European "Austerity" or American "Job Growth"?

Liberals' idea of 'austerity' is raising taxes so that taxpayers are forced to tighten their belts while governments continue to expand theirs. Michael Barone explains why this European-style austerity hurts everyone, including governments:

Veronique de Rugy of the Mercatus Center at George Mason University took a look at what "austerity" in Europe actually means.

What she found is that government spending has increased or not appreciably declined in Britain, France, Italy, Spain and Germany. The only significant spending reductions are in Greece, where the bond market cut off funding. In the other countries, the big adjustment has been an increase in tax rates. European "austerity" is an attempt to reduce government budget deficits largely by increasing taxes and only to a small extent by reining in spending.

The debate before Americans today is which type of policy to pursue: European-style austerity or American-style job growth.

Over the past three years, Obama has pursued the goal of higher tax rates as relentlessly as Captain Ahab pursued the great white whale. Never mind that by some measures the United States, even with the "Bush tax cuts," already has the most progressive tax system in advanced economies. About 40 percent of federal income tax revenues come from the top 1 percent.

And we know from experience that when top rates are increased above Bill Clinton's 39.6 percent, the intake is always less than projected. Since World War II, federal revenues have never risen much over 20 percent of gross domestic product, whether the top rate was 28 percent or 91 percent. The reason is that when rates get high enough, investors' animal spirits (John Maynard Keynes' term) are directed less at increasing productivity and creating wealth and more at avoiding taxes. And without increased productivity, you don't get robust economic growth -- which hurts everyone.

[snip]

Higher taxes are the prime ingredient of European austerity. The danger is that with sluggish growth revenues will languish and the bond market will shut down, as in Greece. Then spending gets cut with a meat cleaver, not a scalpel. House Budget Chairman Paul Ryan understands this. House Democrats' "balanced approach" -- with tax rate increases -- "just means let's start European austerity right now," he told The Washington Examiner last week.

Ryan's budget, which passed the House, would cut tax rates but would also eliminate tax preferences. Many high earners would end up paying more. But because they wouldn't face higher rates on the next dollar they earn, there would be no incentive to seek tax shelters. You can find Democrats who agree with this approach, though they'd differ with Ryan on details. But they won't speak up as long as their leader keeps pursuing that great white whale.