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Sunday, December 16, 2007

How Will You Pay for That Free Lunch?

The CBO has this graph featured on its website:

Federal Spending (Percentage of gross domestic product)

The graph identifies the main source of the projected growth in our fiscal imbalance, health care costs (and it's mainly the growth in costs, not the baby boom retirement wave, though demographics do play a role). The CBO report says:

The rise in health care spending is the largest contributor to the growth projected for federal spending. Therefore, efforts to reduce overall government spending will require potentially painful actions to slow the rise of health care costs. There may be ways, however, in which policymakers can reduce costs without harming the health of Medicare and Medicaid beneficiaries. Changing those programs in ways that reduce the growth of costs—which will be difficult, in part because of the complexity of health policy choices—is ultimately the nation’s central long-term challenge in setting federal fiscal policy.

Given the magnitude and importance of the budget problem, why are some politicians proposing tax cuts that will make the problem even worse?:

The Republicans’ Expensive Tax Promise, by Tom Redburn, NY Times: For decades, ever since Ronald Reagan was elected in 1980, promising to cut taxes has been an essential element of every successful Republican campaign for the presidency. ...

But there is a crucial twist to the campaign this time around. All of the Republican candidates have pledged to extend President Bush’s tax cuts from the early 1990s beyond their scheduled expiration in 2010. That promise, however, does not carry the same weight as in the past.

That’s because, rather than delivering any additional benefit..., carrying out such a pledge would do nothing more than maintain the status quo. Nobody’s taxes would be cut further... There’s not as much political payoff in that.

And preventing anybody from being worse off is going to be incredibly costly. ... Simply to extend the Bush tax cuts indefinitely into the future and ... prevent the alternative minimum tax from imposing an increasingly heavy burden on tens of millions of middle-class and upper middle-class taxpayers would cost the government, over the next decade, roughly $2.5 trillion in revenues now expected under current law. And that’s just the beginning.

Even without taking on any additional tasks, merely meeting the government’s existing obligations — mostly to pay for the military and to keep up with the health care and retirement needs of the elderly — would send the budget deficit soaring... [graph]

“The combination of roughly constant revenues and significantly rising expenditures would quickly create an unstable fiscal situation,” the budget office report notes...

How would the Republican candidates deal with this problem? Most say they would try to hold down spending — and cut taxes even more.

Indeed, ... Rudolph W. Giuliani, in a recent op-ed article in The Wall Street Journal, wrote that he was “committed to making the 2001 and 2003 tax cuts permanent, while aiming at still-lower marginal rates. We’ll give the death tax the death penalty... We also need to reduce the corporate tax rate.”

Fred D. Thompson recently unveiled his own tax proposal, which would ... allow taxpayers to choose between paying under the current system or opting for a “flat tax”... The simplified tax system would have just two rates: 10 percent and 25 percent.

The nonpartisan Tax Policy Center analyzed Mr. Thompson’s overall proposal and found that it would “represent, by far, the largest tax cut in history...

Mr. Thompson predicted that the tax cut would largely pay for itself by stimulating economic growth and discouraging tax avoidance. If not, he suggested, any additional savings could be achieved by limiting Social Security benefits.

But the Tax Policy Center report found that ... the Treasury would recover no more than about $1 trillion over the decade, resulting in an overall revenue loss of $5 trillion to $6 trillion. The tax cuts would fall far short of paying for themselves. And nearly all the money, like the earlier rounds of tax cuts this decade, would flow to those at the top of the income ladder.

Meanwhile, Mike Huckabee has proposed yet a third alternative, endorsing the so-called “fair tax,” which vows to replace all federal revenues — income taxes, payroll taxes for Social Security and Medicare, estate taxes, etc. — with a national sales tax on everything except education.

Proponents say that a sales tax rate of 23 percent on just about all goods and services would generate the same revenues as the current system, but tax experts ... say that it would effectively mean raising the cost of everything people buy by at least 30 percent.

And even if such a tax could be practically instituted, it would still not close the fiscal gap that is about to explode over the next few years.

“Campaigns bring out the Santa Claus in politicians,” said Leonard Burman, director of the Tax Policy Center... “But the numbers just don’t add up. By promising more tax cuts than we can afford, they are really misrepresenting the choices the nation faces.” ...

[T]he Republican candidates, by vowing to extend President Bush’s tax cuts, have left themselves with a far bigger fiscal gap to fill. So before the Republicans make any new tax promises, it might help if they first told voters how they plan to pay for the old ones.

    Posted by on Sunday, December 16, 2007 at 12:15 AM in Budget Deficit, Economics, Taxes | Permalink  TrackBack (0)  Comments (22)

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