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  • The Lower Spending Solution to Deficits

    With the expiration of the 2001 and 2003 tax cuts fast approaching, the debate over whether to extend the cuts, and for whom, has taken on a new face. Proponents of allowing for tax increases on the highest income brackets, or in some cases, on all Americans, argue that this is a necessary step to reducing projected federal deficits.

    But, as Edward Lazear, former chairman of the President’s Council of Economic Advisors, explains in The Wall Street Journal, this creates a false choice between huge deficits or tax increases. He writes:

    This argument rests on the flawed premise that we can reduce the deficit only by increasing taxes, as if high levels of spending are a given. Not so. … Americans don’t have to choose between an enormous deficit or high taxes. If we returned to the relative fiscal restraint that prevailed during the Clinton and Bush years, when spending was 19.7% and 19.6% of GDP, respectively, we could avoid the entire mess.

    Lazear proposes returning spending closer to 2008 levels, then limiting spending in the future by imposing an “inflation-minus-one” rule, under which, if government expenditures exceed 18 percent of gross domestic product (GDP), Congress could only increase spending “by the last three years’ inflation rate, minus one percentage point.”

    Reducing spending is the right way to reduce deficits, since it’s spending that is driving federal deficits in the first place. Heritage budget expert Brian Riedl writes:

    By 2020, spending is projected to be 6.2 percent of GDP above the historical average, while projected 2020 revenues are 0.2 percent of GDP above the historical average. Thus, the entire expanded budget deficit will be caused by rising spending, rather than by falling revenues—even if the 2001 and 2003 tax cuts are extended.

    Capping spending would require lawmakers to make trade-offs and set priorities for use of taxpayers’ dollars. What’s important is not how we cap spending, but that we cap it—for both discretionary and mandatory outlays. In “10 Elements of Comprehensive Budget Reform,” Riedl lays out several feasible ways to do this, including capping the percentage by which spending can increase from year to year, an overall “omnicap” on all federal spending, and caps on discretionary spending and mandatory spending on entitlement programs.

    Achieving the ambitious reductions championed by Lazear would be difficult—and impossible if entitlement reform is not part of the equation. If untouched, Medicare, Medicaid, and Social Security alone will consume 18.2 percent of GDP—the historical average of tax revenue—by 2052. This would mean that all federal revenues would go towards paying for these programs, leaving other national priorities to be provided for by adding to the deficit.

    Allowing the 2001 and 2003 tax cuts to expire, even just for higher income brackets, is not the solution to reducing deficits. Congress should extend current tax rates and then make the necessary spending cuts to put the nation back on a fiscally sound course.

    Posted in Economics [slideshow_deploy]

    2 Responses to The Lower Spending Solution to Deficits

    1. Kevin H, college par says:

      Everyone at Heritage knows full well the low and middle income cuts will be extended. The only question is whether to extend the upper income tax cuts and add an additional 700billion to the deficit over the next decade.

      But just as the piece states that the deficit cannot be addressed by taxes alone, the same is absolutely true with spending. Spending cuts alone cannot address the deficit. Look at the House Republicans Pledge, it only saves 7% of the deficit. They extend all tax cuts and cut spending 20% on non defense discretionary and only addresses 7% of the problem. Obviously, that isn't going to work either.

      Eventually, everyone must come to realization that all options need to remain on the table. Both spending cuts and revenue increases will be needed.

    2. George Colgrove, VA says:

      Here is a bold idea. Sell off ALL public lands including ALL national parks to the highest bidder. Allow the new corporate owners to construct hotels, play areas, recreational areas and so on a limited track of land so they can earn money to care for the national park. Form a public group called the National Public Lands Association, which will be funded by a membership by these new entities as well as members of the public, state government officials and all other related industries. This group will act as the governing body over the public lands. The feds will take the sell off money to pay off the debt. All related federal employees will be transferred to the new corporate owners.

      The corporate entities would be required to provide free access to the public lands as we have now. The commercial enterprises on these premises would be used to fund the care for the land.

      Let us face it as Kevin said, the suggestions made will not even make a dent and we need to wreck the car. This will allow much of the department of the interior to be eliminated. When all fish and game related functions are returned to the states, the department can be removed in its entirety.

      We need to come up with out of box ideas – post government ideas. We are smart people and we can do the things the federal government is doing at a fraction of the cost by coming up with competing private sector solutions. The HF and the GOP set of ideas still give too much credibility to the government. We may have short-term gains, but it only lasts until the next democrats take the offices. They will just grow government again (we have the best example in the White House right now) By eliminating departments when we can, we make it harder to bring them back. People need to feel the benefit of a reduced government.

      Today I heard that we are going into debt by 4 billion dollars a day. Each fed earns about $123,000 (USA Today) in pay and benefits. Assuming 2.5 million feds and that each day a fed earns about $500. That it $1.3 billion a day. This means every day we pay the entire federal employee payroll we are going into debt. We need to reduce the size and scope of the federal government. Reducing federal property, departments, agencies and programs need to be done until we are no longer going into debt.

      Regardless of what we do to reduce government, we still need to pay the interest and principal on what we owe. This unfortunately will not be a line item we can reduce any time soon. This item will only grow so long as we are spending as we are. Little cuts as the HF and the GOP have suggested will still end up with the debt growing.

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