• Tag Archives deficit
  • Yes, You Can Be for Lower Taxes and Smaller Deficits

     

    One needn’t support the recently-enacted tax legislation to be disturbed by the tenor of much criticism of it. Many opponents, and indeed some press reporting, took for granted that if one voted for a significant tax cut after having expressed longstanding concerns about federal deficits, one must be an irredeemable hypocrite. But lower taxes and smaller deficits can coexist.

    Some examples of the criticism: Neera Tanden wrote in NBC news of the “staggering hypocrisy” inherent in passing “shameful tax cut legislation” after sponsors had previously warned of a “forthcoming debt crisis.” Robert Schlesinger opined in US News & World Report that the legislation suggested “an incredible case of cognitive dissonance or simple breathtaking hypocrisy and/or duplicity.” Ezra Klein fumed at Vox that lawmakers who supported the bill were “nihilists.”

    This refrain was repeated on editorial pages nationwide: you could be for deficit reduction, or alternatively, you could be for tax cuts. Only a nihilist hypocrite could possibly have taken both positions.

    The Case for Lower Taxes and Smaller Deficits

    Beyond its closed-mindedness, this outpouring of indignation was all premised on a mistaken foundational assumption. It is entirely possible to be for both lower taxes and smaller deficits. In fact, I would argue this was not only possible but that it represented the most responsible policy position given the projections lawmakers faced when the tax bill was debated. (Disclaimer: the following should not be misinterpreted as necessarily an endorsement of the specific tax legislation, nor of prioritizing tax relief over fiscal consolidation.)

    When the tax bill was debated, lawmakers faced baseline budget projections that looked like this:

    Everything on this graph is shown as a percentage of GDP, so in effect, this shows how both federal spending and (to a lesser extent) revenue collections are growing faster than our economic output. Beyond the time window shown here, the long-term fiscal picture looked even worse. Spending would continue to rise dramatically faster than our ability to finance it, threatening escalating deficits in the decades ahead.

    The graph also shows that undertaxation is not the cause of this fiscal gap. Over the next decade, tax burdens were actually projected to be higher than the historical average and to increase gradually faster than our economic capacity.

    This was not and is not a stable situation. Taxing and spending as a share of our economy cannot keep increasing forever. (Actually, there is a theoretical sense in which we can spend more than 100% of our economic output if all spending takes the form of domestic income transfers. In other words, we could theoretically tax people several times the amount of their income, provided that we simultaneously write government checks that give it all back to them.

    However, this is neither practicable nor politically feasible. In the real world, we must moderate both our tax and spending growth. Fixing this problem within historical political norms would mean cutting future spending growth substantially – but importantly, also lowering some future tax growth, even as projected deficits are reduced.

    In other words, the baseline budget picture was such that there was no contradiction between reducing projected deficits and lowering projected tax collections. Indeed, that is exactly what a solution consistent with historical experience would require.

    The Case against Lower Taxes and Smaller Deficits

    Now, there is a standpoint from which it would be inconsistent to claim support for both lower taxes and smaller deficits – specifically if one argued that projected spending growth must never be slowed. Some progressives seek not only to preserve currently projected spending growth but to add enormously to it.

    In this mindset, deficits could only be closed if tax collections rise faster than projected. Importantly, this would still not produce a stable budget situation because tax collections would need to grow much faster than Americans’ ability to pay them. Nevertheless, some advocates effectively take this policy position.

    But those who voted for the tax bill are not generally guilty of this. To the contrary, those members have repeatedly been assailed for their allegedly heartless determination to cut spending. House Speaker Paul Ryan has even been depicted — in one particularly revolting ad a few years ago — as dumping an innocent grandmother out of her wheelchair over a cliff, because of his efforts to address rising entitlement spending. And just a few months before their tax vote, lawmakers were attacked for supposedly taking away people’s health care because of their efforts to tackle hundreds of billions of dollars in projected spending growth under the ACA.

    Credit and Criticism Where It’s Due

    It is legitimate to oppose legislation to slow the growth of federal spending, if one believes that spending is needed. But one cannot fairly attack legislators who try to address runaway spending growth, and then later assail those same legislators as hypocrites for widening the deficit.

    Now, it is fair to criticize sponsors of deficit-widening legislation for denying they are increasing the debt. There has been a regrettable amount of such denial, where the public would have been better served to hear arguments as to why the benefits of tax cuts outweighed the downside of a debt increase.

    One can simply assume growth-stimulation effects under which tax cuts do not add to long-term debt, but non-partisan scorekeepers widely reject them — in the same way they rejected assumptions crafted during the last administration to conclude additional stimulus spending could pay for itself. Advocates should acknowledge adverse fiscal consequences of any legislation under consideration, even as they argue for its passage.

    The bottom line is this: prior to the tax legislation, lawmakers faced projections in which both tax burdens and spending patterns exceeded historical norms and were projected to rise still further, driven principally by growth in the major federal health entitlements and Social Security. The merits of this specific tax bill aside, a responsible and sustainable fiscal policy would reduce both projected spending and deficits substantially, while also slowing tax growth somewhat, and ensuring that neither taxes nor spending ultimately grow faster than our ability to finance them.

    Recognizing these realities involves no hypocrisy, but attacking lawmakers for fiscal recklessness — just a few months after taking political advantage of their efforts to rein in part of the federal spending explosion — most certainly does.

    Reprinted from Economics 21.


    Charles Blahous

    Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, a public trustee for Social Security and Medicare, and a contributor to e21.

    This article was originally published on FEE.org. Read the original article.




  • Should Taxpayers Be Fleeced Forever Because of the Deficit?

    Should Taxpayers Be Fleeced Forever Because of the Deficit?

    As anyone could have predicted, after President Trump released his tax proposal last week the response from the left was a familiar one about “tax cuts we can’t afford” and “mountains of debt” that will supposedly result from reduced penalties placed on work, investment, corporate profits, and of course, death.

    So while the left acted as expected, the truly unfortunate part of this story is that Republicans and conservatives responded to the criticism of Trump’s proposal in a similarly predictable fashion.

    The Ongoing Debate



    The Republicans said what they always say, that tax cuts will author booming growth and will lead to higher federal revenues. This included Treasury Secretary Steven Mnuchin who, as if coached by GOP automatons, responded that the “tax plan will pay for itself with economic growth.”

    And then, right on cue, deficit scolds from the Republican side of the aisle, including Douglas Holtz-Eakin, expressed skepticism that the proposed cuts would raise “$2 trillion in revenue.” Meanwhile, Greg Mankiw questioned the GOP math, telling the New York Times that according to accepted wisdom only “one-third of the cost of tax cuts is recouped via faster economic growth.”

    With the tax cut debate, nothing ever changes.

    Focus on the Spending

    Lost on many Republicans is that the moment they start talking about revenues they concede the taxation argument to the Democrats. And this is true even though their oft-stated statistics are correct.

    As the 1920s, 1960s, 1980s, late 1990s (capital gains cuts in ’97), and 2003 (income, capital gains cuts) reveal rather clearly, reduced penalties on work and investment lead to more taxable economic activity that leads to higher federal revenues. Ok, but federal revenues are not the point, and tax cuts are certainly not a “cost.”

    When Republicans talk about how much the treasury will collect they concede to the Democrats that we have a revenue problem that requires a taxation answer, as opposed to one of too much spending. Sorry, but government spends too much. It’s as simple as that.

    Seemingly forgotten by Republicans and conservatives long ago is that with government spending, it’s not their money. In that very real sense, all government spending is deficit spending.

    For governments to spend, they must tax or borrow precious resources from the private sector only to hand them over to Paul Ryan, Nancy Pelosi and Donald Trump, rather than intrepid investors putting more capital to work, or allowing those who earned the money to actually keep it.

    Reducing all of this to what’s basic, what would voters prefer? A balanced budget annually of $4 trillion, or $1 trillion in annual deficits based on $1.5 trillion in spending? This is not a trick question. It’s easy.

    The spending is the problem.

    Deficits Don’t Really Matter

    At least when governments borrow on our backs they’re paying for the right to waste resources we produce. So if the economy-sapping waste is going to happen, better for government to pay interest back to investors rather than simply confiscate the wealth with taxes.

    To state, what should be obvious is that budget deficits really don’t matter. No one is forcing investors or central banks to buy debt that is only attractive insofar as productive Americans are being fleeced.

    Republicans and conservatives who focus on deficits are wasting brain space on what is an accounting abstraction.They need to tape a note to their mirrors, reminding themselves that when politicians spend at the expense of the people’s freedom—and to the detriment of experimentation in healthcare advances, transportation advances, and technological innovation that would render WiFi an antique—they’re being wasteful with our money.

    When governments spend, we the taxpayers naturally have less to spend, and of even greater importance, less to save and invest.

    Real Cuts; Less Rhetoric

    Considering all of the above, Republicans invariably miss that it’s a very good thing when governments collect less revenue. Indeed, that should be the goal of tax cuts; to reduce the amount that the treasury takes in each year.

    Politicians can only waste precious resources insofar as we allow them to, so if Republicans want to live up to their lofty rhetoric about freedom, they should talk about tax cuts that reduce revenues as a feature of tax reform, not a bug.

    The above also speaks to another problem tied to the Republican approach to reduced taxation: They justify their actions by saying that economic growth will be the result. It’s fair to say that when work and investment are less restricted, we gain greater access to both. These arguments are true, but so what?

    Republicans should be for tax cuts even if they were proven to stagger economic growth because the core argument should always be about freedom. It’s through hard work that Americans express themselves and the fruits of their labor should not be taken from them without consent.

    Of course, there are always the deficit scolds who talk ad infinitum about “budget shortfalls,” debt as “far as the eye can see,” and “unfunded liabilities” that will soon enough, even making the most laughable prediction, “Make America Greece.”

    As much as the left confidently predicts global doom if we don’t do anything about an allegedly warming planet, so do the misguided “deficit hawks” on the right regularly inform us that America is doomed to follow in Greece’s footsteps if we don’t reduce the deficits. This silly argument fails in two ways.

    First, a focus on deficits once again places the taxation and spending argument squarely on the turf of the left. They’ll gladly discuss what isn’t a revenue problem as though it is.

    But the bigger problem with this mindless argument concerns something economists bereft of market knowledge seemingly miss all the time: rising revenues are what enable ever-growing federal “deficits.”

    The paradoxical truth missed by a right blinded by false balance is that real-world investors are always willing to buy debt that is backed by ever-increasing wealth creation and produced by the most productive people on earth.

    Of course that’s why actual tax cuts large enough to reduce federal revenues would be so wondrous for the confused hawks. When revenues into the treasury decrease, and continue decreasing, so will the relative willingness of investors to buy treasury debt. A benefit of the latter will be that the deficit hawks, who’ve been predicting doom for decades, will finally (one can hope) disappear into their campus and think tank cubicles never to be heard from again.

    The main point is, of course, that taxes are way too high. Taxes should ideally be so low that federal revenues plummet. Wouldn’t it be a nice change to see Republicans promote tax relief that penalizes American workers less while also reining in politicians?

    One can dream, but if history has proven itself to be any sort of indicator, Republicans are set to resume yet another debate about growth and revenues that will hand the terms of the debate over to the left on a silver platter. For all politicians, regardless of party alliance, freedom is always an afterthought.


    John Tamny

    John Tamny is a Forbes contributor, editor of RealClearMarkets, a senior fellow in economics at Reason, and a senior economic adviser to Toreador Research & Trading. He’s the author of the 2016 book Who Needs the Fed? (Encounter), along with Popular Economics (Regnery Publishing, 2015).

    This article was originally published on FEE.org. Read the original article.


  • Trump’s Budget Paves the Road to Fiscal Failure

    Trump’s Budget Paves the Road to Fiscal Failure

    President Donald Trump has issued his preliminary federal budget proposal looking to the U.S. government’s next fiscal year. What it shows is that there will likely be no attempt to reduce the size and cost of most of the American interventionist-welfare state.

    On Thursday, March 16, 2017, the White House released, “America First: A Budget Blueprint to Make America Great Again.” Listening to the comments of some on the political left, you would think that the world was going to come to an end. For many on the political right, the programs placed on the chopping block for reduction or near elimination seem like a dream come true–if the budgetary proposals were to be implemented.

    Furthermore, the blueprint offers an insight into the mind of Donald Trump about the role of government in society. When the budget was released, Michael Mulvaney, the director of the Office of Management and Budget, said that this was Donald Trump’s fiscal vision for America. “If he said it on the campaign, it’s in the budget,” Mulvaney declared. “We wrote it using the president’s own words.”

    Same Entitlements, More Defense Spending


    Even a cursory look at President Trump’s budgetary proposals reveals that he plans to leave “entitlement programs” untouched while reallocating approximately 30 percent of the federal budget’s “discretionary” expenditures from one set of activities to another. Neither the total amount of government spending nor the likely budget deficit is threatened with meaningful reduction.

    In the current 2017 federal fiscal year, Social Security, Medicare, and related spending make up almost 64 percent of Uncle Sam’s expenditures. The net interest on the near $20 trillion national debt makes up another 7 percent of federal spending. Out of the remaining around 30 percent of the budget, defense spending absorbs 15 percent of federal outflows.

    The budget proposal makes it clear that President Trump is devoted to expanding military capabilities for continued foreign intervention. A foreign policy focused on “America First” is losing none of its global reach or the military hardware to back it up.

    During his March 17 press conference with visiting German Chancellor, Angela Merkel, Donald Trump reiterated that he was not a foreign policy isolationist. Indeed, he emphasized his allegiance to NATO and its role in Europe. At the same time, Secretary of State, Rex Tillerson, was at the demilitarized zone between North Korea and South Korea, declaring that nothing was off the table, including a preemptive military attack on North Korea’s nuclear capability.

    For conservatives and classical liberals who hope for foreign policy that leaves the United States less vulnerable to regional foreign conflicts, President Trump and his cabinet members are making it clear that America’s political and military allies must pick up more of the financial tab for the joint policing of different parts of the world.

    Reflecting this, the president’s blueprint proposes to increase Defense Department spending by $54 billion dollars, which would put military expenditures for 2018 at a total of $603 billion. The Department of Homeland Security would gain an additional $2.8 billion dollars for a total in 2018 of around $70 billion.

    The eyes and ears of the surveillance state will, also, remain intact and grow. The only wiretapping that President Trump seems to mind was an alleged eavesdropping on his own conversations before he took office. As for the rest of us, well, Big Brother is watching and listening–for our own good. After all, it’s all part of making America “great” and “safe” again.

    Cue Progressive Whining

    To pay for increases in the warfare state, President Trump’s budgetary axe has fallen on a variety of “discretionary” welfare and redistributive programs. To cover the $54 billion increase in defense spending, $54 billion is to be cut from half of the of the budgeted 30 percent discretionary spending. It’s worth keeping in mind that all the teeth gnashing by the left is over a less than 1.5 percent decrease to the projected $4 trillion (and then some) that Uncle Sam will spend in 2018.

    It must be admitted, conservative and classical liberal hearts can only be warmed by virtually every cut in this part of the budget. For example, Department of Agriculture spending will be reduced by 20.7 percent. However, it is worth observing that subsidies paid to farmers, including subsidies for not growing crops, are not on the chopping block. Trump does not want to antagonize a crucial part of rural Republican America that lives at the trough of government spending.

    On the other hand, the State Department and related foreign aid programs would be slashed by almost 29 percent. Not many tears need be shed here, given that State Department programs and personnel are at the heart of America’s misguided global social engineering schemes, and foreign aid is merely a slush fund for foreign political power lusters that undermine real market-oriented economic development in other parts of the world.

    This list goes on: Housing and Urban Development, down 12 percent; Health and Human Services, cut 16 percent; Commerce Department, reduced 16 percent; Education Department, decreased by over 13 percent (but with a shift of funds to increase falsely named “school choice” programs). The Interior Department is down almost 12 percent; the Labor Department cut nearly 21 percent.

    The Environmental Protection Agency would be cut by over 31 percent. The climate and land-use social engineers are being driven berserk by this one. It is being forecast as the end of planet Earth that swarms of regulatory locusts will be reined in from plaguing the country with their wetland rules, land-use restrictions, market-hampering prohibitions, and abridgments of private property rights. The heavens will darken, the seas will rise, and the land will be barren. How will humanity survive without self-righteous elitists leading mankind to socially-sensitive, greener pastures?

    O! The Humanities!

    Additionally, the National Endowment for the Arts, the National Endowment for the Humanities, the Institute for Museum and Library Services, and the Corporation for Public Broadcasting are targeted for a virtual 100 percent cut. Those concerned about the arts and humanities may have to put their private money where their mouths are.

    The thought that those who listen to the moralizing, collectivist voices on National Public Radio may have to pay for it (either out of their own pockets or from capitalist commercial interruptions) is just too much for these delicate souls to bear.

    Political pocket-pickers are warning that planned “Meals on Wheels” spending cuts threaten the poor and aged with starvation. But, in fact, 65 percent of the program’s funding comes from private donations or local and state governments, with only 35 percent funded by federal dollars. Furthermore, the day after the budget blueprint was released, the media reported that Meals on Wheels around the country received a more than 50 percent increase to their regular private donations rate. Private benevolence–amazingly!–materialized almost instantly to replace coercively collected funding with voluntary support for the charity that, apparently, many consider worthy of support.

    Leaving the Entitlement State Intact

    Donald Trump’s budgetary blueprint for American greatness needs to be put into the wider context. Where does this leave the size and scope of government in the United States?

    Alas, Trump’s budget leaves it seemingly untouched. The entitlement programs are feeding the insatiable growth of America’s domestic system of political paternalism: the governmental spending surrounding Social Security and Medicare redistribution.

    Under current legislation, their cost and intrusiveness will only get worse. In its January 2017 long-term federal government budgetary forecast, the Congressional Budget Office estimates that if nothing changes legislatively, the “entitlement” programs will end up consuming nearly 80 percent of all the taxes collected by the United States government.

    Since the remaining 20 percent of projected federal tax revenues will not sufficiently cover all projected defense and other “discretionary” spending, plus interest on the national debt between 2018 and 2027, the United States government will continue to run large annual budget deficits between now and then. This will add $10 trillion more to the total national debt over next decade.

    Donald Trump made it clear during the primary and general presidential election campaigns in 2016 that he considers Social Security and Medicare sacrosanct, not subject to the budget cutter’s chopping block. In addition, ObamaCare may be repealed, but the reform that Trump and the Republican leadership in Congress have in mind will still leave a heavy fiscal footprint. This, too, will maintain and entrench Uncle Sam’s intrusive presence in the healthcare and medical insurance business, and will, inescapably, cost a lot of government dollars, though the full estimates are still forthcoming.

    The Proposed Cuts Are Unlikely

    Keep in mind that Trump’s budgetary blueprint is merely his administration’s recommendation to Congress, and especially to the House of Representatives where spending legislation is constitutionally supposed to originate. Already the grumbling has begun to be heard, not only from the Democratic Party minority in Congress but from members of the Republican Party majority, as well.

    Abstract spending cuts almost always serve as good campaign rhetoric, especially for Republicans running for elected office, but like their Democratic Party counterparts, Republicans soon find themselves pressured and dependent upon the financial support of special interest groups, each of which feeds off of concrete government spending dollars.

    The resulting resistance to fiscal repeal and retrenchment turns out to be no different than with the groups surrounding the Democrats. Plus, the Republican foreign policy hawks have all the big-spending military contractors to serve in the name of warding off foreign threats to American greatness.

    At the end of the day, when the actual 2018 federal fiscal budget gets passed by Congress and signed by the president, it will no doubt contain fewer of the discretionary spending cuts than proposed in Trump’s blueprint. Other than adding whatever “repeal and reform” emerges out of the contest between ObamaCare and TrumpCare (or RyanCare), the “entitlement” portion of the federal government’s budget will remain untouched.

    Challenging the Entitlement Premises

    The fact is America is continuing to move in the long-run direction of fiscal unsustainability. The supposed untouchability of the “entitlement” segment of the federal budget will have to be made touchable. Nearly 90 years ago, in 1930, the famous “Austrian” economist, Ludwig von Mises, said to an audience of Viennese industrialists during an earlier economic crisis:

    Whenever there is talk about decreasing public expenditures, the advocates of this fiscal spending policy voice their objection, saying that most of the existing expenditures, as well as the increasing expenditures, are inevitable . . . What exactly does ‘inevitable’ mean in this context?

    That the expenditures are based on various laws that have been passed in the past is not an objection if the argument for eliminating these laws is based on their damaging effects on the economy. The metaphorical use of the term ‘inevitable’ is nothing but a haven in which to hide in the face of an inability to comprehend the seriousness of our situation. People do not want to accept that fact that the public budget has to be radically reduced.”

    If there is any chance of stopping, reversing and repealing the welfare state, the entitlement language in political discourse has to be challenged. “Entitlement” presumes a right to something by some in the society, which in the modern redistributive mindset equally presumes an obligation to others to provide it.

    It is essential to emphasize and explain the dollars and cents of the fiscal unsustainability of the entitlement society. And there are certainly a sufficient number of historical examples to point to for demonstration that the welfare state can go down the road to societal ruin.

    In addition, the entitlement mindset must be confronted with an articulate and reasoned defense of individual liberty, based on a philosophy of individual rights to life, liberty, and honestly acquired property. Plus, the ethics of liberty must be shown to be inseparable from the idea of peaceful and voluntary association among people in all facets of life, and that government’s role is to secure and protect such liberty and individual rights, not to abridge and violate them.

    If this is not done, and done successfully, the road to fiscal failure and paternalistic serfdom may be impossible from which to exit.


    Richard M. Ebeling

    Richard M. Ebeling is BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. He was president of the Foundation for Economic Education (FEE) from 2003 to 2008.

    This article was originally published on FEE.org. Read the original article.