Breaking News: There’s Still No Free Lunch

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Milton Friedman taught us “there’s no such thing as a free lunch,” and there still isn’t. The $787 billion Obama stimulus plan was supposed to create jobs and get the economy moving again, raising incomes for everybody. Instead, three million more jobs have been lost. A new report by the Tax Foundation helps explain why.

It finds that federal spending for bank bailouts, stimulus plans, auto rescue plans, and cash for clunkers has been so high that future tax rates will have to skyrocket to pay the tab. “Federal income tax rates would have to be nearly tripled across the income spectrum if Congress were to close the deficit,” the group calculates. If the gap were to be closed with income taxes alone, we’d need a new lowest bracket of 27.2% and a highest bracket of 95%.


These tax rate projections, by the way, are not much different from what the Democratic-controlled Congressional Budget Office projects. CBO estimates that tax rates would have to rise about 80% to pay for the Bush-Obama spending frenzy of recent years.

According to the Tax Foundation, if state and local taxes are included, some income earners could face marginal rates that would confiscate virtually all their earnings after a certain point. “Yes,” says Scott Hodge, president of the Foundation, “we would have to have 100% tax rates to balance the budget given how high spending is now.”

All this may explain why jobs remain scarce, and why the stimulus plan has backfired. Steve Entin, an economist with the Institute for Research on the Economics of Taxation, points out that the mere threat of future taxes can do serious damage to an economy: “No one wants to invest when tax rates are going to shoot up. The combination of higher income, capital gains and dividend taxes are putting a damper on business investment.”

So enjoy your “free” lunch while it lasts — because when the bill comes, it will be a whopper.

‘Stephen Moore is a columnist for the Wall Street Journal’