Friday, November 25, 2005

Mythbusting the Budget

It seems as if everywhere I look lately I'm seeing rationalizations for cutting taxes. As a regular person who has to manage their financial dealings ensuring that what I'm spending is less than what I'm bringing in, I thought it was time to take a little closer look at some of the myths around the present taxation strategies, with a little help from the Center on Budget and Policy Priorities.

Myth #1: The deficit is the result of excessive spending on domestic programs.

In fact, recent domestic spending increases come in a distant fourth as a cause of the current deficit, well behind tax cuts, spending increases for defense, homeland security, and operations in Iraq and Afghanistan, and the economic downturn.
If we focus just on the causes over which Congress and the President have control — that is, if we look at all spending increases and tax cuts enacted since the start of 2001 and see how much they are costing the government this year — we find that tax cuts amount for nearly half (48 percent) of those costs. Increased spending for defense, homeland security, and international affairs (including Iraq and Afghanistan) account for another 37 percent. Increased spending on all domestic programs combined accounts for just 14 percent.

Myth #2: Taxes are higher than they used to be.

In fact, taxes are at their lowest levels in decades when measured as a share of the economy, the standard way that analysts and institutions such as the Congressional Budget Office and the Office of Management and Budget examine such trends over time.
This year, total federal revenues are a smaller share of the economy than in any year since 1959, a time when Medicare, Medicaid, most federal aid to education, most child care and environmental programs, and anti-poverty programs such as food stamps did not exist. Federal individual income tax revenues are a smaller share of the economy than in any year since 1943.

Myth #3: Tax cuts spur so much economic growth that they ultimately pay for themselves.

In fact, no reputable economist — liberal or conservative — has ever shown that the economy expands so much as a result of tax cuts that it produces the same level of revenue as it would produce without the tax cuts.

The President’s own Council of Economic Advisers explicitly acknowledged in their Economic Report of the President last year that tax cuts are unlikely to pay for themselves.

The history of the past two decades bears this out. If we compare the 1980s (when taxes were cut) to the 1990s (when taxes were raised), we find that the economy grew just as quickly during the 1990s as during the 1980s, and income-tax revenue grew nearly three times as quickly in the 1990s as in the 1980s.

Moreover, a major recent study by Brookings Institution scholars William Gale and Peter Orszag concludes that the tax cuts are likely to reduce economic growth over the long term if they are extended. This is because the large, persistent deficits that are forecast if the tax cuts are extended would reduce long-term investment by forcing the government to borrow large sums of capital that otherwise would go toward private investment.

Myth #4: The President's 2006 budget would reduce deficit over the next several years.

In light of the current fiscal situation, the Administration says it plans to get serious about deficit reduction. The President’s fiscal year 2006 budget proposes cuts across a range of domestic programs in a purported effort to cut the deficit in half by 2009.

While the deficit is projected to decline as a share of the economy over the next few years, this is in spite of the policies in the Administration’s budget, not because of them.

Despite proposing cuts to scores of important programs, the Administration's budget would expand the deficit over the next five years, mostly because those proposed cuts are more than outweighed by proposed tax cuts and increases in defense and homeland security spending. As shown by the Administration’s own figures, deficits over the next five years will total $1.364 trillion if no policy changes are made but $1.393 trillion if the Administration’s proposals are enacted.
Moreover, the deficit is projected to rise significantly in years after the five-year period the budget covers, when (among other things) the cost of the Administration’s tax cuts would mushroom from $39 billion in 2010 to $287 billion in 2015 if they are extended.

Someone hand those boys a pocket calculator and enrol them in an economics class before the country goes completely down the toilet.


Blogger mikevotes said...

The myth that bugs me the most is that tax cuts to the wealthy benefit the economy more than tax cuts to the middle and lower class.

Let me say that I agree with your agrument that tax cuts are not always an economic wise choice, but if there are to be breaks, the premise of "trickle down" economics has always made me angry.

I am fortunate enough to belong to a tennis club with a fairly economically successful membership. Look if these guys pick up a $50K tax break, it is a big deal to them, but that money isn't immediately put back into the economy. Generally, that money is not specifically spent, and finds its way, more or less, on top of the pile.

Whereas, if you gave a $100 tax break to 5,000 lower middleclass families, that money would be spent and back out into the economy before the ink on the checks dried.

It is preposterous to think that the Bush method of tax breaks for the wealthy benefits the country as a whole. This country's economy is built largely on consumer spending, and thus, to get an economic spurt, you need to put the tax breaks towards people who will put that money back into the flow as quickly as possible.

A strong and broad middle class is vital to a consumerist economy, and trickle down tax breaks work to destroy that middle class.

Kind of tangential to your general point, but I rant about this anywhere I get the chance.


12:42 PM  

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