Topic: Tax and Budget Policy

Republicans Join Democrats to Bust the Federal Budget

Last fiscal year Uncle Sam had some budget good news.  After running $1 trillion-plus deficits four years in a row, Washington had to borrow “just” $680 billion in 2013. 

True, that was the fifth highest deficit in history, 50 percent greater than the pre-financial crash record.  But it’s only the taxpayers’ money, so what’s the big deal? 

Now Republicans and Democrats have come together on Capitol Hill to increase both outlays and taxes.  Bipartisanship in action! 

That the Democratic Party wants to spend more is hardly surprising.  But the GOP has demonstrated yet again that its principal role in Washington is to hold the coats of Democrats who raid the Treasury.

The legislation adopted by the House drops sequestration, which actually trimmed federal outlays, and hikes spending over the next two years by $62 billion.  In return, Congress promises to lower the collective deficit over the next decade by $85 billion. 

The accord raises revenue, including $12.6 billion in airline taxes. There are a few spending reductions—kind of. 

As I point out in my latest Forbes online column:

in the same bill the House GOP voted to drop discretionary spending cuts for 2014 approved just two years ago.  Yet the new entitlement caps are slated to take effect after two presidential elections and four congressional elections.  Which means the reductions will never occur.

Of course, holding only the House means the Republican Party has to compromise, as it learned during the recent health care battle.  However, a budget fight would have been far easier.  The GOP merely had to support the fiscal status quo, sequester included, unless the Democrats offered equivalent alternative cuts. 

Earlier this year the Congressional Budget Office highlighted the stakes:  “Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946.”  The debt-GDP ratio “is higher than at any point in U.S. history except a brief period around World War II, and it is twice the percent at the end of 2007.”

Even More on Ryan-Murray Budget Deal

In the Wall Street Journal, Peggy Noonan calls the Ryan-Murray budget deal a “step in the right direction,” which echoes a claim by Rep. Paul Ryan. She says the deal “goes in the right general direction, not the wrong one.”

But how could a deal composed of spending and revenue increases possibly be the right direction when the government is already far too large? Noonan points to savings from “a little entitlement reform” that will “compound in the outyears.” She seems to be referring to planned health care provider cuts in 2022 and 2023, but those tiny trims are purely smoke and mirrors.

Noonan says “the deal breaks the caps for discretionary spending but fortunately leaves most of the sequester intact.” But that is not true for 2014, which is the only year that matters in a discretionary spending deal since appropriations is an annual process. Indeed, this deal proves that Congress can’t be trusted on caps or other sorts of promises for future discretionary spending restraint.

Before this deal, 2014 discretionary spending was to be sequestered $20 billion and capped at $967 billion. I had thought that GOP leaders would perhaps agree to put aside the $20 billion cut in exchange for some actual entitlement reforms. But the deal hikes 2014 spending to $1.012 trillion, or $45 billion above the current law amount. That’s not “moderate progress” as Noonan says, but a total GOP cave-in.

Noonan calls the deal a “confidence-building measure” that could “encourage both parties toward bigger agreements, such as tax reform.” In fact, approval of this tax-and-spending deal will blow the trust of fiscal conservatives that GOP leaders could negotiate any reasonable deal with Democrats on bigger issues such as tax reform. Rather than build confidence, this deal will undermine the confidence of conservative voters that Republican leaders are on their side. Sadly, this deal shows that today’s GOP leaders would probably be taken to the cleaners by the Democrats on a major tax or entitlement reform deal.

Other observations on this bad deal are here and here.

More on the Ryan-Murray Budget Deal

The Ryan-Murray budget deal is remarkably bad when you look at the details. If the Republican Party is supposed to be the fiscally conservative party, there is virtually nothing Republican in the agreement. The Democrats could have written the whole thing themselves. It raises spending and taxes, and reduces the deficit only in a jury-rigged scorekeeping kind of a way that won’t actually be realized.

This analysis by Republicans on the Senate Budget Committee (SBC) provides details. The last page shows the year-by-year numbers.

The deal raises spending $63 billion in 2014 and 2015, split between defense and nondefense programs. That is a lot of money even by Washington standards, and it effectively guts the Budget Control Act of 2011. At least it guts the authority of it; appropriators now know that if they whine and complain a bit, future-year spending caps will dissolve like butter under a hot knife.

In return for the spending hike, the deal creates $85 billion of savings on paper. According to the SBC analysis, $34 billion of those savings are actually revenue increases and $51 billion are spending reductions. So there are more spending hikes in this package ($63 billion) than claimed spending cuts ($51 billion). So this agreement makes government bigger, not smaller, even by its own accounting.

Here’s the most astounding thing: $47 billion of the $85 billion in claimed savings are scored to occur in 2022 and 2023. So the package hikes spending right now, but promises to deliver more than half of the offsetting savings a decade from now.

Most of the 2022 and 2023 savings ($28 billion) are supposed to come from putting caps on entitlement spending in those years. Senate Budget Committee Chairman Jeff Sessions says these savings are of “dubious validity,” but he is being polite. After all, we now know that Republicans won’t stick with caps when push comes to shove, so I would call those future caps “worthless.”

If we count the 2022 and 2023 entitlement savings as being worth zero, we are left with a budget package that hikes spending $63 billion, cuts other spending just $23 billion, and raises revenues $34 billion. With fiscal results like that, I’d take gridlock over bipartisan agreement any day.

For more on the budget deal, click here.

Ryan-Murray Budget Deal Replaces Real Spending Restraint of Sequester with Budget Gimmicks and Back-Door Tax Hikes

How disappointing, but how predictable.

Politicians approved legislation in 2011 that was supposed to impose a modest bit of spending restraint over the next 10 years.

It wasn’t much. The enforcement mechanism, known as sequestration, merely was supposed to guarantee that spending climbed by $2.3 trillion rather than $2.4 trillion over the 10-year period.

But something is better than nothing, and the sequester that took place this year was a bitter defeat for President Obama and other advocates of bigger government.

Progress on the Laffer Curve*

The title of this piece has an asterisk because, unfortunately, we’re not talking about progress on the Laffer Curve in the United States.

Instead, we’re discussing today how lawmakers in other nations are beginning to recognize that it’s absurdly inaccurate to predict the revenue impact of changes in tax rates without also trying to measure what happens to taxable income (if you want a short tutorial on the Laffer Curve, click here).

But I’m a firm believer that policies in other nations (for better or worse) are a very persuasive form of real-world evidence. Simply stated, if you’re trying to convince a politician that a certain policy is worth pursuing, you’ll have a much greater chance of success if you can point to tangible examples of how it has been successful.

That’s why I cite Hong Kong and Singapore as examples of why free markets and small government are the best recipe for prosperity. It’s also why I use nations such as New Zealand, Canada, and Estonia when arguing for a lower burden of government spending.

And it’s why I’m quite encouraged that even the squishy Tory-Liberal coalition government in the United Kingdom has begun to acknowledge that the Laffer Curve should be part of the analysis when making major changes in taxation.

UK Laffer CurveI don’t know whether that’s because they learned a lesson from the disastrous failure of Gordon Brown’s class-warfare tax hike, or whether they feel they should do something good to compensate for bad tax policies they’re pursuing in other areas, but I’m not going to quibble when politicians finally begin to move in the right direction.


The Wall Street Journal opines that this is a very worthwhile development.

Chancellor of the Exchequer George Osborne has cut Britain’s corporate tax rate to 22% from 28% since taking office in 2010, with a further cut to 20% due in 2015. On paper, these tax cuts were predicted to “cost” Her Majesty’s Treasury some £7.8 billion a year when fully phased in. But Mr. Osborne asked his department to figure out how much additional revenue would be generated by the higher investment, wages and productivity made possible by leaving that money in private hands.

By the way, I can’t resist a bit of nit-picking at this point. The increases in investment, wages, and productivity all occur because the marginal corporate tax rate is reduced, not because more money is in private hands.

I’m all in favor of leaving more money in private hands, but you get more growth when you change relative prices to make productive behavior more rewarding. And this happens when you reduce the tax code’s penalty on work compared to leisure and when you lower the tax on saving and investment compared to consumption.

Budget Deal: A Dangerous Precedent

Republican and Democratic negotiators are expected to agree to a budget deal this week setting spending levels for 2014. The Washington Post says that the deal will amount to “little more than a cease-fire.”

However, the deal being described in media reports would be much worse than a cease-fire for Republicans, at least for fiscally conservative Republicans. That’s because the Budget Control Act of 2011 and related sequester have started bearing fruit and are currently providing substantial discretionary spending control. Yet Republican leaders are apparently planning to throw it away in return for revenue increases and paltry spending trims.

In theory, Republicans have the upper hand in budget talks because current law specifies that discretionary spending will be modestly reduced in 2014 to $967 billion. Republicans always claim that they are for spending restraint, and here they just need to hold firm on current-law budget caps to save serious money over time.

However, the Post story indicates that the GOP may agree to scrap the budget cap for 2014 and spend up to $1.015 billion in return for a tiny cut to federal pensions and a revenue increase, possibly from auctioning radio spectrum.

That would be a giant cave-in because a precedent will have been set. The next decade of savings from current-law budget caps would be in jeopardy. If Republican leaders up-end the budget caps this year, they will empower big-spending Democrats, liberal Republicans, and appropriators to completely blow up the caps in later years.

A $48 billion cap overrun this year could set the stage for spending hundreds of billions of dollars more over the coming decade. That would be snatching defeat from the jaws of 2011’s modest budget victory.

The ‘Stupid Party’ Strikes Again: Congressional Republicans Poised to Give Up Sequester Victory

There’s a saying in sports that teams that come back to win in the final minutes often “snatch victory from the jaws of defeat .”

I don’t like that phrase because it reminds me of the painful way my beloved Georgia Bulldogs were defeated a couple of weeks ago by Auburn. But I also don’t like the saying because it describes what President Obama and other advocates of big government must be thinking now that Republicans apparently are about to do away with the sequester.

Specifically, the GOP appears willing to give away the sequester’s real and meaningful spending restraint and replace that fiscal discipline with a package of gimmicks and new revenues.

I warned last month that something like this might happen, but even a pessimist like me didn’t envision such a big defeat for fiscal responsibility.

You may be thinking to yourself that even the “stupid party” couldn’t be foolish enough to save Obama from his biggest defeat, but check out these excerpts from a Wall Street Journal report.

Sen. Patty Murray (D., Wash.) and Rep. Paul Ryan (R., Wis.), chief negotiators for their parties, are closing in on a deal… At issue are efforts to craft a compromise that would ease across-the-board spending cuts due to take effect in January, known as the sequester, and replace them with a mix of increased fees and cuts in mandatory spending programs.