Pethokoukis

Math is hard: Why spending, not tax revenue, is the big problem

11.30.12 FRED Expenditures vs Receipts

OK, so Team Obama is proposing $4 trillion in debt reduction. About $1.6 trillion would come immediately via tax hikes — both higher rates and lower deductions — from wealthier Americans. So based on that, this plan is roughly 60% spending cuts, 40% tax hikes. Balance?

But wait, there’s more.

The Obama plan includes $1 trillion in war spending that wasn’t ever going to happen. Phony cuts. So now the package is 53% tax hikes, 47% spending cuts.

But wait, there’s more.

Of that 47% in spending cuts, about $1.4 trillion, $1.2 trillion would be from the already announced sequester (which Obama wants to delay a year) and $400 billion in savings over ten years from Medicare and other entitlement programs. Also figure about $500 billion in reduced debt service.

At the same time, the president wants some new spending: a $50 billion stimulus package, a mass refi mortgage proposal, a $30 billion extension of unemployment insurance, a $25 billion Medicare physician payment patch. And on the tax front, AMT and business tax extenders ($236 billion), and a payroll tax extension or some alternative policy ($110 billion.)

Now here’s some of what a decent — though hardly ideal — Obama plan would have:

1. At least 5-1 spending cuts vs. tax hikes (assuming you think it’s smart to raise any taxes in such a weak economy).

2. Raising investment taxes no higher than the 1990s 20% Clinton-Gingrich rates.

3. Leaving marginal rates where they are while scaling back deductions.

5. Structural entitlement reform.

The Obama plan is deficient on all fronts, and hardly a sound foundation for bipartisan compromise. Rather, it’s a recipe for EU-style, tax-hike austerity.

But what if a) all the Bush tax cuts and other expiring tax provisions — other than the payroll tax reduction) were extended, and b) the AMT were indexed for inflation?

Well, the CBO sees tax revenue as a share GDP climbing back to its 1960-2010 average of 18% by 2015-16 and then climbing to 18.6% by 2022. More tax revenue through higher growth. But above-average tax revenues + above average spending = above average deficits.

Once again, spending is the big problem, not revenue.

 

7 thoughts on “Math is hard: Why spending, not tax revenue, is the big problem

  1. by James Pethokoukis

    “OK, so Team Obama is proposing $4 trillion in debt reduction. About $1.6 trillion would come immediately via tax hikes — both higher rates and lower deductions — from wealthier Americans. So based on that, this plan is roughly 60% spending cuts, 40% tax hikes. Balance?”

    Pity the GOP whackjobs couldn’t accept the compromises the President made last August- the split was 83% cuts, and 17% revenue. But because of a piddling increase of 4.9% on less than 4% of the population, it was deemed by the GOP as the equivalent of the renunciation of the Virgin Birth.

    Now, politically, the GOP is at sea. But it doesn’t act like it.

    So why don’t you just get in line and do what the American people voted the President in office to do?

    • Maxiee boy,
      You must have an inferiority complex and some kind of mental retardation; really.
      “…it was deemed by the GOP as the equivalent of the renunciation of the Virgin Birth.”
      Are you a Mark Alan Siegel follower?

  2. Counting is hard too! Just kidding, great post, but Obama’s plan is missing WAY more than just #4, and the Dims (sic) don’t really have a plan, and the GOP is in control of the purse strings….oh, you get it. None of this stuff matters much when the two wolves get together with the sheep for lunch and so on.

  3. Well,no. Consumer debt (and dampened demand) is the big problem. The housing bust wiped out $7 trillion in home equity and submerged roughly one third of all mortgages (i.e. the house is worth less than the note on it.) Unlike the $13 trillion in federal debt, households have no way to print more money and zero options if sh*t happens. Needless to say, consumers are hunkered down, and business is sitting on $1 trillion in cash because they can’t see any demand in the future. Agreeing on ANY cliff climbdown would go along way to reassuring business, if not consumers. The last thing we need is more supply side BS. Been there. Done that .It doesn’t work.

  4. what happened to the 2% payroll tax expiration?

    that’s about 100 billion….

    is the GOP “concerned” about the tax increases on folks paying into FICA?

  5. One cannot help but see the unfortunate prediction of Alexis de Tocqueville coming to fruition in this chart:

    “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”

    As of this morning, $16.3 trillion in bribes have been paid according to the Associated Press in its tabulation of Federal Government debt outstanding.

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