Still More Bad News for the Liberal Democrat Naysayers

Spending is the real cause of the budget deficit

By Lawrence Hunter
The Hill

Contrary to popular belief, the federal budget deficit is not out of control — yet. And to the extent it is projected to spiral out of control in the coming decades, it is totally because of a projected explosion in federal spending, not any deficiency of federal revenue.

Right now, the federal government is awash in money. Just last week, the Treasury Department reported that total revenue in fiscal year 2005 was up $275 billion, a 14.6 percent increase over 2004.

Let that sink in for a minute. During a period when inflation has averaged just over 3 percent, federal revenue went up 14.6 percent. Wouldn’t you have appreciated having a 14.6 percent raise last year?

Even more important, of that $275 billion in new federal revenue a full $207 billion came from higher income-tax revenue.

Why is that important? Because for the past several years the Bush administration has cut income-tax rates in various ways — through eliminating the estate tax, through cutting taxes on dividend income, through reducing the marriage penalty. And, despite those tax cuts, federal income-tax revenue rose — substantially.

The reason the Bush administration (and supply-siders in general) argues in favor of cutting taxes on work, saving and investment is the belief that low taxes generate faster economic growth, which in turn will raise revenues.

The statistics cited above, as well as the entire economic experience in the United States of the past 25 years, proves that the supply-side assumption is true.

But the converse is true as well, although most liberal politicians simply refuse to acknowledge the obvious: Raising tax rates will fail to translate into higher revenues and in fact would result in lower revenues over the long run.

Even the patron saint of liberal economists and politicians, John Maynard Keynes, argued that as a general rule tax rates should not exceed 25 percent. By Keynes’s standard, there is still a lot of cutting to do, since the current top marginal tax rate on income is somewhere in the neighborhood of 45-50 percent when the full panoply of state, local and federal taxes is taken into account.

But even supply-siders realize that, while the tax cuts have done their job and further lowering of tax rates is necessary, tax cuts alone will be insufficient to keep the deficit from exploding. Even a faster growing economy and the resultant increase in revenues will not solve the long-run deficit problem if Congress does not immediately put in place the mechanisms to slow the growth of federal spending to something approaching the annual growth rate of the economy.

There is a coming deficit crisis if Congress doesn’t take action to avert it. But the crisis is one of big government — spending out of control — not a deficiency in federal revenue. The Congressional Budget Office (CBO) projects that, by midcentury, federal spending will explode from its current level of about 20 percent of gross domestic product (GDP) to 34 percent.

But liberal politicians don’t want the Bush tax cuts to be made permanent, and they certainly don’t want even further tax cuts. Despite the clear evidence of the wisdom of tax cuts, liberals are arguing for increased and even new taxes to deal with the deficit.

But even using the government’s own flawed revenue-estimating model, the CBO projects that repealing the Bush tax cuts will only raise revenues to about 25 percent of GDP, a full 14 points short of what would be required to eliminate projected deficits. In other words, no matter how fast the federal money machine pumps out new revenue, it won’t be enough to cover the tremendous projected increases in federal spending.

The only solution to the coming federal deficit disaster is to control spending, and that means not only reforming a federal budget process that allows Congress to spend as much money as it wants without any restrictions but also reforming the biggest drivers of the deficit disaster scenario: Medicare, Medicaid and Social Security.

Now I am no fan of the Congressional Republican's and the President's spending habits, but here once again for you Liberal Democrats, is proof positive that tax-cuts always generate increased revenues. We do not have a deficit because we don't tax the American wage-earner enought, we have a deficit because our government is spending too much money. Pure and simple.

Original Post: Budget Deficit Binge

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