From Bloomberg Businessweek, August 15, 2011

You would think that abysmal growth and jobs data, the first ever downgrade of U.S. debt, and heart-stopping gyrations in the financial markets would impel political leaders to at least take a look at some of their assumptions about restoring confidence in the U.S. economy. Sadly, you would be mistaken.

Whatever one thinks of the validity of the S&P decision to downgrade U.S. debt, it contained an admonition that we should take seriously. Spending cuts alone won’t place the debt, and by extension, the economy, on a sustainable path.

In a memo to his Republican colleagues, House Majority leader Eric Cantor warned that S&P’s analysis put the party under “pressure to compromise on tax increases” on the ground that there is “no other way forward.” His response: “ I respectfully disagree.”

As always, the Republican leaders justified their intransigence by invoking the demons of job-killing taxes that would suppress the dynamism of overtaxed Americans, hampering growth. This is partisan nonsense. In terms of the economy as a whole, federal taxes are at their lowest levels since 1950. The Congressional Budget Office estimated that federal taxes would account for 14.8% of gross domestic product in 2011.

That isn’t a one year anomaly. Revenue was 14.9% of GDP in both 2009 and 2010. Compare that with a postwar average of about 18.5% of GDP, and an average of 18.2% during the administration of President Ronald Reagan. Which brings us to another dubious claim: Raising taxes in a downturn hinders growth. In 1982, amid a punishing 16 month recession, Reagan approved the largest peacetime tax increase in U.S. history. A booming economy followed in 1983 and 1984, enabling him to sail to re-election. (And began the secular bull market that lasted until 2000.)

In 1993, President Bill Clinton forced a tax increase through Congress that Republican Dick Armey, then chairman of the House Republican Conference, condemned as a “job killer” that would push the economy into recession. That increase was succeeded by the creation of 23 million new jobs, and the Clinton Administration left a budget surplus of about $236 billion.

By contrast, President George W. Bush pushed through two rounds of tax cuts and created just 3 million jobs. He also turned the surplus he inherited into a $1.2 trillion deficit.

Obviously, today’s economic crisis is vastly more severe than anything Reagan or Clinton faced, thus the timing and scope of tax increases must be carefully calibrated. Over the long term, however, the Republican mantra of “no higher taxes, ever” is as senseless as are claims by some Democrats that we can solve our fiscal gaps simply by soaking the rich. Both spending cuts and revenue increases are required.