Tax pledge proves its worth

Grover Norquist’s Tax Pledge isn’t perfect. But it successfully forces lawmakers and taxpayers to address America’s current fiscal path.

Opponents of the pledge say it is blocking the “reasonable” compromises needed to avert the dreaded fiscal cliff. They say we need a “balanced” approach that includes not just spending cuts — or, at least, reductions of the rate at which government spending increases — but also “revenue enhancements,” in essence, taxes. The pledge makes that hard and, opponents say, therefore must go.

But before we burn Grover and the pledge at the stake, let us consider what’s at the root of our fiscal difficulties. Nations run into deficit problems when economic growth stagnates and tax revenues fall. A primary cause of that stagnation is wealth transfers that stymie wealth creation. There is no shortage of entrepreneurial creativity in America, but our complex regulatory structure and tax code has favored wealth transfers at the expense of wealth creation in many ways.

Tax-favorable treatment and subsidies artificially encourage capital to flow into non-economic renewable energy ventures. More significantly, tax and regulatory arbitrage and a falling dollar encouraged excessive growth in the housing market, which inflated the bubble that, when it burst, led to a financial crisis.

Taxpayers have too long been told that if the rich are taxed a bit more, economic revival will be at hand. But promised spending cuts never materialize, and taxes continue to be exploited to favor certain companies and industries. Instead of being used to pay down debt, revenues go to further expanding government, and the reality is Americans are continually asked to pay more for Washington.

Grover Norquist’s organization, Americans for Tax Reform, has long promoted less-distorting tax policies. This is much needed. With the Tax Pledge, ATR has now placed a large STOP sign in the path of tax increases. Norquist’s genius has been to recognize politics can be disciplined only by qualitative rules, such as the “No Tax Increase” pledge.

Bureaucrats and politicians have proved far too creative at gaming quantitative disciplinary rules. Americans are rethinking the need for the qualitative restraints the Founding Fathers saw as far superior to the “parchment barriers” proposed by so many centrists today. Thanks to Grover, there at least is discipline on tax increases.

Now we need to place similar barriers before these other obstacles to wealth creation. The pledge doesn’t address the effects of government spending and regulation, which are slowing economic growth and wealth creation. Spending shifts capital from those who risk investing in wealth-creating enterprises to bureaucracies that allocate it in ways that reward special interests. Primary spending comes not from discretionary spending, not even from the military, but from demographically unsustainable entitlement promises, such as retirement and health benefits that have piled up over several decades.

Regulations — and the massive uncertainties their vagueness creates — further raise the risk of innovative investments.

The Tax Pledge is not perfect. It doesn’t address government spending. If the $10 in spending cuts for every $1 in tax increases deal mentioned in the Republican primaries were actually offered in an ironclad form, a tax increase might make sense for America.

Yet absent the pledge, there would be little consideration of a “balanced” discussion of how to address America’s true fiscal challenges. Anybody can oppose taxes on the stump as an abstraction. It is now, when increasing taxes is touted as the only possible solution, that the pledge proves its worth.