I have many pet peeves, but one that causes me endless frustration is the Washington “spending cut” scam. This happens when politicians increase spending, but claim that they’re cutting spending because they previously had planned to make government even bigger.
The proposal unveiled yesterday by the Co-Chairman of President Obama’s Fiscal Commission is a good example. If you read through their report, it sounds like there are lots of spending cuts. But they never explain that these supposed cuts are really just reductions in previously-planned increases.
Here’s the bottom line. As shown in the graph, it is quite simple to balance the budget (and permanently extend all of the 2001 and 2003 tax cuts) if politicians simply limit spending growth. You can balance the budget within a few years with an overall cap on spending at current-year levels. But if you prefer a more moderate approach, you can let spending increase 2 percent each year and balance the budget by the end of the decade.
The proposal from the Fiscal Commission, incidentally, does not balance the budget – even though they have a big tax increase (which they assume will have zero negative impact on economic performance).
So what does this mean? Well, we know that the budget can be balanced (with the 2001 and 2003 tax cuts) if spending grows two percent each year. And we also know that the Fiscal Commission increases the tax burden, yet still doesn’t achieve fiscal balance. So this means that they must be letting spending grow much faster than 2 percent each year. I’m guessing 4-5 percent annual spending growth.
In other words, the Fiscal Commission is asking us to pay higher taxes so that government spending can grow at twice the rate of inflation. That’s not a good deal.
Moreover, that’s almost certainly a ridiculously naive best-case scenario. If past behavior is any indication (and it is), politicians will spend any additional tax revenue. Whenever there’s a budget summit, the folks who want higher taxes make all sorts of empty promises about spending discipline. And when the other side caves in on taxes, they grab the money and have a party.
[…] There have been several proposals from centrists and bipartisan groups to address the problem, such as the Simpson-Bowles plan, the Debt Reduction Task Force, and Obama’s Fiscal Commission. […]
[…] There have been several proposals from centrists and bipartisan groups to address the problem, such as the Simpson-Bowles plan, the Debt Reduction Task Force, and Obama’s Fiscal Commission. […]
[…] Co-Chairmen of Obama’s Fiscal Commission Unveil Real Tax Increases and Fake Spending Cuts […]
[…] Indeed, this may already be happening as part of the “Gang of Six” negotiations, with Senator Coburn and two other Republican Senators joining three Democrats in putting together some sort of grand compromise (presumably something similar to what was proposed by Obama’s Fiscal Commission). […]
[…] Indeed, this may already be happening as part of the “Gang of Six” negotiations, with Senator Coburn and two other Republican Senators joining three Democrats in putting together some sort of grand compromise (presumably something similar to what was proposed by Obama’s Fiscal Commission). […]
[…] Indeed, this may already be happening as part of the “Gang of Six” negotiations, with Senator Coburn and two other Republican Senators joining three Democrats in putting together some sort of grand compromise (presumably something similar to what was proposed by Obama’s Fiscal Commission). […]
[…] Indeed, this may already be happening as part of the “Gang of Six” negotiations, with Senator Coburn and two other Republican Senators joining three Democrats in putting together some sort of grand compromise (presumably something similar to what was proposed by Obama’s Fiscal Commission). […]
[…] 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. […]
[…] 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. […]
[…] 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. […]
[…] 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. […]
[…] also interesting that both of the big “deficit reduction” plans recently unveiled, the President’s Fiscal Commission and the Domenici-Rivlin Debt Reduction Task Force Report, endorsed lower marginal tax rates […]
[…] also interesting that both of the big “deficit reduction” plans recently unveiled, the President’s Fiscal Commission and the Domenici-Rivlin Debt Reduction Task Force Report, endorsed lower marginal tax rates […]
[…] It’s also interesting that both of the big “deficit reduction” plans recently unveiled, the President’s Fiscal Commission and the Domenici-Rivlin Debt Reduction Task Force Report, endorsed lower marginal tax rates – […]
[…] also interesting that both of the big “deficit reduction” plans recently unveiled, the President’s Fiscal Commission and the Domenici-Rivlin Debt Reduction Task Force Report, endorsed lower marginal tax rates […]
[…] already commented on the proposal from the Chairmen of President Obama’s Fiscal Commission (including a very clever cartoon, if it’s okay to pat myself on the […]
fake spending cuts? unbelievable
[…] already commented on the proposal from the Chairmen of President Obama’s Fiscal Commission (including a very clever cartoon, if it’s okay to pat myself on the […]
[…] 17, 2010 by Dan Mitchell I’ve alreadycommented on the proposal from the Chairmen of President Obama’s Fiscal Commission (including a very clever cartoon, if it’s okay to pat myself on the […]
We already tried the simplify tax code when they removed all the last batch of deductions. Remember when you could deduct credit card interest!
This is just a way of getting every special interest back at ground zero so they all need to bribe the congressmen for their loophole, nothing more than a money grab by gongress.
As long as congress can recreate new loopholes with a simple majority / bribe and threaten vote, you are just increasing your taxes and making your tax return even worse.
The Fair Tax is probably the only real reform that will work since it repeals the income tax so congress can’t make loop holes, only change rates on everyone the same. What lobyist is going to push to have the rates increased or decreased if their competitor gets the same deal.
Once they can’t hide behind the tax code, they will either need to raise rates for their wastefull pet projects or cut spending. Both would be easily seen by the voters.
And voters could just not buy new items when they dislike what congress is doing and defund congress the way they like to do to the military on the battlefield.
[…] of the government, I’d be happy to do pay more. However….this is the usual scenario. Please read the whole piece from International Liberty If past behavior is any indication (and it is), politicians will spend any additional tax revenue. […]
[…] I’m not saying there aren’t good ideas in the report. It’s just that the good ideas stand no better a chance of seeing the light of day than a snow ball will be able to descend into hell and return. Se Dan Mitchell’s take here. […]
What don’t these statists get about smaller govt as a solution?
1. Limited Government – Actually exponentially smaller government. Start with eliminating Depts of Energy, Education, & Agriculture.
The federal government size has continued to grow even under republicans and is inconsistent with the constitution. Cabinet level departments must be totally dismantled and functions returned to the states. Not only does the existing size easily foment socialist concepts and never ending programs, but drives an entitlement mentality not supported in the constitution. Start with Depts of Education, EPA, Agriculture. No guts, no glory!
2. Bailouts/Stimulus – Let the markets rule.
A constitutional issue also. No company is too big to fail. This only occurs when government intervenes. Exiting bankruptcy laws are sufficient to control orderly market corrections when companies like AIG, GM, etc. fail to manage the companies to the satisfaction of their shareholders. The markets and companies must feel the full pain for rapid economic recovery to correct corporate errors in managing risk, profitability and creating the internal balance for meeting market needs. Business cycles will always exist and government intervention has always caused bad results and uncontrollable swings in prosperity for the \”chosen\” industries or business that are too big to fail. It is unconstitutional to bail out any business. These activities will only lead to socialist experiments and failure.
3. Illegal Immigration – The Mexican border must be sealed end to end.
The law is clear on illegal immigration. Both republicans and democrats have tried to subvert the law. With the board sealed, orderly, legal immigration can be managed to fill the labor needs that illegal\’s now are filling. Legalizing existing immigrants and occur on case by case basis after the border is sealed. Illegal\’s should be routinely returned to their county of origin, not warehoused for legal processing.
4. Term limits for Congress – 4 terms for Reps, 2 terms for Senators
Both Republican and Democrat representatives and Senators must have term limits. They have become a polictical ruling class and have assumed that the power and priviledges of serving for the people are permanent. They have given themselves unchecked benefits and must be stopped.
Eliminate colas for Congress along with those for SS recipients, and reduce the bloated congressional staffs.
Ryan Ellis,
The only advantage of broadening the tax base is that it finally gets a larger percentage of the electorate interested in what the actual tax rate is. Many people think that they do not actually pay any of the tax the company they work for pays.
I’ve seen several right wing type economists who loved the things put out by the commission (Greg Mankiw comes to mind) but I don’t think I’ve really seen anyone else fond of the idea. The non-intellectual parts of the right (Hannity, Beck, Rush, most politicians) hate it just as much as the left, albeit for completely opposite reasons. When you have talk radio pundits saying that it does nothing but entrench high taxes and big government (??) and liberal bloggers like Krugman and company saying that it’s a “catfood commission” and something the “right and hard right can agree on” (??) then it would seem that one or both of them are wrong. I’m banking on both.
It combines big reductions to Medicare and Social Security spending (yay!), sensible cuts to Defense (yay!) with a massive massive simplification of the tax code and sizable reduction in tax rates. There would only be three brackets of 8%, 14% and 23% or so with no deductions. A freakin 23% top marginal rate. That’s amazing. It does a similar sort of simplification for corporate tax rates, with ridiculous tax credit subsidies being thrown out the window in favor of a much more sensible lower corporate tax rate of 26%, down from 35%. As far as I can tell the only tax hike is on gasoline- which is easily the most efficient thing you could raise taxes on given the negative externalities associated with gas use.
While I usually like CATO, this post didn’t address or quote a single actual provision from the report. It simply made the argument that we should just freeze spending until the budget is balanced- an idea that I actually think is pretty damn sensible- then made a vague comment about a tax hike (presumably the one on gasoline) and government spending growing at twice the rate of inflation.
The deficit commission’s plan isn’t just good because of the budgetary aspects, the structural changes to the economy (the top marginal cuts, tax simplification, corporate tax reduction and Pigouvian tax on gas) are all positive and would be desirable even if they had a net zero impact on the budget. Balance the budget AND encourage savings/investment, both of which are extremely important to the growth of the capital stock and lead to higher levels of long term economic growth? Even better. If you told the University of Chicago Economics department to sit around and come up with a plan that had a semi-realistic chance of being implemented this is probably what it would look like.
[…] Dan Mitchell has a different take. I have many pet peeves, but one that causes me endless frustration is the Washington “spending cut” scam. This happens when politicians increase spending, but claim that they’re cutting spending because they previously had planned to make government even bigger. […]
[…] More… […]
What would it take to dissolve the entire government and start over from scratch?
@Arnold Kling, it doesn’t count as tax reform if you’re not lowering the rates by at least as much as you are broadening the base. That’s called a tax hike which happens to cut marginal rates.
I would be delighted to pay more taxes if there was a commensurate reduction in the federal government. Take away the mortgage tax deduction? Sure, right after you shut down the entire Department of Education. Increase the age of retirement? Fine, but eliminate the National Endowment for the Arts and for Humanities, and shutter the Department of Energy.
What has angered and energized the people of this country is the repeated refusal of the government to downsize, all the while taking more and more money from us for nonsensical and wasteful uses, mainly to bribe voters to vote certain ways. It’s time to do something meaningful about the massive federal beauracracy.
Tedstur:
The proposal you are recommending (to tie government growth to GDP) is what the Bowles/Simpson plan does. Its goal is to bring spending and revenue to ~21% of GDP. Don’t buy Mr. Mitchell’s misdirection. Because GDP rises faster than inflation (thank god), he’s arguing that any growth in inflation adjusted terms is “increased government spending” even if the % of GDP is the same.
Ryan,
They are proposing rate *cuts* along with base broadening. This is tax reform.
What we need is a proposal that calls for a reduction of government spending tied to another index, like GDP. How much of our total GPD can we reasonably expect government to use? I am no economist, but that seems more reasonable to me than tying the budget to what can be politically extracted from the country.
@Arnold Kling, so are you saying that only income tax rate hikes are income tax hikes? The Left will give us that “deal” all day (that is, base broadening but no rate hikes).
The practical issue in the upcoming era of Pitchfork Economics is:
Are you going to be a poor moocher (eg. surfer in some beach town) or a richer sucker (stressed out manager in Silicon Valley)? How many people are going to switch sides? Incentives and pressure are mounting!
The HOPE of prosperity through CHANGE to decreased incentives to produce! The economist’s equivalent to a perpetual motion machine: The less energy you put into it the more energy it produces! A miracle!
So keep HOPING that the CHANGE to lower incentives to produce will maintain the US at the top of the worldwide prosperity scale. The 3 billion (now partially liberated) people of Brazil Russia India and China are going to stop growing at 3x the American rate any time soon now. Not much to worry, relax, enjoy the new entitlements and ignore the additional taxes … and don’t forget to produce more…
Love, hope, and change
Martha
[…] I realize for the front page this should probably be a longer post, but this must be your must read of the day. […]
We’ve seen the give-up-deductions-for-lower-tax-rates scam before. It took exactly two years after the lowered rates went into effect in 1988 before George Bush I was out manuevered by George Mitchell into raising taxes. Then Clinton started caterwauling about “the rich paying their fair share” and off we went.
If the “rich” (just about any moderately successful, two earner family) aren’t paying their “fair share” at 35%, how long will it take the progressives to demagogue 23%?
Beware politicians peddling “tax reform”. What they mean is, we’ve about hit the max with the current system so we need to change it to raise even more money.
Obamas increase of federal spending by at least 25% in the last 2 years has nothing to do with entitlements …
go back to 2008 spending numbers (non entitlement) and the budget balances in short order …
the budget can certainly be balanced in the short term without touching SS and Med …
Yes, there are long term issues with SS and Med … prove you can balance the budget first then work on fixing those …
[…] Dan Mitchell, Real Tax Increases and Fake Spending Cuts […]
Further to Ellens comment, currently fed employees can retire at 57! In ADDITION to real cuts to federal pay and workforce size, we need to extend that retirement age immediately to 62 or 65. Greece and France have already proven that early civil service retirement is just structurally impossible.
I’m not opposed to tax hikes, but the gov’t leviathan must shrink first, prior to any and all tax hikes on any segment of the private sector.
I recall that Reagan negotiated reductions in taxes and spending with then House Speaker Tip O’Neill, and he got his tax cuts but O’Neill didn’t deliver on the spending cuts. I hope the Republicans recall their history, for tax cuts have typically lead to spending increases as Congress tends to pre-spend the projected revenue increase.
Following up, I see that indeed the CBO estimates 7.3% annual growth in tax revenue over the next decade.
Is that estimate to be believed?
The graph, sourced to the CBO, seems to suggest that revenues (w/tax cuts) will rise from around 2 trillion in 2010 to over 4 trillion in 2020. That’s an annual growth rate of around 7.5%, no? Color me skeptical!
The proposal appears to cut federal employment only 10% and freeze federal pay for 3 years but slash govt contractors. However, federal compensation is 40% higher than the private sector and federal employment increased. I haven’t seen any data on federal worker productivity but there is plenty of anecdotal evidence that is way below private sector, and who knows? may be falling. So, why not reduce federal payroll by say, 30% and freeze wages for 5 or 7 years, or cut them altogether? Not many federal workers are going to jump ship in this economy. Why not increase dramatically their contributions to their pensions and health care? This plan looked like a federal worker job protection plan. Notice the Medicare rationing implicit throughout.
This is a bit disingenuous, considering that the commission’s projections were all based on aligning government spending to a fixed percentage of GDP. You’re talking about holding the federal budget static until GDP growth shrinks its share of the overall economy. On top of that, most of these spending increases are from Social Security and Medicare obligations. If you want to freeze the budget in real dollar terms and then apportion increasingly smaller SS and MC benefits to an increasingly large demographic, by all means, just admit that’s your plan.
To freeze federal spending in real dollars we’d have to freeze federal tax payments at their real dollar value, which would require a radically different system of collection, since almost all revenues are collected as a percentage of some type of income (which is why it grows with GDP).
And the commission’s plan does involve cuts, to Ag subsidies, Ethanol subsidies, and I believe it has a federal pay freeze in there (I could be wrong on that last point). A nominal freeze over 10 years is the same as a cut as inflation depletes its value.
Now, describing a shift from wage-indexing of SS to inflation-indexing as a cut is equally disingenuous, and should more appropriately be described as a “restraint on the rate of growth,” but I get the feeling thats what the commission co-chairs called it, and its just idiot journos and Democratic flacks calling them cuts.
I disagree with much of this analysis. First of all, the proposal is for tax reform, not for tax rate increases. Second, you make it sound as though it is really simple to slow the growth rate of spending, when in fact doing so almost surely requires reducing entitlements.
That’s not the point NormD. The point is that the commission is a lie. These are not real cuts, merely cuts in the rate of increase. Talk your policy all you want. People are angry at how it’s done.
[…] for tax increases with the “promise” that there will eventually be debt reduction. Huh, are you convinced? I’m not. It seems like just more crapola and […]
I thought that the problem was that some spending increases are “baked in”, ie people are going to retire and claim SS and MC. You cannot simply say stop the spending, although it sounds nice, you have to take positive action. The way that you stop spending in SS is eliminate COLAs and increase the retirement age. I am not sure how you stop the increase in MC other than simply pay less.