December 2010

I’ll Start that Diet Tomorrow!

by Amy K. Frantz

Former Chief of Staff to President Clinton, Erskine Bowles, and former Wyoming Republican Senator Alan Simpson, the co-chairs of President Obama’s National Commission on Fiscal Responsibility and Reform, released a draft proposal last month aimed at reducing the nation’s deficit. The proposal recommends cutting spending, but also suggests eliminating many tax credits and deductions, such as the home-mortgage interest deduction, as well as increasing the gas tax, among other revenue-raising proposals.

Could this proposal be successful in reducing the deficit with a combination of less spending and more tax revenue? Two economists, Stephen Moore of The Wall Street Journal, and Richard Vedder, Ohio University economics professor,  have studied our nation’s past attempts to reduce the deficit through tax increases and are not optimistic.  Moore and Vedder have concluded that “higher taxes won’t reduce the deficit,” instead finding that “over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending.  Politicians spend the money as fast as it comes in – and a little bit more.”[1]

Moore and Vedder describe their research and the results:

We also looked at different time periods (e.g., 1947-2009 vs. 1959-2009), different financial data (fiscal year federal budget data, as well as calendar year National Income and Product Account data from the Bureau of Economic Analysis), different lag structures (e.g., relating taxes one year to spending change the following year to allow for the time it takes bureaucracies to spend money), different control variables, etc. The alternative models produce different estimates of the tax-spend relationship—between $1.05 and $1.81. But no matter how we configured the data and no matter what variables we examined, higher tax collections never resulted in less spending.[2]

From entitlement programs, to stimulus spending, to earmarks for special projects, the federal government cannot get its spending under control, even when tax revenue rises. One other item the federal government has increased spending on lately is the number of federal employees with an annual salary greater than $150,000.  A recent USA Today article brought to light the explosive increase in the number of federal-government workers earning $150,000 or more each year, which “has soared tenfold in the past five years and doubled since President Obama took office.”[3]

In 2005, the federal government had only 7,420 employees earning a salary of $150,000 or greater each year. By this year, 2010, that number had soared to 82,034 employees.  Of those employees in 2010, 16,912 earn a salary of $180,000 or greater, a number up from just 805 employees in 2005.[4]

One of the recommendations in the draft report from the co-chairs of the President’s National Commission on Fiscal Responsibility and Reform is to “freeze federal salaries, bonuses, and other compensation at non-Defense agencies” as well as at the Department of Defense, for three years.[5]  The draft proposal estimates this would cut just over $20 billion from federal spending.

Many of our country’s newly-elected Senators and Representatives campaigned on the need to reduce federal government spending. Will this renewed focus on reducing federal government spending result in a reduction of the federal deficit?  Or will it be closer to those of us who justify that second slice of pumpkin pie on Thanksgiving by proclaiming that we will start that diet tomorrow?  If past actions are repeated in the future, the federal government will be the eternal dieter that keeps putting off the tough choices and hard work until tomorrow.

Amy K. Frantz is Research Vice-President at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.

[1] Stephen Moore and Richard Vedder, “Higher Taxes Won’t Reduce the Deficit,” The Wall Street Journal, November 22, 2010, p. A17.

[2] Ibid.

[3] Dennis Cauchon, “More federal workers’ pay tops $150,000,” USA Today, November 10, 2010, p. 1A.

[4] Ibid.

[5] Erskine Bowles and Alan Simpson, “Co-Chairs’ Proposal,” National Commission on Fiscal Responsibility and Reform, November 2010, 11.10.10 Draft Document, pp. 19-20, <http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/CoChair_Draft.pdf > (November 23, 2010).