It has been too easy for the fiscal cliff debate to be reduced to the narrow argument of whether Washington should raise revenues by increasing tax rates on the wealthy or by removing their tax deductions. With everyone’s attention riveted on this absurd question, their attention is diverted from the real fiscal challenges this country faces and the real math we must learn in order to make the best policy decisions. The President is right “the math doesn’t work”, but it is his and the Democrats’ math that must be examined.
The President most recently proposed raising $1.6 trillion in new tax revenue over the next 10 years by raising rates and reducing deductions for the wealthy. In addition he proposed about $600 billion in “spending savings” to quote his messenger, Secretary Geithner, and asked for control of the Federal debt limit. Each of these proposals needs careful scrutiny.
Accepting tax rate changes (raising marginal rates and reducing deductions for the wealthy) that supposedly will increase Federal tax revenues (a result that is questionable) in order to reduce the deficit and the total Federal debt implies that the deficit and debt are importantly the result of income tax shortfalls because the wealthy are not paying enough. This is not only implied in the Democrats’ message, it is explicitly stated that the Bush tax cuts favored the wealthy and hurt Federal tax revenues. We will examine the Federal tax consequences of the Bush tax cuts after we see what is really behind the mushrooming deficit and escalating total Federal debt.
The Executive Branch of government executes its responsibilities largely through a number of cabinet departments and special agencies. What has happened with the major cabinet departments’ budgets from 2007 to 2010? Hold on to your calculators -the result is astounding! On average, the 15 major cabinet departments saw a 77% increase in their budgets over this short 3-year period. That’s right -77%! The absolute dollar amount these departments spent in 2010 as compared to 2007 increased by $794 billion.
To put this in perspective, the largest single year bill for the combined Iraq-Afghanistan wars was $170 billion with the budget for 2011 at $159 billion. Ten years of this massive increase in cabinet department spending is almost $8 trillion while the total cost of the Iraq-Afghanistan wars from 2003-2011 is almost $1.3 trillion. We have a problem with runaway spending in Washington.
Pile $800 billion a year of new spending on top of $200-$400 billion in reduced revenues resulting from a stagnant economy and you end up on China’s doorstep asking for a loan. We should ask all the middle class households whose budgets have been at best flat over this prolonged economic slowdown what they think of their government’s spending growth of 77% between 2007 and 2010. (There is a fundamental flaw in how the Executive Branch manages the cabinet departments which I will address in a future blog.)
Why would the middle class, challenged to balance their own budgets, tolerate these astounding excesses of our Federal government? The answer is simple — they don’t know because the media ignores this issue and the Republicans can’t seem to articulate the compelling math. If our citizens knew and understood the math, I believe more of them would reject the path the Democrats want this country to follow. I believe they would not buy the argument that this country’s major fiscal problem is that we do not tax the wealthy enough.
But who is taking the real math to the public? The media is oblivious and the Republican leadership isn’t talking about the real numbers. This is one reason why I currently score the Republicans at -5 in the fiscal cliff debate.
The President says he needs $1.6 trillion in new tax revenue over the next 10 years. The Republicans respond by being indignant that the President asks for twice as much new tax revenue as he campaigned on. What are they thinking? The Republicans again ignore the math. They need to point out clearly that Federal tax revenues, which fell from a bit over $2 trillion in 2000 to less than $1.8 trillion in 2003, rose dramatically after the Bush tax cuts. The math, which no one can deny (although many do ignore), shows that Federal tax revenues increased by $2.6 trillion in the five years after the Bush tax cuts. Let me repeat- over a five year period after significant reductions in marginal tax rates, capital gains tax rates, dividend tax rates, and estate tax rates– tax revenues increased by $2.6 trillion!
Obama wants an average of$160 billion a year increase in Federal tax revenues and proposes to do so by increasing taxes on the wealthy while Bush’s tax cuts on everyone resulted in an average of $520 billion a year in increased tax revenues. Cutting taxes generated revenues over 3 times more than Obama proposes to generate through raising taxes on the most successful of earners. To borrow a well-known phrase “It’s the economy, stupid.” You can lower tax rates in an expanding economy and increase Federal tax revenues dramatically. Raise tax rates in a sputtering economy and look out. The President wants to protect the Bush tax cuts for the middle class (so does everyone else) but maintaining that portion of the status quo does nothing to stimulate economic growth. The message is simple -any change in tax policy needs to be clearly pro-economic growth, something which taxing the top 2% does nothing to accomplish.
Now for the third request in the President’s proposal: He wants the Executive Branch to control the limit of the U.S. Federal debt. This request was clearly articulated by Secretary Geithner who also attempted to defend it while keeping a straight face. Besides the fact that the Constitution places authority for Federal spending with the House of Representatives, why would anyone give debt limit authority to people who know no limit in spending? An analogy that illustrates the absurdity of this White House proposal goes something like this: Imagine you borrow money from your neighborhood bank. Despite your borrowing, you do not have enough money to pay your bills. So you go back to the bank and borrow more. Eventually the bank looks at your balance sheet and revenue sources and puts a limit on your borrowing. So you go to your bank and say “Guess what? I no longer want you to determine how much money I can borrow. I demand the authority to set my own borrowing limit.” No way that could ever happen in the real world and no way should it happen in Washington.
So let me summarize why I score the fiscal cliff debate at Obama 0, Democrats 0, and Republicans -5. Obama gets a zero because he keeps on misleading people with his claim that the Bush tax cuts favoring the wealthy are an important contributor to the current fiscal crisis. He also earns his zero because he can’t find more than $60 billion a year in “spending savings” when his cabinet, over a short 3-year period, increased their spending by almost $800 billion a year.
The Democrats get a zero because, to a person, they parrot, almost word-for-word, the President’s message. It appears that none of them have ideas of their own. I can’t easily get a family of 5 to agree on what restaurant to go to for dinner, while hundreds of Democrats all agree with budget-busting out-of-control spending and appear to have no interest in understanding the real math.
Finally, the Republicans, who are currently losing the debate, deserve a score of -5 because they have stupidly allowed themselves to be characterized as obstructionists because they want to protect “tax cuts for the wealthy.” Unless the Republican leaders place more emphasis on educating people with the real math and make it clear that they are protecting the country and not the wealthy, we have no hope of saving this country; not from falling off the fiscal cliff, but from falling into the abyss- the abyss of Federal bankruptcy–the abyss where our legacy to our children and grandchildren is a mortgaged country unable to pay its debts.