President Obama always sounds good until you really look beyond the words. A good example in yesterday's speech was this statement.
"We have to live within our means, we have to reduce our deficit, and we have to get back on a path that will allow us to pay down our debt".When I see a statement like this the first question I ask is what is "our means"? Who defines that? As I showed in my last post, "our means" would seem to be something around 18% of GDP. Tax receipts have averaged around 18% of GDP since World War II. It has been a little higher from time to time, but in only two years has it exceed 20%-in 1945, when we had to pay for WWII and in 2000 when the stock market boom created enormous temporary capital gains. Therefore, any honest analysis would indicate that 18% of GDP is the best indicator of "our means".
The OMB estimates that our revenues will be 16.6% of GDP next year. Therefore, there is an argument for some tax adjustments as part of an overall budget deal. However, it must be remembered that a big reason that revenues are down right now is because of the unemployment rate and the poor economy. The same tax code, tax rates and tax deductions generated 18.5% of GDP in 2007 before the economy imploded. We also generated more revenue with the Bush tax cuts in place than we did in any year in the first term of the Clinton Administration (after the Clinton tax increases). Recall that these are some of the years that the liberals think were the glory years of enlightened tax policy.
If 18% defines "our means" how much are we living beyond "our means". This year we are spending over 25% of GDP and the current projection is for that to still be in excess of 24% of GDP in next year's budget. Could it be any clearer that we have a spending problem rather than a revenue problem? It should also be evident that the spending problem that is in excess of "our means" is at least 6% of GDP. To put that in perspective, that is almost $1 trillion in annual spending that needs to be cut to live within our means.
How would President Obama propose to solve the problem? Increase taxes on the rich. Cut out waste in Medicare and demand more efficiency and accountability from Medicaid. Cut out waste in the Defense Department. Keep annual domestic discretionary spending low by building on the budget deal of last week (a deal he fought to the bitter end). That was about as specific as he got. That was also a classic campaign speech.
If we could actually get all the savings from waste in Defense, Medicare and Medicaid that has been promised by politicians over the last 30 years we would have a budget surplus right now rather than borrowing over 40 cents of every dollar we spend. It is pretty clear that "living within our means" as President Obama defines it means only one thing. Getting tax revenues up to where our spending is right now-24% of GDP.
We are only about a month away from reaching the current debt limit ceiling. President Obama had the means to begin to chart a path to a bipartisan solution. It simply appears to be beyond his means. As a result, I will be very surprised if the debt ceiling limit is increased on its pending expiration date. After that, it will get very interesting.
Good article.
ReplyDelete"We also generated more revenue with the Bush tax cuts in place than we did in any year in the first term of the Clinton Administration (after the Clinton tax increases)."
Are you referring to total tax dollar revenue or tax dollar revenue as a percentage of GDP? Bush tax cuts occurred in 2001 and 2003 and tax dollar revenue as a percentage of GDP drops below Clinton Administration levels most years from 2001 to 2010 (the Bush tax cuts are still in effect). Of course there are many events going on here such as Sept 11 and massive recession.
In response to Drew,
ReplyDeleteWe generated more revenue as a % of GDP in 2007 than in any of the first four years of the Clinton Adminstration. The point here is that lower tax rates do not mean lower revenues. Also, higher tax rates do not necessarily bring in more revenues because people change their behavior.
The biggest factor in high government tax revenues is a healthy economy with low unemployment. In 2007, the unemployment rate was 4.6%-less than half of what it is now. In 2000, the high water mark for revenues as a % of GDP, unemployment was 4.0%. However, most of the increase in revenues in the late 1990's up to 2000 was driven by huge windfalls in capital gains taxes from the internet bubble.
In 2000, $119 billion of revenue came from capital gains taxes. Capital gains revenues were less than half of that amount (in constant dollars) in 2003 but had almost fully recovered to late 1990's levels in 2007 (despite the Bush capital gains tax cut from 20% to 15% in 2003) when the economy imploded and so did government revenues.
When it comes to government revenues, a rising tide raises all boats.