The Facts About Spending Cuts, the Debt, and the GDP

Separating economic myths from economic truths

Editor's Note: Reason columnist and Mercatus Center economist Veronique de Rugy appears weekly on Bloomberg TV to separate economic fact from economic myth.

Raising the debt limit might put off a downgrade disaster in August, but that still isn’t enough—as Standard & Poor’s recent warning made clear. Perhaps the most important shot not heard around the world was S&P’s other admonition: Namely, that the U.S. bond rating will be downgraded in three months, if not sooner, unless we do something about government spending. Beyond raising the debt limit, S&P laid out clear criteria for avoiding a downgrade: 1) reduce the debt by about $4 trillion; 2) agree to a credible plan within three months; and 3) guarantee that this newfound fiscal discipline will actually stick.

If S&P isn’t bluffing, then lawmakers should get serious about reducing the debt-to-GDP ratio, and they should do it quickly. But how do we achieve such a task?

Myth 1: You cannot reduce the deficit to an appropriate level without also raising taxes.

Fact 1: Spending cuts are the most effective way to reduce the debt-to-GDP ratio.

We are not the first nation to struggle with a dangerous debt-to-GDP ratio, and thankfully, the academic world has already produced great insights into what can be done to reduce this ratio without hurting the economy.

Take the work of Harvard’s Alberto Alesina and Silvia Ardagna. They examined 107 efforts to reduce the debt in 21 OECD nations between 1970–2007. Their findings suggest that tax cuts are more expansionary than spending increases in the cases of a fiscal stimulus. Also, they found that spending cuts are a more effective way to reduce the debt-to-GDP ratio:

For fiscal adjustments we show that spending cuts are much more effective than tax increases in stabilizing the debt and avoiding economic downturns. In fact, we uncover several episodes in which spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions. We also investigate which components of taxes and spending affect the economy more in these large episodes and we try to uncover channels running through private consumption and/or investment.

As you can see in this chart, in cases of successful fiscal adjustments—defined by the cumulative reduction in debt-to-GDP ratio three years after fiscal adjustment greater than 4.5 percentage points—spending as a share of GDP fell by about 2 percentage points while revenue also fell by half a percentage point (left bars). On the other hand, unsuccessful fiscal adjustment packages—cumulative increases in debt-to-GDP ratio—were made of smaller spending reductions (only 0.8 percentage-point reduction) and large revenue increases (right bars).

The IMF found similar results and reports that fiscal adjustment on the requisite scale of what we need today is actually not unprecedented:

During the past three decades, there were 14 episodes in advanced economies and 26 in emerging economies when individual countries adjusted their structural primary balance by more than 7 percentage points of GDP. Several economies were also able to sustain large primary surpluses for five or more years afterwards, though the record is more mixed in this regard.

For those who are not ideologically inclined toward austerity measures, it is key to remember that this research is consistent with the work of former Obama Council of Economic Advisers chairman Christina Romer and her economist husband, David Romer, which shows that increasing taxes by 1 percent of GDP for deficit-reduction purposes leads to a 3 percent reduction in GDP. In fact, Alesina and Ardagna discuss the work of Romer and Romer  starting on page five of their paper.

Myth 2: Lawmakers facing economic catastrophe forget about politics and adopt measures that address genuine fiscal issues.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Rob||

    We are going to be downgraded regardless of weather or not we raise the debt ceiling. The "proposed" cuts are bogus and will never happen, and any tax increase will not be used by the statists to pay down the debt. They will be used as an excuse to create another f ed up stupid progam. Show a backbone and vote NO.

  • Paul||

    Economist on NPR got in a good zinger this afternoon.

    After saying pretty much exactly that, that our rating is likely to drop-- budget deal or no, he said, "some people think the rating is the problem. I'm in the camp that thinks the problem* is the problem."

    *of course referring to debt and spending.

  • Tonto the Anarcho-Capitalist||

    What you mean "we", kemo sabe?

  • Realist ||

    Exactly

  • ||

    "debty" in grocery store pitching a fit for the chocolate covered ice creme fruit loops.
    "Mommie Congress" Now debty, your getting ginormous, so I can't let you go on eating like this. So I am cutting the amount of chocolate covered ice creme fruit loops you can eat....in 10 or 20 years.

  • ||

    Tony? Veronique is fucking with the life blood of statism again.

    Set her straight with some talking points, will ya?

  • Turnkey||

    The non-specific 80% vs 20% chart in that video sure seemed meaningful....

    Not that the point about the whole gross overspending being a problem is off, but this kind of thing should not change anyone's mind.

  • WWNGD?||

    She *did* say, "There is a lot going on in this chart."

  • gutterpunk||

    Well I mean, those two Harvard economists are just fringe extremist libertarians and of course don't count.

  • NoTalentAssclown||

    there are too many numbers and stats in this thread. Just more libertarian nonsense.

    -shorter Tony

  • jacob||

    If you miss tony that much, take him out for a drink ;-)

  • ||

    The studies mention cuts in expenses in nations; any specific examples of when this has happened in the US and what where the ramifications?

  • ||

    Canada would be a good example in the 1990s. They cut spending and flattened tax rates (poor pay more; rich pay less; corporations pay less; fewer deductions, etc.)

    The Canadian dollar got stronger, businesses flourished, jobs became abundant.

    Nothing else happened.

  • Crickets||

  • ||

    Yeah well, the Cup is in Boston, so how 'bout them apples?

  • Bayreporta||

    And surprisingly Canada has a functional universal health care system.

  • ||

    Yeah, in the northern USA.

  • ||

    The big hospitals in Detroit haven't managed to stay open taking care of drug addicts on medicaid, they survive on cash payments from Canadians.

  • Tony||

    So which country's free-market system is France leaching from?

  • ||

    Yep, there he is. A little late to the fight. Must have been out late harassing little old ladies, demanding to see their papers.

  • ||

    Where you can die whilst waiting, an obvious win/win for the world.

  • DarkVisitor||

    What also happened was the erosion of our safety net. Income inequality rose. And no, the dollar did not get stronger, not until the resource boom. Which was helped by the declining American Dollar. And if by nothing else happened you mean that the Canadian economy got hollowed out like a pumpkin on halloween, then you would be right.

    But I'm thinking that none of that matters to you.

  • ||

    Cleveland police officer arrested, charged with misusing law enforcement database

    CLEVELAND, Ohio -- A Cleveland police officer is facing a felony charge after being accused of misusing a national crime database.

    Police Chief Michael McGrath announced Friday that Patrolman Alex Parente, a 20-year veteran of the department, was arrested Thursday by Internal Affairs investigators.

    Internal Affairs did not shoot any dogs whilst arresting Parente.

    Nothing else happened.

  • Crickets||

  • ||

    Can I ring up the bank that issued my credit card and complain that they need to increase my credit limit so that I can (a) take out a cash advance to make my monthly minimum payments, and that (b) I will default if they don't increase it because my credit score will be low thanks to using 100% of my available credit?

  • Crickets||

  • BigT||

    If the US economy were a guy who makes $50k per year, that guy would be spending $80k per year, have $350 k debt on his credit cards, and a mortgage of about $1.2 million (long term liabilities).

    What would that guy’s credit rating be?

  • El Duderino||

    I don't know, but I bet he gets a lot of nice ass in that million dollar house of his.

  • CE||

    So if I'm so far in debt that I would have to devote my entire paycheck for the next 7 or 8 years to get out, I can only improve my credit score by opening a new credit card so I can continue making the minimum payments on my existing credit cards? Cool.

  • Spnge the Dyslexic||

    Doea anyone know if this newly minted turd still contains the unconst. super congress. Because if it does i have to call a few reps and let them know its treason!

  • Bayreporta||

    Yes, it does

  • Easy Peasy||

    I didn't know about this until I read your comment and all I have to say is HOLY CRAP.

  • ||

    So should the government raise the debt ceiling or not?

    Tell me! I have to know!!

  • ||

    Its interesting to note the ECB guidelines - they're obviously just guidelines - recommend member states' budget deficits not exceed 3% of their respective GDP's.

    The United States will make that number this year, if you count every country's GDP in the world added together.

    This show's just about over.

  • jacob||

    Are we going to get someone to hit the reset button? Ol' TJ talked about resetting the pieces every 50 years or so.

  • ||

    It needs to be flushed but the sheeple would never go along with any sort of revolution. Not as long as we have cable tv, American idol,football games and minimal losses in comfort, we will keep marching to our doom. It will be when UN peacekeepers start knocking on our doors for our hunting rifles will anyone finally wake up. Its over we just don't know it yet.

  • EJC||

    "Expenditure cuts outweigh revenue increases in successful consolidations"

    True. The problem is that most (55%) of government spending is mandatory based on laws passed by Congress going back to the 1940s i.e. Soc Sec, Medicaid, Medicare. These cannot simply be "cut". Laws would need to be passed; plus, it's political suicide to tell your aging constituents that you're cutting the entitlements they signed up for.

    On top of that, you've got discretionary military spending that takes up another 25% or so - hard to mess with that. That leaves less than 20% of discretionary spending from which to cut. This all means that spending cuts are great, but are not enough. Revenue must increase to some degree.

  • ||

    Increasing revenue simply means more money for the government to piss away.

    Since the government can tweak the tax code all day long and not increase revenue as a % of GDP, the only way to get more dollars flowing into the coffers is to grow the economy. But in order to do that, they need to get the fuck out of the way and let businesses do their thing. And none of the overlords seem willing to do that at present.

  • EJC||

    Did not know it was so simple! Grow the economy by getting the Federal Gov't out of the way.

    Nevermind misguided spending by consumers, huge and numerous real estate loans given out based on mathematical formula created math majors, which turned into derivatives, etc.

    Oh, and that whole world-wide recession thing. And let's not lay any blame on the bank and investing industries.

    The deficit will not be reduced unless there are wholesale change to the current tax laws, meaning cutting mandated spendings on entitlements, need-based entitlements, amont other things. Revenue must also be increased.

  • Tony||

    Means testing doesn't save money and it turns a quite fair social insurance system into a welfare handout. Why would you want a more redistributive program? It doesn't work as well either--creating sharp cutoffs that discourage upward mobility. It's a less libertarian system than social insurance in every way. However, dumping the welfare state on the poor does make it easier to kill it later.

  • Aimeng||

    Hello Tony, do you like the sparkling crystal?

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  • DK||

    I love your examples of free market failures (real estate loans, etc). Don't worry about the fact that most of these loans were issued either due to governmental coercion (HUD policies, etc) or the understanding that any mistakes would be bailed out by the Treasury.

    I'm not defending banks, etc here. Just saying that, without the implicit bailout guarantee (later made explicit, of course), the banks would have been far more conservative and not issued such huge amounts of bad debt. Sans perverse incentives leveled in part by the federal policies, the recession would not have been as severe. It still would have happened, as business cycles are unavoidable.

    As far as the revenue thing goes, that's fine. Higher revenue will help. But there's a huge body of research which shows that you can't just raise revenue through taxation, as everyone seems to call for. It just doesn't work.

  • ||

    The problem has always been these ridiculous programs like Medicare, Medicaid that make promises of future treatment for pay as you go financing. The supreme soviet then uses these programs like a slush fund for other programs. Add a dash of complete lack of accountability and voila you have the current calamity. A this point I don't give a flyin fornication about who's fault this is I just want to see action, and I mean drastic responsible action such as elimination of entire agencies. The coming storm is going to be very very scary.

  • derek||

    Your point being?

    Canada got rid of long standing entitlements, and on the final push, cut spending on health care. Among other things.

    The entitlements are the result of a law passed in the legislature and signed by a president. A law passsed in the legislature and signed by a president could annul any of those entitlements.

    What Congress giveth, congress takes away.

  • EJC||

    As I mentioned, running for office with the goal of cutting spending to reduce the deficit is great...until your constituents (or potential constituents) hear that you'll be voting to reduce or take away their (or their parents' or grandparents') social security / other entitlement checks, either presently or in the future.

    Idea: I'd guess most of the posters to this thread have been contributing to these entitlements for years, and most likely are not poor. Let's all agree to give back what we've accumulated so far, thus reducing the deficit in the short term and making the money available to those seniors who truly need it or will need it.

    Who's with me?

  • Gray Ghost||

    I'd take that deal in a second. If you told me that I could leave SocSec and Medicare (hopefully because we were phasing both of them out), and the only catch would be that I'd have to forfeit any prior contributions, I'd do that instantly.

    So would anyone who had been saving for their own retirement/medical bills. But you have to get Gov't out of medical care. The dollars they provide flood the market and make medical care more expensive for everyone.

    And with your statement, "those seniors who truly need it...", I'm completely on board with that. I've advocated means-testing Medicare/SocSec for awhile now, as well as removing the income caps for contributing to FICA/SSI. Fold it into the income tax, and consider Medicare/Medicaid/SocSec to be just another form of welfare.

    You are aware this is a libertarian site, not Team Red, right?

  • ||

    I am. I've already told my congressmen that they can have it. PROVIDED THEY GET RID OF THE SYSTEM!

    I never expected/expect to see a penny of it anyway. It would be worth every penny to see this overwhelming drain on the economy be eliminated.

  • ||

    I'm not an economist but I know one thing that is true: We should not let S&P dictate our economic policy.

  • ||

    We need someone who isn't playing for one team or the other to keep an honest score. I don't know how honest S&P is, but who else is there?

  • robc||

    Moody.

  • robc||

    and the 3rd one.

  • ||

    Then we shouldn't have an economic policy predicated on accumulating debt.

  • BooMushroom||

    S&P is a marker. Downgrading our credit rating is just a way of telling us what we already know: the Government of the United States of America does not know how to manage its finances.

  • Red Rocks Rockin||

    Whatever--this is the recognition of reality that the US is a financially dysfunctional nation.

    The main problem with the global economy the last 3-4 years, particularly in Europe and the US, is that the markets HAVE been dictating our economic policy by doing everything they can not to manipulate bailouts in various forms. Iceland's one of the few countries to actually tell these entities to go fuck themselves while everyone else is trying to play hide the sausage.

  • Red Rocks Rockin||

    doing everything they can not to manipulate bailouts in various forms

    That should read, "doing everything they can TO manipulate bailouts"

  • ||

    The last thing we need is IMF riots in this country.

  • Silent Owl Scribe||

    What will happen if nothing happens? Does anybody knows?

  • ||

    Did you just answer your own question?

  • ||

    An "official" downgrade by S&P or Moody's will only confirm what any honest person already knows: that the US government is not a AAA credit. How can any entity with tens of trillions in off-balance sheet liabilities possibly be considered AAA? The debt ceiling has almost nothing to do with our credit-worthiness.

    The ONLY reason we have not had a crisis already is that the sorry state of the global economy, and especially the sorry state of other sovereign credits, has caused investors to irrationally flock to the "safety" of treasuries. This is all going to come to a painful end soon enough, debt ceiling increase or not.

  • Jason||

    Why should we fear S&P? They can easily be bought just like they are by Wall Street to give high ratings to undeserving investments.

  • sevo||

    "Why should we fear S&P? They can easily be bought just like they are by Wall Street to give high ratings to undeserving investments."
    Buying off the messenger doesn't change the message.

  • Tony's Mom||

    Wake up Tony.

  • "Basic Economics 101"||

    Yeah, really. Wake up Tony.

  • ||

    I suggest this periodically, but here it is again: I think the most politically doable way of tackling the deficit is to freeze spending for the 5-7 years it would take revenues to catch up. That would be a cut in effect, because the same amount of money would split among the growing legions of SS and Medicare recipients, but a "freeze" still sounds better than a "cut."

  • ||

    Ms. de Rugy conveniently neglected to mention that Romer and Romer found one type of circumstance in which raising taxes had the hoped-for outcome--one that is very relevant to our present situation: "... we find suggestive evidence that tax increases to reduce an inherited budget deficit do not have the large output costs associated with other exogenous tax increases. This is consistent with the idea that deficit-driven tax increases may have important expansionary effects through expectations and long-term interest rates, or through confidence."

  • Red Rocks Rockin||

    "... we find suggestive evidence that tax increases to reduce an inherited budget deficit do not have the large output costs associated with other exogenous tax increases.

    The problem is that you need a balanced budget AND ensure spending doesn't exceed that budget AND hope that real GDP was on the positive end, if you want to make that tactic work.

  • ||

    Lori F conveniently neglected to mentions that raising taxes to address an "inherited" deficit doesn't work if you CONTINUE TO INCREASE THE DEFICT BY RAMPING UP SPENDING.

  • ||

    Should be interesting to see how that all works out.

    www.privacy-tools.no.tc

  • ||

    Q: do other nations have debt
    ceiling (farce)>? web: no data found
    Poor pay cash, command economies
    order rationing, Western nations
    default (Arg. 1899. 2001) or issue
    permanent debt, as UK's guilt bonds?

  • ||

    The debt ceiling itself is a joke, a self imposed spending limit, like a soft salary cap. Creative pols have found their way around it for generations, now here we are $14 Trillion later.

  • tory burch reva||

    I agree to cut the spending on military matters

  • Aimeng||

    I like the style of president of USA, not like China, too serious...

    http://www.aimengcrystal.com

  • nike shoes||

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  • ||

    very interesting to share this

  • tory burch||

    Unbelievable, maybe it is ture.

  • Brian||

    The big elephant in the room that nobody talks about is the industrial military congressional complex. We could halve our military budget and stop hiring expensive corrupt mercenaries like Blackwater(now named XE)and still be the biggest military by a long shot. Imperialism will be our downfall. Also, where is the discussion about the endless,expensive,ineffective and never ending war on drugs. It has failed miserably and as a result, we have the highest incarceration rate of any industrialized nation. Freedom is absolutely an illusion.

  • ||

    Most people here will agree with you, but you are fooling yourself if you think that is going to make much more than a dent in the debt/defecit. The only way is to cut ALL spending.

  • DarkVisitor||

    At what point are people going to stop listening to the "revenue isn't the problem" horseshit. Jobs = taxes. If the government has to raise some revenue from some undertaxed (compared historically) groups to fund infrastructure programs that create jobs (and also tax revenue) and a lasting legacy in durable goods, isn't that an aoppropriate policy?

  • ||

    John Maynard Keynes is dead and so is his general theory.

  • Tony||

    I don't remember a multi-decade waiting period in the tenets of Reaganomics. When do you think supply-side giveaways might start creating the jobs that were promised?

    Or is employment just another rhetorical smokescreen for a philosophy of economics that seems to require an inordinate amount of them?

  • ||

    What ? Reagan had to pull us out of a worse economic crises than the present. Double digit inflation, interest rates, and unemployment, higher energy prices and the Iranian hostage mess, he righted the ship in two years, even gold dropped to 1/3 of it's value afterwards. America was back. Unlike the present mess that's only getting worse. He also never once blamed Carter, he just did his job.

  • DarkVisitor||

    A look at the record suggests otherwise.

    First, Reagan interfered in the hostage crisis to prolong it until he was in office.

    Second, his economic policies piled up trillions in new debt. And he raised taxes several times, including the largest single tax increase in history. Even his economic advisers have said that those policies are a bad idea.

    Third, the benefits of his policies went to a small portion of the population. Wages for the middle and lower end of the country (the great majority) stagnated. This started the unsustainable trend of growing income inequality.

    Fourth, look at the historical record. Reagan and his administration blamed Carter for years.

    I think the best things are can be said about Reagan can be summed up this way: He wasn't Carter (which was important psychologically at the time) and START I. The rest of his record isn't so shiny.

  • Jackson||

    Eh, wrong.

    Supply Side economics more or less worked. Unemployment declined, inflation declined and this was done without massive spending. THe problem is he did send too much in other areas, especially the military. He wasn't a great President but you'd have to be a liar like Tony to suggest the tax cuts didn't help and his supposed tax increases are not what you describe. All the data is at the Irs website you know, so it's easy to call bullshit on you.

  • DarkVisitor||

    When the people who helped him enact his policies have said that they were bad idea, I take notice.

    Taking into account his tax increases (7?) and cancellation of planned cuts, Reagan raised taxes on the non-wealthy more than anyone else, not counting major wars. I know that doesn't fit the narrative, but a better narrative would be that even Reagan knew you had to raise revenue in the face of skyrocketing debt.

    I should add that the social security fix should have been on the list of things he did right.

  • ||

    You know what, I will give Keynesians like you or Tony the benefit of the doubt. Go ahead and confiscate all of the wealth from the rich (presumably the people you are talking about being undertaxed. Nevermind that the lower 50% of the country pays no taxes). Go ahead and do that and when all of that money gets used up within one fiscal year and you have nothing else to grab from the rich and you turn your greedy little eyes on my meager earnings you can get on your knees and suck my cock.

  • Tony||

    Will you still be sucking the collective cock of the wealthy? That could be interesting.

    You don't understand the point of Keynesian theory. It's not about taking money from the rich as an end to itself, it's about increasing consumer demand with short-term spending spikes, with the hope that enough demand will be stimulated that it will become self-sustaining.

    Taxing the rich has little to do with this. It's people who think reducing the debt is the most important thing now who have to explain why they think only the working poor and middle class have to contribute anything to the effort.

  • ||

    Short-term spending spikes? Maybe you haven't noticed but we have been on a spending binge for the last 11 fucking years. How exactly is that short-term?

    Oh that's right your entire premise is "hoping" that what you are doing will work while completely disregarding what the spending is actually doing and if you even have the fucking money to spend.

    My point has always been to do whatever the fuck you want to the rich (in the name of helping the poor and middle class no less). But don't you dare turn around and say that all of a sudden I'm the rich and you need me to contribute more because what you "hoped" would happened didn't do shit.

  • Tony||

    Don't blame Keynes that Bush engaged in runaway deficit spending during a good growth period.

    I share your frustration, but except for a brief and inadequate period in the middle of the financial crisis, we haven't really tried Keynes. Like the rest of the world we've been going in the opposite direction, not having learned any lessons apparently from the last such worldwide event. Stimulus programs are running out, and look at where the economy is heading simultaneously.

    There is no real alternative being offered. You may or may not be fine, but that's not the fault of the only people trying to solve any problems. Last I checked the only alternative was deliberately suicide bombing the economy.

  • Tony||

    Don't blame Keynes that Bush engaged in runaway deficit spending during a good growth period.

    I share your frustration, but except for a brief and inadequate period in the middle of the financial crisis, we haven't really tried Keynes. Like the rest of the world we've been going in the opposite direction, not having learned any lessons apparently from the last such worldwide event. Stimulus programs are running out, and look at where the economy is heading simultaneously.

    There is no real alternative being offered. You may or may not be fine, but that's not the fault of the only people trying to solve any problems. Last I checked the only alternative was deliberately suicide bombing the economy.

  • Jackson||

    Except the Germany is recovering and Canada is in good shape and they have practiced Austerity over stimulus. We already know what stimulus and Keynesian theory does: it hurts. It didn't work in World War 2 and it lead to inflation in the 1970's as most economist ruled it dead then. Tony you clearly know nothing about economics, it's almost comical when you post here.

  • DarkVisitor||

    Canada did stimulus. In fact, there was a major political crisis over the Conservative government lying about budget and economic predictions that almost toppled the government. The crisis forced them to come clean with the numbers and admit that stimulus was needed. Then they started handing out stimulus checks with CPC headings, not GoC, as a filthy political trick.

    The central provinces, manufacturing heavy, are not so hot right now. The province that is riding the highest (last I saw) is Saskatchewan. Why? Potash, oil, gas, and uranium. A resource boom only lasts so long.

    And Canada has higher safety net standards, universal health care, and greater banking regulation. All things that people around here seem to dislike an awful lot...

    So... It's almost comical when you post here.

  • DarkVisitor||

    Most of that "spending binge" has been in the form of tax cuts, at least 5 wars (Iraq, Afghanistan, Pakistan, Libya, Yemen, and Somalia that we know of) and giveaways to major drug companies. Non-defense discretionary spending has risen little (if at all) when tracked in terms of population growth.

    I would like to point out that business (and the people that own and run them) also see benefits for my orignial comment. First, the government has to buy products and services. Second, overall demand rises as the unemployed can get back to work and spend money again.

  • ||

    I will definitely give you the wars and, except for a few of the more "team red" people that post here, everyone here would agree that we need massive draw downs and complete pull outs. You also won't get a lot of complaints about that steaming pile of crap Medicare Part D.

    However, tax cuts are not spending in any sense of the word. Spending is spending. If you take a pay cut at work but keep spending like you were before that happened you don't have a revenue problem you have a spending problem. And yes, it really is that simple.

    Letting people keep more of the money that they earned allows them to spend it on things they want or need is a good thing. This is a much bigger boon to the economy than government spending it (seeing as how the government forcibly takes that money away from someone to be able to spend it).

  • DarkVisitor||

    You're right. Tax cuts are not spending. Fair enough.

    They do, however, impact the budget and debt situation.

    And an individual taking a pay cut has a revenue problem. A stable budget built on revunue X which is then asked to pay for the same expenditures at revenue X-Y has a revenue problem. Especially when cutting expenditures starts to do real harm to that persons life.

    Which brings me back to the original point. Raising rates on groups who are seeing their lowest tax burden in decades can preserve the services that provide the foundation for the free market system (courts, roads, hospitals, schools, etc...) as well as put money back into economy.

    Large corporations have trillions of dollars sitting idle (and some of which pay little or negative taxes on billions of revenue). They are not spending because they have no customers right now. A few percentage points is not going to adversely affect them. Once demand picks up as people are put back to work, they will be doing better business to make up for it.

    This is in no way meant to be a punishment. Punishment should be reserved for those that do wrong. Being successful in a legal manner is not wrong.

    Maintaining that success does rely on the basic services that the government provides (courts to enforce contracts, safety inspections that maintain consumer confidence and the like). And they should be paid for in such a manner that does not undermine the economy.

    By they way, I appreciate the less hostile tone. Thank you.

  • ||

    If you HAVE to maintain your current level of spending after the pay cut then, yes you do have a revenue problem, I'll give you that. However, most people spend money on non-essential items just like the government (WOT, WOD, DOE, etc.) so if you are facing less revenue, the prudent thing to do is cut those non-essential items. I'm sorry but the idea that cutting federal spending back to 2001 levels would result in old people dying in the street and poor people not getting their food stamps/medicaid is laughable. (For the record, I know you aren't saying that but the things you laid out like infrastructure are a tiny part of the federal budget.)

    I guess where I'm coming from is that the government has proven that they are in no hurry to end the spending binge started by Bush and the Republicans and perpetuated by Obama and the Democrats. This tells me that you can raise taxes all you want and they're just going to spend more money. The only fiscally sound thing to do is cut spending.

  • DarkVisitor||

    The plan to cut government spending is contractionary. I think I read it would lower GDP growth by 1.5%. Which is a BFD in the middle of a huge recession with millions of people out of work and millions more underemployed.

    By all means, figure out a responsable way to restrain and cut spending once people are back to work. You could start with the 1.2 trillion a year defense/security apparatus. That's a black hole of unaacountable spending right there.

    The problem with cutting discretionary spending is that those have consistently been the target of cuts, meaning that those programs are among the leanest programs in the federal government. Cutting huge amounts from them now essentially cripples them.

    As for old people dying in the street... well, cutting food inspectors or electricity subsidies in the middle of a heat wave has already led to that.

    And cutting the DOE after Fukishima seems shortsighted. Not the mention the fact that they are vital in locking down loose fissibles around the world. They could cut the numbers of nukes the US has, that would save a few bucks. The DOE needs more money and a organizational overhaul, not reduced funding.

    I agree with the WOD 100%. Tons of savings from reduced incarceration over low rent drug charges. I agree with WOT 95%. There still needs to be the intelligence and law enforcement personnel (who are the ones that should be leading, not the DoD), but still massive savings.

  • DarkVisitor||

    First, at no point did I say "confiscate all of the wealth". Raising rates a few percentage points is what I was talking about. Second, if by pays "no taxes" you are refering to just federal income taxes, then you might be right. However, I suspect that you are simply choosing to ignore all other taxes i.e. payroll, sales, state, local, etc... I would also like to point out that the reason they are in that tax situation is because they do not make enough money to bump into a higher tax bracket. I would be surprised if anyone in that situation would give up the chance to be making more money if it meant that they had to be in a higher bracket.

    You also ignored the main point of my comment. New funds would be used to pay for infrastructure (which also benefits the wealthy and the corporations), education, training, etc. These are programs that put people back to work, which puts money back into the treasury.

    This is not experimental. There are many benefits to this approach, most of all getting people back to work. Secondly, as I said, this leaves lasting infrastructure (both physical and in the workforce) for future generations.

  • ||

    I know you didn't say you wanted to confiscate all of the wealth. What I was merely pointing out, was that you could take it all and it still wouldn't be enough to fix what's broken.

    Of course I meant income tax. That's the tax that everyone talks about increasing. I haven't seen a lot of people calling for raising sales or payroll taxes and since we are talking about the Federal budget "crisis" (and since not every state has their own income tax) I logically would exclude those as well. Obviously no one gets away with paying no taxes if you live somewhere and buy things.

    I didn't mean to ignore your main point, although besides infrastructure (and some would argue even that) the government doesn't need to put money into education or training. We already put a shit ton of money into education and it hasn't gotten us dick.

    It seems to me that what you are proposing is somewhat a Broken Window Fallacy. Basically saying the government needs to raise taxes on the Rich and Corporations to help train people to work in those corporations. Wouldn't it just be easier to let the corporations train the people they hire?

  • DarkVisitor||

    You make a good point. This is not problem that will be fixed in one year. Which is why taking all the wealth would be ruinous policy.

    Getting back to a growth economy would allow for stable budgets that can be used to pay down deficit and debt. If the government has to spend money now to make more money later, then that's what should be done.

    As for education and training, well, tradesmen and professionals come from somewhere. The vast majority of Americans are educated in public schools and a either public tech institutes or colleges/universities.

    Government also spends money on research and development at these public institutions (as they do at private institutions as well). Many companies can afford to spend far more on advertising than they do on R&D because of government research.

    Having each company do their own training would be highly ineffecient. Sure some companies can afford to train their own workers because they have the resources and their workforce is uniform enough to make it possible. Oilfield workers for instance. The lawyers, engineers, computer systems analysts, etc... that also make that company function, on the other hand, would be an efficiency handicap.

    Most companies don't work like sports teams. They tend not to have a minor league filled with prospects that can be called up and sent down as needed. Employees come from the general workforce.

    A better trained and educated workforce is a higher earning more productive workforce. That means more taxes and more private sector spending. Helping people get into higher paying jobs is an investment for the future. It ensures that they will have the skills to replace the current generation and continue to pay taxes that support all the other things the government does. It's not like the army, or FD, or PD pay for themselves.

    Training and education are at once a financial investment and an investment in quality of American life.

  • Jackson||

    You and Tony must study economics together at the local grocery market or something because the effective tax rates for people making under 40k are still miniscule and even the CBO has said the biggest hit on tax revenues are not from taxes on the rich but from the middle class. Nice try though!

  • DarkVisitor||

    Sure. By numbers of people. That doesn't mean that they saw the sunnyside of the Bush tax cuts. All taxes considered, the lower and middle classes pay a far higher percentage of their income than do the rich, wealthy and corporations.

    In the near term, it is the middle and lower classes (by sheer weight of numbers) that, if put back to work, can get the economy going.

    And the rich and corporations are paying their lowest effective rates in generations. Boost those, spend on infrastructure, stop states from slashing hundreds of thousands of jobs, and get things going again.

    How come the country could win WWII, land a man on the moon, build millions of miles of superhighways, start programs to keep seniors out of poverty and protect our food, water and air supply when top rates were up to 90%, but we can't do a damn thing now?

    If you want to raise rates in the middle classes once we get going, then have at it. After presiding over the single largest tax cut in the history of the US (the stimulus) Obama can afford to raise rates a bit. Once things are back on track.

  • ||

    I'm sorry but I'm going to need citation of this higher percentage of income.

    The thing you seem to not be considering is that if the government takes a dollar from a corporation or rich person, that is one less dollar they have to spend on labor or materials.

  • DarkVisitor||

    A 30 second google search breaks the Bush cuts down this way:

    Lowest Quintile: 1.3
    Second: 7.6
    Third: 11.8
    Fourth: 17.8

    Top
    80-90%: 15.3
    90-95%: 10.1
    95-99%: 12.7
    Top 1%: 23.5

    Broken down by percentage share of total tax cut. Source: NYT and a bunch of tax policy centers.

    And the capital gains rates are 15%. Given that the wealthy hold a massive proportion of CG taxables (think stock options and fundies), and are far more likely to have CG be their main source of income, they pay a lower tax rate. See Buffett admiting that his secretary pays a higher tax rate than he does.

    Your point about corporations having less money to spend on goods and labour would matter if they weren't busy laying off hundreds of thousands of employees, making record profits, and sitting on trillions of dollars. Why? Lack of demand. Corporations don't simply hire employees when they have some spare change, they hire them when demand forces them to.

    The U.S. goverment is also the single largest purchaser of goods and services in the country (or so I've heard). Bombs, pens, fuel, paper, software, electricity, etc...
    Strangling that demand cushion right now is a terrible idea.

  • hk||

    You need to read the article, when the capital gains tax goes up revenue goes down. Enter: Clinton 1st term vs Clinton second term debate.

    Further, focusing on the top quintile and whining about them hides the larger point, they already pay more taxes in the corporate income tax.

    Lastly, the complete lack of awareness to LOWER people's taxes to 15% is also disturbing. And the 50% of Americans that don't pay income tax, is also wrong.

    Your big government spending has already failed in the Eurozone, now they are engaged in Austerity measures.

  • hk||

    Additionally, the reason Rich people pay less in taxes is because they actually don't. They get taxed at several levels already, including the inflation, sales, estate taxes, so you need to shut up about that.

    And if middle-class people were smarter they would invest their money in securities or derivatives, but instead they choose to use their money inefficiently. They should not be rewarded by that.

    A 30 second search on google completely shreds your argument apart.

  • شات||

    Williams

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    Williams

  • شات بنات||

    Williams

  • شات بنات مصر||

    Williams

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    Williams

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    Williams

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    Williams

  • دردشة بنات مصر||

    Williams

  • قبلة الوداع||

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  • قبلة الوداع||

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