Monday, January 25, 2010

Tax cuts and deficit reduction...

For most on the right, the two preferred forms of deficit reduction are cutting taxes they pay and and cutting government payments others receive. That position is no more self-serving than many on the left. The problem is the staggering scope of the deficit will require the worst of both worlds.

A commenter points out that a previous post seems to blame the Bush tax cuts for much of the deficit. True enough, but simply political opposition is not an argument in itself. The Bush tax cuts were time bombs set to go off after many of the authors were outta town (like the estate tax). Or more charitably, based on the assumption of a vigorously growing economy generating lots of extra tax revenue from other sources. The cuts themselves were large, but not historically so.  What they did do is start a precedent of putting the bulk of the costs just after the 10 year budget window used for analysis, so the 10-year cost looked one way, the >10-year cost was ghastly. (Again the estate tax is Exhibit A)

The problem with the Bush tax cuts is they were they were unfunded - there was no way to recover the lost income. While the idea of tax cuts paying for themselves has been pretty well discredited, tax cutters still cling to the idea than putting people's money back in their pockets somehow will address a government income shortfall.
The recent analysis by Mr. Page at the Congressional Budget Office dismisses the idea that tax cuts may actually improve the government's fiscal situation. Even in his most generous scenario, only 28 percent of lost tax revenue is recouped over a 10-year period. The United States, it seems, is firmly planted on the left side of the Laffer Curve. Recent experience corroborates this prediction. In the second quarter of 2001, just before the first of President Bush's tax cuts took effect, federal receipts from personal taxes accounted for 10.3 percent of the economy. By the end of the post-recession slump, receipts had dropped to 6.4 percent. But in the third quarter of 2005, with the economy booming, they were still under 7.5 percent - an enormous difference. In dollar terms, federal receipts from personal income taxes, at $802 billion in 2004, are still lower than they were in 1998 ($826 billion) and much lower than in 2001 ($994 billion). ...[More from a 2005 analysis]
This is the CBO talking - not some left-wing think tank either. We're on the wrong side of the Laffer curve - even if it is true.

So how do we shrink the deficit? Over the next months some unavoidable truths will become clear.

First we have to address entitlements.  I've already expressed my skepticism over meaningful spending cuts - nor have I seen any deficit hawk running for office provide a list of specifics. I'll start taking complainers seriously when they outline their cuts with numbers and also indicate some reason on revenue.  For example, I advocate means-testing all entitlements, including Medicare (if universal coverage is available).

Second we will need new revenues - taxes. It simply isn't going to happen otherwise.
Rosanne Altshuler, Katherine Lim and Roberton Williams, all of the Tax Policy Center, recently ran some calculations on how Congress could cut the deficit to a sustainable 2 percent of gross domestic product. Their models had major fiscal-consolidation efforts starting in 2015, “to give the country time to regain its economic footing.”
They simulated what would happen to tax revenues under three basic policy proposals: raising all tax rates proportionally; raising only the top three income tax rates; and raising rates only for couples with income over $250,000 and singles with income over $200,000 (the only group of taxpayers President Obama said he would raise taxes for). The authors also tried eliminating or limiting itemized deductions, and seeing how these policies would interact with current plans for the tax system, like extending most of the Bush tax cuts.
The results were “discouraging,” showing that the government would have to impose almost ludicrously high rates in order to make a dent in the deficit. You can find a summary here.
The moral? However painful they may be, spending cuts will probably be necessary. And a new source of revenue may also be inevitable. [A little more]

If you follow the link above to the study you can read the stunning numbers for yourself. I will be posting about what new taxes we might see proposed - namely a VAT and how it might affect us on the farm.

My point is after we have spent this year being angry, the deficit will patiently wait, and all the political retribution in the world isn't going to stop its growth.

If we want to reduce this deficit, cutting taxes is something we used to do.


steve said...

The Federal Reserve owns a large portion of the US debt. Who is the Federal Reserve? Is it us? If we write off all Federal Reserve debt but continue to honor all other national debt what happens? When the government sells debt and the Federal Reserve buys it then are we not effectively creating money. Research who owns the Federal Reserve. It appears that it is a group of individuals and banks which have been given the authority to create money. I wonder what it would talk for me to get the authority to create money?

Just curious, what happens if the government chooses to state that it will not treat bonds purchased by the Federal Reserve as debt? Who loses?

Brandon E. said...

I will agree in a way, it is a train wreck no matter how you look at it. We have met the enemy, and it is us. And we can't go on and on expecting more and more from Uncle Sam, and not expect to pay dearly for it.

Anonymous said...

Look, I have to live within my means, so why shouldn't the government have to as well? Sure, cutting spending hurts, but we all have to do it. If I don't have the money for a t-bone steak, I don't eat a t-bone steak. It's not that complicated.

Anonymous said...

I agree with you completely!
Retired Farmer