Friday, December 03, 2010

Deficits, Tax Cuts, Budget Cuts and Reality

Taxes Are Unpopular, But Voter Sentiment Is Unrealistic

In the current political climate, many Americans want less government spending, lower taxes and the elimination of the deficit. Yet, they simultaneously demand that their (or their parents/grandparents) Social Security and Medicare benefits remain untouched.

Republicans have long embraced the idea that tax cuts don’t need to be paid for. And it seems that the Democrats have joined them in this reckless belief.

The Republicans strongly pushed the extension of the Bush tax cuts. And the Democrats feared letting them expire for all but the richest Americans. After all, raising taxes is one of the 'third rails' of Americans politics.

The problem was, extending all of the Bush tax cuts increased the deficit by about $4 trillion. Even if Congress had extended the cuts only for people making less than $250,000 a year, it would have increased the deficit by more than $3 trillion.

That's a whole lot more than the Obama stimulus or Bush's bank bailouts, both of which were wildly unpopular. This deficit increase via tax cuts occurred after the election of the Tea Partiers and other conservatives to Congress. How could that be acceptable to anyone concerned about the deficit?

Ultimately, cutting taxes or increasing spending both have the same effect on the government's balance sheet. One takes money out of the Treasury at the front end, while the other takes it out at the back end.

The Democrats have long been labelled as the party of 'tax and spend'. Yet, it's also fair to describe the Republicans the party of 'borrow and spend'.

At least one dyed-in-the-wool, true-blue conservative has called out his party for the reckless irresponsibility of their unyielding tax cut mantra.

"This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts," said former Reagan budget director David Stockman in a NY Times op-ed last summer.

Stockman is not a lone voice in the wilderness.

In 2006 William Niskanen, the former chairman of the libertarian Cato Institute, published an influential paper titled “Limiting Government: The Failure of ‘Starve the Beast.’ ”

In it, he critiqued the conservative idea that cutting taxes now would “starve” the government of revenue, and thus force it to reduce spending. The reality, he said, was the opposite. If politicians found they could cut taxes without paying for it, they realized they could increase spending without paying for it, too.

Between 1981 and 2005, tax cuts led to more, rather than less, spending. The other problem with the theory, Niskanen wrote, was that it let Republicans off the hook. The belief that you could cut taxes without reducing spending had “substantially reduced the traditional Republican concern for fiscal responsibility.”

At present, there is a lot of anger about the size of the federal government's budget deficit, and rightly so. Americans, who are tightening their belts, want the government to do the same. People are looking for governmental responsibility and restraint. The anger and concern is coming from across the political spectrum.

However, the current deficit was not caused just by over-spending and under-taxation. It was caused by the collapse in tax revenues that resulted from the 2008 financial crisis and the subsequent economic downturn. And tax revenues will only improve when the unemployment problem improves. That may be a long way off.

There is no doubt that the federal government is too big, has too many employees, and spends too much money. But the deficit problems won't be solved with budget cuts alone.

After all, we're now in year-nine and year-11 of two separate wars that are both part of America's larger and ongoing 'War on Terror'. And since tax revenues were not raised to pay for those wars, but were in fact cut, they were put on the government's credit card.

The reality is that there are no easy solutions. Rather, there are only painful ones. There will be austerity measures that deeply affect most Americans, and budget cuts of all varieties that will anger just about everyone.

But the reality is that the US won't eliminate its deficit, balance its books, and pay down its debt without tax increases. But that's the problem; any tax increases in such tenuous times could ultimately cool the ailing economy even further.

A recent LA Times/USC Poll of California voters is reflective of the general American sentiment. The poll found that Californians oppose tax hikes in favor of budget cuts to balance the state budget. Yet, they object to most of the cuts that could be made. Reality bites.

Naturally, everyone favors cutting 'waste', 'fraud' and 'abuse', however vague those terms may be. Most voters favor cuts over taxes because they believe we're already taxed too much.

The government has gotten itself — and, by extension, the rest of us — in quite a pickle. Cuts need to be made, revues need to be raised, and voters want neither.

Meanwhile, the tax base has been shrunken considerably because so any people are out of work.

Dick Cheney, who argued for a tax cut despite a looming shortfall, famously declared, "Reagan proved that deficits don't matter."

While many conservatives may have agreed with him then, most Americans — regardless of political affiliation — would beg to differ right now.

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