Economy & Budget

Should the GOP cave on taxes?

Should the GOP cave on taxes?

Republicans in Congress are under tremendous pressure to cave in to President Obama’s demand for tax hikes by December 31. These tax hikes are projected to generate $823 billion in additional revenues, and save another $127 billion in interest payments, for a cumulative reduction of $950 billion in the national debt over 10 years, according to the left-wing Center for Budget and Policy Priorities.

Ten-year budget projections are notoriously unreliable, but the White House estimates budgets for five years. By 2017, the administration projects that the national debt will be more than $21 trillion but these tax hikes will have generated just $307 billion, reducing the debt by a miniscule 1.44 percent.

If Republicans fail to increase revenues, “sequestration” – automatic spending cuts – will go into effect, cutting up to $1.2 trillion from federal spending over the next 10 years. These cuts, we are told, will slash essential programs “across the board.”

BUNK

In reality, sequestration is not a spending cut at all, but a slight reduction in the growth of spending.

In the worst-case scenario, cutting $1.2 trillion over 10 years means cutting $120 billion from each year’s spending over a decade. Without sequestration, the Obama White House projects that federal spending in 2017 will exceed $4.5 trillion  – some $736 billion (19 percent) more than 2012’s $3.8 trillion budget.

Cutting $120 billion from each year’s budget means that, under sequestration, federal spending in 2013 will still exceed $3.68 trillion – $80 billion more than in 2011! Moreover, federal spending five years hence will still be about $4.4 trillion – some $616 billion (16 percent) more than today. The effect of the sequester will be not to cut spending, but to reduce spending growth by just 3 points over this period – from about 19.4 percent to 16 percent.

At least one part of the government will see actual spending cuts. Sequestration will not be distributed evenly throughout the budget: Fully half of sequestered funds will be taken from Defense, which makes up less than 18 percent of the budget.

Even without sequestration, the Obama administration projects that Defense spending will decline by about $127 billion (about 18 percent) by 2017. Meanwhile, non-Defense spending (the other 82 percent of the budget) will increase by $863 billion (28 percent).

Cutting 50 percent of sequestered funds ($60 billion) from each side (Defense and non-Defense spending alike) each year means that Defense spending will fall $187 billion (26 percent) by 2017, while non-Defense spending – even after sequestration – will rise by $803 billion (26 percent).

So under sequestration, Defense spending by 2017 will fall an additional 8 points, to 26 percent less than 2012, while non-Defense spending continues to grow, rising 26 percent. In inverse symmetry, Defense spending will fall 26.08 percent, while non-Defense spending will rise by 26.08 percent.

The purpose of these cuts is to reduce the deficit. To avoid these cuts, Republicans are under pressure to allow the Bush tax cuts of 2003 to expire for high earners.

Since those tax cuts were enacted, the federal budget deficit has more than tripled, from about $378 billion to more than $1.3 trillion. This rising deficit, according to the president, is directly due to these tax cuts. By reducing tax rates, he says, these cuts reduced tax revenues.

In reality, this rising deficit has been driven not by falling revenues, but by increasing spending. According to Obama’s own Office of Management and Budget, since these tax cuts went into effect, federal revenues have not decreased, but actually increased by some $686 billion – about 39 percent. The problem is that federal spending has increased more than twice as much, by some $1.6 trillion – about 76 percent.

Since the budget deficit is not a revenue problem, but a spending problem, it makes sense that deficit reduction should focus on spending cuts, rather than tax hikes. Allowing the Bush tax cuts to expire will not address the underlying problem of exploding spending; allowing sequestration to occur just might be a start toward long-term sustainability.

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