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Read my lips - Cut spending!
Posted by: McQ on Wednesday, April 09, 2008

In the midst of the Iraq report and all the coverage it is getting, John F. Cogan and R. Glenn Hubbard put some numbers to the taxes which will assault American's pocketbooks if the tax cuts are left to lapse:
By historical standards, federal revenues relative to GDP, at 18.8% last year, are high. In the past 25 years, this level was only exceeded during the five years from 1996 to 2000. Still, we stand on the verge of a very large tax increase, one that will occur unless the next Congress and president agree to rescind it. Letting the Bush tax cuts expire will drive the personal income tax burden up by 25% – to its highest point relative to GDP in history.

This would be the largest increase in personal income taxes since World War II. It would be more than twice as large as President Lyndon Johnson's surcharge to finance the war in Vietnam and the war on poverty. It would be more than twice the combined personal income tax increases under Presidents George H. W. Bush and Bill Clinton. The increase would push total federal government revenues relative to GDP to 20%.
This, of course, in the face of the claims by Obama and Clinton that these increases are needed to "restore near-term budget balance and finance longer-term entitlement growth." Not a word about spending cuts. Not one.

"Restore near-term budget balance?" Couldn't that be done by reducing spending to reduce the deficit to near zero?

"Finance long-term entitlement growth?" As we've noted, not a thing has been done to either reduce entitlement spending or fix the problems with entitlement programs, yet they see nothing wrong with demanding more money from you to finance more spending.

And if you've been paying attention to food and fuel prices, you know that unless you get commensurate wage increases, these coming tax increases (and let's not play the semantics game, if taxes go up, even to "previous levels" it is an increase") are going to bite you very hard in your wallet.

Sometimes a picture is worth a thousand words:

So, what, instead, needs to be done? How about something called 'fiscal restraint'?
Balancing the federal budget without a tax increase will require strong fiscal restraint. To achieve balance by the end of the next president's term in office, federal nondefense spending growth needs to be restrained to 2% per year instead of the currently projected 4.5%. This will be tough, but the federal government has been on a bipartisan spending binge for a decade. How large is this binge? Compared to the 1997 level adjusted for inflation and new homeland security spending, in 2007 actual nondefense appropriations were $125 billion higher, or cumulatively, a nearly $900 billion excess for the decade. If the next two congresses were to remove this excess gradually and shave 1% per year from projected entitlement growth, the budget could be balanced.
This is the sort of plan a responsible candidate running for office (either Congress or the Presidency) should be talking about. This is a plan that any responsible candidate for the last few decades should have been talking about and trying to implement. Leave the tax cuts alone and make the commensurate cuts in federal spending necessary to "restore near-term balance in the budget".

And as for "financing long-term entitlement growth", the answer is "no", not until some hard and necessary changes are made to those programs as have been demanded for decades now.

If you see your country heading into tough economic times which are going to require people to tighten their financial belts, why shouldn't government do the same? And does it make sense to take more money from those whose purchasing power is eroding because of price increases among the staples of their lives? If small business is the real engine of the economy and taxes are raised on those incomes, what will happen?

None of these questions are being asked of those claiming it is necessary to let these tax cuts lapse. And they're important questions. Consider this:
The current economic slowdown will increase the federal budget deficit this year and, in all likelihood, next year as well. But as the economy enters its recovery phase, raising taxes would choke off the recovery. The right policy, for both the economy and the budget, would be to make current tax rates permanent well before the scheduled increase. Giving investors greater certainty that current tax rates will be maintained will spur investment and aid the economic recovery, as it did in 2003. Federal budget balance will be achieved once the economy is again operating on all its cylinders.
But that's not what we're hearing is it?

Until and unless there is fiscal restraint now - planned fiscal restraint, not just promises, we should demand politicans leave the tax structure as it is until they can prove they can handle the money they have just as each and every one of us must. And we should further refuse a single extra penny until they address entitlements:
This near-term budget debate foreshadows the more significant long-term budget debate the next president must lead. The CBO tells us that after a generation, Social Security and Medicare spending, left unchecked, will rise by 10 percentage points of GDP. Continuing the current hands-off entitlement policy will have severe consequences. The strategy of ratifying spending with higher taxes would require that all federal taxes rise by nearly 60%, bringing them to a European-level tax burden.

We still have time to prepare for the looming entitlement problem. Although baby boomers soon begin their retirement, the real impact of their numbers on the federal budget will not be felt for a decade. According to official budget forecasts, Social-Security costs will claim 4.5% of GDP in 2013, no higher than its claim on GDP during the first half of the 1990s.

Having time is no excuse for inaction, but a near-term tax increase is the wrong way to prepare. Higher revenues will encourage Congress to raise spending, compounding the long-term budget problem. And, the long-term tax increase required to fund unchecked long-term spending would likely reduce annual GDP growth by a full percentage point.

The proper way to prepare to meet the entitlement challenge consists of three essential elements: Change entitlements to slow their cost growth; eliminate all nonessential spending in the remainder of the budget; and, most important but often overlooked, adopt policies that promote economic growth. The greater the economic growth, the larger the economic pie, and the greater the public and private resources available to finance entitlement obligations and other national priorities.
Unless the candidates for president are willing to lead this fight and propose a specific plan for addressing it, they shouldn't be considered a serious candidate for president. At this point, I don't believe, based on that criteria, that any of them qualify.

While the war in Iraq is important and is costing a lot, it is going to end. But this other fiscal intemperance - which costs us much more - never seems to end, and unless you want increasingly larger portions of your income (as a percent of GDP) going to a wasteful, profligate and unaccountable federal government you're going to have to stand up and make some demands (and then follow up those demands by making them toe the line in terms of spending cuts and fiscal restraint).

Given the recent record, I wish us all good luck on that - depressing, isn't it?
One of the stirring cries that led to the American Revolution was:
“Taxation without representation is tyranny. “
—Attributed to James Otis, Boston lawyer and politician
Based on the misleading rhetoric we are hearing from our political leaders, I think it is safe to say:

“Taxation with representation ain’t so hot either.” —Gerald Barzan
(HT: Kurt)
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Previous Comments to this Post 

While the graph is technically true, it doesn’t correspond to a proposal that anyone has made. Instead, Dems talk about repealing the tax cuts for "the rich", which they define as those with incomes >200-250k and upping cap gains and dividend rates to pre-cut levels. Such changes wouldn’t produce a graph anywhere near that displayed, not that I support them.

Here’s a summary.

It’s reasonable that war costs drive spending above peace-time averages, although it would be nice to consider cutting some of the particularly stupid domestic spending (farm/ethanol subsidies, anyone?) to compensate.
Written By: Larry
URL: http://
Hate to say this, but asking Congress not to overspend is like asking a person not the breath. Overspending is built in.

That’s why I say don’t raise taxes for two reason. Regardless of our position on the Laffer Curve, letting people keep more of their income stimulates the economy. But the second reason is a lower Revenue increases the pressure against overspending. Its the Psychology of percentages.

Lets look at a hypothetical.

Say Revenue is 10 trillion and overspending is 1 trillion. Long term if we raised taxes to 11 trillion, overspending would become 1.1 trillion and congress, the public and press would say we’re staying the same. Democrats will put the cost of the War over ’entitlements’ in a heartbeat. There will never be agreement.

In other words, collecting more money won’t fix anything. Overspending is systemic.

Congress needs to work apportioning in percentages terms and then dictate the overall total. To enforce this need to take either spending or revenue away from Congress and put the other in the Constitution by formula based off the other.
Written By: jpm100
URL: http://
Even as cynical as I am, I am still amazed at the stupidity of those who think letting those tax cuts expire is a good idea. Even as this article was written Congress, in its infinite wisdom, is passing legislation to stimulate the economy. That is in addition to the tax rebate already scheduled. Yet they think it a good idea to let taxes simultaneously increase in a faltering economy.
Written By: timactual
URL: http://
Well, China’s been passing laws like mad to give workers more benefits, increase the minimum wage, etc., so hey, its not just America. Its so bad people are simply closing their factories rather than deal with all of the new regulations/costs.
Written By: Harun
URL: http://

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