Strategic Briefing | 7.26.2011 | Taxes & The Budget

Our Real Deficit Problem Has Nothing to Do With Traditional Government
The Atlantic | July 25
In 1960, the last full year of the Eisenhower administration, taxes were 17.8 percent of GDP and primary spending (excluding interest) was 16.4 percent. Social Security took in and paid out 2.2 percent. Medicare didn’t exist. So Everything Else had a primary surplus, with taxes at 15.6 percent and spending at 14.2 percent.
In 2010, in the supposed age of “big government,” spending on Everything Else was only 14.7 percent of GDP, and that was swollen by the recession and stimulus spending. By 2021, according to the CBO’s alternative fiscal scenario (the pessimistic one), spending on Everything Else will be 13.0 percent–less than in 1960. Everything Else tax revenues–that is, everything except the Social Security and Medicare payroll taxes–will be 12.5 percent of GDP, for a primary deficit of only 0.5 percent. And that’s assuming that all of the 2001, 2003, and 2009 tax cuts are extended indefinitely.

Are the Bush Tax Cuts the Root of Our Fiscal Problem?
Bruce Bartlett (NY Times) | July 26
Whether revenue should play any role in deficit reduction is at the root of the fiscal impasse between Congressional Republicans and President Obama. One factor underlying the hard-line Republican position that taxes must not be increased by even $1 is their assertion that the Bush tax cuts played no role in creating our deficit problem… Federal revenue fell in 2001 from 2000, again in 2002 from 2001 and again in 2003 from 2002. Revenue did not get back to its 2000 level until 2005. More important, revenue as a share of G.D.P. was lower every year of the Bush presidency than it was in 2000.
Editorial: Drop Balanced-Budget Amendment — For Now
Investor’s Business Daily | July 25
The balanced-budget amendment has become a major sticking point in deficit talks. We think it’s a great idea. But if it gets in the way of a deal that cuts spending with no tax hikes, we say drop it — at least for now. Republicans seem to have won the debate over taxes and spending. Now, even the Democrats are scrambling to create a plan that at least appears to cut spending but not raise taxes. This is a huge victory for the GOP — and for fiscal responsibility. It has also pushed hard to include a balanced-budget amendment in a deficit-reduction deal. Coupled with spending caps, a BBA has obvious appeal. It would require not only a balancing of the federal government’s books but a gradual shrinking of the government’s size. But while polls show that Americans favor a balanced-budget amendment, Democrats in Congress hate it — and will draw a line in the sand over it.
Call him ‘Drama Obama’
The Hill | July 25
We face a debt crisis largely of Obama’s making. Spending as a percentage of GDP now stands at a startling 25 percent, thanks to Obama’s failed stimulus boondoggle, his healthcare law and just run-of-the-mill spending by Democratic appropriators. Taxes as a percentage of GDP now stand at historic low of 14.4 percent, thanks to a still-sluggish economy made worse by the president signing an extension of the Bush tax cuts. Obama can try to blame Republicans for these tax cuts, but when he had overwhelming majorities in both the House and Senate, he chose to keep those tax cuts in place. Solving this debt crisis requires a math degree, not a degree in drama. It is largely a function of vote-counting (218 in the House, 60 in the Senate) and budget number-crunching (anywhere from $1 trillion to $4 trillion in savings). But instead of looking coldly at the votes and cutting a deal that would pass both chambers, Mr. No-Drama has tried to increase the drama, by putting unnecessary pressure on House Republicans, trying to drive a wedge between John Boehner and Eric Cantor and having dramatic weekend meetings well before the deadline hits.
Norquist: ‘We’re not raising taxes’
Indy Star | July 26
Anti-tax advocate Grover Norquist, who has been called the most powerful unelected person in the nation, said in Indianapolis on Monday that the federal government needs to avoid default by raising the debt ceiling — but only by cutting spending. “If you want two-and-a-half trillion in higher debt ceiling, you’ve got to find two-and-a-half trillion in reduced spending, and we’re not raising taxes,” he insisted. One reason that tax increases are off the table, Norquist said, is because a majority of the U.S. House has signed the anti-tax pledge that his organization, Americans for Tax Reform, has pushed. Norquist, who formed Americans for Tax Reform in 1986, has succeeded in getting numerous politicians nationwide, including 236 members of the U.S. House and 41 U.S. senators, to sign a pledge promising “to oppose and vote against any and all efforts to increase taxes.”
More Data: Debt, and the Origins of Debt
Econobrowser | July 25
I thought it of interest to see the evolution of Federal debt held by the public, and exactly what Administrations were the most spendthrift. Figure 1 highlights the fact that debt-to-GDP began its startling rise in 2008 Q2.
Note that from 2001 Q1 (the beginning of the G.W. Bush Administration) to 2009 Q1 (the beginning of the Obama Administration), debt-to-GDP rose 17 percentage points. From 2009 Q1 to 2011 Q1, a period encompassing the worst recession in the post-War era, that figure rose 13 percentage points.