Tag: bush tax cuts

Let Sequestration Happen

Some members of Congress are anxious to undo sequestration, ignoring the inconvenient fact that they created the process in the first place. Instead of accepting responsibility, they are proposing legislation that would force the White House to outline the effects of the cuts. And people wonder why Congress’s approval rating is at an all-time low.

But there is more than enough blame to go around. The Republican-controlled House, the Democratic-led Senate, and the Obama White House had a chance to implement a range of proposals aimed at deficit reduction last summer. They chose to kick the can down the road, empowering an independent, bipartisan panel to make the tough choices for them. That effort failed.

If the Super Committee was unable to hammer out a compromise when the conditions were ripe last summer, it is unlikely that one will materialize this summer. Sequestration may be the only way to achieve real spending cuts. Let’s let it happen.

To be clear, sequestration is not the best way to cut the military budget, or federal spending overall. It wasn’t supposed to happen at all; the threat of spending cuts was supposed to compel the various parties to reach a compromise. But it may be the only feasible way to cut spending. And it isn’t going to get any easier in the future.

The Democrats are beginning to show their hand: this was never about cutting spending; it was always about raising taxes. Sen. Patty Murray (D-WA) explained yesterday that her party would allow the cuts in defense and nondefense spending to go forward, and the Bush tax cuts to expire, if Republicans didn’t agree to tax hikes on the wealthy. That isn’t likely to happen, and not just because the GOP is being stubborn. A sizable majority of Americans—Republicans and Democrats alike—are in favor of cutting military spending. More than half want to extend the Bush tax cuts for all.

Still, there are some Republican politicians who have always been willing to raise taxes in order to protect the Pentagon, despite what the public says it wants. I don’t fault Democrats for holding Pentagon spending hostage as much as I fault Republicans for allowing themselves to be maneuvered into a corner.

The GOP has a straightforward way out of the box: allow the defense and nondefense cuts to go forward, refuse a tax increase, and renegotiate a debt reduction deal that doesn’t leave entitlements—the real drivers of our long-term fiscal calamity—off the table.

Sequestration likely won’t be as bad as special interests and those in favor of ever-increasing military spending claim. The reductions would only apply to FY 2013 budget authority, not outlays. The Pentagon and Congress will then have greater flexibility starting in FY 2014 to adjust the reductions under the BCA spending caps. In the meantime, many programs could continue on funding already authorized.

We must also keep the cuts in proper perspective. The DoD base budget under sequestration would total $469 billion, about what we spent in 2006, which was not exactly a lean year for the Pentagon. And as for the claim that the military cuts will result in perhaps one million lost jobs, that seems implausible considering that the cuts would amount to less than three tenths of one percent of GDP.

More to the point, the defense budget should never be seen as a jobs program. In a dynamic, market economy, capital and resources adjust to changing demand. Some regions and municipalities that are relatively more dependent upon military spending might suffer some short-term effects, but there is evidence that economies reliant on the military can recover. Some regions could emerge stronger and more diversified. Other reporting indicates that some businesses are already positioning themselves to weather reduced government spending.

Americans spend more today on our military—in real, inflation-adjusted terms—than during the high point of the Reagan buildup. Some might justify these expenditures by claiming that the world is much more dangerous today. But the evidence for that is pretty thin. The Soviet Union on its worst day could do more damage in a few minutes than al Qaeda has managed to inflict in over a decade. We are safer than most politicians are willing to admit.

If they embraced our good fortune, policymakers could cut military spending without undermining U.S. security. Shifting resources from a relatively unproductive and inefficient sector to a more productive one would be good for the economy. And lower military spending could even improve our foreign policy.

It simply isn’t fair to saddle fewer troops with more missions. If we cut spending and reduced the size of the U.S. military, policymakers would have to be more discriminating in the use of force. But greater restraint by the United States would encourage other countries to take responsibility for their own security, and share in the costs and risks of policing the global commons.

Strategic spending cuts informed by a realistic assessment of today’s threats would be ideal. Sequestration may not reach this ideal, but it may be the only way to achieve actual cuts in military spending.

Cross-posted from the Skeptics at the National Interest.

CBO Report Reveals Spending Disaster

New projections from the Congressional Budget Office show that without reforms rising federal spending will fundamental reshape America’s economy, and not in a good way. Under the CBO’s “alternative fiscal scenario,” the federal government will consume an 86 percent greater share of the economy in 2035 than it did a decade ago (33.9 percent of GDP compared to 18.2 percent).

The CBO report and many centrist budget wonks focus more on the problem of rising federal debt than on rising spending. As a result, many wonks clamor for a “balanced” package of spending cuts and tax increases to solve our fiscal problems. But CBO projections show that the long-term debt problem is not a balanced one—it is caused by historic increases in spending, not shortages of revenues.

This chart shows CBO’s alternative scenario projections, which assume no major fiscal policy changes. All recent tax cuts are extended and entitlement programs are not reformed.

Let’s look at federal revenues first (blue bars). In President Clinton’s last year of 2001, revenues were abnormally high at 19.5 percent of GDP as a result of the booming economy. Over the last four decades, federal revenues as share of GDP have fluctuated around about 18 percent of GDP. The tech boom a decade ago helped generate large capital gains realizations. CBO data show that capital gains tax revenues were $100 billion in 2001, or 1 percent of GDP (see page 85). By contrast, the CBO expects capital gains taxes to be $48 billion in 2011, or just 0.3 percent of GDP (see page 93).

In 2011, revenues are way down because of the poor economy. Some people complain that the Bush tax cuts drained the Treasury, but note that revenues were 18.2 percent of GDP in 2006 and 18.5 percent in 2007, when the economy was growing and the Bush cuts were in place.

Looking ahead, the CBO projects that with all current tax cuts in place and AMT relief extended, revenues will rise to 18.4 percent of GDP by 2021, or a bit above the normal levels of recent decades. For 2035, the CBO assumes that revenues would be fixed at the same 18.4 percent, but their discussion reveals that “real bracket creep” would actually keep pushing up revenues as a share of the economy beyond 2021.

In sum, CBO projections reveal no shortage of revenues. The problem is on the spending side, as the red bars in the chart illustrate. As a result of the Bush/Obama spending boom, federal outlays soared from 18.2 under President Clinton to 24.1 percent this year. With no reforms to entitlement programs, outlays will be 33.9 percent of GDP by 2035, which is 86 percent higher than the Clinton level.

By the way, the CBO nets Medicare premiums out of outlays, which makes spending look a little smaller than it really is. Using gross Medicare spending, total federal outlays will be 35 percent of GDP by 2035.

Also note that CBO data (and other U.S. government data) low-ball government spending in other ways compared to OECD measurement standards. The OECD puts federal/state/local government spending in the United States at 41 percent of GDP in 2011. More than four out of ten dollars we earn are already being gobbled up by our governments.

If the federal government grows by 10 percentage points of GDP by 2035 per CBO, American governments will be consuming more than half of everything produced in the nation.

To fix the problem, see here.

Words I Don’t Say Very Often: ‘I Applaud Senate Republicans’

Much to my surprise, Senate Republicans held firm earlier today and blocked President Obama’s soak-the-rich proposal to raise tax rates next year on investors, entrepreneurs and small business owners.

I fully expected that GOPers would fold on this issue several months ago because Democrats were using the class-warfare argument that Republicans were holding the middle class hostage in order to protect “millionaires and billionaires.” Republicans usually have a hard time fighting back against such demagoguery, and I was especially pessimistic since every Republican senator had to stay united to block Senate Democrats from pushing through Obama’s plan for higher tax rates on the so-called rich.

But the GOP surprised me earlier this year with their united opposition to higher taxes, and they stayed strong again today in blocking a bill that would raise tax rates on upper-income taxpayers. Here’s an excerpt from the New York Times.

Republicans voted unanimously against the House-passed bill, and they were joined by four Democrats — Senators Russ Feingold of Wisconsin, Joe Manchin III of West Virginia, Ben Nelson of Nebraska, and Jim Webb of Virginia — as well as by Senator Joseph I. Lieberman, independent of Connecticut. “You don’t raise taxes if your ultimate goal, if the main thing is to create jobs,” said Senator John Thune, Republican of South Dakota, echoing an argument made repeatedly by his colleagues during the floor debate. The Senate on Saturday also rejected an alternative proposal, championed by Senator Charles E. Schumer of New York, to raise the threshold at which the tax breaks would expire to $1 million. Some Democrats said that the Republicans’ opposition to that plan showed them to be siding with “millionaires and billionaires” over the middle class.

Not only did GOPers stand firm, but they were joined by five other senators (including four that have to face the voters in 2012). This presumably means Democrats will now have to compromise and agree to a plan to extend all of the 2001 and 2003 tax cuts.

At the risk of being a Pollyanna, I wonder if the politics of hate and envy is falling out of fashion. Obama’s plan for higher tax rates hopefully is now dead, but that’s just one positive indicator. It’s also interesting that both of the big “deficit reduction” plans recently unveiled, the President’s Fiscal Commission and the Domenici-Rivlin Debt Reduction Task Force Report, endorsed lower marginal tax rates - including lower tax rates for those evil rich people. Both proposals also included lots of tax increases, so the overall tax burden would be significantly higher under both plans, but it is remarkable that the beltway insiders who dominated the two panels understood the destructive impact of class-warfare tax rates. Maybe they watched this video.

Taxes and Uncertainty

It looks like Republicans and Democrats may have made a deal on blocking the tax increases that loom on January 1. No details yet, but reports are that they will extend the current tax rates for one to three years. That means investors and businesses will face continuing uncertainty and the real prospect of a tax increase in one to three years.

Unfortunately, pundits continue to use terms like “extending the Bush tax cuts” or “tax breaks for the wealthy.” In reality, American taxpayers have faced a particular range of personal income tax rates for the past eight years. If the 2001 and 2003 tax laws are allowed to expire, then Americans will see increased tax rates on income, dividends, capital gains, and estates. So the issue is not “tax cuts” or “tax breaks,” it’s whether we should increase taxes in 2011.

And as I noted before, President Obama understands this. He said in mid-November, “I want to make sure that taxes don’t go up for middle class families starting on January 1st.”

The president’s got it right. Taxes are about to go up, and the debate in Congress is whether that’s a good idea. Unfortunately, President Obama does want taxes to go up for business owners, corporate executives, and investors on January 1, the very people whose decisions have the most immediate impact on economic growth and job creation.

And that’s the issue we should be debating: Is it a good idea, especially in a time of continuing high unemployment and slow growth, to raise taxes on investors and entrepreneurs. And even if Congress delays the decision, is it a good idea to leave investors uncertain about what tax rates they’ll face in a year or two?

Let’s hope Congress and the Obama administration soon learns that higher taxes, more regulation, a larger share of GDP shifted to government, fears of Fed monetization of soaring debt — not to mention newspaper reports of Obama budgeteers “flipp[ing] through the tax code, looking for ideas” and threats of “an array of actions using his executive power to advance energy, environmental, fiscal and other domestic policy priorities” — can only discourage employers, investors, and entrepreneurs. Robert Higgs has cited the role of “regime uncertainty” in prolonging the Great Depression, as investors worried about what FDR might do next. Will Wilkinson points to Treasury Secretary Tim Geithner’s saying “businesses want certainty. They need certainty so they can make long-term plans today.” Unfortunately, Will says, “Creating completely irresponsible, economically chilling regime uncertainty would appear to be the basic modus operandi of the Obama administration.” A temporary extension of today’s tax rates, with a continuing threat of a rate hike in a year or two, is entirely in keeping with a regime of uncertainty.

Obama: “I Want to Make Sure That Taxes Don’t Go Up”

Much of the media discussion of the massive tax increase that looms on January 1 uses terms like “extending the Bush tax cuts” or “tax breaks for the wealthy.” In fact, American taxpayers have faced a particular range of personal income tax rates for the past eight years. If the 2001 and 2003 tax laws are allowed to expire, then Americans will see increased tax rates on income, dividends, capital gains, and estates. So the issue is not “tax cuts” or “tax breaks,” it’s whether we should increase taxes in 2011.

It’s good to see that President Obama understands this. At a news conference at the end of the G-20 Summit on Friday, he said:

I want to make sure that taxes don’t go up for middle class families starting on January 1st.

That’s the right way to understand it. Taxes are about to go up. Of course, the problem is that President Obama does want taxes to go up for business owners, corporate executives, and investors on January 1, the very people whose decisions have the most immediate impact on economic growth and job creation.

And that’s the issue we should be debating: Is it a good idea, especially in a time of continuing high unemployment and slow growth, to raise taxes on investors and entrepreneurs?

The Something-for-nothing Quandary

Most of the debate over extending the Bush tax cuts has focused on whether to extend slightly lower marginal rates for higher earners who already bear a huge burden. But at the other end of the income spectrum, a growing share of Americans don’t pay income taxes. Indeed, the Bush tax cuts increased the share of U.S. households that pay no income taxes.

From the Wall Street Journal:

Efforts to tame America’s ballooning budget deficit could soon confront a daunting reality: Nearly half of all Americans live in a household in which someone receives government benefits, more than at any time in history.

At the same time, the fraction of American households not paying federal income taxes has also grown—to an estimated 45% in 2010, from 39% five years ago, according to the Tax Policy Center, a nonpartisan research organization.

A little more than half don’t earn enough to be taxed; the rest take so many credits and deductions they don’t owe anything. Most still get hit with Medicare and Social Security payroll taxes, but 13% of all U.S. households pay neither federal income nor payroll taxes.

As the price of something drops, the demand increases. For a growing share of Americans, government services are effectively “free,” so they are demanding even more and policymakers are giving it to them.

As the following chart shows, federal payments to individuals as a share of the economy have reached an all-time high after seventy years of steady growth:

George Bernard Shaw said that “A government which robs Peter to pay Paul can always depend on the support of Paul.” In order to head off the coming fiscal train wreck, Paul is going to need to be convinced that robbing Peter is no longer in his best interests. However, by foisting a larger share of the burden of government onto a smaller and smaller group of taxpayers, policymakers will make it more and more difficult for Paul to see the error of his ways.