As of May 10, the federal deficit was $15,678,869,907,107.48, according to the National Debt Clock.org site. The question of whether Washington can reduce the deficit while avoiding a worsening of the economic climate has come to a head in the debate over the expiring Bush Tax Cuts.
Cutting federal spending is a difficult maneuver in an election year. However, there has been a 21.4% increase in federal spending over the past two years, according to the Wall Street Journal. Government spending as a share of the economy is about 24% under Obama, several points higher than under President Bush and significantly higher than the historical average of 20.7%, according to U.S. Government Spending.com. A 6.2% increase in federal employees during the Obama Administration, (CNN/Money) and the $787 billion stimulus account for a portion of that hike.
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FEDERAL RECEIPTS/OUTLAYS/DEFICITS
(From Tax Policy Center statistics)
(Billions of dollars, in constant 2005 dollars)
YEAR RECEIPTS OUTLAYS DEFICIT
1952 635.6 650.2 14.6
1962 659.7 707 47.3
1972 908.1 1010.4 102.4
1982 1202.8 1452 249.2
1992 1467.5 1857.9 390.4
2002 2028.6 2201.3 172.7
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Statistics under Obama Presidency
(2008=Last year of Bush Presidency)
2008 2,288.1 2703.8 415.7
2009 1899 3173.4 1274.4
2010 1927.9 3081 1153
2011 1998.7 3126.3 1127.6
The rate of deficit increase during the three years of the Obama presidency exceeds the general rate of increase per decade over the past half century.
Should tax increases be employed to reduce the deficit? Should those increases come from allowing the Bush Tax Cuts to expire?
FACTCHECK has refuted claims by DNC Chair Howard dean that “60% of the deficit is due to the Bush Tax Cuts.” According to Harvard Economics Professor Martin Feldstein’s Wall Street Journal article,
“Historians and economists who’ve studied the 1930s conclude that the tax increases passed during that decade derailed the recovery and slowed the decline in unemployment. That was true of the 1935 tax on corporate earnings and of the 1937 introduction of the payroll tax. Japan did the same destructive thing by raising its value-added tax rate in 1997.”
Taxes are scheduled to skyrocket in 2013. 34% of the increases are due to the expiring Bush Tax Cuts, 25% from the expiration of the payroll tax cut, and the remainder from various provisions of President Obama’s health care reforms. Top rates will climb to 39.6% from 35%, the child tax credit would shrink, the capital gains tax would soar to 20% from 15%, (which could play a major role in a harsh employment picture) and the estate tax would affect more families, as noted in a Heritage/CRS report.
Bloomberg News has described how Republicans, particularly guided by Rep. Ryan, have produced various proposals to prevent the hike. Senate Democrats blocked these proposals, although there is general agreement that some protection for taxpayers in the under $200,000 bracket is required.
The higher taxes under consideration would, at first glance, appear capable of reducing the deficit by about 17.7%, as a recent NPR report argued. But the reality of that concept’s approach is less optimistic. History indicates that tax hikes deepen and prolong economic downturns, promote long term unemployment, and makes the U.S. less competitive in the global economy. In the final analysis, a reduced economic outlook would reduce federal revenues far greater than tax hikes would increase them.
Heritage examined the effects of tax hikes and cuts during the 1990s.
“The 1993 Clinton tax hikes slowed economic growth during that decade, despite the common assumption that it was a period of rapid expansion. It was not until a tax cut later in the decade that growth took off. Lower rates paved the way for faster growth. The 2003 Bush tax cuts helped the economy recover from a recession [initiated by the “Dot.com” bubble burst] and put it on a stronger footing in the face of growing headwinds [caused in part of the events of 9/11.]”
The impact of higher taxes on the prolonged employment downturn is particularly worrisome, particularly in light of historical analysis. Under the current administration, the latest (April) unemployment rate is 8.1%, continuing the trend of high unemployment rates which have seen, in April of their respective years, 8.9% (2009), 9.9% (2010), and 9.0 (2011). These are dramatically higher than the rates experienced during the prior Administration, which ranged from a low of 4.5% to a high of 6.0%. But these statistics reveal only part of the ominous trend. Long term unemployment (27 weeks or longer), at 5.1 million, represents 41.3% of all those unemployed, and there are 7.9 million “forced part timers” as well. Civilian labor force participation has declined to 63.6%, a sharp drop from 2000 (67.1) and even from 2010 (64.7). The severe, detrimental effects of the past several years of high unemployment will continue even after jobs rebound. As noted by Christine Dugas in a USA Today article, many families who lost jobs used savings to pay current bills and went into debt. Even after securing new jobs, they are not going to spend at normal levels until those debts are paid.
This must be contrasted with the policy of the prior administration. Faced with an economic downturn, President Bush lowered taxes, which produced significantly lower unemployment rates. The Tax Foundation notes that these followed historical precedent. When President Kennedy cut taxes, and when President Reagan did the same, the economy accelerated.
Although a 2010 Pew study argued that continuing the Bush tax cuts would negatively impact the national debt, it noted that “many who are concerned about the high cost of extending the tax cuts acknowledge that it would be unwise to let them expire while the economy is still fragile.
The Tax Foundation argues that those who claim that the Bush tax cuts didn’t aid all economic groups are incorrect.
“Virtually every tax return received a tax cut as a result of the 2001 and 2003 Bush tax cuts. Even many tax returns at the very bottom of the income scale that paid no income taxes to the IRS saw an increase in their refundable credit amount.”
The argument that tax increases reduce budget deficits lacks substantiation. Alvin Rabushka, writing for the Hoover Institute, noted that between 1950 and 1992, total federal receipts rose from $39.4 billion to $1.09 trillion. Total spending over the same period increased from 42.6 billion to 1.38 trillion.
“Deficit reducing tax increases in particular, show no perceptible impact on deficit reduction; indeed, they appear to have the perverse effect of increasing future deficits.” Tax increases retard economic development which eventually increases the deficit.
In the final analysis, tax revenue will never be sufficient if federal spending is unchecked, and if the economic activity upon which it is based is unhealthy. Domestic non defense spending growth over the past eighty two years reached a peak rate of increase in the past several years–a self defeating treadmill to nowhere. At a time when unemployment continues to soar and the economy continues to stagger, significant tax increases are demonstratively counterproductive.