Raising taxes now is a crazy idea

According to the Tax Foundation, in 1978 Virginians' per-capita state and local tax burden was $553. When reckoned in 2008 dollars, that means that every man, woman, and child in Virginia back then forked out $1,964 to fund state and local government activities. By 2008 that tax burden had risen to $3,281 -- a whopping 67 percent higher, in real terms, than 30 years earlier.

And yet some pundits and politicians insist that now is the time to make this burden even heavier.

Yes, state and local government revenues now are falling because of the economic downturn. But not by much. Richmond's fiscal year 2008 general-fund revenues were up by 1.3 percent over 2007, exceeding the official forecast by nearly $16 million. But projections for fiscal year 2009 are indeed for those revenues to come in lower by about 5 percent.

Projections for fiscal 2010, however, are for those revenues to nearly completely recover to their 2008 levels.

The state's revenue stream continues to flow pretty strongly.

In contrast, the economy remains wobbly. Raising taxes at any time risks economic damage, but never more so than during recessions. Higher taxes shrink the return that investors and workers receive in exchange for their risk-taking, creativity, and productive efforts. So the inevitable consequence of higher taxes is less investment, entrepreneurship, and work.

During normal or booming economic times, growing demand from consumers -- and investors' eagerness to invest -- means that higher taxes are more easily endured. It's not that raising taxes even during boom times doesn't discourage some risk-taking and entrepreneurship; it does. But the general good health of the economy is often sufficient to swamp the ill consequences of higher taxes.

In bad economic times matters are very different. Businesses are losing customers and investors are sitting on the sidelines. Higher taxes, by cutting even further into businesses' falling profits, only fuel more economic pessimism. During recessions, there's no general economic vibrancy to balance out the profits lost to higher taxes. So raising taxes only amplifies entrepreneurs' and investors' pessimism.

Indeed, raising taxes during a recession likely does more than amplify producers' pessimism only for the duration of the downturn. By signaling to entrepreneurs and investors that the government is economically tone-deaf -- by revealing the government to be desperate to maintain its revenue stream even when many of the rest of us must struggle with reduced incomes -- raising taxes during a recession tells the world that the tax-addicted government is especially unfriendly to markets.

An economically tone-deaf, market-unfriendly government will scare away many entrepreneurs and investors even during booms, thus denying its citizens the ability to share fully in the economic good times.

"But these government services are vital!" insist the advocates of higher taxes. The suggestion is that every dollar spent by government is critical to support public programs whose demise would cause considerable harm to the commonwealth. To which I can only reply . . . "Puhhl-eeesse."

I know of no entity -- including my own household -- that spends money so carefully that a 5 percent budget reduction would unleash intolerable hardship. Is it really plausible that Virginia's government cannot trim away 5 percent of what it spends? Indeed, Richmond as well as local governments throughout Virginia can certainly trim away much more than this relatively small amount.

As the late Nobel economist Milton Friedman pointed out, "No one spends someone else's money as carefully as he spends his own." Government, of course, is an institution filled with people who daily spend other people's money.

Of course, the fact that officials in Virginia are elected democratically restrains governments' ability to spend irresponsibly. But does anyone seriously believe that a legislator in the General Assembly or in a county council exercises as much care and concern when choosing how to spend taxpayers' money as each taxpayer himself or herself would exercise in spending that money were it still in that taxpayer's pocket?

Does anyone seriously believe that the influence of special-interest groups -- those gluttonous, hydra-headed creatures that thrive and multiply in the hothouse of politics -- is so small that citizens throughout the Old Dominion would suffer real hardship if government cut its budget for a year or two by, say, 10 percent?

Special-interest groups would suffer from such fiscal discipline, but that would be a good thing. And we citizens of Virginia would benefit, especially in the long run, because our government would show that this state is one in which entrepreneurs, investors, and citizens need not fear that government will always blindly put the welfare of special-interest groups ahead of that of the general interest.

During these times, taxes should be cut. Raising them would be crazy-dangerous.

Don Boudreaux is a professor of economics at George Mason University and senior fellow for economic policy and tax reform at the Virginia Institute for Public Policy. He can be reached at .