Fixing Budget Deficit Means Both Tax Hikes and Spending Cuts

Reader Comments
Back to blog

The idea that the deficit can be reduced by public spending cuts or tax increases is a popular piece of nonsense. The flaw in this idea is that such cuts (and tax increases) raise unemployment, which in turn increases spending on the automatic stabilisers, like unemployment benefit. In fact there is even evidence that public spending cuts actually RAISE public spending! See:
http://www.debtonation.org/wp-content/uploads/2010/06/Fiscal-Consolidation1.pdf
The above bit of nonsense is popular with those who have not grasped the difference between macroeconomics and microeconomics. A microeconomic entity (like a household or business) CAN reduce its deficit by cutting expenditure or raising income. A government which is a macroeconomic entity CANNOT.
But what a government CAN do – at least to cut the structural debt - is simply to reverse the process that brought the debt into being. What brings a structural debt into being is failing to collect enough tax to cover spending. Reversing that consists of, 1, printing money and buying back the debt (i.e. QE), and 2, raising taxes and paying off the creditors. And those tax increases would NOT reduce GDP or total numbers employed as long as the tax increase and QE were pitched at levels such that the demand reducing effect of the tax equalled the demand increasing effect of the QE.
For more details, see here:
http://ralphanomics.blogspot.com/2011/06/fast-fiscal-consolidation-would-not.html

Ralph Musgrave 12:40PM June 26, 2011

We need to get out of this recession, in addition to tax hikes and spending cuts! This country has always grown itself out of economic downturns and to pay off deficits, so getting the economy going and getting people employed should be the first priority.
Deficits didn't matter to Republicans when they created the $10 trillion of our $14 trillion debt. But since its such a big deal to them for political tactics, lets go for it. Ron Paul has been the only GOP to dare call for military budget cuts - we spend more on our military that all the rest of the world combined. So next, eliminating Reagan's and Bush's Tax Cuts for the Rich will get the deficit trend going back in the right direction. In addition let's get some real tax reform, ridding the tax codes with all the loopholes that allow companies and the wealthy to pay no taxes whatsoever.
Yes, I want us all to be taxed equally but that means taxing the rich more. Taxes on the rich are the lowest in fifty years and American corporations pay some of the lowest taxes in the modern industrial world in practice - sure the tax rates look in line, but all the loopholes let companies pay zero effective tax rate. Some of the same conservatives who are so happy to let corporations not pay no taxes yet often are the same ones who want heavy military spending. We spent billions for BP to invade Iraq (apparently that was the bribe to get the UK to join us), and BP makes trillions harvesting our resources, yet BP doesn't contribute a nickel to our Treasury - to the contrary BP is on welfare, collecting checks from the US Govt because of Bush's subsidies to the oil companies.
We all want taxation to be fair and equal but that means taxing the deadbeat corps and the deadbeat rich, both who are the worst leeches on our economy.
There's one more thing we need to do to get rid of the deficit, that's campaign finance reform to get rid of the lobbying profession entirely, which is the biggest tax on our economy and business in the US.

Sam of NV 9:21PM April 24, 2011

First Peter Fenn is a democrat consultant, that should be known to the readers of this article. I think we should start taxing all union dues at 36% that are not used for collective bargaining purposes. PBS and NPR add revenue and residuals from shows should be taxed at 36%.

susan of RI 7:58AM April 23, 2011

I'm not a big fan of the class warfare that is being generated by Obama and his Progressive Marching Band. I don't want the rich to be taxed more; I want us all to be taxed equally. Let's set a single tax rate with the only "loophole" being some minimum amount of money per person that is exempt from taxation. The only other caveat is that everyone has to pay a minimum tax ($100?) so that everyone has skin in the game. That is what equal justice under the law means.
I will bet the number of Congressmen and Senators who would vote for such a tax structure could be counted on the fingers of Ron Paul's hands.
And, of course, handcuff Congress so that they can't use the checkbook!

Jim of MI 6:57PM April 20, 2011

Half of people do not pay IRS taxes.
_____
Says "dumping Bush's tax cuts for the rich."
"Tax cuts for the wealthy increase government revenue."
http://www.taxcutsincreaserevenue.com/
_____
“The Historical Lessons of Lower Tax Rates”
http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates
_____
“Lying About Bush's Tax Cuts”
“According to the non-partisan Congressional Budget Office (CBO), the Bush tax cuts actually shifted the total tax burden farther toward the rich so that in 2000-2004, total income tax paid by the top 40% of income-earners grew by 4.6% to 99.1% of the total”.
http://www.americanthinker.com/2010/03/lying_about_bushs_tax_cuts.html

Bill Hedges of MO 8:59PM April 19, 2011

Little wonder that Congress is tone deaf to the majority of the public that want to raise taxes on the rich, it could be that most in Congress are millionaires and billionaires themselves.
Let's get serious and cut spending by dumping Bush's tax cuts for the rich. Let's close all the tax loopholes that let individuals and corporations get by without paying any taxes at all.
Since taxes now are at a 50 yr low especially for the wealthy (who don't pay any taxes with all their efing loopholes), lets get real and raise some revenue off these real parasites in this country. There is a whole crop the Wall Street dudes who got the bank bailouts so they could get paid their exorbitant bonuses even we their banks collapsed - these guys are leaches, paper shufflers who don't create anything but skim money changing hands between themselves.

Jesse of OK 6:50PM April 19, 2011

Let's institute a Flat Tax similar to that proposed by the Deficit Commission, clamp severe spending restrictions on Congress and move government functions out of the Federal government back to the states and communities that use them.
Of course, given the nature of politicians and the apathy of the citizenry, this will occur sometime after the next Ice Age and long after Progressives have run out of other peoples' money. The parasites (aka Progressives) are working hard to destroy the productive people in this country. Tax the productive people!

Jim of MI 3:27PM April 19, 2011

You might want to actually looks at the official numbers before opening your mouth.
From http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200 ;
The tax receipts under Reagan went up almost 1% between 1983 and 1988 as a percentage of GDP (17.5% to 18.2%) for a dollar increase from 600B to 909B - a 50% increase in both collections and overall GDP.
The deficit went up because Regan ( and the Democrat controlled congress) over-spent the receipts for that time period by 1.1 Trillion.
In the first half of Clinton's term (with the Dems solidly in control in Congress) , receipts rose from 1.154T (1993) to 1.453T (1996) for a 26% increase (and a total deficit spending of 730B), and for the second half (when the Repubs were in control of Congress). the receipts rose to 2.025T - and increase of 39% - but they spent 409B less then they took in.
So, you were saying about the difference between Reagan (and the repubs when they got in control) and Clinton?

junior of DC 3:01PM April 19, 2011

the simple truth both spending reduction and revenue increase,s are need to bring the deficit under control.

bruce b of NV 2:18PM April 19, 2011

You can't just go and print funny money. It only exacerbates the problem and compounds the issue. We've seen other countries take the easy route by printing more money. Think Germany at the end of world war II where people were burnings stacks of Marks to warm themselves. Think Mexico where the peso was once pegged at the dollar and eventually became so devalued as to be completely worthless. Think of Argentina and their money supply woes. This has been a reoccurring theme in South/Central America. Their economies still suffer because they couldn't make the tough choices and went the monopoly money route.
A liberal money supply will devalue the dollars you currently hold. That will severely, adversely impact people's savings. The result, people will convert their currency into the things that do have value . . . property (land), precious/semi-precious metals like gold and silver.
This is a basic economic/finance principle. You have to have good control over the money supply. I firmly hope the central bank keeps politicians at arms length and that it will adhere to good governance over our money supply.
It's a game of musical chairs. When the printing press cranks out devalued notes the music stops. The person holding an arm full of dollars instead of property and metals losses. The effect will hammer other paper currency like stocks and bonds.
Consider where most people carry their wealth. Stocks, Bonds, Banks. Very few, in comparison to the aggregate, own property and precious metals.

david of ID 1:18PM April 19, 2011