Category Archives: Cato Institute

With Govt Spending at 41% of GDP should President Obama try to raise taxes?

October 21, 2011 – 3:07 pm

Cato Institute: Government spending is 41% of GDP

I love the Cato Institute because they give us the facts that liberals just can’t refute. Instead of trying to raise our taxes, President Obama should be cutting spending.

American Government Spending: 41% of GDP

Posted by Chris Edwards

My good friend Kathy Ruffing at CBPP takes me to task for testifying that government spending in the United States is 41 percent of GDP, which in my view is a very high and harmful level.

Kathy says that recent U.S. spending data is “exaggerated” because of the recession, and indeed, spending has soared not only here, but in most major countries because of the unfortunate popularity of Keynesian pump-priming theories. My point was that the American smaller-government advantage eroded both during the Bush growth years and during the Obama recession years, as seen in Figure 2 of my testimony.  

Kathy noted that the OECD data I used are different than U.S. national income accounts data published by the Bureau of Economic Analysis. Well, that’s right. Every country has quirks in the way they do their national income data. The advantage of using OECD data is that the economists at the OECD adjust for these quirks and create spending data that is comparable across countries. If Kathy has more accurate international comparisons, I’d love to see them.

Finally, Kathy says that just because American government spending divided by GDP is about 40 percent, that “doesn’t mean that government controls about 40 percent of the U.S.economy.” I don’t agree. She means that government does not produce 40 percent of gross domestic product, which is true. The broader figure of 40 or 41 percent includes not just government production but government transfers. And transfers do entail government control over resources because both the taxing and spending activities involved in transfer programs distort private sector behavior. Thus, the government misallocates resources both when it “produces” useless solar power activities in its own labs and when it subsidizes failed private solar companies.   

Anyway, thanks to Kathy for raising the important issue of the overall size of government because it is something that the policy community should focus more attention on. For data geeks, the OECD has all kinds of cross-country comparison data here. Government spending is Table 25.

Federal Spending per Household Is Skyrocketing

Everyone wants to know more about the budget and here is some key information with a chart from the Heritage Foundation and a video from the Cato Institute.

The federal government is spending more per household than ever before. Since 1965, spending per household has grown by nearly 162 percent, from $11,431 in 1965 to $29,401 in 2010. From 2010 to 2021, it is projected to rise to $35,773, a 22 percent increase.

INFLATION-ADJUSTED DOLLARS (2010)

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Federal Spending per Household Is Skyrocketing

Source: U.S. Census Bureau, White House Office of Management and Budget, and Congressional Budget Office.

Chart 1 of 42

In Depth

  • Policy Papers for Researchers

  • Technical Notes

    The charts in this book are based primarily on data available as of March 2011 from the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO). The charts using OMB data display the historical growth of the federal government to 2010 while the charts using CBO data display both historical and projected growth from as early as 1940 to 2084. Projections based on OMB data are taken from the White House Fiscal Year 2012 budget. The charts provide data on an annual basis except… Read More

  • Authors

    Emily GoffResearch Assistant
    Thomas A. Roe Institute for Economic Policy StudiesKathryn NixPolicy Analyst
    Center for Health Policy StudiesJohn FlemingSenior Data Graphics Editor

By Everette Hatcher III | Also posted in President Obama, spending out of control, Taxes | Tagged , , , , | Comments (0)

Herman Cain’s 9-9-9 plan attacked for starting Value Added Tax (VAT)

October 21, 2011 – 7:20 am

Herman Cain’s plan 9-9-9 gets attacked in the clips above. Is this plan the same as a Value Added Tax (VAT).

Look Before You Leap on Cain’s 9-9-9 Tax Plan

Posted by Daniel J. Mitchell

I like the overall approach of Herman Cain’s 9-9-9 tax plan. As I recently wrote, it focuses on lower tax rates, elimination of double taxation, and repeal of corrupt and inefficient loopholes.

But I included a very important caveat. The intermediate stage of his three-step plan would enable politicians to impose both an income tax and a national sales tax. I wrote in my earlier post that I had faith in Herman Cain’s motives, but I was extremely uncomfortable with the idea of letting the crowd in Washington have an extra source of revenue.

After all, Europe’s welfare states began their march to fiscal collapse and economic stagnation after they added a version of a national sales tax on top of their pre-existing income taxes.

But it seems that I was too nice in my analysis of Mr. Cain’s plan. Josh Barro and Bruce Bartlett are both claiming that the business portion of Cain’s 9-9-9 is a value-added tax (VAT) rather than a corporate income tax.

In other words, instead of being a 9 percent flat tax-9 percent sales tax-9 percent corporate tax, Cain’s plan is a 9 percent flat tax-9 percent sales tax-9 percent VAT.

Let’s elaborate. The business portion of Cain’s plan apparently does not allow employers to deduct wages and salaries, which means — for all intents and purposes — that they would levy a 9 percent withholding tax on employee compensation. And that would be in addition to the 9 percent they presumably would withhold for the flat tax portion of Cain’s plan.

Employers use withholding in the current system, of course, but at least taxpayers are given credit for all that withheld tax when filling out their 1040 tax forms. Under Cain’s 9-9-9 plan, however, employees would only get credit for monies withheld for the flat tax.

In other words, there are two income taxes in Cain’s plan — the 9 percent flat tax and the hidden 9 percent income tax that is part of the VAT (this hidden income tax on wages and salaries, by the way, is a defining feature of a VAT).

This doesn’t make Cain’s plan bad from a theoretical perspective. The underlying principles are still sound — low tax rates, no double taxation, and no loopholes.

But if I was uneasy when I thought that the 9-9-9 plan added a sales tax on top of the income tax, then I am super-duper-double-secret-probation uneasy about adding a sales tax and a VAT on top of the income tax.

Here’s my video on the VAT, which will help you realize why this pernicious tax would be a big mistake.

Uploaded by on Oct 14, 2009

This Center for Freedom and Prosperity Foundation video explains why a value-added tax would be a dangerous money machine for big government. The evidence from Europe also shows that VATs actually lead to higher income taxes. www.freedomandprosperity.org

___________________________

Again, this doesn’t make Cain wrong if we’re grading based on economics or philosophy. My anxiety is a matter of real-world political analysis. I don’t trust politicians with new sources of revenue. Whether we give them big new sources of revenue or small new sources of revenue, they will always figure out ways of pushing up the tax rates so they can waste more money trying to buy votes.

By Everette Hatcher III | Tagged , , , , | Comments (0)

Cato Institute:Spending is our problem Part 6

October 21, 2011 – 12:02 am

But we also know that it is difficult to convince politicians to do what’s right for the nation. And if they don’t change the course of fiscal policy, and we leave the federal government on autopilot, then America is doomed to become another Greece.

The combination of poorly designed entitlement programs (mostly Medicare and Medicaid) and an aging population will lead to America’s fiscal collapse.

People think that we need to raise more revenue but I say we need to cut spending. Take a look at a portion of this article from the Cato Institute:

The Damaging Rise in Federal Spending and Debt

by Chris Edwards

Joint Economic Committee
United States Congress

Joint Economic CommitteeUnited States Congress

Added to cato.org on September 20, 2011

This testimony was delivered on September 20, 2011.

Conclusions

Federal spending is soaring, and government debt is piling up at more than a trillion dollars a year. Official projections show rivers of red ink for years to come unless policymakers enact major budget reforms. Unless spending and deficits are cut, the United States is headed for economic ruin as growth falls and rising debt threatens further financial crises.

Policymakers should turn their full attention to long-run spending reforms. They should begin terminating the many unneeded and damaging federal programs that draw resources out of the private sector and sap the economy’s strength. The essays on Cato’s website http://www.DownsizingGovernment.org describe many federal programs that produce low or negative returns. Programs often create economic distortions, damage the environment, restrict individual freedom, or have high levels of fraud and abuse.

I’ve proposed a plan to cut spending on entitlements, defense, and discretionary spending over 10 years to balance the budget.25 Spending reforms should aim to revive constitutional federalism and reverse the expansion of the federal government into areas better left to state and local governments, businesses, charities, and individuals.

Some analysts worry that spending cuts would hurt the economy, but other high-income nations have cut spending with very positive results. In the mid-1990s, for example, Canada faced a debt crisis caused by runaway spending — similar to our current situation. But the Canadian government changed course and slashed total spending 10 percent in just two years — which would be like us chopping annual spending by $360 billion in two years.26 Total government spending in Canada was cut by more than 10 percentage points of GDP over a decade. The Canadian economy did not sink into a recession as Keynesian economists might fear, but instead was launched on a 15-year economic boom.

A recent Joint Economic Committee report summarizes other international examples of spending cuts coinciding with strong economic growth.27 Thus, spending cuts should not be viewed as bad tasting medicine needed only to cure our debt disease, but as an opportunity to create positive and lasting benefits to the economy and society.

Thank you for holding these important hearings.

Notes:
.
25 http://www.DownsizingGovernment.org/balanced-budget-plan.
26 See http://www.cato-at-liberty.org/cutting-government-the-canadian-way and see http://www.cato-at-liberty.org/canadas-spending-cuts-and-economic-growth.
27 Joint Economic Committee, “Spend Less, Owe Less, Grow the Economy,” Republican Staff, March 15, 2011

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Cato Institute:Spending is our problem Part 5

October 20, 2011 – 12:00 am

Uploaded by on Feb 15, 2011

Dan Mitchell, Senior Fellow at the Cato Institute, speaks at Moving Forward on Entitlements: Practical Steps to Reform, NTUF’s entitlement reform event at CPAC, on Feb. 11, 2011.

People think that we need to raise more revenue but I say we need to cut spending. Take a look at a portion of this article from the Cato Institute:

The Damaging Rise in Federal Spending and Debt

by Chris Edwards

Joint Economic Committee
United States Congress

Joint Economic CommitteeUnited States Congress

Added to cato.org on September 20, 2011

This testimony was delivered on September 20, 2011.

Rising Spending Reduces Growth

Let’s take a look at how federal spending damages the economy over the long-run. Federal spending is financed by extracting resources from current and future taxpayers. The resources consumed by the government cannot be used to produce goods in the private marketplace. For example, the engineers needed to build a $10 billion government high-speed rail project are taken away from building other products in the economy. The $10 billion rail project creates government-connected jobs, but it also kills $10 billion worth of private activities.

Indeed, the private sector would actually lose more than $10 billion in this example. That is because government spending and taxing creates “deadweight losses,” which result from distortions to working, investment, and other activities. The CBO says that deadweight loss estimates “range from 20 cents to 60 cents over and above the revenue raised.”19 Harvard University’s Martin Feldstein thinks that deadweight losses “may exceed one dollar per dollar of revenue raised, making the cost of incremental governmental spending more than two dollars for each dollar of government spending.”20 Thus, a $10 billion high-speed rail line would cost the private economy $20 billion or more.

The government uses a “leaky bucket” when it tries to help the economy. Stanford University’s Michael Boskin, explains: “The cost to the economy of each additional tax dollar is about $1.40 to $1.50. Now that tax dollar … is put into a bucket. Some of it leaks out in overhead, waste, and so on. In a well-managed program, the government may spend 80 or 90 cents of that dollar on achieving its goals. Inefficient programs would be much lower, $.30 or $.40 on the dollar.”21 Texas A&M University’s Edgar Browning comes to similar conclusions about the magnitude of the government’s leaky bucket: “It costs taxpayers $3 to provide a benefit worth $1 to recipients.”22

The larger the government grows, the leakier the bucket becomes. On the revenue side, tax distortions rise rapidly as marginal tax rates rise.23 On the spending side, funding is allocated to activities with ever lower returns as the government expands. Figure 4 illustrates the consequences of the leaky bucket. On the left-hand side, tax rates are low and the government delivers useful public goods such as crime reduction. Those activities create high returns, so per-capita income initially rises as the government grows.

As the government expands further, it engages in less productive activities. The marginal return from government spending falls and then turns negative. On the right-hand side of the figure, average income falls as the government expands. Government in the United States — at 41 percent of GDP — is almost certainly on the right-hand side of this figure. In a 2008 book on federal fiscal policy, Professor Browning concludes that today’s welfare state reduces GDP — or average U.S. incomes — by about 25 percent.24 That would place us substantially to the right in Figure 4, and it suggests that major federal spending cuts would boost incomes over time.

19 Congressional Budget Office, “Budget Options,” February 2001, p. 381.
20 Martin Feldstein, “How Big Should Government Be?” National Tax Journal, vol. 50, no. 2, June 1997, pp. 197-213.
21 Michael Boskin, “A Framework for the Tax Reform Debate,” in Frontiers of Tax Reform, ed. Michael Boskin (Stanford: Hoover Institution, 1996), p. 14.
22 Edgar K. Browning, Stealing From Ourselves: How the Welfare State Robs Americans of Money and Spirit (Westport, CT: Praeger Publishers, 2008), p. 179.
23 Deadweight losses rise more than proportionally as tax rates rise.
24 See Edgar K. Browning, Stealing From Ourselves: How the Welfare State Robs Americans of Money and Spirit (Westport, CT: Praeger Publishers, 2008), p. 188

By Everette Hatcher III | Also posted in spending out of control | Tagged , , , , | Comments (0)

India’s government officials smart as Steve Jobs?

October 19, 2011 – 3:19 pm

I have written a lot about Steve Jobs recently and I wanted to link those posts below. Here is an interesting article for those who think that government officials are smart as those like Steve Jobs who are able to survive in the private market place and thrive.

Indian Bureaucrats Are No Steve Jobs

by Swaminathan S. Anklesaria Aiyar

Swaminathan S. Anklesaria Aiyar is a research fellow at the Cato Institute’s Center for Global Liberty and Prosperity.

Added to cato.org on October 19, 2011

This article appeared in The Wall Street Journal Asia on October 18, 2011.

The Indian government has launched an ultra-cheap tablet called Aakash (meaning sky) to be sold to secondary school students for just $35. The Aakash, which was designed by DataWind—a company owned by an Indian-Canadian—is the result of a government tender for an inexpensive tablet. The cost of the tablet is $46, and the government is subsidizing the difference of $11. Education Minister Kapil Sibal proclaims this will take cheap computing to the masses.

But hold the champagne. India has launched several ultra-cheap initiatives like the Tata Group’s Nano car that sells for under $3,000, yet that doesn’t mean every one of them will succeed. It’s especially risky if the government picks winners and losers, as in Aakash’s case.

Bureaucrats might believe they know where the future demand will lie, but they are no Steve Jobs.

For one thing, cheapness doesn’t always guarantee customers. The famed Tata Nano, unveiled in 2009, has so far been a disappointment. Yet many in government marveled at the fanfare surrounding private-sector projects like the Nano and wished to replicate them in the public sector, egged on by the belief that Indians care primarily about price because one-third of them live below $1 a day. But like any consumers, Indians care not about price, but about value.

Mr. Sibal seems to be forgetting the government’s own past folly here. In 2005, New Delhi launched a $200 Mobilis computer, based on free Linux software. Before that, in 2002, the government had hailed a hand-held computer called the “Simputer,” which cost $240 as a major breakthrough. Both failed. While politicians were busy thinking of subsidizing older products, the computer industry had itself innovated to push the market price down.

The larger problem is that some Indians think tablets are the technology of the future. This thinking partly reflects the glamour of Apple in the West, but also the belief that low incomes, low literacy and severe electricity shortages in India will make use of larger personal computers difficult. But no tablet launched by the Indian private sector, at prices ranging from $99 to $265, has caught the public imagination. One reason is competition from cellphones.

Chances are these private firms will realize their mistake and correct themselves. But the government has, again consumed by fanfare, invested at least $5 million into a dubious, unproven product. That means funds from taxpayers, who shouldn’t be paying taxes to support the venture-capital-like predilections of the Indian government, which risk going into a sinkhole.

Aakash may prove a failure because, first, used computers are available at dirt cheap prices. Second and more important is the phenomenal rise of cell phones. They can increasingly do things that computers and tablets do.

Swaminathan S. Anklesaria Aiyar is a research fellow at the Cato Institute’s Center for Global Liberty and Prosperity.

 

More by Swaminathan S. Anklesaria Aiyar

A basic Indian cell phone costs just $15, far cheaper than an Aakash. In fact, the cost of the cell phone is only slightly higher than the government’s subsidy, and calls are only two cents a minute. Cell phones can be charged by batteries in rural areas with little or no electricity. The Aakash, by contrast, will have an extra charge in the cost of a wireless connection. At this rate, the people most likely to buy the Aakash are better-off Indians—clearly not those at whom the subsidy is aimed.

This magnifies the risks of the Aakash project, not to mention the probable waste and corruption that typically accompanies Government initiatives like this. It may be irrelevant at a time when cell phone applications are multiplying at much lower cost. By promoting the tablet, the government is making a bet that could well go wrong.

Instead, the Indian government’s policies should offer the maximum possible flexibility, and then leave it to the market to work out what suits consumers best. Bureaucrats might believe they know where the future demand will lie, but they are no Steve Jobs.

Related posts:

Occupy Wall Street vs. Steve Jobs

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Steve Jobs was raised as a conservative Lutheran but he chose to leave those beliefs behind. Below is a very good article on his life. COVER STORY ARTICLE | Issue: “Steve Jobs 1955-2011″ October 22, 2011 A god of our age Who was Steve Jobs? A revered technology pioneer and a relentless innovator, the Apple […]

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By Everette Hatcher III | Also posted in Current Events | Tagged , , , , | Comments (0)

Cato Institute:Spending is our problem Part 4

October 19, 2011 – 7:35 am

Cato Institute:Spending is our problem Part 4

Should we spend more federal money to help the poor?

Uploaded by on Oct 3, 2011

The so-called War on Poverty has failed. Making government bigger and creating more federal redistribution programs has been bad news for taxpayers. But the welfare state also has been a disaster for the less fortunate, creating a flypaper effect that makes it difficult for people to lead independent and self-reliant lives. This Center for Freedom and Prosperity Foundation video shows how the poverty rate was falling after World War II — but then stagnated once the federal government got involved. www.freedomandprosperity.org

People think that we need to raise more revenue but I say we need to cut spending. Take a look at a portion of this article from the Cato Institute:

The Damaging Rise in Federal Spending and Debt

by Chris Edwards

Joint Economic Committee
United States Congress

Joint Economic CommitteeUnited States Congress

Added to cato.org on September 20, 2011

This testimony was delivered on September 20, 2011.

Baseline Projections Are Optimistic

In support of building a large “fiscal buffer,” policymakers should recognize that both short-term and long-term CBO projections are optimistic in various ways. Perhaps the future will include some positive budget surprises, but the big risk factors seem to be on the negative side.

In CBO’s baseline, federal deficits fall substantially over the coming decade, partly due to changes under the recent Budget Control Act. However, spending will be higher than projected if:

  • Policymakers lift caps in the Budget Control Act.
  • Policymakers launch new spending programs or respond to unforeseen crises or wars.
  • Higher interest rates push up interest costs, which is a risk that gets magnified as federal debt grows larger.
  • A major recession causes large cost increases in programs sensitive to economic cycles, such as unemployment insurance.
  • Policymakers respond to another recession with costly new “stimulus” plans. The persistence of Keynesian policy ideas in Washington is an important risk to the outlook for federal debt.

There are likely to be negative shocks in coming years that we don’t foresee. Consider that in its January 2008 budget outlook, CBO projected that U.S. economic growth would slow in 2008 but then rebound fairly strongly in subsequent years.15 CBO discussed the risk of a recession, but didn’t foresee the calamity that was already starting. The upshot is that policymakers should take a conservative approach and build a “fiscal buffer” with large spending cuts now before another recession causes the deficit to soar again.

CBO’s long-range projections — such as the “alternative fiscal scenario” (AFS) shown in Figure 1 — are also optimistic. In its basic projections, CBO does not factor in the negative effects of rising spending, debt, or taxes on GDP after 2021, but it does do that in a separate analysis.16 If spending actually followed the course shown in Figure 1, CBO estimates that GDP in 2035 would be up to 10 percent less than shown in the AFS, and GNP would be up to 18 percent less. In turn, spending-to-GDP and debt-to-GDP ratios would be worse than usually shown in long-range budget charts.

Under the AFS, rising deficit spending could reduce American incomes. The CBO finds that real GNP per capita could stop growing in the late 2020s, and then start falling after that. In a historic reversal, future generations of Americans would become successively poorer.

The way to ensure our continued prosperity is to cut federal spending and reduce debt. In a 2010 analysis, the CBO compared the high-spending AFS with Rep. Paul Ryan’s “Roadmap” plan.17 The Ryan plan would restrain federal spending to roughly current levels for the next few decades, and then start reducing it. By the late 2020s, GNP per capita under the Ryan plan would begin rising above the flat and then falling levels under the AFS. By the late 2050s, GNP per capita would be 70 percent higher under the Ryan plan than under the AFS.18

15 Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2008 to 2018,” January 2008, Chapter 2.
16 See Chapter 2 in Congressional Budget Office, “Long-Term Budget Outlook,” June 2011.
17 Congressional Budget Office, Douglas Elmendorf letter to Paul Ryan, January 27, 2010, http://www.cbo.gov/ftpdocs/108xx/doc10851/01-27-Ryan-Roadmap-Letter.pdf.
18 Congressional Budget Office, Douglas Elmendorf letter to Paul Ryan, January 27, 2010, p. 16.

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Cato Institute:Spending is our problem Part 4

October 19, 2011 – 12:55 am

Cato Institute:Spending is our problem Part 4

Should we spend more federal money to help the poor?

Uploaded by on Oct 3, 2011

The so-called War on Poverty has failed. Making government bigger and creating more federal redistribution programs has been bad news for taxpayers. But the welfare state also has been a disaster for the less fortunate, creating a flypaper effect that makes it difficult for people to lead independent and self-reliant lives. This Center for Freedom and Prosperity Foundation video shows how the poverty rate was falling after World War II — but then stagnated once the federal government got involved. www.freedomandprosperity.org

People think that we need to raise more revenue but I say we need to cut spending. Take a look at a portion of this article from the Cato Institute:

The Damaging Rise in Federal Spending and Debt

by Chris Edwards

Joint Economic Committee
United States Congress

Joint Economic CommitteeUnited States Congress

Added to cato.org on September 20, 2011

This testimony was delivered on September 20, 2011.

Baseline Projections Are Optimistic

In support of building a large “fiscal buffer,” policymakers should recognize that both short-term and long-term CBO projections are optimistic in various ways. Perhaps the future will include some positive budget surprises, but the big risk factors seem to be on the negative side.

In CBO’s baseline, federal deficits fall substantially over the coming decade, partly due to changes under the recent Budget Control Act. However, spending will be higher than projected if:

  • Policymakers lift caps in the Budget Control Act.
  • Policymakers launch new spending programs or respond to unforeseen crises or wars.
  • Higher interest rates push up interest costs, which is a risk that gets magnified as federal debt grows larger.
  • A major recession causes large cost increases in programs sensitive to economic cycles, such as unemployment insurance.
  • Policymakers respond to another recession with costly new “stimulus” plans. The persistence of Keynesian policy ideas in Washington is an important risk to the outlook for federal debt.

There are likely to be negative shocks in coming years that we don’t foresee. Consider that in its January 2008 budget outlook, CBO projected that U.S. economic growth would slow in 2008 but then rebound fairly strongly in subsequent years.15 CBO discussed the risk of a recession, but didn’t foresee the calamity that was already starting. The upshot is that policymakers should take a conservative approach and build a “fiscal buffer” with large spending cuts now before another recession causes the deficit to soar again.

CBO’s long-range projections — such as the “alternative fiscal scenario” (AFS) shown in Figure 1 — are also optimistic. In its basic projections, CBO does not factor in the negative effects of rising spending, debt, or taxes on GDP after 2021, but it does do that in a separate analysis.16 If spending actually followed the course shown in Figure 1, CBO estimates that GDP in 2035 would be up to 10 percent less than shown in the AFS, and GNP would be up to 18 percent less. In turn, spending-to-GDP and debt-to-GDP ratios would be worse than usually shown in long-range budget charts.

Under the AFS, rising deficit spending could reduce American incomes. The CBO finds that real GNP per capita could stop growing in the late 2020s, and then start falling after that. In a historic reversal, future generations of Americans would become successively poorer.

The way to ensure our continued prosperity is to cut federal spending and reduce debt. In a 2010 analysis, the CBO compared the high-spending AFS with Rep. Paul Ryan’s “Roadmap” plan.17 The Ryan plan would restrain federal spending to roughly current levels for the next few decades, and then start reducing it. By the late 2020s, GNP per capita under the Ryan plan would begin rising above the flat and then falling levels under the AFS. By the late 2050s, GNP per capita would be 70 percent higher under the Ryan plan than under the AFS.18

15 Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2008 to 2018,” January 2008, Chapter 2.
16 See Chapter 2 in Congressional Budget Office, “Long-Term Budget Outlook,” June 2011.
17 Congressional Budget Office, Douglas Elmendorf letter to Paul Ryan, January 27, 2010, http://www.cbo.gov/ftpdocs/108xx/doc10851/01-27-Ryan-Roadmap-Letter.pdf.
18 Congressional Budget Office, Douglas Elmendorf letter to Paul Ryan, January 27, 2010, p. 16.

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Dumas:Herman Cain’s 9-9-9 plan will not work

October 18, 2011 – 8:16 am

Senator Obama’s Social Security Tax Plan

Uploaded by on Jul 23, 2008

In addition to several other tax increases, Senator Barack Obama wants to increase the Social Security payroll tax burden by imposing the tax on income above $250,000. This would be a sharp departure from current law, which only requires that the tax be imposed on the amount of income needed to “pay for” promised benefits. But more important, at least from an economic perspective, the Senator’s initiative would increase the top tax rate on productive behavior by as much as 12 percentage points – and this would be in addition to his proposal to kill the 2003 tax rate reductions and further boost the top rate by 4.6 percentage points. This mini-documentary explains why a big tax rate increase on highly productive people would be very damaging to America’s prosperity, especially in a competitive global economy. Simply stated, pushing top tax rates in the United States to French and German levels means at least some degree of French-style and German-style economic stagnation. Visit http://www.freedomandprosperity.org for more information.

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Max Brantley wrote on the Arkansas Times Blog:

Dumas exposes Herman Cain’s 9-9-9 plan

Herman Cain is the hot Republican candidate at the moment, so Ernest Dumas’ examination of some of his ideas is timely. His easy 9-9-9 tax plan? The details aren’t so hot. More like appalling. 

He would replace all federal taxes—individual and corporate income taxes, and social security, Medicare, disability, unemployment, gasoline, cigarette and all other excise taxes—with three simple tax rates: 9 percent on personal income, 9 percent on business income and a 9 percent sales tax on all commercial activity. That sounds fair enough. There would be no exemptions and deductions. Well, only a few. Investment income—capital gains, interest and dividends, the income of the leisure class—wouldn’t be taxed at all. Your social security? Yes, tax it. As for the 9 percent business tax, it would apply only to the share of a company’s revenue that was spent on wages.It would be a mammoth tax cut for the rich and corporations and a giant tax increase for the middle class, the elderly and disabled.

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I have to say that I am not able to go along with the sales tax portion myself. My views are closer to those of the Cato Institute below:

Herman Cain: How About 15-15-15?

 
PrintPresidential candidate Herman Cain has made a splash with his 9-9-9 tax reform plan. I love his 9 percent income tax, but the skunk at the tax reform picnic is his 9 percent retail sales tax. Mr. Cain is an articulate advocate of free enterprise and I wish him well in the contest, but he should ditch the sales tax.Adding a retail sales tax to the federal government’s powerful tax armada would be a terrible idea from a small-government perspective. Democrats are desperate to find ways to fund soaring entitlement costs, so it’s dangerous to give them conservative political cover to add a new federal funding source.Cain’s 9 percent business tax is also a problem. It is similar to a value-added tax (VAT) because would it disallow a business deduction for wages, which would make the base much broader than the corporate income tax base. And like a VAT, Cain’s business tax would apparently be imposed on all businesses, not just those currently paying the corporate income tax.The result would be that American businesses would be collecting a large tax on workers’ wages — but workers wouldn’t see this major government grab. One caveat is that the Cain business tax would allow a deduction for dividends paid, which would narrow the base compared to the standard VAT.

In sum, two of Cain’s three 9’s are bad ideas. His advocacy of lower marginal rates and reduced taxes on savings and investment are great, but he should drop the 9-9-9 plan.

Instead, Cain and other candidates should consider a 15-15-15 plan. At first blush, that doesn’t sound very appealing because the rates are higher than Cain’s. But the business tax base would be much smaller than Cain’s, and the plan would make existing revenue sources more visible and efficient. Here’s the 15-15-15 plan:

  • 15 Percent Payroll Tax. Cain would abolish the current 15.3 percent payroll tax that funds Social Security and Medicare. That’s odd because Cain — to his credit — is proposing a Chilean-style Social Security system with personal accounts. I’d keep the current payroll tax, but move to a Chilean-style system by allowing workers to put 6 percentage points or more of the tax into a personal account. That would feel like a tax cut for workers because they would retain ownership of the money. I would also require that all 15.3 percent of the tax be listed on employee pay stubs so that the burden is highly visible. Currently, workers only see half of the payroll tax, and thus might be unaware of the high cost of these retirement programs.
  • 15 Percent Personal Income Tax. Like Cain, I’d get rid of just about all deductions and other breaks under the income tax, except pro-savings features such as the 401(k) rules. It’s also reasonable to retain a substantial basic exemption for low-income filers, as under the Dick Armey/Steve Forbes “flat tax” plans. The Armey/Forbes plans had rates in the range of 17 to 20 percent, but they only taxed labor income at the individual level, not capital income. Technically, that is the right way to go under a flat tax, but as a bow to today’s political realities, we might want to tax wages, dividends, interest and capital gains all at 15 percent.
  • 15 Percent Corporate Income Tax. We should cut the 35 percent corporate income tax rate to 15 percent. People say we should trade a rate cut for loophole closing, but loophole closing is not worth the effort. Corporate loopholes are far smaller than loopholes in the individual code, and trying to scrap them just creates a blockade of business opposition to reform. Also, if we dropped the rate to 15 percent, the base would automatically broaden as businesses reduced their tax avoidance and evasion. Corporate profits parked offshore would flood back into the United States, and capital investment would get a huge boost. In the long-run, policymakers should consider switching to the simpler cash-flow business base under the Armey/Forbes flat tax, but if we cut the rate to 15 percent, the distortions caused by the current base would be greatly reduced anyway.

How much revenue would 15-15-15 raise? You could probably make it revenue-neutral by adjusting the basic exemption amount under the individual income tax. Dick Armey’s flat tax exemption was huge at about $35,000 for a family of four. A lower exemption amount makes more sense, but this is a variable that could be fine-tuned.

Of course, tax reform would be much easier if it created an overall tax cut. And that would be much easier to achieve if Congress cut spending. So I’d encourage Mr. Cain and the other candidates to roll up their sleeves and give us their detailed spending-cut plans. As a modest first step, how about a 9-9-9-9-9-9-9-9 plan to slice 9 percent off the budget of every federal agency?

This article appeared on The Daily Caller on October 14, 2011.

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By Everette Hatcher III | Also posted in President Obama, Social Security | Comments (0)

Cato Institute:Spending is our problem Part 3

October 18, 2011 – 6:47 am

Cato Institute:Spending is our problem Part 3

Uploaded by on Feb 15, 2011

Dan Mitchell, Senior Fellow at the Cato Institute, speaks at Moving Forward on Entitlements: Practical Steps to Reform, NTUF’s entitlement reform event at CPAC, on Feb. 11, 2011.

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People think that we need to raise more revenue but I say we need to cut spending. Take a look at a portion of this article from the Cato Institute:

The Damaging Rise in Federal Spending and Debt

by Chris Edwards

Joint Economic Committee
United States Congress

Joint Economic CommitteeUnited States Congress

Added to cato.org on September 20, 2011

This testimony was delivered on September 20, 2011.

Harmful Effects of Deficit Spending

Federal deficit spending has exploded. Even with the recent passage of the Budget Control Act, the deficit is still expected to be about $1 trillion next year. The damage caused by this spending includes:

1. Transferring resources from higher-valued private activities to lower-valued government activities. With government spending already at 41 percent of GDP, new spending will likely have a negative return, which will reduce output.
2. Creating pressure to increase taxes in the future, which would reduce growth. Higher taxes impose “deadweight losses” on the economy of at least $1 for every $2 of added revenues, as discussed below.
3. Increasing federal debt, which creates economic uncertainty and a higher risk of financial crises, as Europe’s woes illustrate. Research indicates that economic growth tends to fall as debt rises above about 90 percent of GDP, as discussed below.

Economists in the Keynesian tradition dispute the first point. They believe that the demand-side “stimulus” benefits of spending are so important that they outweigh the problems of microeconomic distortions and misallocations caused by federal programs. However, it is very difficult to see any economic boost from the huge deficit spending of recent years.

The total Keynesian stimulus in recent years includes not only the 2009 stimulus package of more than $800 billion, but the total amount of federal deficit spending. We’ve had deficit spending of $459 billion in fiscal 2008, $1.4 trillion in fiscal 2009, $1.3 trillion in fiscal 2010, and $1.3 trillion in fiscal 2011. Despite that huge supposed stimulus, U.S. unemployment remains at high levels and the current recovery has been the slowest since World War II.5

The Obama administration claimed that there are large “multiplier” benefits of federal spending, but the recent spending spree seems to have mainly just suppressed private-sector activities.6 Stanford University’s John Taylor took a detailed look at GDP data over recent years, and he found little evidence of any benefits from the 2009 stimulus bill.7 Any “sugar high” to the economy from spending increases was apparently small and short-lived. Harvard University’s Robert Barro estimates that any small multiplier benefits that the stimulus bill may have had is greatly outweighed by the future damage caused by higher taxes and debt.8

John Taylor recently testified that deficit-spending stimulus actions “have not only been ineffective, they have lowered investment and consumption demand by increasing concerns about the federal debt, another financial crisis, threats of inflation or deflation, higher taxes, or simply more interventions. Most businesses have plenty of cash to invest and create jobs. They’re sitting on it because of these concerns.”9

As federal debt grows larger, the problems caused by fiscal uncertainty will get magnified. The CBO notes that “growing federal debt also would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates. Such a crisis would . . . probably have a very significant negative impact on the country.”10

Research by economists Kenneth Rogoff and Carmen Reinhart found that government debt burdens above 90 percent of GDP are associated with lower economic growth.11 After examining data on dozens of countries, they concluded that “high debt is associated with slower growth; a relationship which is robust across advanced and emerging markets.”12 High debt can also be associated with inflation crises, “financial repression,” and other problems. Furthermore, high public and private debt acts as a “contagion amplifier” in the globalized economy.

A new paper by economists at the Bank for International Settlements (BIS) similarly found that when government debt in OECD countries rises above a threshold of about 85 percent of GDP, economic growth is slower.13 As debt rises, borrowers become increasingly sensitive to changes in interest rates and other shocks. “Higher nominal debt raises real volatility, increases financial fragility, and reduces average growth,” the authors note.14

The BIS economists conclude that countries should build a “fiscal buffer” by keeping its debt well below the danger threshold. They note that without major reforms, debt-to-GDP levels will soar in coming decades in most advanced economies due to population aging. Thus, one more reason for the United States to cut its spending and debt is to help it weather future financial crises spilling over from countries that are in even worse shape than we are.

 
5 See Joint Economic Committee, “Uncharted Depths: Welcome to Barack Obama’s ‘Recover Bummer,'” Republican Staff, June 23, 2011. And see the comments of economists Robert Gordon and Robert Hall at http://www.cato-at-liberty.org/biggest-keynesian-stimulus-slowest-recovery.
6 See Robert J. Barro, “Government Spending Is No Free Lunch,” Wall Street Journal, January 22, 2009; John F. Cogan and John B. Taylor, “The Obama Stimulus Impact? Zero,” Wall Street Journal, December 9, 2010; John H. Cochrane, “Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies,” University of Chicago Booth School of Business, February 27, 2009.
7 John Taylor, Testimony to the House Committee on Oversight and Government Reform, Subcommittee on Regulatory Affairs, Stimulus Oversight, and Government Spending, February 16, 2011.
8 Robert J. Barro, “The Stimulus Evidence One Year Later,” Wall Street Journal, February 23, 2010.
9 John Taylor, Testimony to the Senate Finance Committee, Subcommittee on Fiscal Responsibility and Economic Growth, September 13, 2011.
10 Congressional Budget Office, “Long-Term Budget Outlook,” June 2011, p. 22.
11 The authors summarize their findings in Carmen Reinhart and Kenneth Rogoff, “A Decade of Debt,” National Bureau of Economic Research, Working Paper 16827, February 2011.
12 Carmen Reinhart and Kenneth Rogoff, “A Decade of Debt,” National Bureau of Economic Research, Working Paper 16827, February 2011, p. 5.
13 Stephen Cecchetti, M.S. Mohanty, and Fabrizio Zampolli, “The Real Effects of Debt,” Bureau for International Settlements, September 2011.
14 Stephen Cecchetti, M.S. Mohanty, and Fabrizio Zampolli, “The Real Effects of Debt,” Bureau for International Settlements, September 2011, p. 4.

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Cato Institute:Spending is our problem Part 2

October 17, 2011 – 7:45 am

Cato Institute:Spending is our problem Part 2

But we also know that it is difficult to convince politicians to do what’s right for the nation. And if they don’t change the course of fiscal policy, and we leave the federal government on autopilot, then America is doomed to become another Greece.

The combination of poorly designed entitlement programs (mostly Medicare and Medicaid) and an aging population will lead to America’s fiscal collapse.

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People think that we need to raise more revenue but I say we need to cut spending. Take a look at a portion of this article from the Cato Institute:

The Damaging Rise in Federal Spending and Debt

by Chris Edwards

Joint Economic Committee
United States Congress

Joint Economic CommitteeUnited States Congress

Added to cato.org on September 20, 2011

This testimony was delivered on September 20, 2011.

America Has a High-Spending and High-Debt Government

Some analysts say that America can afford to increase taxes and spending because it is a uniquely small-government country. Alas, that is no longer the case. Data from the Organization for Economic Cooperation and Development (OECD) show that federal, state, and local government spending in the United States this year is a huge 41 percent of GDP.

Figure 2 shows that government in the United States used to be about 10 percentage points of GDP smaller than the average government in the OECD. But that size advantage has fallen to just 4 percentage points. A few high-income nations — such as Australia — now have smaller governments and much lower government debt than the United States.

 

Historically, America’s strong growth and high living standards were built on our relatively smaller government. The ongoing surge in federal spending is undoing this competitive advantage we had enjoyed in the world economy. CBO projections show that without reforms federal spending will rise by about 10 percentage points of GDP by 2035. If that happens, spending by American governments will be more than half of GDP by that year. That would doom young people to unbearable levels of taxation and a stagnant economy with fewer opportunities.

American government debt has also soared to abnormally high levels. Figure 3 shows OECD data for gross government debt as a share of GDP.3 (The data include debt for federal, state, and local governments). In 2011, gross government debt is 101 percent of GDP in the United States, substantially above the OECD average of 78 percent.4

3 Organization for Economic Cooperation and Development, “Economic Outlook Database,” September 2011, Annex Table 32.
4 This is a simple average of OECD countries. The OECD publishes a weighted average, but that figure is, of course, heavily influenced by the United States.

 

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