Tag: debt

You Should Support a Value-Added Tax…if You Want Bigger Government and More Debt

I testified before the House Ways & Means Committee yesterday. As always, my trip inside the belly of the beast was an interesting adventure.

The tax-writing committee was holding a hearing on the value-added tax. I was on a panel with five other witnesses, and all of the other people testifying were sympathetic to a VAT. But since I had truth on my side, that made it a fair fight (though it did cross my mind that it’s not a good sign when a Republican-controlled committee stacks the witnesses in favor of a European-style tax system).

I made two points. First, a VAT is less destructive than the current income tax. As such, if we somehow repealed the 16th Amendment and replaced it with something ironclad that would prevent the income tax from ever again haunting the land, I would gladly make a trade.

But that’s not going to happen, so my second point was to warn that the VAT would be a recipe for bigger government. And even though some of my fellow witnesses said the revenue could be used to reduce deficits, I pointed out that Europe adopted VATs beginning in the 1960s and that hasn’t stopped welfare states such as Greece and Portugal from spending themselves into a fiscal crisis.

This chart, which is similar to what I included in my testimony, compares spending and debt levels in EU-15 nations (Western Europe) and the United States. As you can see, the burden of spending and debt is onerous in America (red columns), but even worse in Europe (blue columns).

That doesn’t prove that a VAT causes bigger government and more debt, to be sure, but it certainly seems to suggest that the other side is smoking dope when they claim a VAT will lead to deficit reduction. Instead, it seems like Milton Friedman was right 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.”

I made some of these points in my VAT video.

P.S. Here are three very good cartoons on the VAT (here, here, and here).

The Gang of Six Is Back from the Dead: Contemplating the Good, the Bad, and the Ugly in Their Budget Plan

The on-again, off-again “Gang of Six” has come back on the scene and is offering a “Bipartisan Plan to Reduce Our Nation’s Deficits.”

The proposal is quite similar to the one put forth by the President’s Simpson-Bowles Commission, which isn’t too surprising since some of the same people are involved.

At this stage, all I’ve seen is this summary (A BIPARTISAN PLAN TO REDUCE OUR NATIONS DEFICITS v7), so I reserve the right to modify my analysis as more details emerge (and since I fully expect the plan to look worse when additional information is available, the following is an optimistic assessment.

The Good

  • Unlike President Obama, the Gang of Six is not consumed by class-warfare resentment. The plan envisions that the top personal income tax rate will fall to no higher than 29 percent.
  • The corporate income tax rate will fall to no higher than 29 percent as well, something that is long overdue since the average corporate tax rate in Europe is now down to 23 percent.
  • The alternative minimum tax (which should be called the mandatory maximum tax) will be repealed.
  • The plan would repeal the CLASS Act, a provision of Obamacare for long-term-care insurance that will significantly expand the burden of federal spending once implemented.
  • The plan targets some inefficient and distorting tax preference such as the health care exclusion.

The Bad

  • The much-heralded spending caps do not apply to entitlement programs. This is like going to the doctor because you have cancer and getting treated for a sprained wrist.
  • A net tax increase of more than $1 trillion (I expect that number to be much higher when further details are divulged).
  • The plan targets some provisions of the tax code – such as IRAs and 401(k)s) – that are not preferences, but instead exist to mitigate against the double taxation of saving and investment.
  • There is no Medicare reform, just tinkering and adjustments to the current system.
  • There in no Medicaid reform, just tinkering and adjustments to the current system.

The Ugly

  • The entire package is based on dishonest Washington budget math. Spending increases under the plan, but the politicians claim to be cutting spending because the budget didn’t grow even faster.
  • Speaking of spending, why is there no information, anywhere in the summary document, showing how big government will be five years from now? Ten years from now? The perhaps-all-too-convenient absence of this critical information should set off alarm bells.
  • There’s a back-door scheme to change the consumer price index in such a way as to reduce expenditures (i.e., smaller cost-of-living-adjustments) and increase tax revenue (i.e., smaller adjustments in tax brackets and personal exemptions). The current CPI may be flawed, but it would be far better to give the Bureau of Labor Statistics further authority, if necessary, to make changes. A politically imposed change seems like nothing more than a ruse to impose a hidden tax hike.
  • A requirement that the internal revenue code maintain the existing bias against investors, entrepreneurs, small business owners, and other upper-income taxpayers. This “progressivity” mandate implies very bad things for the double taxation of dividends and capital gains.

This quick analysis leaves many questions unanswered. I particularly look forward to getting information on the following:

  1. How fast will discretionary spending rise or fall under the caps? Will this be like the caps following the 1990 tax-hike deal, which were akin to 60-mph speed limits in a school zone? Or will the caps actually reduce spending, erasing the massive increase in discretionary spending of the Bush-Obama years?
  2. What does it mean to promise Social Security reform “if and only if the comprehensive deficit reduction bill has already received 60 votes.” Who defines reform? And why does the reform have to focus on “75-year” solvency, apparently to the exclusion of giving younger workers access to a better and more stable system?
  3. Will federal spending under the plan shrink back down to the historical average of 20 percent of GDP? And why aren’t those numbers in the summary? The document contains information of deficits and debt, but those figures are just the symptoms of excessive spending. Why aren’t we being shown the data that really matters?

Over the next few days, we’ll find out what’s really in this package, but my advice is to keep a tight hold on your wallet.

I’m Willing to Go Along with President Obama’s ‘Balanced Approach’ to Deficit Reduction, but Only if We Use Honest Math

The President has issued an ultimatum that more tax revenue must be part of budget negotiations. Indeed, he endlessly repeats his desire for a “balanced approach,” implying that as much as 50 percent of the deficit reduction in any agreement should come from higher revenues.

Because I am a thoughtful, middle-of-the-road, pragmatic guy, I’m willing to accept the President’s ultimatum. I do have one tiny request, however, and that is for any such deal to be based on honest math.

What I mean by this is that I don’t want politicians to approve a budget that results in more spending, but then claim that they “cut spending” because the budget didn’t grow even faster. I want a spending cut to mean less spending (gee, what a novel idea).

And when they talk about new revenue, I want to see how much revenue the IRS is collecting this year, and measure revenue increases against that number. After all, the crowd in Washington should be happy to get more money, even if it is the result of benign factors such as more jobs being created, companies earning higher profits, and people getting more pay.

I assume these are reasonable requests. After all, this is how businesses and households operate their budgets, and I’m sure the political insiders wouldn’t want to use dishonest numbers to mislead voters (perish the thought!).

So what would a balanced approach look like, assuming we want to use honest math? The answer isn’t that complicated. I started with the latest estimates from the Congressional Budget Office for spending and revenues for this fiscal year (FY2011). I then assume, in the interest of a “balanced approach,” that spending should be cut by 5 percent each year and that revenues should climb by 5 percent each year.

The results, as illustrated by the graph, are remarkable. If we use a 50-50 deal of higher revenue and lower spending, we balance the budget in just five years. The President is right!

Taxpayers will be happy to know the “balanced approach” gets rid of red ink and also leaves enough room to make the 2001 and 2003 tax cuts permanent. Heck, there would be enough left-over revenue to enact additional tax cuts. After all, since we’re looking for balance, there’s no need to let revenues grow by 7 percent or 8 percent each year.

So, Mr. President, do we have a deal? Should we use your “balanced approach” and eliminate today’s big deficit by cutting spending and raising revenue by equal amounts? You were serious about your request, right? Hello, is anybody there?

As you already realize, I don’t think the President actually means what he says about a “balanced approach.” Or, to be more specific, I think he’s happy to do a 50-50 deal, but only if “spending cuts” and “revenue increases” are defined in ways that enable the growth of government.

Inside the beltway, this is known as “baseline budgeting” or “current services budgeting.” But whatever it’s called, it is a dishonest way of presenting information to the American people, as explained in this video.

European Political Elite React to Deteriorating Fiscal Outlook with Decisive Moves to…Kill the Messenger

I’m not a big fan of the rating agencies. I’ve warned in TV interviews that they generally wait too long before downgrading profligate governments.

So when the rating agencies finally catch up to everyone else and lower their outlook for failing welfare states such as Greece and Portugal, one would think that this would be seen as a useful – albeit late – warning sign. But European politicians are not very happy about this development. At the risk of mixing metaphors, they want everyone to keep their heads buried in the sand and to continue complimenting the emperor on his new clothes.

Here are some excerpts from a BBC report.

The European Commission has strongly criticised international credit ratings agencies following the downgrade of Portugal by Moody’s. The Commission said the timing of the downgrade was “questionable” and raised the issue of the “appropriateness of behaviour” of the agencies in general. Earlier, Greek Foreign Minister Stavros Lambridinis said the agencies’ actions in the debt crisis had been “madness”. Ratings agencies have downgraded Greece and Portugal many times recently. …German Finance Minister Wolfgang Schaeuble told a news conference that he wanted to “break the oligopoly of the ratings agencies” and limit their influence. …”The timing of Moody’s decision is not only questionable, but also based on absolutely hypothetical scenarios which are not in line at all with implementation,” said Commission spokesman Amadeu Altafaj. “This is an unfortunate episode and it raises once more the issue of the appropriateness of behaviour of credit rating agencies.” Commission President Manuel Barroso added that the move by Moody’s “added another speculative element to the situation”.

This is not the first time this has happened, by the way. Back in January, I mocked the President of the European Council for whining that “bond vigilantes” had the nerve and gall to demand higher interest rates to compensate for the risk of lending money to incontinent governments.

$2 Trillion in Cuts in Perspective

Congressional Republicans have said that spending cuts must be at least as large as an increase in the debt ceiling. Negotiations over lifting the debt ceiling are ongoing, but the “magic number,” so-to-speak, would be around $2 trillion in spending cuts.

Cutting $2 trillion in federal spending sounds like a lot, but it’s actually relatively small because the cuts would likely occur over ten years. According to the Congressional Budget Office’s most recent budget baseline, the federal government will spend almost $46 trillion over the next ten years.

The following chart shows what $2 trillion in spending cuts over the next ten years looks like when measured against the CBO’s baseline. Even with the cuts, federal spending would still increase by $1.8 trillion:

Rather than actually cutting spending, federal spending (and debt) would continue to grow – just at a slightly lower rate. And as Chris Edwards continues to warn, there is a strong possibility that some or all of the “cuts” could be phony.

$1 Trillion in Phony Spending Cuts?

In the Washington Post Friday, Ezra Klein partly confirmed what I fear the Republican strategy is for the debt-limit bill—get to the $2 trillion in cuts promised through accounting gimmicks. As I have also noted, Klein says that there is about $1 trillion in budget “savings” ($1.4 trillion with interest) to be found simply in the inflated Congressional Budget Office baseline for Iraq and Afghanistan. Klein says, “I’m told that a big chunk of these savings were included in the debt-ceiling deal” that Rep. Eric Cantor (R-VA) and Sen. Jon Kyl (D-AZ) are negotiating with the Democrats.

Republican leaders have promised that spending cuts in the debt-limit deal must be at least as large as the debt-limit increase, which means $2 trillion if the debt-limit is extended to reach the end of 2012. In a Daily Caller op-ed, I noted that you can find $1 trillion in “savings” from this phony war accounting and another $1 trillion by simply pretending that non-security discretionary will stay flat over the next decade.

There is more evidence that few, if any, real spending cuts are being discussed. One clue is that the media keeps quoting Joe Biden essentially saying that it was easy to reach agreement on the first $1 trillion in cuts.

The other suspicious thing is that the media keeps floating trial balloons for specific tax hikes, but I’ve seen very few trial balloons for specific spending cuts. Friday, the Washington Post story on the debt discussions mentions all kinds of ideas for raising taxes on high earners. A few days ago, news stories revealed that negotiators were talking about changing tax bracket indexing to create annual stealth increases in income taxes. The only item I’ve seen being discussed on the spending side is trimming farm subsidies.

If Republican and Democratic lawmakers were really discussing major spending cuts, then the media would be full of stories mentioning particular changes to entitlement laws to reduce benefits and stories about abolishing programs widely regarded as wasteful, such as community development grants.

I hope I’m wrong, but this is starting to look a lot like the phony $100 billion spending cut deal from earlier this year.

Sean, Rush, Greta, Glenn, Bill: When you get Republican leaders on your shows, get them to promise that they won’t use phony baseline accounting like war costs to reach the $2 trillion in cuts. The budget and the nation desperately need real cuts and real government downsizing.

Will the GOP Finally Cut Farm Subsidies?

With trillion dollar deficits and mounting federal debt, will Congress finally get serious about cutting farm subsidies? We’ve been disappointed before, but there are a few hopeful signs—like the front-page story in this morning’s Washington Post—that this Congress may be serious about cutting billions in payments to farmers. As the Post reports:

In their recent budget proposals, House Republicans and House Democrats targeted farm subsidies, a program long protected by members of both parties. The GOP plan includes a $30 billion cut to direct payments over 10 years, which would slash them by more than half. Those terms are being considered in the debt-reduction talks led by Vice President Biden, according to people familiar with the discussions.

The Post story profiles a freshman Republican from Kansas, Tim Huelskamp, a fifth-generation farmer himself, who has been traveling his sprawling district telling his farmer constituents that they can no longer be exempt from budget discipline. Many farmers in his district appear to agree.

It remains an open question whether the Republican freshman class will live up to Tea-Party principles of limited government when it comes to agricultural subsidies, as we have speculated ourselves (here, here, and here) at the trade center.

Farm subsidies have certainly been a weak spot of Republicans in the past. According to our online trade-vote feature, more than half of the GOP House caucus voted in May 2008 to override President Bush’s veto of the previous, subsidy laden farm bill. In July 2007, more than half the GOP caucus voted against any cuts in the sugar program, and more than two-thirds opposed any cuts in cotton subsidies. (Of course, Democrats were just as bad overall on farm subsidies.)

The next farm bill, due to be written by this Congress, will tell us a lot about whether the Republicans really believe what they’ve been saying about limiting government and reducing the debt.