Tad recently put $61 billion in spending cuts in perspective. I’ve added a few bells and whistles to his data. Enjoy.
This is how a front‐page story in this morning’s Washington Post portrayed the cause of this year’s $1.5 trillion deficit:
Record U.S. Deficit Projected This Year
CBO forecasts tax cuts will push budget gap to $1.5 trillion
The still‐fragile economy and fresh tax cuts approved by Congress last month will drive the federal deficit to nearly $1.5 trillion this year, the biggest budget gap in U.S. history, congressional budget analysts said Wednesday.
Federal spending and federal tax revenue play equally important roles in creating the federal budget deficit. Yet the Post blames the deficit only on inadequate tax revenue. Federal spending isn’t too high, the Post implies, tax revenue is too low.
This may not be an example of media bias. But it is an example of why supporters of limited government believe that major news organizations like the Washington Post are biased toward bigger government. At a minimum, the Post has some explaining to do.
The calls for cutting the federal budget continue to build in Congress as the new GOP members try to make good on their promise to rein in the deficit. And, right on time, the latest issue of the Weekly Standard features an article by Robert Kagan critiquing the chorus of calls for cuts to military spending.
I think Kagan’s critique is reasonably fair, certainly more so than others of the recent past. But his basic premise, that national security spending is unrelated to the national debt, simply is not true. At the The Skeptics, I address this:
It is of course true that entitlements and mandatory spending pose the greatest threat to the nation’s fiscal health, but $700+ billion [in defense spending] isn’t chump change. The question of what we should spend on the military ought to take into account the trade‐offs, an argument that Dwight Eisenhower advanced in his farewell address just over 50 years ago, and that Charles Zakaib and I highlighted last week. (See also James Ledbetter’s discussion on this point.)
Actually, it is a question of fairness, but not the one that [Kagan] proposed. Because security is a core function of government (I think one of the only core functions of government), it would be a mistake to treat military spending as synonymous with spending on, say, farm subsidies. But Kagan’s writings presume that other countries’ governments do not — and should not — see their responsibilities in the same way. Kagan contends that American taxpayers should be responsible for the security of people living in Europe or East Asia or the Middle East. Or anywhere in the world, really… It simply isn’t fair to ask Americans to pay for something that other people should pay for themselves. For reference, the average American — every man, woman and child — spends two and a half times more on national security than the French or the British, five times more than citizens living in other NATO countries, and seven and a half times as much as the average Japanese.
Justin Logan is in the process of authoring a lengthier response for publication, but in the mean time click here to read the full post at The National Interest.
A recent study by economists Alberto Alesina, Dorian Carloni, and Giampaolo Leece looked at 19 OECD countries from 1975 to 2008 and found no evidence that “governments which quickly reduce budget deficits are systematically voted out office.” Therefore, the authors conclude that governments can “decisively” reduce deficits and be returned to office by voters.
A particularly interesting finding is that only 20 percent of the governments that reduced deficits by cutting spending were subsequently voted out of office. In contrast, 56 percent of governments that reduced deficits by increased taxes were given the boot.
The findings are good news for the large group of incoming members of Congress who promised to cut spending during the campaign.
The authors ask, “If it is the case that certain types of fiscal adjustments are not necessarily costly in terms of lost output or lost votes, why are they often delayed and politicians reluctant to implement them?”
One possible reason they suggest makes the most sense:
Certain constituencies may be able to block adjustments to continue receiving rents from government spending because they have enough political energy (time, organization, money). This is sometimes referred to as an issue of diffuse benefits and concentrated costs. For example, in some cases strikes of public‐sector employees may create serious disruptions. Pensioners lobbies may be able to persuade politicians not to touch their pension systems even when future generations will suffer the costs of delayed reforms. Lobbyists for certain protected sectors use campaign contributions for continued protection.
Policymakers in Washington are surrounded by doting staffers, political operatives, and persistent lobbyists representing countless special interests. The result is an endless stream of feedback telling policymakers to SPEND! Or, as is currently more likely the case, DON’T CUT! Many politicians learn to enjoy the warm feelings (and campaign support) that come with delivering the taxpayer goods to particular interests, while those who would actually like to cut spending don’t make any friends.
The media often doesn’t help matters.
Consider how many journalists tend to portray the subject of spending cuts. They describe proposed cuts as “draconian” and modest trims as “slashing” spending. Instead of considering the cost to taxpayers of a program or the possible alternatives to government programs, journalists just think of cuts as “painful.”
One way to puncture a hole in the Beltway spending echo‐chamber would be for congressional committees to spend more time listening to witnesses who don’t want more government spending. In a Cato Policy Analysis, former Yale professor James Payne surveyed 14 congressional committee hearings. He found that “in those 14 hearings, 1,014 witnesses appeared to argue in favor of programs and only 7 spoke against them, an imbalance of 145 to 1.”
There’s a lot of talk coming from House Republicans about “changing the culture” in the appropriations committee and elsewhere. A good start would be for the committees to start hearing more from the “diffuse” taxpayers footing the bill, and less from the concentrated beneficiaries. Perhaps then more policymakers will come to realize that pushing spending cuts isn’t so scary after all.
Today POLITICO Arena asks
Will implementing President Obama’s Fiscal Commission recommendations require that everyone take a hit?
My response (with tax insights from Jagadeesh Gokhale):
President Obama’s Fiscal Commission Report offers a useful start in reducing our budget deficits and national debt, but it hardly goes far enough. As several of my Cato colleagues have just noted here, here, here, and here, the report recognizes, to its credit, that our corporate income tax structure puts U.S. corporations at a considerable competitive disadvantage against their foreign competitors. And the report keeps military spending cuts on the table, even if there is much more to be cut. Yet by proposing a reduction in government spending from 24.3 percent of GDP today to 21.8 percent over the next 15 years — total federal spending as recently as 2000 was just 18.4 percent of GDP — it plays the old Washington game of calling a slower increase than previously projected a “cut.”
As for taxes, this report should be read in the context of a powerful argument in last Friday’s Wall Street Journal to the effect that over the past six decades, tax revenues as a percentage of GDP have averaged just under 19 percent, regardless of the top marginal personal income tax rate or whether taxes were cut or raised. What this suggests is that low tax rates spur income growth to leave the government’s revenues undiminished over the long‐term. High tax rates do the opposite. It doesn’t take a large leap of faith to believe that this effect would be stronger for those who earn more and pay more in taxes. Indeed, among high earners are the nation’s business leaders — innovators who create new products and jobs — who would respond positively to the growth opportunity provided by a stable, low‐tax‐rate environment. So those who believe that we help ourselves by more heavily taxing the rich need to ask themselves whether it might not be better to cut rates and keep them stable instead. Wouldn’t that promote a robust economy and lift all boats — with the government continuing to generate 19 percent in revenues?
None of this has anything to do, of course, with whether our current out‐of‐control federal government is constitutionally authorized to do all it is doing. But it’s a start toward returning the government to within its constitutional limits. Had those limits been respected — as the Framers understood, unlike New Deal progressives — we wouldn’t be in this mess.
I hit a nerve with my post, “There Ain’t No Such Thing as a Tax Expenditure.” To recap: The federal tax code has credits, deductions, exemptions, and exclusions that reduce tax revenue. By convention, budget experts call that forgone revenue a “tax expenditure,” a “tax subsidy,” or even “backdoor spending in the tax code.” This is incorrect. To claim that forgone tax revenue is a government expenditure implies that the money at stake actually belongs to the government, which is graciously letting taxpayers keep it, rather than to the people who earned it. Government is not spending that money; it is merely not extracting that money from the private sector. Statists deliberately use terms like “tax expenditure” precisely because that erroneous impression obscures their efforts to raise your taxes.
Less than an hour after posting, Matthew Yglesias of the Center for American Progress Action Fund called me “daringly inaccurate.” (Why be timid?) The Manhattan Institute’s Josh Barro devoted a very thoughtful 1,155 words to the topic at NRO.
Yglesias explains in an email:
I understand why you might want to object to the “tax expenditure” phrasing, but surely we can agree that there’s such a thing as a “tax subsidy,” right? If the government declares that fuel‐efficient hybrid cars are now tax‐deductible, that’s a subsidy to the makers and purchasers of Priuses.
I’m afraid I cannot agree to that.
- The term “tax expenditure” is nonsense because not taking Peter’s money, conditional on Peter buying a Prius, is not the same as spending the same amount of money on a Prius. The outcome may be exactly the same. But no one can spend money that he doesn’t possess.
- The term “tax subsidy” is likewise nonsense because a subsidy involves giving something to someone else. Not taking Peter’s money, conditional on Peter buying a Prius, is not a subsidy to Peter. The government is not giving Peter anything. Nor is it a subsidy to Paul, even though he profits from Prius sales: the government is not giving anything to Paul, either. Again, the outcome may be exactly the same as a government subsidy. Notably, Paul’s income rises. Yet it does not rise because Paul received a subsidy. Paul’s income rises because the state used coercion in a different way: to alter, for Peter, the cost of a Prius relative to other uses of Peter’s income.
- To see the absurdity, consider what it would mean to eliminate a “tax subsidy.” All else equal, eliminating an actual government subsidy reduces the tax burden. Eliminating a “tax subsidy” increases someone’s tax burden. Which is the whole point, isn’t it?
Barro makes more of our disagreement than actually exists.
- We agree targeted tax preferences are harmful. (I argue, for example, that the tax exclusion for employer‐sponsored health insurance operates more like a tax hike than a tax break because, among other atrocities, it denies the typical parent control over $10,000 of her earnings.)
- We agree they expand government power.
- We agree government should account for them. (Along those lines, the Congressional Budget Office has developed a concept it calls the “federal budgetary commitment to health care,” which is the sum of all federal health spending and all tax revenue forgone due to health‐related tax loopholes. The CBO calls them “tax expenditures” — grrrr. I dislike “budgetary commitment” for the same reason: the government can’t commit resources it doesn’t possess. But the CBO is on to something. We need an aggregate measure of “federal budgetary interference in the economy.”)
- Finally, Barro and I probably agree that Congress should simultaneously eliminate all such loopholes and reduce marginal payroll‐ and income‐tax rates — perhaps to zero.
I reject the term “tax expenditure” — as distinct from the concept — because it is nonsensical and biases the debate toward more government control of the economy and our lives. Barro asks what term I’d prefer. Until someone comes up with something pithier than “tax revenue forgone due to targeted tax preferences,” I’ll stick with that.
In coming months, new Republican members of Congress will be looking for ways to cut the budget deficit and also to increase economic growth. One way to do both is to privatize government assets, such as the U.S. Postal Service, Amtrak, and the air traffic control system.
Privatization can reduce deficits from the one‐time gain of an asset sale and from the elimination of annual taxpayer subsidies. Privatization can spur economic growth by moving resources from moribund government agencies to the higher‐productivity and more innovative private sector.
A new report by a trade magazine specializing in privatization confirms that the United States lags many nations on innovative infrastructure financing. Public Works Financing has been tallying data on “public‐private partnerships” around the world since 1985. PPP is sort of half way toward the full privatization of government assets such as highways. I prefer full privatization (such as this highway), but PPP has swept the world in recent years and it is a step in the direction of market reform.
Public Works Financing is subscription only, but I can summarize a few findings from their October annual survey.
- Since 1985, the magazine has tallied 1,867 PPP infrastructure projects worldwide valued at $712 billion. U.S. projects represented just 8 percent of the total value.
- With a population about 10 percent as large as the United States, Canada had 53 percent of the U.S. PPP deal value. With a population of a similar size as the United States, Europe has had five times the value of PPP deals.
- Of the 35 top global transportation firms doing PPP deals, the United States had only one firm, Flour, which was ranked number 33. Countries with firms heavily involved in PPP include Spain, Australia, China, and France. American entrepreneurs are apparently losing out because U.S. policymakers are asleep at the switch regarding private sector infrastructure financing.
Examples of PPP in the United States include the project to widen the Capital Beltway in Virginia, which involves the firms Transurban and Flour, and the leasing of the Indiana Toll Road, which involves Cintra and Macquarie. These deals aren’t full privatization, but they will hopefully bring some market efficiencies into an area of the economy dominated by the government over the last half century.
Congress is expected to write a major transportation authorization bill next year. The likely GOP chairman of the House Transportation and Infrastructure Committee, John Mica, has a more favorable view of private infrastructure than the prior Democratic chairmen. However, it is not clear that some of the incoming Republicans really understand the anti‐spending message that voters delivered on Tuesday. Regarding President Obama’s $8 billion in wasteful high‐speed rail subsidies, Mica did not call for killing them, but just for making them “better directed.”
The election ended the debate over whether to cut federal spending, but the debate about cutting particular programs has just begun.