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Deficit Reduction Redux PDF Print E-mail
Friday, 12 November 2010 00:17

Today saw the release of the draft proposal to deal with our insane deficit (currently around $1.3 trillion, but final numbers won't be available for a little while).  Just 4 short years ago, FY2007 saw a $162 billion deficit, and it's now 8 TIMES that level.  In FY2007 Federal receipts were $2.6 trillion, and for FY2010 they were about $2.2 trillion - meaning a $400 billion loss in receipts, considerably less than the $1.2 trillion bloom in deficit!  The deficit is now 10% of the total GDP - a level that is completely unsustainable for even a few years, let alone the decade that the Obama Administration is predicting.  Especially in light of the $13 trillion in total debt the US currently carries, and not including the estimated $50 trillion in underfunded long-term commitments (Medicare and Social Security).  So what did this committee suggest?  Read on...

 

 

They actually had the political will to recommend deep - DEEP - cuts in spending.  The plan slashes an estimated $4 trillion from the deficits over the next 10 years, and 75% of that is from spending reductions.  A good start!  I'd argue that we need 100% funding from slashed spending (after all, it's increased spending that's created the current nightmare), but the supermajority of savings from spending reduction is a good start.

 

Looking further into the plan, one idea I don't see in there - freezing or CUTTING the capital gains tax. It's proven to increase tax receipts (but I guess we need to consider "what's fair", after all). It is a PROVEN means to increase Federal receipts.  Every time it's been lowered, actual absolute dollars from this tax increased; every time it's been raised, actual absolute dollars from this tax decreased.  So how about cutting that tax?  Somehow I think that is very unlikely, given then-candidate Obama's insistent that taxation be fair, rather than just or effective.  As long as the idea that taxation and the business of Government is social engineering, and not guarantee of our liberties and protection of our rights, we'll always have this problem.


And I'd argue a lower capital gains tax rate would lower the deficit in two ways: higher receipts directly, and stimulated economic growth evidenced by those higher absolute receipts even at a lower tax rate, meaning other tax receipts from the increased economic activity, but I'll settle for just the proven higher receipts directly from the lower capital gains tax rates.

 

Another would be to eliminate - not just cut, eliminate - the corporate income tax.  Eliminate altogether; not just set to zero, but make it unlawful.  A rate that cannot be increased in the future without re-implementing the tax (considerably harder than just raising the rate).  Corporate taxes are about $130 billion per year - about 7% of total Federal revenues.  Assuming Hauser's Law, to "offset" that tax loss, we would need those corporations to increase the GDP by about $650 billion.  Since a typical profit margin for a Fortune 500 company is around 10%, that would mean we'd need to see about $65 billion in additional profit revenue flow back to US companies.  And guess what? Just recently $58 billion was kept overseas - including the economic activity to generate that profit - by just ten corporations!  I would wager there is more than $65 billion in profits earned - and retained - overseas by US corporations, meaning that we could cover any loss of the revenue from the corporate income tax by encouraging those companies to return to the US - by eliminating the corporate income tax.

 

Additionally, think of the jobs created when literally millions of new hires are needed in the US to support those now-returning economic activities.  Since the VAST majority of Federal income is from personal income taxes and Social Security/Medicare taxes, any employed individual becomes a yet-further source of Federal revenue.

 

However, given the current Administration's insistence of "fair" and "rich not paying their fair share" which we've already proven to be a false concept, I would see elimination of the corporate income tax (along with the capital gains tax) as DOA.  Too bad the President isn't seriously interested in deficit reduction; of course, his pushing to raise the deficits from the $162 billion of the GOP/Bush to $1.5 trillion may have something to do with the issue; this President simply does not see anything wrong with high deficits.  Reality of actions trumps promises of rhetoric.


Back to the issue at hand...  If the goal is deficit reduction, then the REAL goal is cutting spending (see those numbers above - spending has DRAMATICALLY outpaced any change in Federal receipts or growth of the GDP) and THEN raising actual revenue into the Government. At least 80% of the problem is too much spending, not too little revenue!  Any plan which does not predominantly attack spending is a plan to lose from the beginning.  Spending has skyrocketed in the last 4 years, and it's on a trajectory to continue such lunacy for the next 10 years.  Federal budgets pushing 25%+ of the GDP are simply unsustainable.  And for all the indignation and denial about the claims of President Obama, Speaker Pelosi, and Majority Leader Reid being socialists - a GDP driven at 25%+ by Federal spending IS socialist.  It's on par with many nations in the EU which are unabashedly socialist.  It's actually higher than "Communist" China, where Federal spending is about 7% of GDP!  Spending is the problem, and reducing that spending simply MUST be the primary goal of any realistic deficit reduction plan.  You do not cure a heroin addict by making heroin cheaper, or giving them more money to spend on their habit.



As such, the tax rates should be set according to what raises revenue, not what is "fair". Machiavellian, perhaps?  Yes, there is a bit of "the ends justify the means" in there, but reality says we need to consider that. Cutting some taxes - notably capital gains and other investment-income-based taxes - actually raises receipts, and thus would lower the deficit. We'll find out how serious DC is about actually cutting the deficit based upon how they approach the problem. If it's more about raising revenue, then they are simply trying to continue the status-quo; if it's about slashing spending (as this report tends to emphasize), then at least someone is being a bit common-sense about it.



However, it should be cuts first THEN tax rate increases. The last few times it was promised to be "cuts and taxes", the taxes came and the cuts never materialized. So do the cuts first, and THEN follow up the next fiscal year with matching $1 for $3 tax increases. Don't cut enough? Then you don't get to raise taxes as desired.



Spending is what's out of control, and increased taxation is the pig that feeds that at that trough.

Last Updated on Friday, 12 November 2010 01:14