ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Friday, September 23, 2005

Taxation, Borrowing, & Spending

H/T Ace of Spades

The American Thinker has a great post discussing this NYTimes editorial calling for (surprise, surprise) higher taxes to pay for Katrina (and Rita?) relief. Here are some relevant points:

Cutting taxes for the rich is the most glaring of the wrongheaded reasons to pile debt upon debt. Since 2001, Congress has passed tax and spending legislation totaling $1.7 trillion. Of that total, tax cuts for people who make more than $200,000 a year, the top 3 percent of the income ladder, have accounted for nearly 20 percent - or about $330 billion.

High-end tax cuts were not a wise policy during the shallow recession of Mr. Bush's first term and they're certainly not called for now. Unpaid-for tax cuts only cause more government borrowing. That takes money from government programs and taxpayers of tomorrow and gives it to the rich of today.
The tax-cutting agenda is breaking the bank for our descendants, while impairing our ability to borrow responsibly today. Every dollar that is saved by letting the tax cuts expire as scheduled is one less dollar the nation will need to borrow for Katrina.

A day after his speech from New Orleans, Mr. Bush ruled out tax increases to help pay for Katrina. That's unrealistic. And in any event, letting temporary tax cuts expire on schedule is not a tax increase. It's the law of the land, which Congress wants to change.

Unfortunately for the Times, consistent with most of its reporting, the facts are counter to the conventional wisdom (which they promote on a daily basis). And yes, if tax rates increase (either due to expiration of a previous tax cut or by an overt act of Congress), it is still an increase. The cause for the increase does not change the fact that it's an increase. It seems that the Times still hasn't grasped the fundamentals of math. Perhaps this would come in handy.

It's also important to know that the tax cuts did not cause government borrowing, but over-spending did. From The American Thinker:
[The US was] deep in hock before Katrina – for more than 70 years before. The United States has been consistently in debt since the Depression, and especially since World War II, when it annually borrowed more money than was received as income tax receipts. As a result, debt has been a fiscal reality for the U.S. government for seven decades, and has not once prevented the country from spending money in response to an emergency without necessitating higher taxes.
Tax cuts don’t create debt; overspending does.

Based on current estimates, the federal government will bring in almost $2.2 trillion worth of income tax receipts in fiscal 2005. This is more than it received during the final stock market bubble year of 2000, and is guaranteed at this point to be an all-time high. If Congress spent the same this year as it did in 2000, there would be about a $400 billion surplus. Unfortunately, spending is estimated to be almost $700 billion more this year than in 2000 - a 39 percent increase. As tax receipts are coming in at a record level this year after two economic stimulus packages, it would be devoid of budget acumen to conclude that the projected $330 billion deficit is caused by anything but overspending.

Having gotten to the main course, the Times then evoked a little fear:
“The resulting deficits could create deep economic distress, including higher interest rates, slower economic growth, future tax increases and constraints on the government's ability to be responsive, both to crises and to everyday needs, like health care. Growing deficits also pose a security threat because increasing foreign indebtedness risks eroding the nation's position in the world.”

Deficits don’t lead to higher interest rates

For several decades, economists and policymakers have debated the causal relationship between budget deficits and higher interest rates. As Lawrence Kudlow wrote in the summer 2003 issue of International Economy magazine, “While there may be a link between deficits and rates, it is a very weak link.” Supporting this view is recent history. When Ronald Reagan entered the White House in 1981, the 30-year Treasury bond was paying about 14 percent per year. When he left office in 1989 with significantly higher budget deficits, the 30-year T-bond was paying less than 8 percent.

More recently, as illustrated by this T-bond chart, interest rates actually rose in the budget-surplus years of 1999 and 2000. Yet, as fiscal indiscipline has returned to Capitol Hill along with rising deficits since then, interest rates have not only declined, but to levels not seen in 45 years.

So much for deficits causing interest rates to rise. And so much for the tax increase the New York Times wants to foist on us.

As other members of the VRWC/Rovian Conspiracy have pointed out, tax cuts actual increase federal tax receipts due to the increase in economic growth. The fact that the Times thinks that taxes should have been held constant (or perhaps increased?) during the economic recession in 2001 is indicative of their poor understanding of economics.

Can someone explain to me why it is that the old Gray Lady sets the stage for the news every single day?

Your Co-Conspirator,
ARC: St Wendeler