Tag: balanced budget

New CBO Numbers Re-Confirm that Balancing the Budget Is Simple with Modest Fiscal Restraint

Many of the politicians in Washington, including President Obama during his State of the Union address, piously tell us that there is no way to balance the budget without tax increases. Trying to get rid of red ink without higher taxes, they tell us, would require “savage” and “draconian” budget cuts.

I would like to slash the budget and free up resources for private-sector growth, so that sounds good to me. But what’s the truth?

The Congressional Budget Office has just released its 10-year projections for the budget, so I crunched the numbers to determine what it would take to balance the budget without tax hikes. Much to nobody’s surprise, the politicians are not telling the truth.

The chart below shows that revenues are expected to grow (because of factors such as inflation, more population, and economic expansion) by more than 7 percent each year. Balancing the budget is simple so long as politicians increase spending at a slower rate. If they freeze the budget, we almost balance the budget by 2017. If federal spending is capped so it grows 1 percent each year, the budget is balanced in 2019. And if the crowd in Washington can limit spending growth to about 2 percent each year, red ink almost disappears in just 10 years.

These numbers, incidentally, assume that the 2001 and 2003 tax cuts are made permanent (they are now scheduled to expire in two years). They also assume that the AMT is adjusted for inflation, so the chart shows that we can balance the budget without any increase in the tax burden.

I did these calculations last year, and found the same results. And I also examined how we balanced the budget in the 1990s and found that spending restraint was the key. The combination of a GOP Congress and Bill Clinton in the White House led to a four-year period of government spending growing by an average of just 2.9 percent each year.

We also have international evidence showing that spending restraint - not higher taxes - is the key to balancing the budget. New Zealand got rid of a big budget deficit in the 1990s with a five-year spending freeze. Canada also got rid of red ink that decade with a five-year period where spending grew by an average of only 1 percent per year. And Ireland slashed its deficit in the late 1980s by 10 percentage points of GDP with a four-year spending freeze.

No wonder international bureaucracies such as the International Monetary fund and European Central Bank are producing research showing that spending discipline is the right approach.

This video provides all the details.

Tax Loopholes Are Corrupt and Inefficient, but They Should only Be Eliminated if Every Penny of New Revenue Is Used to Lower Tax Rates

There’s been a lot of heated discussion about various preferences, deductions, credits, shelters, and other loopholes in the tax code. Some of this debate has revolved around whether it is legitimate to refer to these provisions as “tax expenditures” or “subsidies.”

Michael Cannon vociferously argues that subsidies and expenditures only occur when the government takes money from person A and gives it to person B. On the other side of the debate are people like Josh Barro of the Manhattan Institute, who argues that tax preferences are akin to subsidies or expenditures since they can be just as damaging as government spending programs when looking at whether resources are efficiently allocated.

Since I’m a can’t-we-all-get-along, uniter-not-divider kind of person, allow me to suggest that this debate should be set aside. After all, we all agree that tax preferences can lead to inefficient outcomes. So let’s call them “tax distortions” and focus on the real issue, which is how best to eliminate them.

This is an important issue because both the Domenici-Rivlin Task Force and the Chairmen of the Simpson-Bowles Commission have unveiled plans that would reduce or eliminate many of these tax distortions and also lower marginal tax rates. That’s the good news.

The bad news is that their plans result in more revenue going to Washington. In other words, the tax increase resulting from fewer tax distortions is larger than the tax decrease resulting from lower tax rates. To put it bluntly, the plans would increase the overall tax burden.

Some argue that this is an acceptable price to pay. They point out, quite correctly, that lower tax rates will help the economy by improving incentives for productive behavior. And they also are right in arguing that fewer tax distortions will help the economy by improving efficiency. Seems like a win-win situation. What’s not to like?

The problem is on the spending side of the fiscal ledger. The Simpson-Bowles Commission and the Domenici-Rivlin Task Force were charged with figuring out how to reduce red ink. We already know from Congressional Budget Office data, however, that we can balance the budget fairly quickly by limiting the growth of government spending. As the chart illustrates, the deficit disappears by 2016-2017 with a hard freeze and goes away by 2019-2020 if spending increases by two percent each year (and this assumes all the 2001 and 2003 tax cuts are made permanent).

If tax revenue is increased, that simply means that the budget gets balanced at a higher level of spending. And since government spending, at current levels and composition, hinders economic growth by diverting labor and capital to less productive (or unproductive) uses, any proposal that enables higher levels of government spending will further undermine economic performance.

It goes without saying (but I’ll say it anyhow) that this analysis is overly optimistic since it assumes that politicians actually will balance the budget. In all likelihood, as explained in today’s Wall Street Journal, any tax increase would probably be followed by even more spending. So if politicians raise the tax burden, we might still have a deficit of $685 billion in 2020 (CBO’s most-recent estimate assuming  all programs are left on auto-pilot), but the overall levels of both spending and taxes would be higher. This modified cartoon captures this real-world effect.

This is why revenue-neutral tax reform, like the flat tax, is the only pro-growth way of eliminating tax distortions.

Obama’s Fiscal Commission and Health Care Spending

Following up on what Dan and Chris have said …

If the co-chairs of President Obama’s fiscal commission were serious about reducing federal spending and deficits, they would have proposed eliminating the federal deficit, rather than “reduc[ing] it to 2.2 percent of GDP by 2015.”  Yawn. They would have proposed cutting federal spending (currently, 24 percent of GDP and rising) to match federal tax revenue (currently at 15 percent of GDP).  But the co-chairs proposed only to “bring spending down to 22 percent and eventually 21 percent of GDP.”  Not only does that elicit another yawn, but since the co-chairs only asked for half a loaf, they won’t even get that much.

If the co-chairs were serious about reducing federal spending and deficits, they would have proposed a balanced-budget amendment.  They would have proposed block-granting Medicaid.  They would have proposed implementing Medicare vouchers immediately.  (Vouchers are the only way to reduce Medicare spending while protecting seniors from government rationing.  They would also change the political dynamics that repeatedly stymie efforts to reduce Medicare spending.)  Instead, the co-chairs propose the same ol’ failed strategy of trying to limit Medicare and Medicaid spending using government price-and-exchange controls, which they euphemistically describe as “rebates” and ”payment reforms.”  Along the same lines, they propose strengthening IPAB, ObamaCare’s rationing board.  IPAB’s mandate is – you guessed it – to ration care by fiddling with Medicare and Medicaid’s price and exchange controls.  It will therefore inevitably fall prey to the same political buzzsaw.  To appease Republicans, the co-chairs propose unwise and unconstitutional federal rules that would prevent patients injured by negligent physicians from recovering the full amount they are due (euphemism:  medical malpractice liability “reform”).  Finally, the co-chairs propose that if federal health spending continues to grow faster than GDP growth plus 1 percent, Congress should consider “a premium support system for Medicare” (which could mean vouchers) and “a robust public option and/or all-payer system” for people under age 65 – a debate that wouldn’t even begin until 2020.

Fiscal Commission members, congresscritters, and citizens who are serious about reducing federal spending and deficits – and who are looking for specific ways to cut government spending – should instead consult Cato’s excellent web site DownsizingGovernment.org.

Would You Trade Higher Taxes for Much Lower Spending and Less Red Tape?

I dislike taxes as much as the next person (and probably a lot more), but other policies matter as well, so if I had the choice of replacing current government policies with the ones that existed at the end of the Clinton years, I would gladly make that trade. Yes, it would mean higher tax rates, but it also would mean slashing government spending from 24 percent of GDP down to 18 percent of GDP. It would mean no sleazy TARP bailout, no Sarbanes-Oxley red tape, no expansion of Fannie Mae and Freddie Mac, and no added power and authority for the federal government.

This is the argument that I made in this interview on CNBC, though my opponent tried to do his version of the Brezhnev Doctrine (what’s mine is mine, what’s yours is negotiable), so I concluded the interview by stating that in the real world higher taxes are completely unacceptable.

To elaborate on this discussion, here’s a chart showing actual revenue over the past decade and what spending would be if policy makers had simply maintained the overall budget level from the last year of the Clinton Administration and allowed spending to grow in line with inflation and population. The deficit would be much smaller. More important, the burden of federal spending would be almost $1 trillion lower.

Here’s How to Balance the Budget

Our fiscal policy goal should be smaller government, but here’s a video for folks who think that balancing the budget should be the main objective.

The main message is that restraining the growth of government is the right way to get rid of red ink, so there is no conflict between advocates of limited government and serious supporters of fiscal balance.

More specifically, the video shows that it is possible to quickly balance the budget while also making all the 2001 and 2003 tax cuts permanent and protecting taxpayers from the alternative minimum tax. All these good things can happen if politicians simply limit annual spending growth to 2 percent each year. And they’ll happen even faster if spending grows at an even slower rate.

This debunks the statist argument that there is no choice but to raise taxes.

Bending the Cost Curve: Ryan’s Roadmap Would Succeed Where ObamaCare Fails

From my oped in today’s Investors Business Daily:

Rep. Paul Ryan’s (R-Wis.) “Roadmap for America’s Future” proposes even tighter limits on Medicare’s growth, leading columnist Bruce Bartlett to opine, “the Medicare actuaries have shown the absurdity of the Ryan plan by denying that Medicare cuts already enacted into law are even worthy of projecting into the future.”

On the contrary, experience and public choice theory suggest that the Ryan plan has a better shot at reducing future Medicare outlays than past efforts, because the Roadmap would change the lobbying game that fuels Medicare’s growth.

For more on Ryan’s Roadmap, click here.  For more on Medicare, read David Hyman’s Medicare Meets Mephistopheles.  For more on public choice economics, click here.

It’s Simple to Balance the Budget without Higher Taxes

John Podesta of the Center for American Progress had a column in Politico yesterday asserting that “closing the budget gap entirely on the spending side would require draconian programmatic cuts.” He went on to complain that there are some people who “refuse to look at the revenue side of the ledger – while insisting that we dig the hole $830 billion deeper over the next decade by extending the Bush tax cuts.”
 
Not surprisingly, Mr. Podesta is totally wrong. It’s actually not that challenging to balance the budget. And it doesn’t even require any spending cuts, though it would be a very good idea to dramatically downsize the federal government. Here’s a chart showing this year’s spending and revenue totals. It then shows the Congressional Budget Office’s estimate of how much revenues will grow, assuming all the 2001 and 2003 tax cuts are made permanent and assuming that the alternative minimum tax is adjusted for inflation. As you can see, balancing the budget is a simple matter of limiting the annual growth of federal spending.

So how is it that Mr. Podesta can spout sky-is-falling rhetoric about “draconian” cuts when all that’s needed is fiscal restraint? The answer is that politicians in Washington have concocted a self-serving budget process that automatically assumes that all previously-planned spending increases should occur. So if the politicians put us on a path to make government 8 percent bigger next year and there is a proposal to instead limit spending growth to 3 percent, that 3 percent increase gets portrayed as a 5 percent cut.
 
This is a great scam, at least for the political class. They get to buy more votes by boosting the burden of government spending, but they get to tell voters that they’re being fiscally responsible. And they get to claim that they have no choice but to raise taxes because there’s no other way to balance the budget. In the real world, though, this translates into bigger government and puts us on a path to a Greek-style fiscal nightmare.
 

The goal of fiscal policy should be smaller government, not fiscal balance. Deficits are just a symptom of a government that is too large, as I have explained elsewhere. But the good news is that spending discipline is the right answer, regardless of the objective. I explained this in more detail for a piece in today’s Philadelphia Inquirer. Here’s an excerpt.

According to the Congressional Budget Office, the federal government this year is spending almost $3.5 trillion. Tax receipts are estimated to be less than $2.2 trillion, which means a projected deficit of about $1.35 trillion. So can we balance the budget when there is that much red ink? And is it possible to eliminate deficits while also extending the 2001 and 2003 tax cuts? The answer is yes. …It’s a simple matter of mathematics. The Congressional Budget Office estimates that tax revenue will grow by an average of 7.3 percent annually over the next 10 years. Reducing the budget deficit is easy - so long as politicians increase overall spending by less than that amount. And with inflation projected to be about 2 percent over the same period, this is an ideal environment for some long-overdue fiscal discipline. If spending is simply capped at the current level with a hard freeze, the budget is balanced by 2016. If we limit spending growth to 1 percent each year, the budget is balanced in 2017. And if we allow 2 percent annual spending growth - letting the budget keep pace with inflation, the budget balances in 2020. …Interest groups that are used to big budget increases will be upset if spending growth is limited to 1 or 2 percent each year. It means entitlements will need to be reformed. It means we might need to get rid of programs and departments that are not legitimate functions of the federal government. You better believe that these changes will cause a lot of squealing by lobbyists and other insiders. But that complaining will be a sign that fiscal policy is finally heading in the right direction. The key thing to understand is that there is no need for tax increases. Politicians might not balance the budget if we say no to all tax increases. But the experience in Europe shows that oppressive tax burdens are not a recipe for fiscal balance either. Milton Friedman was correct many years ago when he warned that, “In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.”