Both Tax Plans Will Add to the Deficit -- And Our Problems

From the Tax Policy Center:

Both John McCain and Barack Obama have proposed tax plans that would substantially increase the national debt over the next ten years, according to a newly updated analysis by the non-partisan Tax Policy Center. Compared to current law, TPC estimates the Obama plan would cut taxes by $2.9 trillion from 2009-2018. McCain would reduce taxes by nearly $4.2 trillion. Obama would give larger tax cuts to low- and moderate-income households and pay some of the cost by raising taxes on high-income taxpayers. In contrast, McCain would cut taxes across the board and give the biggest cuts to the highest-income households.

.....

Neither candidate's plan would significantly increase economic growth unless offset by spending cuts or tax increases that the campaigns have not specified.

For those of you who are unfamiliar with the Tax Policy Center, it is a joint effort by the Brookings Institution and Urban Institute. They have consistently done very good policy work.

Now -- here are some basic overviews of the individual plans.

Despite not working as advertised under Reagan and Bush II, McCain is adopting a supply side cut of corporate taxes from 35% to 25%, and making all cuts from 2001 and 2003 permanent. He would lower the estate tax to 15% with a $5 million dollar exemption.

The Obama plan would reduce taxes for low and moderate income families, but raise them significantly for high-bracket taxpayers. By 2012, middle-income taxpayers would see their after-tax income rise by about 5%...Those in the top 1% would face a....1.5% reduction in after tax income.

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The end result of both plans is a loss of revenue for the years 2009 - 2013 of $1.4 trillion under McCain and a loss of $966.7 billion under Obama.

Here's the basic problem with the plans. No one is talking about specific spending cuts. And spending has really increased over the last 8 years. According to the Congressional Budget Office discretionary spending totaled $649 billion in 2001 and $1.041 trillion in 2007 for an increase of 60%. At the same time revenue increased from $1.9 trillion to $2.5 trillion -- an increase of 31%. As a result, the US government has issued over $500 billion dollars of net new debt per year since 2003:

09/30/2007 $9,007,653,372,262.48
09/30/2006 $8,506,973,899,215.23
09/30/2005 $7,932,709,661,723.50
09/30/2004 $7,379,052,696,330.32
09/30/2003 $6,783,231,062,743.62
09/30/2002 $6,228,235,965,597.16
09/30/2001 $5,807,463,412,200.06
09/30/2000 $5,674,178,209,886.86

Total debt outstanding is now $9,618,645,199,394.09.

The Republicans fiscally jumped the shark a long time ago. Under Reagan we saw debt balloon from a little over 30% of GDP to a little over 60% of GDP. Under Bush II we've seen the total increase from about 57%/GDP to about 64%/GDP, yet they continue to push their "supply side" theory under the psychotic belief that repeating a behavior proven not to work will somehow work if they just try it again. In addition, no Republican administration has come close to balancing a budget in the last 25 years. So please -- if you're a Republican and you believe the supply-side garbage (along with the statement that Republicans are "fiscally responsible") please -- just don't talk. I have better things to listen to.

However, the Democrats are beginning to move into dangerous ground as well. Clinton balanced the budget in 8 years, yet he is still pilloried for his other problems. Then the Republicans came into power and they spent more money on their constituency then anyone thought was possible. Now the Democrats want their turn at Washington's feeding trough. To that end, we've seen an increasing justification for massive Washington spending. Add to that an economy in a recession with little possibility of solid growth ahead and the impetus to spend big increases.

The problem with this theory is the dollar. Here is a 30 year chart of the dollar:

Notice the dollar is near its lowest level in 30 years. Also notice the dollar dropped in value during the latest expansion, which is extremely odd behavior. When an economy is expanding the country's currency should increase because a growing economy attracts investors which in turn should bid up the country's currency. But the dollar fell. The primary reason for the drop was the US economy was issuing debt like it was going out of style, indicating the possibility of the US actually paying back its debt was decreasing, which in turn makes the US dollar less attractive. This has led to a host of problems, not the least of which is spiking commodity prices. Because commodities are priced in dollars, a drop in the dollar is a de facto increase in commodity prices. A long-term drop in the dollar is an invitation to inflationary pressures that hurt everyone (been to the gas station lately?).

The point to all of this is the US can't go on a major spending spree right now without seriously risking the dollar dropping further leading to another round of commodity price spikes. It may be that the dollar doesn't drop. But the possibility of the dollar dropping more is pretty high.

As a result, it is imperative for Washington to get the national checkbook under control. We've spent the last 8 years not making tough choices that need to be made. Now we have two presidential hopefuls who would continue that trend. If this trend continues, the market will make our choice for us by sending the dollar lower and spiking commodities further. And that is something no one wants in any way shape or form.

Comments

[riverhippie]

We, as a nation, need to declare bankruptcy and star over. Sorry China, Japan, Saudi Arabia, but we can't pay you.

[walk0nwalls]

It's because in order to ensure the dominance or at least the persistence of the great American experience in the upcoming century Americans must do what they like least to do, like least to hear about and politicians like least to say, and that is sacrifice.

In WWII, the concept of sacrificing for the benefit of the nation was commonplace, largely considered patriotic. Nowadays nobody wants to hear it, least of all any politicans hoping to run for office. In an environment such as this, it becomes a saddening inevitability that this experiment has run its course, and after some 200 years of existence we can begin to see the end signs of the great American project. For all its falsehoods and flaws, the ideals it represented to the world still provided - however briefly - an example and aspiration for the better part of human nature.

Because we, the American people have been divided by politics, desire, and greed, our nation shall fall. And so the world shall remember us.

[ElkoJohn]

`
great post

the Dems know the voters want Happy Talk, ya know, HOPE, CHANGE, HOPE
and a little ego stroking . . . ''you voters will be just awesome for voting democratic''

what ??
what 10.6-TRILLION DOLLAR DEFICIT ??
what 500-BILLION DOLLAR DEFICIT for 2009 ??
what 2-years of a Democratic Congress giving Bush everything he wanted ??

so the Dems will cut taxes, BUT NOT gov't. spending
and give us new Federal Programs for everybody

and the deficit keeps ticking . . .
11-TRILLION, 12-TRILLION . . .
& whose gonna pay the Piper ??
maybe your great-grand children
but not the Dems, not the Repubs
not the Repub.LIE-cratic parties

business as usual
business as usual
business as usual
`

[jhNY]

Democracies begin to fail when the politically powerful (and in troubled times, this can include a mass of voters) write themselves checks or tax breaks. Lather and repeat. Eventually, the checks are backed by borrowed money. Eventually, nobody votes to pay back the debt. And here we are.

[Brainoverbraun]

Obama is the new great black hope but even he doesn't have the cahones to tell the American public the truth about their debt situation. You guys have to get serious and start paying for the services you currently enjoy and want to think about for the future (like a proper educational system or health care). The only way to do that is to raise taxes. Maybe people will have to start making some hard choices about what is more important in their lives...a new flat screen TV or education for their children.

You have all been living on the futures of your children....they are the ones who will pay for your folly. Maybe it's time to grow up and deal with your reality...the one on the books....instead of the fantasy of never ending credit you have all been enjoying.

Just a thought.

[Doofus]

Aside from the expected 'automatic vote generation', what's the point of Obama's middle-class
tax cuts? I can appreciate that increasing upper-income taxes to generate revenue makes
sense, as does reducing low-income taxes to reduce poverty, but it's possible (for people
such as me) that income taxes for those in the middle are 'just about right'. I'm not going
to be offended or disturbed if the impending tax cuts from whoever gets to be President
don't change my taxes.

It seems to be a given that 'mandated expenses' for social programs consume most of
the national budget, with military expenditures also taking a huge bite. What has to come
down for sure is military costs. It has to be done, but I'm fairly sure that no one in Washington
is thrilled to make this happen. Probably something similar has to happen to social program
expenditures also, but let's start with the military. That's going to have to include a lot of
expensive science programs also (& that means NASA, unfortunately) & various high-end
research programs. Since it looks like, at some point soon, we are actually going to be broke
or close to it. Got to be done, people.

[jhNY]

If you made a pie chart of expenditures, you'd see the military is gobbling up a monster share of the pie. And as for entitlements, you've got nothing to worry about, at least where social security is concerned-- there's a lockbox filled to the brim with treasury bonds, which as Yogi says, are almost as good as money!

[Doofus]

Last time I looked, not that recently, social expenditures (health/MediCare, welfare,
social security, etc.) were the biggest piece, but mostly 'mandated', meaning that
they supposedly cannot be reduced, by law. That's your 'lock box'. Such costs, even
Social Security, come out of general revenue, not out of any government stash.
Defense/military spending is far higher in the US than anywhere else in the world,
as a portion of the total budget, either as a percentage or the absolute amount,
which befits the 'last of the superpowers', if not 'the world's largest economy'. (Sure
it does!) And of course, interest on the National Debt is another increasingly large
part of the budget.

It's interesting in an unpleasant sort of way that FICA (social security payroll taxes)
are about the most regressive tax around, aren't actually used to pay benefits, and
won't even come close to covering the actual expenditures required IN THE
FUTURE, though FOR NOW are lower than actual expenditures. But that's a different problem.

On the other hand, we still have a huge GDP/GNP, so arguably all this debt just
doesn't matter *that* much. Our children's children will handle it.

[john456]

The problem is that military expenditures are spread throughout the country and provide many if not most of the living wage manufacturing jobs. I becomes political suicide to cut them. Lieberman maintained his position by taking New London off the BRAC and getting Electric Boat another submarine contract.

[Doofus]

Yes, this is true all over the country. Ted Kennedy (gotta love him) gets the
AF to buy jet engines they don't want to keep jobs in Massachusetts. Susan
Collins, senator from Maine, gets the Navy to keep buying expensive new
destroyers they don't want, which are built in Maine. (Well, maybe they do
want them, but the new ships are just too damn expensive, which the Navy
seems to admit.)

It's got to stop. Yes, it's part of the problem that large parts of our industrial
capacity, our manufacturing base (or what's left of it), builds ARMAMENTS.
This is what Eisenhower warned US about.

[UnbiasView]

Why do people decide that taxes up or down are the make or break reason for a large deficit?

Government spending is out of control and all government wants to do is keep growing. Just wait to universal health care and other programs are brought into the mix.

[MrTessier]

Good down to earth explanation of the problems we face. I agree that something needs to be changed. I'd love to get a true fiscal conservative in the presidency, but I'm not naive to the consequences. To ballance the budget, we will have to sacrifice a lot of lives. Trimming the fat won't come close to restoring our fiscal responsibility. We would have to cut programs that are keeping folks alive. I ended up falling in line with Obama that right now is not the time to do that. We want and can limit federal spending, but doing it during a recession is a very dangerous move. McCain's policies didn't make any sense to me, but I'm not an economist. Maybe cutting the corporate tax rate will generate an economic boom, but in doing so, it seems we would put ourselves into an even bigger hole. What would you suggest the solution to all of this is? Cuts to the major programs (Welfare, Medicare/Medicaid, Social Security) are going to cost lives and I don't know if we're willing to do that.

[UnbiasView]

"I'd love to get a true fiscal conservative in the presidency"

Then why would you vote Democrat or Republican?

Neither plans on hitting the root of the problem, government spending and Obama with universal healthcare, free college, etc. is going to end us.

[scooperss]

Stuck on R and D aren't they?

[DuganS1]

Debt went up from $5.7 to $9 trillion during Bush's tenure but GDP also went up substantially from 9.6 to14.26 trillion, so growth compensated for a large part of the increase in debt. Regarding supply side, Reagan tax cuts were mitigated by unfriendly monetary policy (Volker increased rates dramatically in beginning of Reagan's first term) and Democrats weren't friend towards his spending cuts. Government revenues did go up dramatically from mid-1983 on. George H.W Bush suffered from a very unfriendly Fed that kept rates high through his entire term. Clinton, in contrast, was helped from 1996 by a tremendously friendly fed, a Republican congress that cut virtually all Clinton's spending proposals, and Y2K where a huge amount of money ($40b) was pumped into the system. George W's economy has mostly been held back by the war and Homeland Security spending. If 9/11 didn't happen, George W would have certainly seen budget surpluses in 2006 and 2007, maybe 2005. At any rate, the budget deficits were very small in all three of those years and interest rates have been so low that payments on the national debt make up the smallest part of the US budget since 1980, when Carter was President. Supply side works.

[Bonddad]

Please.

1.) The median GDP quarterly growth rate was 3.85% under Reagan, 3.4% under Clinton and 2.7% under Bush.

2.) Tax revenues increase from $297 billion in 1982 to $466 billion in 1990. But the GDP price deflator increased from 61.55 to 84.762. That's a 70.36% increase in revenue vs. a 37% increase in inflation. Half your gain is gone

3.) Revenues increased from $467 billion in 1991 to $994.3 billion, for an increase of 112%. At the same time the GDP price deflator increased from 83.626 to 103.191 or an increase of 23%. And Clinton raised the top marginal rate.

4.) "The Fed was hostile to Reagan". And if a bullfrog had wings, he wouldn't bump his butt on the ground when he hopped. Great justification for trying a debt-inducing policy again, but I'd rather keep the dollar stable (in addition to the economy as a whole).

[DuganS1]

The dollar increased in value significantly from 1982 thru 1984, to the point that the US made an agreement with Germany and Japan to make a concerted effort to bring the value of the dollar back down. The end of the 80s saw an export explosion following that devaluation of the dollar. Right now we're seeing the same thing. We saw the dollar strengthen significantly and to unsustainable levels in the late 90s to 2001, then we had to devalue to remain competitive. Right now we're seeing a huge export boom and booming profits from corporation operations overseas (50%+ of S&P 500 profits are now earned overseas). As for the Fed being hostile to Reagan, Volker increased the discount rate to 14%. It was only 3% in the first two years of Clinton's Presidency and 4.5% in 1999.

[joebhed]

NOTHING has changed since Wright Patman, Former House Banking and Currency Committee Chairman for 16 years criticized the National Debt creation process:

"I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money....I believe the time will come when people will demand that this be changed.
I believe the time will come in this country when they will actually blame you and me and everyone else connected with the Congress for sitting idly by and permitting such an idiotic system to continue."

SIXTEEN YEARS as Chair of the Banking Committee !

Look at all the bigwigs at Jackson Hole.

Among ALL of them , they don't see any options to doing exactly what Obama and McCain must do.

You know my solution.

Implement the Chicago Plan.

Put the government in charge of creating the nation's money supply through issuance of "credits" rather than through issuance of private debts.

Restore our Constitutional rights to a debt-free money supply.

The coming crash of the global economy has associated with it the gravest threats to both security and the environment.

I saw a recent confirmation that our national debt obligations, both public and consumer, are over $50 TRILLION.

Public, debt-free credits, substituting in quality and quantity for debt-money, is the only answer.

[zizyphus]

That sounds like a better plan. How long before the populace wakes up to it?

Plus, trim the horrific military budget. The military and intelligence agencies with all their trillions could not even defend our most critical airspaces on 911. Then, they tried to hide the evidence of their ineptitude and corruption from the 911 Commission.

[jhNY]

Somebody higher up must believe that once our indebtedness prevents us from buying whatever we think we need, we'll just have to shoot folks to get it.