Tag: taxation

Do We Have a Problem of Too Much Spending or Too Little Revenue?

Here’s a chart from Veronique de Rugy’s new article on federal revenues vs. spending in The American. Amazing how the problem becomes obvious when you look at real numbers and don’t get trapped into using “baseline” math (as I explain in my latest video).

By the way, find out when John Stossel’s program on Fox Business News airs in your area. Veronique is a guest this week talking about these issues.

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.

There Is No Libertarian or Conservative Argument for Higher Taxes

Eli Lehrer has an article on the FrumForum entitled “Five Revenue Raisers the GOP Should Back.” He argues it would be good to get rid of preferences such as the state and local tax deduction and the mortgage interest deduction, and he also asserts that there should be “user fees” for things such as transportation.

As an avid supporter of a flat tax and market pricing, I have no objection to these policies. Indeed, I would love to get rid of the state and local tax deduction so that taxpayers in Texas and Florida no longer have to subsidize the fiscal profligacy of politicians in California and New York.

But there is a giant difference between getting rid of certain tax preferences as part of revenue-neutral (or even better, tax-cutting) tax reform and getting rid of tax preferences in order to give politicians more revenue to spend.

The former is a noble goal. Who can argue, after all, with the idea of getting rid of the corrupt and punitive internal revenue code and replacing it with a simple and fair flat tax? Lots of loopholes are eliminated, so there are plenty of tax-raising provisions in tax reform. But every one of those provisions is offset by provisions that lower tax rates and get rid of double taxation of saving and investment.

The latter, by contrast, is an exercise in trying to lose with minimal damage – sort of the “French Army Theory” of taxation, surrender gracefully and hope that your new masters give you a few crumbs after their celebratory feast.

What is especially strange about this approach is that the Republicans who advocate higher taxes claim that they are political realists. Yet if we look at real-world evidence, the moment Republicans show their “realism” by putting taxes on the table, the entire debate shifts.

Instead of the debate being tax-hikes vs. no-tax-hikes, it becomes a debate over who-should-pay-more-tax. Republicans win the first debate. They get slaughtered in the second debate.

Remember when the first President Bush agreed to enter into tax-hike negotiations in 1990? He set out two conditions – that there should be a reduction in the capital gains tax and that there should be no increase in income tax rates. So what happened? As everyone with an IQ above room temperature predicted, the capital gains tax stayed the same and income tax rates increased.

Last but not least, this conversation only exists because some people have thrown in the towel, acquiescing to the idea that there is no way to balance the budget without higher taxes. Yet the Congressional Budget Office data shows that the budget can be balanced by 2020 simply by limiting annual spending growth to 2 percent.

Overhauling CBO and JCT Is a Real Test of GOP Resolve, not the ‘Pledge to America’

While I’m glad Republicans are finally talking about smaller government, I’ve expressed some disappointment with the GOP Pledge to America. Why “reform” Fannie and Freddie, I asked, when the right approach is to get the government completely out of the housing sector. Jacob Sullum of Reason is similarly underwhelmed. He writes:

In the “Pledge to America” they unveiled last week, House Republicans promise they will “launch a sustained effort to stem the relentless growth in government that has occurred over the past decade.” Who better for the job than the folks who ran the government for most of that time? …Republicans, you may recall, had a spending spree of their own during George W. Bush’s recently concluded administration, when both discretionary and total spending doubled – nearly 10 times the growth seen during Bill Clinton’s two terms. In fact, says Veronique de Rugy, a senior research fellow at George Mason University’s Mercatus Center, “President Bush increased government spending more than any of the six presidents preceding him, including LBJ.” Republicans controlled the House of Representatives for six of Bush’s eight years.

Redemption is a good thing, however, so maybe the GOP actually intends to do the right thing this time around. One key test is whether Republicans do a top-to-bottom housecleaning at both the Congressional Budget Office and the Joint Committee on Taxation.

These Capitol Hill bureaucracies are not well known, but they have enormous authority and influence. As the official scorekeepers of spending (CBO) and tax (JCT) bills, these two bureaucracies can mortally wound legislation or grease the skids for quick passage.

Unfortunately, that clout gets used to dramatically tilt the playing field in favor of bigger government. It was CBO that claimed that Obama’s stimulus created jobs, even though the head of CBO was forced to admit that the jobs-created number was the result of a Keynesian model that was rigged to show exactly that result . You would think that would shame the bureaucrats into producing honest numbers, but CBO continues to produce absurd job creation estimates regardless of the actual rate of unemployment.

CBO favors deficits and debt when it is asked to analyze proposals for more spending, but it rather conveniently changes its tune when the discussion shifts to tax increases. Since we’re on the topic of twisted economic analysis, CBO actually relies on a model which, for all intents and purposes, predicts that economic performance is maximized with 100 percent tax rates.

The Joint Committee on Taxation, meanwhile, is infamous for its assumption that taxes have no impact - at all - on economic output. In other words, instead of showing a Laffer Curve, JCT would show a straight line, with tax revenues continuing to rapidly climb even as tax rates approach 100 percent.  This creates a huge bias against good tax policy, yet JCT is impervious to evidence that its approach is wildly flawed.

And don’t forget that CBO and JCT both bear responsibility for Obamacare since they cranked out preposterous estimates that a giant new entitlement would lead to lower budget deficits.

Not that we need additional evidence, but the head of the CBO just repeated his higher-taxes-equal-more-growth nonsense in testimony to the Senate Budget Committee. With this type of mindset, is it any surprise that fiscal policy is such a mess?

Douglas Elmendorf said extending breaks due to expire at year’s end would increase demand in the next few years by putting more money in consumers’ pockets. Over the long term, he said, the tax cuts would hurt the economy because the government would have to borrow so much money to finance them that it would begin competing with private companies seeking loans. That, in turn, would drive up interest rates, Elmendorf said.

I’ve already written once about how the GOP sabotaged itself when it didn’t fix the problems with these scorekeeping bureaucracies after 1994. If Republicans take power and don’t raze CBO and JCT, they will deserve to become a permanent minority party.

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.”

Obama’s Wants a 23.9% Capital Gains Tax, but the Rate Actually Will Be Much Higher Because of Inflation

Thanks to the Obamacare legislation, we already know there will be a new 3.9 percent payroll tax on all investment income earned by so-called rich taxpayers beginning in 2013. And the capital gains tax rate will jump to 20 percent next year if the President gets his way. This sounds bad (and it is), but the news is even worse than you think. Here’s a new video from the Center for Freedom and Prosperity that exposes the atrociously unfair practice of imposing this levy on inflationary gains.

The mini-documentary uses a simple but powerful example of what happens to an investor who bought an asset 10 years ago for $5,000 and sold it this year for $6,000. The IRS will want 15 percent of the $1,000 gain (Obama wants the tax burden on capital gains to climb to 23.9 percent, but that’s a separate issue). Some people may think that a 15 percent tax is reasonable, but how many of those people understand that inflation during the past 10 years was more than 27 percent, and $6,000 today is actually worth only about $4,700 after adjusting for the falling value of the dollar? I’m not a math genius, but if the government imposes a $150 tax (15 percent of $1,000) on an investor who lost nearly $300 ($5,000 became $4,700), that translates into an infinite tax rate. And if Obama pushed the tax rate to almost 24 percent, that infinite tax rate gets…um…even more infinite.

The right capital gains tax, of course, is zero.