Gregg’s next objection to the “budget to beggar us” is:
”Instead of tightening Uncle Sam’s belt the way so many American families are cutting back these days, the president’s proposal spends so aggressively that it essentially adds $1 trillion to the debt, on average, every year.
”Except for some accounting gimmicks, the budget makes no attempt to cut wasteful spending or find savings. It ignores reform for major entitlement programs such as Medicare and Social Security, which are on track to cost us $67 trillion more than we have over the next 75 years.”
If I hear the analogy likening the Government to an American family one more time, I’ll scream. How many more years will these Republican war horses try to get the American people to believe this really old piece of nonsense. Does an American family have a printing press? Can an American family get everyone else to accept its currency? Can an American family coerce private economic agents into following reasonable rules of the economic road? Of course, the Government is not like one’s family, and what is rational behavior for a family often makes no sense for a Government. In particular, in hard times, when economic demand is down, it is rational for individuals to spend as little as possible to protect themselves; but it is precisely during these times that it is rational for Government to stimulate demand with more public spending, so that individual reluctance to spend doesn’t result in economic deflation and destruction of national wealth. Economists have known about this paradox since the 1920s, why doesn’t Judd Gregg and his fellow Republicans know about it? Why are they talking about the Government acting like a family, when, instead, it should be acting to save families by providing work and an economic multiplier.
Gregg points out that the Obama Budget doesn’t cut “wasteful spending.” Apart from the fact that it would be very difficult to come to agreement on what wasteful spending is in any reasonable time, and we need to pass a stimulative budget quickly to cope with the downturn, the forecast that entitlement costs will exceed tax revenues by $67 Trillion is one of those fairy stories that people tell when they don’t want to recognize the foolishness of anyone’s really long-term economic forecasts. Small differences in the Social Security Program and Universal Health Care can fix these “problems.” Of course, if Sen. Gregg along with his compatriots insists on opposing cost and quality reforms in the health industry, and refuses, as well, to move towards national health care, then his entitlement problem may well prove real. On the other hand, if we can lower our health care costs to those we see in other industrialized countries, and also make some changes in social security that recognize today’s longer life expectancy, then there will be no $67 Trillion problem 75 years down the road.
Gregg’s next beauty is: “The new spending is coupled with the largest tax increase in U.S. history — $1.5 trillion over 10 years.” Yeah, sure. This is an increase averaging $150 Billion per year, and the only reason why it’s the largest tax increase in history, is because the whole scale of our economy and Government’s part in it is much larger than before on absolute terms; but, even more importantly, because it allows the supposedly “temporary” Bush tax cut for the wealthy, to expire according to the schedule specified in the legislation that passed it. Also, when one looks for perspective on that tax “increase”, it’s plain that we’re looking at an amount that currently is only 1% of GDP and that, assuming moderate growth will be 0.7% in 10 years. Moreover, this tax rise doesn’t begin to restore progressiveness in the tax code. The fact that the maximum tax rate kicks in at the $250,000 level, and that there are no income brackets ending at $500,000, $1,000,000, and $5,000,000 specifying incrementally higher marginal tax rates is a gift for those with really high incomes, and a primary reason why the distribution of wealth in the United States has reached levels of inequality not seen since the 1920s. Clearly, also, this is not the biggest tax increase in American History, except in absolute dollars, the magnitude of which is an artifact of the current size of the economy.
The distinction of implementing the biggest percentage tax increase belongs to Herbert Hoover who raised the top marginal income tax rate from 24% to 63%. Franklin Roosevelt then increased top marginal rates first to 79% and then to 94% during WW II. That rate was lowered to 91% later, where it remained until Lyndon Johnson’s administration when it was reduced to 70%. Beginning in 1981, we’ve seen our marginal tax rates decrease, our society economically stratify, and our deficits increase. It begins with Reagan’s reduction of top marginal tax rates to 50%, and continues with the 1986 bill which lowered the top rate to 28%. Bill Clinton raised that top rate to 39.6% during the ’90s and, for awhile saw deficits decrease as a result. But George W, Bush couldn’t stand prosperity, and cut it to 35% in 2001. Now, Obama wants to allow that “temporary” tax cut to expire, as originally agreed upon by the Republican controlled-congress that passed the bill, restoring the highest marginal rate to 39.6% and suddenly, it’s the biggest tax increase in history.
It gets worse. Gregg’s next insight is: “Who will pay all those taxes? The president says it’s just the rich. But let’s keep in mind that a lot of these “rich” people are actually small-business owners, and small businesses create 70 percent of the new jobs each year. When millions of Americans are out of work, taxing job creators and making it harder to run a business are certainly not the answer.“
I wouldn’t hesitate to “sigh” over this one, except I remember what happened to Al Gore in the 2000 campaign when he did just that. Look, this is one of the most stupid of the Republican talking points, and the Democrats have been letting the Republicans get away with it since the last campaign. Say you’re a small business owner whose income (i.e. salary plus Schedule C profits) is $250,000 per year, and you think you will add $30,000 to your net profit, if you hire two more employees. Under the Bush tax rates, you’d have to pay $10,500 in taxes, leaving you with $19,500 after taxes. Under Obama’s proposed tax rates, you’d pay $11,880, leaving you with $18,120. That’s less, but is it enough to destroy your incentive to hire the two employees? I doubt that very seriously. Let’s say the marginal tax rate on those profits was 50%, then you’d be down to making an additional $15,000 on the deal. Is that enough to remove your incentive? Again I doubt it? The proof of this is to look back to the ’40s and ’50s when marginal tax rates were very high. Did this stop businesses from expanding, or business owners from refusing to hire new employees? Not so anyone noticed. Instead, a much bigger factor in slowing economic growth was flagging demand. It was this problem which the Kennedy-Johnson tax cut of 1964, directed at the working and middle classes was designed to address. Even after the Revenue Act of 1964, the top marginal tax rate remained at 70%, yet there was a wonderful economic recovery in response to that tax cut even though it retained very high marginal tax rates on “small business”.
Sen. Gregg’s next gem is: “since the revenue the government collects still won’t cover all its spending, we will be left with an unsustainable level of debt. Under the president’s budget, the national debt doubles in five years and nearly triples in 10 years. Our debt will exceed 80 percent of GDP by 2019 — the highest level since World War II.”
Well, again, that 10 year forecast is pretty much meaningless, and even the five year forecast is highly questionable since we don’t know how quickly the economy will recover and tax revenues are very sensitive to that little matter. Apart from this, however, even if the debt did climb to 80 percent of GDP, that doesn’t mean it’s unsustainable. It all depends on what the expenditures accounting for the debt produce. If they produce the foundations for a new economy as the Obama Administration intends, it won’t take long to bring the debt to GDP ratio down to the ’50s or ’40s, as the post-WW II experience shows. In short, sustainability of the debt doesn’t depend on whether we raise the Public Debt to GDP ratio to 80% over the next ten years. It depends on how well we spend that investment. If we spend it as Bush did, to make the wealthy wealthier. It will be unsustainable. If we spend it on demand stimulus, energy, education, health care, and reconstructing America, that ratio will, once again, go down.
To Be Continued