The 'Growth Fairy' and the Federal Deficit

In August, the Congressional Budget Office projected a $426B federal deficit for fiscal 2015, which ends on September 30. Since the record deficit of $1,412B in 2009, there’s been about a trillion dollars of improvement on the budget -- and almost all of it came after the U.S. House, where budgets originate, was taken over by Republicans in January 2011.

A deficit of $426B, however, is still larger than any before fiscal 2008, when the Pelosi-Reid Congress took over the budget. And not only that, the CBO also projected (see chart on page 69) that after fiscal 2016 the deficit will resume its upward trend and by 2025 be back up above a trillion dollars. Republicans must not let that happen. Now is the time, perhaps the last time, to tackle the deficit.

Assuming static economic growth, there are two ways to get rid of the deficit: Congress can raise taxes to accommodate their spending or they can cut their spending. For fiscal 2015 the CBO projects $3.3T in revenues and $3.7T in outlays (spending). Closing the $426B deficit shortfall could be accomplished by raising revenues (taxes) by 12.9 percent, or by cutting spending by 11.5 percent.

The film Field of Dreams held the promise that “If you build it, they will come.” Some Republicans adhere to a “Field of Dreams Orthodoxy” concerning taxes: “If you [cut rates, revenue] will come.”

Their orthodoxy is built on the “supply-side” idea that cutting tax rates will spur economic growth, resulting in more tax revenue. But, whose tax rates would they cut? Only the top 10 percent of individual income tax filers have effective income tax rates above 10 percent (see first chart).

For several years, the bottom 40 percent of income earners have accounted for no income tax revenue, which is due to refundable tax credits zeroing out what little they pay. But I did a little math recently that leads me to believe that net-net the bottom half of income earners pay no income taxes. For the bottom half, we’ve been practicing supply-side as never before. The entire tax policy of the last 15 years has been to exempt more and more Americans from paying income taxes. So, supply-side dreamers, whose taxes are you going to cut, the hedge fund managers?

Supply-side tax rate cuts made sense 35 years ago when the top income tax rate was 70 percent and the national debt was $1T. But in today’s America, we have a top rate of 39.6 percent and a national debt of $18.3T. (Also note that 35 years ago the bottom half actually paid income taxes.) Republicans must resist the Sirens’ song of “if you cut tax rates, revenue will come.” Republicans should not accept any drop in federal revenue; not even while waiting for economic growth to kick in. We’ve waited long enough.

Some professional politicians think that they can balance the budget without pain for the many by hiking taxes on the few. Such careerists don’t want to cut spending that might mean eliminating the jobs of their constituency: government workers. But we’ve tried tax hikes and we’ve tried tax cuts, and still the feds run huge deficits. What Congress must now do to balance the budget is to cut spending, and that will be painful.

On September 20, National Review ran an excellent little article by Kevin Williamson: “The Question No Candidate Will Answer.” Mr. Williamson delves into the political realities of cutting popular programs, and trots out some of the budget proposals offered up by GOP presidential hopefuls. It’s a colorful article, where adherence to “self-financing tax cuts” is like believing in “the Growth Fairy”:

A broad and deep program of entitlement reform would be a national game-changer, a radical improvement in the credibility of our public finances. Of course, the populist Right, which is in the end barely distinguishable from the populist Left, detests Social Security reform, because it [the populist Right] is in reality another welfare-state interest group, one that has convinced itself that all that extravagant New Deal and Great Society statism would be just peachy if it weren’t for all the damned dirty foreigners.

Entitlements account for most of federal spending, with Social Security and Medicare taking up the lion’s share. But retirees aren’t going to be amenable to cuts in their benefits unless the rest of the federal government has already gone under the knife. To prepare the ground for entitlement reform, budget cutters need to wade into the “discretionary” budget and spill its blood; no program should be held sacred and untouchable. Entire departments, such as Education, should be up for elimination. Only when discretionary spending has been cut significantly will the American people agree to a cut in their federal benefits.

Careerist politicians admit that the debt is a problem, but think it won’t start affecting us for a decade or longer. I think they’re mistaken, because most of the federal debt is in the form of Treasury notes, not bonds. Since the longest term for a T-note is 10 years, the trillion-dollar deficits from 2009-2012 will come due long before the “Spending Fairy” at the New York Times would have us believe.

The downsizing of the federal government should be so dramatic that it affects real estate prices in D.C. And there should be no state dinners for foreign dignitaries and potentates, no pomp and circumstance, and no Kennedy Center galas until we have a real balanced budget.

Jon N. Hall is a programmer/analyst from Kansas City. 

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