August 2011

A Spending Problem, Not a Tax Problem

By John Hendrickson

The “summer recovery” that was predicted by President Barack Obama and Democrats in Congress has failed to emerge. Recovery from the “Great Recession” continues on a slow pace and unemployment remains a high 9.2 percent. Businesses are uncertain because of the policies that are emerging from President Obama and Democrats in Congress. The massive increase in regulation, class warfare rhetoric, and the Patient Protection and Affordable Care Act (Obamacare) have caused economic uncertainty in the private sector. Businesses are also uncertain over the current debt-ceiling debate. The national debt has hit its ceiling at over $14 trillion and the federal budget has been running trillion dollar deficits over the past few years — a trend that is expected to continue unless spending is reformed. President Obama and Democrats are calling for not only additional stimulus spending, but also tax increases in solving the debt crisis. The solution to economic growth and reducing the debt rests in cutting federal spending and reducing and reforming the tax code.

Contrary to the progressive and liberal argument that taxes need to be raised in order to solve the debt crisis, policymakers must consider how much government spending has increased over the past several years. Chris Edwards, Director of Tax Policy Studies at the Cato Institute, recently wrote:

Federal spending has soared over the past decade. As a share of Gross Domestic Product, spending grew from 18 percent in 2001 to 24 percent in 2011. The causes of this expansion include the costs of wars, growing entitlement programs, the 2009 stimulus bill, and rising spending on discretionary programs such as education.[1]

Federal spending is projected to continue to grow unless reformed. The nation has reached the high-water mark of the welfare state. Edwards notes that the Congressional Budget Office is projecting “spending growing to 34 percent of GDP by 2035.”[2] Michael Tanner, a Senior Fellow at the Cato Institute, correctly described the debate over the national debt as “whether we will have a limited constitutional government or a European-style social democracy.”[3] Tanner’s point accurately describes the philosophical nature of this debate.

The current policies of stimulus (Keynesian) spending, regulation, and the possibility of tax increases will not result in a stronger economy or even more revenue for the government. The current policies championed by President Obama and Democrats in Congress are simply not working — the proof is the continual high unemployment and business uncertainty. Businesses are uncertain because of the threat of higher taxes, including the expiration of the Bush Tax Cuts, as well as the increase in regulation and massive new programs such as the Patient Protection and Affordable Care Act. Certainly additional stimulus spending programs (some have even suggested a new Works Progress Administration) and placing higher taxes on the “rich” will only result in slower economic growth and the possibility of a double-dip recession.

Public Interest Institute Research Vice-President, Amy Frantz wrote to this extent in her July Tax Education Foundation article, “Can we tax ‘the rich’ enough to pay down the U.S. debt?” Frantz not only provided evidence that the rich already pay a greater share of the tax burden, but she also wrote that “increasing the tax rates for the ‘rich’ will clearly not provide enough funds to make a dent in the debt or deficit, if spending levels remain the same or continue to rise.”[4]

A tax increase, especially in a slow recovery, would be a major policy mistake. “What school of economic thought — Keynesian, supply-side or monetarist — says raising taxes in a slumping economy is the recipe for a return to prosperity? There is no such school, wrote columnist Patrick J. Buchanan.”[5]  “Why, when the whole country is talking about the need to create jobs, would Congress raise taxes on a private productive sector that employs six in seven Americans and is the creator of real jobs, asked Buchanan?”[6]

Economist Thomas Sowell recently wrote that:

The political battles about whether to have high tax rates on people in high income brackets or to instead have “tax cuts for the rich” have been fought out in at least four different administrations in the 20th century — under Presidents Calvin Coolidge, John F. Kennedy, Ronald Reagan, and George W. Bush.[7]

The Presidential administrations as noted above by Sowell — as well as the administration of Warren G. Harding — all handled economic downturns by cutting tax rates and encouraging economic growth and business expansion. Public Interest Institute Policy Studies “How to Return to Normalcy” and “The Harding-Coolidge Path to Prosperity,” demonstrate the successful economic policies of the Harding and Coolidge administrations.[8] President Harding inherited a severe economic depression with 12 percent unemployment and a nation that was suffering from high war-time taxation and debt, and his response was to cut government spending, reduce tax rates, and lesson the regulatory burden on the economy. President Coolidge followed the same policies, which resulted in an era of economic prosperity and economic growth.

The problem is spending rather than revenue. Reducing spending will not only begin the process of solving the debt crisis, but also bring more stability to the economy. This also means that the federal budget process must be reformed to allow for real spending cuts and spending caps. This also includes the need for a balanced budget amendment to restore constitutional limited government. In addition cutting tax rates, such as the corporate tax rate and others, will result in private sector growth and job creation. Significant tax reform would include changing to a flat tax system or a national sales tax system (FAIR Tax). “America’s job creators want certainty and confidence in the economy — which requires a credible plan to cut spending, prevent future tax hikes, and reassure our creditors that we’re restoring fiscal discipline,” wrote Republican budget leaders Senator Jeff Sessions and Representative Paul Ryan.[9]

“As the government expands further, it engages in less productive activities,” wrote Edwards.[10] Policymakers need to return back to constitutional limited government policies in order to solve the debt crisis and return economic prosperity. This will also include reforming the welfare state entitlement programs. Both spending reductions and entitlement reforms will be difficult challenges, but some policymakers are offering solutions. Representative Paul Ryan’s “The Path to Prosperity” 2012 budget blueprint is one example of a serious policy proposal not only to reduce spending, but also reform entitlement programs, especially Medicare.

The debt crisis is a spending problem and tax increases will not only fail to raise enough revenue to pay for all the spending, but in the process actually hurt revenue and damage the economy. Only by cutting spending and actually reducing the size of government will the debt crisis be solved. Most likely Congress will raise the debt ceiling, but if policymakers give in to the Democrat demand for tax increases and fail to reduce spending and the size of government, the problem will only worsen. “The real fiscal Armageddon that this country faces comes not from a delay in raising the debt ceiling, but from out-of-control federal spending and government debt,” wrote Tanner.[11]

John R. Hendrickson is a Research Analyst 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] Chris Edwards, “Federal Spending Doesn’t Work,” Cato Institute, July 5, 2011, Washington, D.C., <http://www.cato.org/pub_display.php?pub_id=13261> accessed on July 7, 2011.

[2] Ibid.

[3] Michael D. Tanner, “How to Get Real Spending Cuts,” Cato Institute, July 6, 2011, Washington, D.C., <http://www.cato.org/pub_display.php?pub_id=13284> accessed on July 8, 2011.

[4] Amy K. Frantz, “Can We Tax ‘The Rich’ Enough to Pay Down the U.S. Debt?” July 2011, Tax Education Foundation, <http://www.taxeducationfoundation.org/> accessed on July 13, 2011.

[5] Patrick J. Buchanan, “An Establishment in Panic,” Creators Syndicate, July 8, 2011, <http://www.creators.com/conservative/pat-buchanan.html> accessed on July 8, 2011.

[6] Ibid.

[7] Thomas Sowell, “Politics vs. Reality,” National Review Online, July 5, 2011, <http://www.nationalreview.com/articles/271038/politics-vs-reality-thomas-sowell> accessed on July 5, 2011.

[8] Both Policy Studies can be found on Public Interest Institute’s website, www.LimitedGovernment.Org.

[9] Jeff Sessions and Paul Ryan, “Jobs and Punting of Responsibility,” National Review Online, July 8, 2011, <http://www.nationalreview.com/corner/271366/jobs-and-punting-responsibility-jeff-sessions> accessed on July 8, 2011.

[10] Edwards.

[11] Michael D. Tanner, “What the Debt Ceiling Really Means,” Cato Institute, July 11, 2011, Washington, D.C., <http://www.cato.org/pub_display.php?pub_id=13339>  accessed on July 11, 2011.