He is right that the actual deficit is caused by direct government spending exceeding income, an imbalance mostly caused, he will tell you with some justification, by the fact that we don’t tax rich people as much as we did in happier and more prosperous times.
We have heard the liberals like John Brummett say for years that Bush put us into this horrible position of deficits because of his tax cuts of 2001 and 2003. However, if Bush was responsible for taking the 236 billion surplus he inherited in 2000 and turning everything downward because of the tax cuts, then why did we only have a budget deficit of 161 billion in 2007?
Brian Riedl is the author of the article “The Three Biggest Myths About Tax Cuts and the Budget Deficit,” (Heritage Foundation, June 21, 2010), and the next few days I will be sharing portions of his article.
Riedl’s budget research has been featured in front-page stories and editorials in The New York Times, The Wall Street Journal, The Washington Post and The Los Angeles Times. He has discussed budget policy on NBC, CBS, PBS, CNN, FOX News, MSNBC, and C-SPAN. He also participates in the bipartisan “Fiscal Wake-Up Tour,” which holds town hall meetings across America focusing on the looming crisis in Social Security, Medicare, and Medicaid.
What the Deficit Commission Should Do
President Obama’s Commission on Fiscal Responsibility and Reform, known popularly as the “Deficit Commission,” has begun assembling recommendations to reduce the budget deficit to 3 percent of gross domestic product by 2015 and to address long-term deficits.
The commission should target the historical levels of taxes (18.0 percent of GDP) and spending (20.3 percent of GDP). Thus, successful reforms would:
- Reform Medicaid and bring long-term sustainability to Social Security and Medicare. It may be possible to squeeze enough savings from other sources to meet the 2015 deficit target, but the swelling cost of these three programs would quickly devour those savings and continue expanding the budget deficit. Thus, the commission should look beyond 2015 and seek entitlement reforms that bring long-term sustainability to the federal budget.
- Reopen the health care law. While most of the current and future entitlement growth comes from Social Security, Medicare, and Medicaid, some of it comes from Obamacare. In fact, much of the law merely shifted spending from Medicare to new health subsidies. Even in the unlikely event that all of the scheduled Medicare cuts actually take place and new health subsidies are not expanded, the CBO estimates that Obamacare would expand federal spending by $382 billion through 2019 and substantially more thereafter. The necessary bipartisan budget reform must include bipartisan health care reform.
- Offer specific spending reforms, not just numerical targets. In 1982 and 1990, bipartisan budget deals coupled immediate tax increases with vague promises of distant spending cuts to meet preset targets. Predictably, the spending cuts were rarely implemented. Long-term spending targets and caps are an important part of budget reform, but they are hollow if not accompanied by specific, credible proposals to reform federal spending programs. Rather than punt the tough spending decisions, the commission should make specific proposals in its report to Congress and the President.
- Avoid tax increases. Low tax revenues are not the problem. Even if the 2001 and 2003 tax cuts are extended, revenues are still projected to rise above the historical average. Furthermore, America simply cannot tax its way out of this problem. Financing the projected 10 percent of GDP long-term cost increase for Social Security, Medicare, and Medicaid would require permanently raising taxes by $12,000 per household (adjusted for both inflation and income growth). Such steep tax rate increases would devastate families, businesses, and the economy.Even the “split the difference” policy of equal tax hikes and spending cuts would eventually push taxes up to near-European levels. Congress is already examining a European-style value-added tax (VAT)—a type of national sales tax— that would allow Congress to keep spending, rather than confront the unsustainable spending trends. Drowning the next generation of Americans in tax hikes is no better than drowning them in debt. Rather than simply raising taxes alongside rising spending, the deficit commission should recommend paring back the burgeoning spending programs.
- Bring budget transparency. Social Security and Medicare face a staggering $46 trillion in unfunded obligations over the next 75 years. Yet these figures do not appear anywhere in the budget that Congress must approve annually. The commission should strongly recommend that Congress disclose all unfunded obligations in its annual budget and vote to acknowledge and approve the long-term consequences of their budget decisions. In addition, they should require that new proposals be scored over the long term, not just over the next 10 years, and create a long-term budget for entitlement programs.