Tuesday, August 3, 2010

A Lesson from Italy for Obama and the Congressional Liberal Democrats

Like many European states facing large budget deficits, Italy is focusing on reducing its deficit. The Italian parliament recently approved the government’s austerity measures, which included spending reductions and a crackdown on delinquent taxpayers. Unlike the austerity plans of many other European states, however, Italy’s plan does not include a tax increase.

United States President Barak Obama and the liberal Congressional Democrats plan to allow some of the tax cuts signed into law by President George W. Bush to expire, which would represent a massive tax increase. Income taxes would rise not only for the wealthy, but also for many small businesses for which the owners file personal tax returns. Additionally, many middle class taxpayers will be among those whose taxes will increase because of a significant increase in the capital gains tax.

The Obama Administration, which, unlike the European governments it usually likes to copy, has been conducting an unprecedented spending spree, claims that raising taxes is a responsible way to reduce the deficit. However, as the conservative Italian government recognizes, tax increases are counterproductive to reducing deficits because they reduce economic growth by removing more money from the private sector, which, in turn, reduces government revenue. Tax increases are especially harmful to the economy during recessions. Conversely, tax cuts increase economic growth.

A better way than raising taxes to reduce deficits is to reduce spending. The European states are cutting spending by reducing the generous pensions of government workers, for example, or even their salaries. Obama and the Congressional liberal Democrats ought to adopt the best European budget-cutting practices and the Italian model of avoiding tax increases in particular.

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