulate a 0.5 to 1 percent increase in GDP growth. The problem is, though, that the Tax Policy Center has pointed out that figure is “implausibly large” and even if we did realize a full 1 percent increase in growth, it still wouldn’t prevent a tax increase on middle-income taxpayers. Now that, my friends, is magic math.

These numbers are disheartening. Even if Romney’s plan were a mathematical reality, it still isn’t a political reality, and it’s probably not an ethical one, either. President Obama, in the same breath, isn’t going to reduce the deficit by much—if at all—by staying the current course. The hard truth, that the candidates aren’t willing to admit and that no one wants to vote for, is that taxes must go up and spending must go down. Perhaps not for everyone, certainly not right away, and hopefully not to the point that it will cause tremendous pain to our people, but still, it’s the truth. You’re just didn’t hear anyone say it last night.