Last week the Congressional Budget Office estimated that President Obama’s budget will cost more than first thought, leading to larger deficits than originally forecast. If we hadn’t received the news by now, we need to cut federal spending.
In commentary made available through the Mercatus Center, Antony Davies notes that there are proposals to cut spending, but even proposals by Republicans aren’t enough: “The President initially offered to cut the budget by $6.5 billion, and Republicans responded by asking for 10 times that amount. The truth is, we need 100 times that amount before we come close to balancing the budget. On any given day, the government spends $6.5 billion before lunch.”
The president estimates this year’s deficit at $1,645 billion. The deficit, of course, is not the total amount of federal spending. It’s the part of federal spending that isn’t being paid for by current year revenue.
Spending needs to be cut, but the cuts don’t have to be overwhelming, as liberals contend they must. Jason J. Fichtner writes in The 1 Percent Solution that reducing real federal spending by one percent each year would balance the federal budget by 2016. This requires actual cuts in spending, not just cuts in budget requests.
It seems inconceivable that we can’t cut spending by one percent each year. But if we could hold down the rate of spending growth to one or two percent per year, we could still balance the budget in less than ten years.
Raising taxes won’t work
There are many who call for raising taxes, especially on the rich, as a way to generate more revenue and balance the budget. But try as we might, raising tax rates won’t generate higher revenues (as a percentage of gross domestic product), due to Hauser’s law. W. Kurt Hauser explains in The Wall Street Journal: “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues. Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this ‘Hauser’s Law.’”
People react to changes in tax law. As tax rates rise, people seek to reduce their taxable income, and make investments in unproductive tax shelters. There is less incentive to work and invest. These are some of the reasons why tax hikes usually don’t generate the promised revenue.
The subtitle to Hauser’s article is “Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.”