Resolving the Federal Fiscal Crisis Requires a Better Understanding of Economic Reality

The graph above was recently created by the Congressional Budget Office to illustrate the size of the US federal debt as a percentage of the country's Gross Domestic Product (GDP) since the founding of our Republic and projected into the future for 30 years or so based on currently planned government policies.

The Washington Post published an editorial today about the CBO report in which this graph appeared and referred to the future projection as a "Matterhorn-like incline of what happens next". As the Post editorial notes, the federal debt has grown very quickly to the present and projected crisis levels shown in the CBO chart.

"The federal debt held by the public -- and, increasingly, "the public" means foreign governments and investors -- has mushroomed from 36 percent of gross domestic product at the end of the 2007 fiscal year to a projected 62 percent of GDP at the end of fiscal 2010. By way of comparison, only during and just after World War II has the federal debt exceeded 50 percent of GDP." http://www.washingtonpost.com/wp-dyn/content/story/2010/07/31/ST2010073100015.html?sid=ST2010073100015

As I have noted in prior posts, one successful approach to reduction of government deficits is to reduce public spending. See my posts about the actions taken by Governor Bob McDonnell in Virginia. The mainstream media (including the Washington Post) and Democratic policy-makers usually say that the solution to our fiscal crisis is to reduce spending and/or to increase taxes. However, it would be more accurate to say that reducing spending and increasing government revenue would help address the problem. Increasing government revenue can actually be accomplished by economic growth without raising taxes. And renewed economic growth can even be stimulated by lowering taxes. These seem to be concepts that are very difficult for the liberal mind to grasp.

Grover Norquist, President of the Americans for Tax Reform, recently presented his recommendations for reducing the federal debt to the National Commission on Fiscal Responsibility and Reform on June 30, 2010. This National Commission is the Presidentially appointed commission (which includes several members of Congress and Senators) that has been asked to make recommendations for solving the debt crisis. President Obama established this commission because our federal officials do not seem to know how to work together effectively in the halls of Congress in accordance with the usual Constitutional procedures to solve the most important problems of the day as we elected them to do.

In his testimony, Norquist stated that the deficit problem is caused by spending:

"100 percent of the fiscal crisis we face is due to an over-spending problem in Washington. Federal tax revenues have averaged approximately 18 percent of GDP since 1970. According to the Congressional Budget Office (CBO), tax revenues over the next decade will climb back to this historical average—even if all expiring tax relief is extended, and the AMT is indexed to inflation. Clearly, taxes are not causing the deficit—spending is.

Since 1970, spending has averaged about 21 percent of GDP (giving a structural budget deficit of 3 percent of GDP). According to CBO, federal spending will exceed this level for the entire decade, averaging 23 percent of GDP."

To reduce spending in the long term, Norquist recommended a Republican proposal offered by Rep. Paul Ryan (R-WI), who is also a member of the National Commission, that Ryan calls a "Roadmap for America's Future". Ryan's proposal can be found at http://www.roadmap.republicans.budget.house.gov/. Liberals would probably be surprised to learn that Republicans actually have ideas for fixing major problems in our country. That is the natural result of believing what the Democrats say about the GOP and only reading the mainstream media or liberal blogs and never watching Fox News.

Here's Norquist's reference to the Ryan plan, as well as another Republican proposal for the short term:

"Given the dual nature of the present overspending problem, leaders must pursue both long and short term solutions. Long-term spending restraint is best achieved by reforming the long-term entitlement programs and enacting meaningful budget constraints as found in Congressman Paul Ryan’s (R-Wis.) “American Roadmap” plan.

In the shorter run, the [Republican Study Committee] balanced budget plan is notable for not raising taxes or letting tax relief expire and returning discretionary spending to the FY 2008 approved level (that is, pre-bailouts)."

The Republican Study Committee recommendation referenced above can be found at http://rsc.tomprice.house.gov/Solutions/RSCFY2011Budget.htm. This recommendation includes the extension of the Bush tax cuts that are scheduled to expire at the end of this year unless extended by Congress.

So how can the extension of tax cuts and the failure to increase taxes cause government revenue to rise? Well, one point often not understood is that for income taxes to bring in more revenue there has to be enough INCOME to tax. When we have high unemployment, increasing bankruptcies and extensive business losses during an economic downturn, there is not as much income to tax. If the economy and hiring increase, there will be more income to tax ... whether taxing at the same rate as today or at lower tax rates that will stimulate more investment and business activity... and, therefore, there will be more government revenue.

Here is Grover Norquist's recommendation on how to raise government revenue:

"Cut marginal tax rates. It is vital to economic growth to cut marginal tax rates on individuals and businesses. In particular, the corporate income tax (the highest in the developed world at 35 percent) should be no higher than Europe’s 25 percent average. The capital gains and dividends tax should be eliminated. The top individual marginal income tax rate (where two-thirds of small business profit taxes are paid) should be reduced from 43.4 percent (after next year’s expiration of the 2001 tax relief and Obamacare’s new 3.8 percent Medicare tax) to 25 percent. This will ensure that the economy will grow faster –and CBO has said that faster economic growth of even one percentage point would lead to $2.5 trillion in new tax revenue.

Lower marginal rates work. They worked in the 1920s when President Coolidge cut rates until President Hoover raised taxes and helped create the Great Depression. They worked in the 1960s when President Kennedy cut rates until Presidents Johnson and Nixon raised taxes to pay for Vietnam abroad and spending at home. They worked in the 1980s when President Reagan cut rates until President George H.W. Bush raised taxes and ended the Reagan boom. They worked in the 2000s when a GOP Congress cut rates in 2001 and 2003 on individuals, businesses, capital gains and dividends until the Democrats took over Congress in 2007 under the promise to let them go up.

Make all expiring tax cuts permanent. Given the positive effects of lower tax rates on growth, economic efficiency, and tax revenues, tax cuts should not be set to sunset when crafting legislative proposals, and those that are scheduled to expire should be made permanent."
http://www.atr.org/grover-norquist-outlines-recommendations-obama-debt-a5252##ixzz0vJ7uwaih

Maybe the wise men and women on the National Commission will see the light and recommend sensible solutions to resolving our fiscal crisis. Sphere: Related Content