Tag: federal budget

Republicans Are Right to Cut the IRS Budget

One of my many frustrations of working in Washington is dealing with perpetual-motion-machine assertions. The classic example is Keynesian economics, which is based on the notion that you magically create additional economic activity by having the government spend money instead of allowing the private sector to decide how it gets spent (in an especially bizarre display of this thinking, Nancy Pelosi actually said that subsidizing unemployment was the best way to create jobs).

Another example of this backwards analysis can be found in the debate over the IRS budget. The President is resisting a GOP proposal to modestly trim the IRS’s gargantuan $12.5 billion budget and his argument is that we should actually boost funding for the tax collection bureaucracy since that will mean more IRS agents squeezing more money out of more taxpayers.

Here are some excerpts from an Associated Press report about the controversy.

Every dollar the Internal Revenue Service spends for audits, liens and seizing property from tax cheats brings in more than $10, a rate of return so good the Obama administration wants to boost the agency’s budget.House Republicans, seeing the heavy hand of a too-big government, beg to differ. They’ve already voted to cut the IRS budget by $600 million this year and want bigger cuts in 2012. …IRS Commissioner Doug Shulman told the committee Tuesday that the $600 million cut in this year’s budget would result in the IRS collecting $4 billion less through tax enforcement programs. The Democrat-controlled Senate is unlikely to pass a budget cut that big. But given the political climate on Capitol Hill, Obama’s plan to increase IRS spending is unlikely to pass, either. Obama has already increased the IRS budget by 10 percent since he took office, to nearly $12.5 billion. The president’s budget proposal for 2012 would increase IRS spending by an additional 9 percent — adding 5,100 employees. …Obama’s 2012 budget proposal for the IRS includes $473 million and 1,269 new positions to start implementing the health care law.

Unlike Keynesian economics, there actually is some truth to Obama’s position. The fantasy estimate of $10 of new revenue for every $1 spent on additional bureaucrats is clearly ludicrous, but it is equally obvious that many Americans would send less money to Washington if they didn’t have to worry about a coercive and powerful tax-collection bureaucracy that had the power to throw them in jail.

This is an empirical question, at least with regards to the narrow issue of whether more IRS agents “pay for themselves” by shaking down sufficient numbers of taxpayers. Reducing the number of IRS bureaucrats by 90 percent, from about 100,000 to 10,000, for instance, surely would be a net loss to the government since the money saved on IRS compensation would be trivial compared to the loss of tax revenue.

But that doesn’t mean that a reduction of 10,000 or 20,000 also would lead to a net loss. And it certainly does not mean that adding 10,000 or 20,000 more IRS agents will result in enough new revenue to compensate for the salaries and benefits of a bigger bureaucracy. Even left-wing economists presumably understand the concept of diminishing returns.

But let’s assume that the White House is correct and that more IRS agents would be a net plus from the government’s perspective. The Administration would like us to reflexively endorse a bigger and more aggressive IRS, but public policy should not be based on what is a “net plus” for the government.

There are two ways to promote better tax compliance. The Obama approach, as we’ve read above, is to expand the size and power of the IRS. Up to a point, this policy can be “successful” in extracting additional money from the productive sector of the economy.

The alternative approach, by contrast, seeks better compliance by lowering tax rates and reforming/simplifying tax systems. This course of action boosts compliance by making evasion and avoidance less attractive. People are much less likely to cheat if the government isn’t being too greedy, and they’re also more likely to comply if they think there is less waste, fraud, corruption, and favoritism in the tax code.

Let’s now put this discussion in context. Obama wants more IRS agents in large part to enforce his new scheme for government-run healthcare. Yet that’s a perfect example of what I modestly call Mitchell’s Law - politicians doing one bad thing (expanding the IRS) only because they did another bad thing (enacting a health care bill that made the tax code even more convoluted and punitive).

So instead of making the IRS bigger in response to a bad healthcare law, why not repeal that bad law and shrink the size of the IRS? Even better, why not junk the entire tax code so we can replace the IRS with a system that is honest and fair?

And if these big steps are not immediately feasible, at least cut the IRS budget so that awful laws are enforced in a less destructive manner.

This Center for Freedom and Prosperity video has additional details about the national nightmare we call the IRS.

Spending Restraint Works: Examples from Around the World

America faces a fiscal crisis. The burden of federal spending has doubled during the Bush-Obama years, a $2 trillion increase in just 10 years. But that’s just the tip of the proverbial iceberg. Because of demographic changes and poorly designed entitlement programs, the federal budget is going to consume larger and larger shares of America’s economic output in coming decades.

For all intents and purposes, the United States appears doomed to become a bankrupt welfare state like Greece.

But we can save ourselves. A previous video showed how both Ronald Reagan and Bill Clinton achieved positive fiscal changes by limiting the growth of federal spending, with particular emphasis on reductions in the burden of domestic spending. This new video from the Center for Freedom and Prosperity provides examples from other nations to show that good fiscal policy is possible if politicians simply limit the growth of government.

 

These success stories from Canada, Ireland, Slovakia, and New Zealand share one common characteristic. By freezing or sharply constraining the growth of government outlays, nations were able to rapidly shrinking the economic burden of government, as measured by comparing the size of the budget to overall economic output.

Ireland and New Zealand actually froze spending for multi-year periods, while Canada and Slovakia limited annual spending increases to about 1 percent. By comparison, government spending during the Bush-Obama years has increased by an average of more than 7-1/2 percent. And the burden of domestic spending has exploded during the Bush-Obama years, especially compared to the fiscal discipline of the Reagan years. No wonder the United States is in fiscal trouble.

Heck, even Bill Clinton looks pretty good compared to the miserable fiscal policy of the past 10 years.

The moral of the story is that limiting the growth of spending works. There’s no need for miracles. If politicians act responsibly and restrain spending, that allows the private sector to grow faster than the burden of government. That’s the definition of good fiscal policy. The new video above shows that other nations have been very successful with that approach. And here’s the video showing how Reagan and Clinton limited spending in America.

Obama’s Budget Means the Burden of Government Spending Will be $2 Trillion Higher in Ten Years

Fiscal policy wonks (like me, I’m forced to admit) sometimes miss the forest because we focus too much on individual trees.

So while I think my posts on the spending and revenue sides of Obama’s new budget contained lots of useful information, I didn’t pay any attention to the elephant in the room (I’m really going overboard with metaphors, huh?).

The most important number in Obama’s budget is that he is proposing $5.7 trillion of spending in 2021, about $2 trillion more than is being spent this year, according to table S-1 of the budget.

Here’s everything you need to know about Obama’s budget, in one chart.

It’s important to make three additional observations. First, Obama’s budget is based on all sorts of optimistic assumptions and rosy scenarios, as explained by Brian Riedl of the Heritage Foundation. When CBO produces a re-estimate of the President’s budget, it almost certainly will show hundreds of billions of dollars of additional spending.

Second, the slope of the line if the graph is very revealing. The first two years look very impressive, with almost no change in spending, but the goal of fiscal policy, to borrow a phrase from the health care debate, should be “bending the cost curve” of government. Short-run gimmicks, to put it mildly, don’t have any long-run impact. That’s why the most important number in Obama’s budget is the $5.7 trillion burden of spending in 2021. That’s a mark of fiscal failure, and it exists because Obama’s budget increases spending at twice the rate of inflation between 2013 and 2021.

Third, many people have appropriately criticized the White House for moving the fiscal goalposts (oops, another metaphor) and focusing on a technical budget concept known as “primary deficit” or “primary balance” instead of traditional budget measures. This is an arcane issue involving the difference between total spending compared to overall spending minus interest payments. Yes, the White House is being slippery, even earning a false rating from PolitiFact, but this is a red herring (there I go again) issue. What really matters is the size of government, not regular deficits or primary deficits. Too many Republicans are fixating on the symptom of too much borrowing and paying insufficient attention to the underlying disease of too much spending. This video explains further.

Deconstructing the Revenue Side of Obama’s Budget

I looked yesterday at the spending side of Obama’s budget and found some good news and bad news. The good news was the absence of any big new initiative to expand the burden of government. That’s a welcome relief since the past couple of years have featured budget busting proposals such as the so-called stimulus scheme and a government-run healthcare plan.

The bad news is that the budget does nothing to undo any of the damage of the past two years. Nor does it undo any of the damage of the previous eight years. And because the President’s budget refuses to address entitlement spending, it certainly doesn’t do anything to avert the damage of rapidly expanding budgets over the next several decades.

Now let’s look at the tax side of the fiscal equation. In large part, the White House is recycling class warfare ideas from last year’s budget. The President wants higher tax rates, including higher taxes on investors, entrepreneurs, and small business owners. He also wants to increase the tax burden of American companies that are competing for market share in global markets.

These are remarkably misguided proposals. But what’s especially disappointing is that the Administration stuck with these bad ideas when the President’s own fiscal commission proposed lower tax rates and base broadening. Those proposals would have increased the overall tax burden, so they definitely were not pure supply-side economics. And the Commission also proposed an increase in the double taxation of saving and investment, which also would be unfortunate.

But at least the Commission proposed to do the wrong thing in a good way. Yes, taxes would have increased, but the damage would have been ameliorated by a better tax structure. Obama’s budget, by contrast, does the wrong thing in the worst way - increasing the tax burden while also making the tax system more unfair.

It’s also worth noting that the President decided to punt on the issue of corporate tax reform. This is remarkable since even he acknowledged during his State-of-the-Union address that America’s corporate tax rate is far too high in a competitive global economy.

Last but not least, it’s worth noting that Obama’s budget shows that tax revenues will rise above their long-run average of 18 percent of GDP - even if taxes are not increased by one penny.

America’s budget problem is too much spending, period.

Obama Shellacking and the Federal Budget

A lot has happened since President Obama introduced his last budget in February 2010. His party took an historic “shellacking” at the polls for its big government policies, his Fiscal Commission recommended serious spending cuts, and European governments have illustrated the severe problems of deficit spending.  

Given all this, did the president adopt a more frugal and prudent approach in his new budget yesterday? Not at all–the spending levels in his new budget are virtually the same as the unsustainably high spending levels in his February 2010 budget.

The chart shows Obama’s proposed spending for FY2012 from last year’s budget, and his proposed spending for the same year from his new budget.  His new budget proposes slightly more discretionary and entitlement spending for next year than did his last budget!

  • Last year, Obama planned to spend $1.301 trillion on discretionary programs in FY2012, but now he plans to spend $1.340 trillion.
  • Last year, Obama planned to spend $2,107 on entitlement programs in FY2012, but now he plans to spend $2,140.

So take that Tea Party!

Obama claimed in his “Budget Message” yesterday that “taking further steps toward reducing our long-term deficit has to be a priority,” but looking at his actual budget numbers shows that isn’t true.

For more budget numbers, see my NRO summary.

Federal Budget: Obama Chickens Out

Despite the record $1.6 trillion deficit this year, and the consensus that exploding spending and debt is pushing the nation toward catastrophe, the Obama administration has completely chickened out on spending reforms in its new budget.

The president took a “shellacking” in the November elections as a result of his big-government policies. Does his new budget reflect any movement to the fiscal center? Not at all — spending levels in his new budget are virtually the same as in last year’s budget.

Read my post at NRO for full details.

Deconstructing the Spending Side of Obama’s Proposed FY2012 Budget

President Obama’s proposed budget for fiscal year 2012 has been released and there is lots of rhetoric in Washington about “budget cuts.”

At first glance, this seems warranted. According to the just-released fiscal blueprint, the federal government is spending about $3.8 trillion this year and the President is proposing to spending a bit more than $3.7 trillion next year. In other words, the White House is going beyond a budget freeze and is actually proposing to spend $90 billion less next year than is being spent this year.

That certainly seems consistent with my proposal to solve America’s fiscal problems by restraining the growth of spending.

But you won’t find a smile on my face. This new budget may be better than Obama’s first two fiscal blueprints, but that’s damning with faint praise. The absence of big initiatives such as the so-called stimulus scheme or a government-run healthcare plan simply means that there’s no major new proposal to accelerate America’s fiscal decline.

But neither is there any plan to undo the damage of the past 10 years, which resulted in a doubling in the burden of government spending during a period when inflation was less than 30 percent.

Moreover, many of the supposed budget savings (such as nearly $40 billion of lower jobless benefits) are dependent on better economic performance. I certainly hope the White House is correct about faster growth and more job creation, but they’ve been radically wrong for the past two years and it might not be wise to rely on optimistic assumptions.

Some of the fine print in the budget also is troubling, such as Table 4.1 of OMB’s Historical Tables of the Budget, which shows that some agencies are getting huge increases, including:

  • 17 percent more money for International Assistance Programs;
  • 24 percent more money for the Executive Office of the President;
  • 13 percent for the Department of Transportation; and
  • 12 percent more for the Department of State.

But these one-year changes in outlays are dwarfed by the 10-year trend. Since 2001, spending has skyrocketed in almost every part of the budget. Even with the supposed “cuts” in Obama’s budget, there will be:

  • 112 percent more spending for the Department of Agriculture;
  • 100 percent more spending for the Department of Education;
  • 154 percent more spending for the Department of Energy;
  • 110 percent more spending for the Department of Health and Human Services;
  • 175 percent more spending for the Department of Labor; and
  • 82 percent for the Department of Transportation.

And remember that inflation was less than 30 percent during this period.

The budget needs to be dramatically downsized, yet the President has proposed that we tread water.

But even that’s too optimistic. America’s real fiscal challenge is that the burden of government spending will dramatically increase in coming decades, thanks largely to an aging population and poorly designed entitlement programs. Barring some sort of change, the United States will suffer the same problems that are now afflicting failed welfare states such as Greece and Portugal.

On the issue of entitlement reform, however, the President is missing in action. He’s not even willing to embrace the timid proposals of his own Fiscal Commission.

Tomorrow, we’ll look at the tax side of the President’s budget.