Max Brantley thinks there are three reasons we have huge debt: 1. Bush Tax cuts for rich 2. Bush’s wars 3. Recession (Real Cause of Deficit Pt 11)

The Laffer Curve, Part I: Understanding the Theory

The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video shows the middle ground between those who claim “all tax cuts pay for themselves” and those who claim tax policy has no impact on economic performance. This video, focusing on the theory of the Laffer Curve, is Part I of a three-part series. Part II reviews evidence of Laffer-Curve responses. Part III discusses how the revenue-estimating process in Washington can be improved. For more information please visit the Center for Freedom and Prosperity’s web site: www.freedomandprosperity.org

Max Brantley made it clear in his post on May 9, 2011 on the Arkansas Times Blog, “Laying Blame for Financial Mess,”  that he thinks there are three main reasons that we have gone from a Federal surplus in 2001 to a huge deficit in 2011. 1. Bush Tax Cuts for the rich, 2. Bush’s wars, 3. the Recession.

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.

Before coming to Heritage in 2001, Riedl worked for then-Gov. Tommy Thompson, former Rep. Mark Green (R-WI)., and the Speaker of the Wisconsin Assembly. Riedl holds a bachelor’s degree in economics and political science from the University of Wisconsin, and a master’s degree in public affairs from Princeton University..

Myth #2: Future deficits are “the result of not paying for two wars, two tax cuts, and an expensive prescription drug program.”

Fact: These policies play a relatively minor role in the growth of future deficits. 

During his 2010 State of the Union Address, President Obama asserted:

At the beginning of the last decade, America had a budget surplus of over $200 billion. By the time I took office, we had a one-year deficit of over $1 trillion and projected deficits of $8 trillion over the next decade. Most of this was the result of not paying for two wars, two tax cuts, and an expensive prescription drug program.[7]

In other words, according to President Obama, the massive budget deficits are President Bush’s fault, but the data do not support this assertion. President Bush implemented the three policies mentioned by President Obama in the early 2000s. Yet by 2007—the last year before the recession— the budget deficit had stabilized at $161 billion. Since the combined annual cost of these three Bush-era policies is now relatively stable, they cannot have suddenly caused a trillion-dollar leap in budget deficits beginning in 2009.[8]

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However, the larger problem is that the President’s entire methodology fails basic statistics. With Washington set to collect $33 trillion in taxes and spend $46 trillion over the next decade, how does one determine which spending programs “caused” the $13 trillion deficit? By the President’s methodology, one could blame any $13 trillion group of spending programs (or tax cuts) for the entire budget deficit. For example, the President could have blamed much of the 10-year budget deficit on Social Security (10-year cost of $9.2 trillion), antipoverty programs ($7 trillion), net interest on the debt ($6.1 trillion), or non-defense discretionary spending ($7.5 trillion).[12] (See Chart 3.) There is no legitimate, mathematical reason for President Obama to ignore all of these more expensive policies and single out the $4.7 trillion in tax cuts, the funding for the wars in Iraq and Afghanistan, and the Medicare drug entitlement. A better methodology would focus on which program costs are actually growing and pushing the deficit up.

Finally, there is some hypocrisy at work. President Obama criticizes President Bush for “not paying for two wars, two tax cuts, and an expensive prescription drug program.” Yet he would extend $4 trillion of these policies (while repealing $700 billion in tax cuts) without paying for them either. By his own faulty logic, he is almost as irresponsible as President Bush.

Can Washington Return to the 2001 Balanced Budget Levels?

Many lawmakers and commentators have stated that the budget was balanced as recently as 2001 and have asked why it cannot be brought back into balance at those levels. Of course, lawmakers are free to alter any policy to achieve such a budget, although significantly reducing net interest costs would require major deficit reduction.

Budget Collapse Following the 2001 Surplus

Virtually all deficit reduction in the 1990s originated from just three sources:

  • Higher revenues, mostly from a temporary stock and economic bubble.
  • Lower defense spending following the end of the Cold War, and
  • Net interest savings resulting from less borrowing, a result of the other two factors.

The rest of the federal budget merely remained level as a share of the GDP throughout the decade, which itself may be considered an accomplishment for lawmakers.

Returning to those budget levels would not be easy. The stock market bubble is unlikely to return, nor would that be desirable. The 9/11 attacks ended the era of massive defense spending cuts, higher debt has brought higher net interest costs, and 10,000 baby boomers per day are retiring into Social Security and Medicare. Overall, the difference between 2001 and 2020 can be explained as follows:

  • The 2001 tax revenues were bubble-inflated (down 1.6 percent of GDP),
  • 2001 defense spending was as at prewar levels (up 0.8 percent of GDP),
  • Social Security, Medicare, and Medicaid costs are growing (up 3.3 percent of GDP),
  • Presidents Bush and Obama hiked domestic discretionary spending (up 0.5 percent of GDP),
  • Other entitlement spending is rising (up 0.8 percent of GDP), and
  • Rising debt means rising net interest costs (up 2.6 percent of GDP).1.

As a result, a budget surplus of 1.3 percent of GDP in 2001 is set to become a deficit of 8.3 percent by 2020. (See Table 1.)

1.Historical data from Office of Management and Budget, Historical Tables, Budget of the United States Government, Fiscal Year 2011 (Washington, D.C.: U.S. Government Printing Office, 2010), pp. 24–25, Table 1.2, and p. 146, Table 8.4, at http://www.whitehouse.gov/omb/budget/fy2011/assets/hist.pdf (June 14, 2010). Current and future projections based on Heritage Foundation calculations of the current-policy budget baseline, using Congressional Budget Office data. See the Appendix for the calculations.

The Laffer Curve, Part II: Reviewing the Evidence

This video reviews real-world evidence showing that changes in marginal tax rates can have a significant impact on taxable income, thus leading to substantial amounts of revenue feedback. In a few cases, tax-rate reductions even “pay for themselves,” though the key lesson is the more modest point that pro-growth changes in tax policy will have a positive impact on economic performance and that good tax cuts therefore do not “cost” the government much in terms of foregone tax revenue.

This video is second installment of a three-part series. Part I reviews theoretical relationship between tax rates, taxable income, and tax revenue. Part III discusses how the revenue-estimating process in Washington can be improved. For more information please visit the Center for Freedom and Prosperity’s web site: www.freedomandprosperity.org.

The Laffer Curve, Part III: Dynamic Scoring

A video by CF&P Foundation that builds on the discussion of theory in Part I and evidence in Part II, this concluding video in the series on the Laffer Curve explains how the Joint Committee on Taxation’s revenue-estimating process is based on the absurd theory that changes in tax policy – even dramatic reforms such as a flat tax – do not effect economic growth. In other words, the current system assumes the Laffer Curve does not exist. Because of congressional budget rules, this leads to a bias for tax increases and against tax cuts. The video explains that “static scoring” should be replaced with “dynamic scoring” so that lawmakers will have more accurate information when making decisions about tax policy. For more information please visit the Center for Freedom and Prosperity’s web site: http://www.freedomandprosperity.org

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I am doing a series on famous Arkansans and today we come to Ronnie Hawkins.

Ronnie Hawkins

Inducted in 2008

(b. 1935) – Born in Huntsville and raised in Fayetteville, his mother was a teacher and his father a barber. After graduating from high school, he studied physical education at the University of Arkansas, where he formed his first band, The Hawks. Hawkins owned and operated the Rockwood Club in Fayetteville where some of rock music’s earliest pioneers came to play, including Jerry Lee Lewis, Carl Perkins, Roy Orbison and Conway Twitty. Upon the recommendation of Conway Twitty in 1958, who thought Canada to be the promised land for a rock n’ roll singer, Hawkins went to Hamilton, Ontario to play a club called The Grange and never left Canada. Over a period of time, the members of the The Hawks, except for Levon Helm, were replaced with Robbie Robertson, Rick Danko, Richard Manuel and Garth Hudson. This was the line-up that was to later become known as The Band. In 1989, Hawkins was reunited with The Band at the concert marking the destruction of the Berlin Wall, and in 1992 he performed at the inaugural party for President Bill Clinton. He has been known over the years as “Mr. Dynamo,” “Sir Ronnie,” “Rompin’ Ronnie” Hawkins or “The Hawk.” He was a key player in the 1960s rock scene and for over 40 years has performed all over North America, recording more than 25 albums. His best-known hits are “Forty Days” and “Mary Lou.”

40 Days, performed live on Lake Minnetonka with legendary Ronnie Hawkins & The Hawks

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