Cut Spending or Raise Taxes?

The Prime Issue of the 2011 Legislative session is what to do about a shortfall of $400 million in the general fund. The legislature has two basic choices:
1. Raise taxes rates
2. Cut spending

I would like to explain why I cannot support a sales, corporate or individual tax increase. I fear that too much time will be spent debating if we should raise taxes or not. The answer is unequivocal: no tax increases. The sooner the legislature comes to this conclusion, the sooner real solutions can be found. Here are a few reasons not to raise taxes.

First: current tax rates are too high and should be cut by 30 percent. According to the Americans for Tax Reform Foundation, 63 percent of all wealth created each year in the United States goes to federal, state, local taxes and/or pay for the cost of regulation. The cost of taxation and regulation should never exceed 40 percent of the GDP. In 1900, the percent of the GDP that was needed to fund all levels of government was only 8 percent! Government is getting plenty of money. Government does not need any more taxes. Government needs to use its current funds more efficiently.

Second: The private sector is struggling. Taxes come from private sector economic activity. State tax revenues have fallen from $3 billion two years ago to $2.3 billion this year. An increase in taxes would further reduce private sector activity and stifle the economy.

Third: Unemployment is up because there is not enough work or wealth in the private sector. If the legislature raises tax rates on the private sector, there will be less money left for businesses to hire workers and tax collections will drop even further.

Fourth: The legislature needs to fund public education. Public education cannot be funded with a shrinking private sector which is the source of public school funding. In order to fund public schools, the health of the private sector must be the 2011 legislature’s main focus. A $56 billion Idaho economy will raise $3 billion while a $45 billion economy will raise closer to $2 billion.

Fifth: The economy is stimulated by private sector production; not by government sector spending. The private sector produces wealth. The private sector is a perpetual wealth producing machine. It does not need government to continue producing wealth.

The government, on the other hand, does not produce wealth. It consumes wealth and gets in the way of the privates sector’s efforts to produce wealth by creating regulations. Regulations and taxes are a burden on the private sector. Proof that the government consumes wealth is to answer this simple question. How long would any government worker receive a paycheck if all taxes were suspended for one year? Government cannot survive without taxes paid by the private sector. (Inflation and printing money is a type of taxation.)

If raising taxes is not an option, then how will the legislature fund public schools and still provide essential government services? Two budgets (Education and Health and Welfare) must be the focus of the legislature’s deliberations because these two budgets consume 85 percent of state general funds. Two separate efforts need to proceed simultaneously. First reduce the cost of government. The second is to reduce the cost of regulations. I would offer several suggestions in the next post.