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Posts Tagged ‘Budget’

President Obama supports higher taxes, but he usually claims he only wants higher tax rates on evil rich people as part of his class-warfare agenda. Heck, he promised back in 2008 that, “no family making less than $250,000 a year will see any form of tax increase.  Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”

I guess we’re supposed to forget the higher tax burdens that were imposed on the middle class by Obamacare in 2010 and the SCHIP legislation in 2009.

Obama’s other rhetorical trick is to claim he wants a “balanced approach.” Translated from Washington-speak to English, that means he wants more of our money. But it’s a soothing way to demand more money. After all, who’s against “balance”?

I actually agree with Obama – but only if one uses honest math. Needless to say, Obama wants to use Washington math, where spending increases get redefined as spending cuts if the burden of government spending doesn’t rise as fast as was projected in some artificial baseline.

This is why the budget deals put together by politicians almost always are awful. In order to protect the goodies they hand out to various special interests, the politicians use fake numbers to pretend they’re restraining spending, but when the dust settles, it turns out that the only real result is that taxpayers are forking over more of their hard-earned cash to the clowns in Washington.

Actually, that statement is incomplete. We need to remember that taxpayers in other nations also get screwed by the political elite. Take a look at this stunning chart that was shown at yesterday’s Cato Institute conference on “Europe’s Crisis and the Welfare State.” Put together by Veronique de Rugy of the Mercatus Center, it shows that politicians across the Atlantic have imposed nine euro of higher taxes for every one euro of spending cuts.

And keep in mind, as Veronique noted in her comments, that many of these so-called spending cuts were merely reductions in planned increases!

This matters because I’m getting increasingly worried that gullible Republicans will get seduced into some sort of budget summit designed to trick them into supporting the Simpson-Bowles tax-hike package.

As I’ve previously explained, this would be a terrible idea. It means a big tax hike with, particularly an increase in the double taxation of income that is saved and invested. It also relies on gimmicks rather than real entitlement reform.

I don’t like higher taxes, but I wouldn’t be completely upset if at least we got some permanent reforms to control the growth of government. But that’s definitely not the case with Simpson-Bowles. And, as Veronique showed, it’s not the case in Europe either.

P.S. It’s rather ironic that the New York Times inadvertently revealed that the only budget deal that worked was the one in 1997 that cut taxes rather than raising taxes.

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Proponents of higher taxes are fond of claiming that Bill Clinton’s 1993 tax increase was a big success because of budget surpluses that began in 1998.

That’s certainly a plausible hypothesis, and I’m already on record arguing that Clinton’s economic record was much better than Bush’s performance.

But this specific assertion it is not supported by the data. In February of 1995, 18 months after the tax increase was signed into law, President Clinton’s Office of Management and Budget issued projections of deficits for the next five years if existing policy was maintained (a “baseline” forecast). As the chart illustrates, OMB estimated that future deficits would be about $200 billion and would slightly increase over the five-year period.

In other words, even the Clinton Administration, which presumably had a big incentive to claim that the tax increase would be successful, admitted 18 months after the law was approved that there was no expectation of a budget surplus. For what it’s worth, the Congressional Budget Office forecast, issued about the same time, showed very similar numbers.

Since the Clinton Administration’s own numbers reveal that the 1993 tax increase was a failure, we have to find a different reason to explain why the budget shifted to surplus in the late 1990s.

Fortunately, there’s no need for an exhaustive investigation. The Historical Tables on OMB’s website reveal that good budget numbers were the result of genuine fiscal restraint. Total government spending increased by an average of just 2.9 percent over a four-year period in the mid-1990s. This is the reason why projections of $200 billion-plus deficits turned into the reality of big budget surpluses.

Republicans say the credit belongs to the GOP Congress that took charge in early 1995. Democrats say it was because of Bill Clinton. But all that really matters is that the burden of federal spending grew very slowly. Not only was there spending restraint, but Congress and the White House agreed on a fairly substantial tax cut in 1997.

To sum things up, it turns out that spending restraint and lower taxes are a recipe for good fiscal policy. This second chart modifies the first chart, showing actual deficits under this small-government approach compared to the OMB and CBO forecasts of what would have happened under Clinton’s tax-and-spend baseline.

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Writing in the Wall Street Journal, Peter Ferrara of the Institute for Policy Innovation explains that Washington budget deals don’t work because politicians never follow through on promised spending cuts. This is a very relevant argument since Obama’s so-called Deficit Reduction Commission supposedly is considering a deal featuring $3 of spending cuts for every $1 of tax increases (disturbingly reminiscent of what was promised – but never delivered – as part of the infamous 1982 TEFRA budget scam). 
Washington’s traditional approach to balancing the budget is to negotiate an agreement on a package of benefit cuts and tax increases. President Obama’s deficit commission seems likely to recommend just this strategy in December. The problem is that it never works. What happens is the tax increases get permanently adopted into law. But the spending cuts are almost never fully adopted and, even if they are, they are soon swept away in the next spendthrift budget. Then—because taxes weaken incentives to produce—the tax increases don’t raise the revenue that Congress initially projected and budgeted to spend. So the deficit reappears. In 1982, congressional Democrats promised President Ronald Reagan $3 in spending cuts for every dollar in tax increases. Reagan went to his grave waiting for those spending cuts. Then there was the budget deal in 1990, when President George H.W. Bush agreed to violate his famous campaign pledge—”Read my lips, no new taxes,” he had said in 1988—in pursuit of a balanced budget. But after the deal, the deficit increased substantially: to $290 billion in 1992 from $221 billion in 1990. 
As the excerpt indicates, Peter’s column is solid and everything he writes is correct, but it suffers from one major sin of omission. He should have exposed the dishonest practice of using “current services” or “baseline” budgeting. This is the clever Washington practice of assuming that all previously planned spending increases should go into effect and categorizing any budget that increases spending by a lower amount as a spending cut. In other words, if the hypothetical “baseline” budget increases by 7 percent, and a budget is proposed that increases spending by 4 percent, that 4 percent spending increase magically gets transformed into a 3 percent spending cut.
 
Politicians love “current services” or “baseline” budgeting for two reasons. First, it allows them to have their cake and eat it too. They can simultaneously shovel more money to interest groups while telling voters they are “cutting” spending. Second, it rigs the process in favor of bigger government. This is because lawmakers who actually propose to restrain the growth of spending can be lambasted for wanting “savage” and “draconian” budget cuts totaling “trillions of dollars” when all they’re actually proposing is to have spending grow by less than the so-called baseline. But since people in the real world use honest math rather than “current services” math, they assume that spending is being reduced next year by some large amount compared to what is being spent this year. And if the phony budget cut numbers sound too big (especially for specific programs such as Medicare or Medicaid), they sometimes conclude that it would be better to raise taxes.
 
Speaking of which, the same misleading process works on the revenue side of the budget. The politicians automatically get to keep whatever additional revenue is generated by population growth and higher incomes, which is not trivial since revenue in a typical year grows faster than nominal GDP. But when they do a budget deal featuring X dollars of tax increases for every Y dollars of spending cuts, the additional taxes are always on top of the revenue increases that already are occurring. And since the supposed spending cuts invariably are nothing more than reductions in planned increases, it should come as no surprise that the burden of spending always seems to increase.
 
Defenders of “current services” or “baseline” budgeting will respond by arguing that spending should automatically increase because of factors such as inflation and demographic change (i.e., more seniors signing up for Medicare). Indeed, they will point out that the government is legally obligated to spend more money for entitlement programs based on current law.
 
But that’s not the point. The issue is whether the American people are being presented with honest numbers. If the fans of big government want to argue that spending should increase by 7 percent for various reasons, they should openly and honestly explain what they are trying to do. And if they disagree with lawmakers who want spending to increase by 4 percent, they should be forthright and tell voters that “this proposal does not increase spending by enough because of…” and list the reasons why they want spending to grow even faster.
 
Unfortunately, deceptive budget practices in Washington are a feature, not a bug. But if you pay close attention, they are very revealing. If the President’s Deficit Reduction Commission uses “baseline” or “current services” budgeting as a benchmark for determining spending “cuts” and tax increases, that’s a good sign that the crowd in Washington wants to pull a fast one on the American people.

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Barack Obama and Angela Merkel are the two main characters in what is being portrayed as a fight between American “stimulus” and European “austerity” at the G-20 summit meeting in Canada. My immediate instinct is to cheer for the Europeans. After all, “austerity” presumably means cutting back on wasteful government spending. Obama’s definition of “stimulus,” by contrast, is borrowing money from China and distributing it to various Democratic-leaning special-interest groups.
 
But appearances can be deceiving. Austerity, in the European context, means budget balance rather than spending reduction. As such, David Cameron’s proposal to boost the U.K.’s value-added tax from 17.5 percent to 20 percent is supposedly a sign of austerity even though his Chancellor of the Exchequer said a higher tax burden would generate “13 billion pounds we don’t have to find from extra spending cuts.”
 
Raising taxes to finance a bloated government, to be sure, is not the same as Obama’s strategy of borrowing money to finance a bloated government. But proponents of limited government and economic freedom understandably are underwhelmed by the choice of two big-government approaches.
 
What matters most, from a fiscal policy perspective, is shrinking the burden of government spending relative to economic output. Europe needs smaller government, not budget balance. According to OECD data, government spending in eurozone nations consumes nearly 51 percent of gross domestic product, almost 10 percentage points higher than the burden of government spending in the United States.
 
Unfortunately, I suspect that the “austerity” plans of Merkel, Cameron, Sarkozy, et al, will leave the overall burden of government relatively unchanged. That may be good news if the alternative is for government budgets to consume even-larger shares of economic output, but it is far from what is needed.
 
Unfortunately, the United States no longer offers a competing vision to the European welfare state. Under the big-government policies of Bush and Obama, the share of GDP consumed by government spending has jumped by nearly 8-percentage points in the past 10 years. And with Obama proposing and/or implementing higher income taxes, higher death taxes, higher capital gains taxes, higher payroll taxes, higher dividend taxes, and higher business taxes, it appears that American-style big-government “stimulus” will soon be matched by European-style big-government “austerity.”
 
Here’s a blurb from the Christian Science Monitor about the Potemkin Village fiscal fight in Canada:

This weekend’s G-20 summit is shaping up as an economic clash of civilizations – or at least a clash of EU and US economic views. EU officials led by German chancellor Angela Merkel are on a national “austerity” budget cutting offensive as the wisest policy for economic health, ahead of the Toronto summit of 20 large-economy nations. Ms. Merkel Thursday said Germany will continue with $100 billion in cuts that will join similar giant ax strokes in the UK, Italy, France, Spain, and Greece. EU officials say budget austerity promotes the stability and market confidence that are prerequisites for their role in overall recovery. Yet EU pro-austerity statements in the past 48 hours are also defensive – a reaction to public statements from US President Barack Obama and G-20 chairman Lee Myung-bak, South Korea’s president, that the overall effect of national austerity in the EU will harm recovery. They are joined by US Treasury Secretary Tim Geithner, investor George Soros, and Nobel laureate and columnist Paul Krugman, among others, arguing that austerity works against growth, and may lead to a recessionary spiral.

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Reckless spending increases under both Bush and Obama have resulted in unprecedented deficits. Congress will soon be forced to increase the nation’s debt limit by an astounding $1.8 trillion. Government borrowing has become such a big issue that some politicians are proposing a deficit reduction commission, which may mean they are like alcoholics trying for a self-imposed intervention.

But all this fretting about deficits and debt is misplaced. Government borrowing is a bad thing, of course, but this video explains that the real problem is excessive government spending.

Fixating on the deficit allows politicians to pull a bait and switch, since they can raise taxes, claim they are solving the problem, when all they are doing is replacing debt-financed spending with tax-financed spending. At best, that’s merely taking a different route to the wrong destination. The more likely result is that the tax increases will weaken the economy, further exacerbating America’s fiscal position.

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I’ve always thought the middle of the road was for yellow stripes and dead ‘possums, so I’m instinctively uncomfortable when attacked from the right and the left. But that’s what happened with my commentary (which I also cross-posted at Cato-at-Liberty) about Bush, Obama, and the FY2009 budget deficit. Bruce Bartlett accused me of being a shill for the GOP on his facebook page, while a Redstate poster said I was giving Obama a free pass on all his spending.

I responded on Redstate, and you can click to read the entire post, but here’s the key points in my defense against attacks from the right:

Let’s deal with Mustango’s criticisms. He argues that budgets are passed by Congress, presumably implying that Nancy Pelosi, et al, should be blamed. The Speaker of the House is a complete statist, so I’m a big fan of anybody who points out her flaws, but since President Bush supported all of the wasteful spending adopted in the last year (as well as the first seven years) of his presidency, he also must bear responsibility for the results.

The second criticism is that I was letting Obama off the hook for his pork-filled stimulus. That’s definitely not the case. My blog post specifically noted that Obama bears part of the responsibility for the FY2009 deficit, but since less than $200 billion of so-called stimulus was allocated in FY2009, that is rather trivial compared to a budget deficit of more than $1.4 trillion. And even if the extra spending from the omnibus spending bill is added to Obama’s tab, his total is still less than $250 billion.

I’m sure I have plenty of flaws, but being squishy on the issue of the size of government surely is not on the list.

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Some critics are lambasting President Obama for record deficits. This is not a productive line of attack, largely because it puts the focus on the wrong variable. America’s fiscal problem is excessive government spending, and deficits are merely a symptom of that underlying disease. Moreover, if deficits are perceived as the problem, that means both spending restraint and higher taxes are solutions. The political class, needless to say, will choose the latter approach 99 percent of the time. A higher tax burden, however, simply means that debt-financed spending is replaced by tax-financed spending, which is akin to jumping out of the frying pan and into the fire, or vice-versa.

In addition to being theoretically misguided, critics sometimes blame Obama for things that are not his fault. Listening to a talk radio program yesterday, the host asserted that Obama tripled the budget deficit in his first year. This assertion is understandable, since the deficit jumped from about $450 billion in 2008 to $1.4 trillion in 2009. As this chart illustrates, with the Bush years in green, it appears as if Obama’s policies have led to an explosion of debt.

But there is one rather important detail that makes a big difference. The chart is based on the assumption that the current administration should be blamed for the 2009 fiscal year. While this make sense to a casual observer, it is largely untrue. The 2009  fiscal year began October 1, 2008, nearly four months before Obama took office. The budget for the entire fiscal year was largely set in place while Bush was in the White House. So is we update the chart to show the Bush fiscal years in green, we can see that Obama is partly right in claiming that he inherited a mess (though Obama actually deserves a small share of the blame for Bush’s last deficit since earlier this year he pushed through both an “omnibus” spending bill and the so-called stimulus bill that increased FY2009 spending).

It should go without saying that this post is not an argument for Obama’s fiscal policy. The current President promised change, but he is continuing the wasteful and profligate policies of his big-spending predecessor. That is where critics should be focusing their attention.

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