Government Spending

Does Preserving the Bush Tax Rates Doom Us to Massive Deficits? Nope!


As Radley Balko notes below, President Obama and Congress have reached an agreement to preserve the Bush-era tax rates that were set to expire on December 31 of this year. The deal extends the Bush rates for two years, lessens what would have been a gigantic increase in estate taxes, and puts more money into long-term unemployment benefits.

One of the main reasons that advocates for a return to Bill Clinton's tax rates put forward was that we needed the extra money higher rates would bring in to pay down the deficit, etc. For individuals making more than $200,000 and households making more than $250,000, the standard figure was that a return to Clinton's rates would bring in $700 billion over the next decade. If all the Bush rates expired, another $3.2 trillion would have come into the government's hands over the next decade. One reason why the argument against just hitting top income earners fell flat, I think, was that it ignored that huge pile of cash the rest of us pay. And one reason why hiking rates on everyone was unpopular was, well, because people don't want to see huge tax increases, especially in a crap economy.

So, does keeping the Bush tax rates mean that the government, which has hiked federal outlays 60 percent in constant 2010 dollars since Bill Clinton left office, will be starved for money? Not hardly.

In fact, as Veronique de Rugy and I laid out yesterday, it would be quite easy to balance the budget in 2020 if the government would start early with small, systematic cuts designed to get government outlays about equal to the historic average of government revenue. Since 1950, the feds have brought in average revenue equal to about 18 percent of GDP. In its more-realistic "alternative scenario" budget projections, the Congressional Budget Office estimates that by 2020, revenues will equal about 19 percent of GDP, near the historic average. The CBO's alternative scenario is based on keeping the Bush tax rates through 2020 and doing various types of AMT patches that reduce the number of people paying the AMT. In other words, CBO's revenue scenario keeps things the way they've been for the past decade or so.

In order to balance the budget by 2020, all the feds need to do is cut 3.6 percent of projected budgets in each of the next 10 years. The table below lays out what this means. The short version is trimming about $129 billion from budgets that average $4.1 trillion. Here, we've broken it down by major expenditure categories. CBO estimates the budget in 2016 will be $4.3 trillion; to put us on a path toward balance in 2020, that would call for $128.7 trillion billion in cuts. Spreading those evenly would mean $20.7 billion in defense, $12.9 billion in Medicaid, etc.

Click on the chart or go here for the full argument.

Note that this exercise isn't utopian from a small-government POV. That is, it gives oodles of money to the government to maintain a status quo that doesn't work particularly well. But what it does do is show the relative ease of balancing the budget over time without raising government revenue. When you hear folks talking about how the "Bush tax cuts" are starving government coffers, remind them of that 60 percent increase in real spending over the past decade and point them to this chart. 

NEXT: Global Temperature Trend Update - November, 2010

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 or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. “a simplerer America” PLUS a “not hardly” in the article.

    lulz and FTW, Nick!

    1. Nick’s a good writer. Don’t misunderestimate him.

  2. What does “simplerer” mean? Is that like saying that Obama is “stupiderer” than Bush?

    Also, nice ass on the tall chick.

    1. “That’s a man, baby!”

    2. By the way, WTF are you doing up so early? It’s 6:45 here. Before you ask me the same question, I woke up and couldn’t get back to sleep.

      1. I’ve been up since 3:40. Got to work at six. It’s the price I pay for living in the sticks.

        Why couldn’t you get back to sleep? Too much deep dish pizza?

        1. Getting up at 3:40am should be illegal.

          1. I have flex time at my job. I could get up as late as probably 6:30 and be at work by around 8:30, but then I won’t get home until after seven. No thanks.

            1. Flex-Time is cool, but holy christ that is early. What time do you go to bed?

              1. Around nine.

                1. Yeah I’d have trouble with that. Too many sports to watch and substances to ingest during the night time hours.

                  1. Yeah, that was me about ten years ago (minus the sports). Now I have kids and (mostly) healthy activities.

        2. 3:40?!? Is this a regular occurrence?

          It was too little deep dish pizza (shudder). I barely ate anything for dinner yesterday. I think I was hungry.

          1. Yeah, every day. On the weekend I usually sleep in until 7:00 or so. It’s so luxurious.

            1. What the hell do you do that requires these hours?

              1. Mailbox puncher. You don’t think those mailboxes punch themselves, do you?

                1. Aerospace tech. Thankfully I don’t work for Boeing and I’m in a non union shop. If I lived in Mill Creek I could be at work in five minutes. But I hate the traffic, the people, the traffic, and the people over here. Did I mention the traffic and people suck?

                2. You’re the king box puncher (if you know what I mean), you tell me.

    3. Fart.

  3. But nothing the government does is nonessential!

    1. Exactly! Just as police officers lie and claim the suspect was resisting arrest when they’re accused of brutality… see…..-oath.html

  4. Thank goodness we will still be paying millions not to take jobs for the next 13 months.

    1. Because there would definitely be fewer than 5 job seekers to a job if only we put more of them out on the streets.

      1. By taking money away from people who are creating value, and giving it to people who aren’t, we can create utopia!

        1. Unemployment benefits create jobs!

          1. Spending is stimulus! It doesn’t matter what you spend it on. Seriously, that’s the whole point!

            1. Welfare for the rich is the best form of stimulus!

              1. ALL welfare needs to stop. Now.

                1. Except the kind that goes to the rich.

                  After all, they deserve it.

                  1. Never been hired by a poor person….

            2. Can we spend it paying people to kick Obama in the nuts?

              1. Hey there!

  5. Spend. . .fucking. . .less. In fact, spend less than you take in and stop funding programs ex recto.

    1. Sage likes this.

      1. Sage is sagacious.

  6. So, does keeping the Bush tax rates mean that the government, which has hiked federal outlays 60 percent in constant 2010 dollars since Bill Clinton left office, will be starved for money?

    The State will wither away to nothing. Children will starve in the streets. The nations defenses will be gutted; Korean tanks will roam the streets of northern California. Education will be reduced to singsong oral history and pictograms scratched on cave walls. Automobiles will be magically transformed into donkey carts. Pillaging warlords will establish fiefdoms and enslave the populace.

    Et c, et c.

    1. Somalia.

    2. Did you see the movie Grapes of Wrath? It’ll look like that. Only worse! Much, much worse!

    3. I remember 1999.
      Money out the wazoo!!!
      White house blowjobs, which made American safe for old fat farts getting hummers from the young and ambitious.
      Fight Club, The Matrix, and the Sixth Sense entertained us at the box office. Phantom Menace causes wailing amongst nerds and geeks everywhere.
      Napster allows payback for all the albums sold that ONLY HAD ONE GOOD SONG ON THEM! Karma is a b*tch Music industry!!!
      DeForest Kelley dies, which surprises most people, as they thought his body was animated for the Star Trek movies.
      It was a glorius time

  7. Thank you all for your comments. I love how common sense ideas are mixed with viciously funny sarcasm! CHEERS for the BLACK-JACKET-BRIGADES!

    1. Meow York City Mike?

  8. I keep on hearing that taxes are about 18 or 19% of GDP – so why do *I* pay close to 50% of my income in taxes despite making only around 40K per annum?

    Figure about 25% of income to the social security and medicare tax (probably closer to 30% when considering the additional hidden social security tax paid “by the employer”), about 12% of what’s left for Federal and State income tax, another 5% (once adjusted for the fact that it is taxing only the portion of one’s earnings that is untaxed) for sales tax, another 2% for property tax which even renters pay by proxy – I’m up to about 49% now – and other miscellaneous taxes and fees, and I’m easily paying half my income in taxes – so how come we pretend we pay so little?

    1. Revenue is 18-19% of GDP, not taxes.

      And you dont pay 50%. You might pay 50% marginally (on the last dollar), but at 40k, I bet you pay around 20-25% (not including employers part of FICA).

      1. Wow, you started with a really wrong number. FICA is 7.65% or 15.3% if you want to count employers portion.

    2. Where do you live man? My wife and I make about 50k and our marginal tax rate last year was like 6%. Even if we hadn’t used any deductions (what American doesn’t?) it still would’ve only been something like 8%. Between SS and Medicare our total taxes were something like 18% of our gross pay. If you’re paying that much in ss, medicare, and income taxes, get a better accountant.

  9. What’s most disturbing is that serial taxers (and their obedient lackeys in the press) talk about “lost” revenues as if they have already been collected and spent and now have to be “given back” to the people who they were counting on stealing them from in the first place. They call this dilemma “paying for” a tax “cut,” and insist that we can’t “afford” the non-theft, mortgaging “our future and our grandchildren’s future” to the Chinese (who hate us?), even though China holds only about 20% of our debt.

    Have a nice day!

  10. We should pass a constitutional amendment restricting fed gov spending to 20% of GDP, to ensure we never reach this level of gov spending again. To protect gov spending from short term fluxuations in GDP the amendment could say the 20% is calculated on the average of the previous 5 yrs of GDP.

    1. That is the same proposal I have and think it is a great idea. Although, the only problem is that by fixing things to GDP we will initiate a national debate on how it is calculated. Might be better to pass a law where we simply mandate a budget that cannot exceed the average of the last 5 years of IRS receipts (with usual caveats). Then, we have to balance the budget and have a national conversation on what we are willing to pay for.

  11. Did anybody read the Fark thread from yesterday about Nick and Veronique’s article? That was painful.

    It starts with this and gets worse:

    Garble 2010-12-06 12:54:32 PM
    It’s nice that we have a Democratic president so that suddenly the debt matters again.

    1. Garble? That’s the handle MNG should use.

    2. Well, I got called a “cowboy” to start off one of the biggest gang-up smack-downs I’ve ever seen on Fark, so that was fun.

      1. The irony is that real cowboys work harder in one day than those goon-nerds will ever work in their whole lives.

    3. I gave up reading Fark threads for the most part. The lulz got fewer and further between and the amount of stupid seems to have increased dramatically. I still enjoy the headlines, tho’.

      1. Yeah. It was fun 4 or 5 years ago, but it’s been a long time since it’s been worth going there.

      2. I walked away from our hometown insituttion around the time every woman talked about who was under 300lbs was told to “eat a sammich.” Chubby-chase all you want fark-tards, just kept your lard-love to yourself.

      3. I stopped reading the politcs tab about 4-5 years ago.

        I still sometimes read comments on business and sports. And on rare occassions geek.

    4. Looks like Fark is infested with wealth-envy cretins.

      1. It’s not even really wealth envy in a lot of cases — that motivation would at least make sense. Most of it is just pure meaningless talking-point parroting, because Team Blue finds libertarians existentially threatening. Or irrelevant. They can’t decide which.

        1. What about morally bankrupt and evil? I always like that criticism.

        2. But wealth-envy is the tool most often used by leftists. One can visualize the spittle on their computer screens as they type the words Evil Rich White People to their fellow HuffPosers and Kos Kids.

          And on here, but thankfully not as much.

          But to your last point: Team Red finds us existentially threatening AND irrelevant. Lurk around FreeRepublic, you’ll see right-wing versions of libertarian hate that are just as vehement and incorrect as anything a lefty can post.

          1. Oh yeah absolutely, agreed on both points. The Red or Blue part matters less in that equation than the Team part.

          2. But wealth-envy is the tool most often used by leftists. One can visualize the spittle on their computer screens as they type the words Evil Rich White People to their fellow HuffPosers and Kos Kids.

            I think in many cases there is guilt weighing them down too. A lot of those types that I know personally are A) whiter than I am (and I practically glow in the dark) and B) richer than I am. I mean, shit, even with the subsidy I couldn’t afford to buy a Chevy Dolt.

            1. It’s definitely a combination of white guilt and projected martyr complexes, since most of those nerds were social basketcases as children. By aligning themselves with progressive causes, they get to perpetuate the victim obsession that’s been their lifelong identity, even though most of the people they are trying to align themselves with would just as soon kick the shit out of them and take their comic books.

              Farkers are the type that tend to think wearing the same wardrobe for 20 years constitutes a cultural norm.

  12. Let me be clear: the economy only exists to fund the government.

  13. What does this photo have to do with the article and how do I get this guys job?

  14. The previous article for this (the one with The Jacket and De Rugby) showed up on Fark. Mouth breathing hilarity ensued.

  15. Good stuff Nick, and it’s easy to do (at least mathematically, if not politically) but it doesn’t address the state and local deficits. AFSCME and the other parasites are not only eating our feed corn, they’re eating our seed corn, and have already future-consumed our future-corn (to use the popular libertarian “corn” meme) via irrevocable(?) pension and benefit deals.

    There are two ways out there: 1) federal bailout (only the feds can create money, not states and municipalities), and 2) renege on the agreements. Unless you think there is a gradualist “few percent here and there” way out of this problem too. If (1) then that complicates your math, right?

    Even if there is a gradualist way out, I’d love to see (2). It would warm my heart to see the public sector parasites left without pensions and benefits promised to them in times of seemingly boundless wealth and profligacy by weak-willed or bought-and-paid for morons in the state and local governments. I’ll be damned if I mortgage my own or my kids’ future to pay for their comfortable retirements, regardless of the promises of my worthless political representatives.

  16. What the tax deal does show is that our political class thinks a compromise consists of both sides running up the deficit, and nobody cutting spending.

    That’s why fiscapocalypse is inevitable. Absolute best case scenario is that we are two election cycles away from replacing our current political class with one that has the brains and stones to cut spending enough so that our debt is merely disastrous and not utterly destructive. But by then, it will be too late.

    Essentially, what this deal does is lock in deficits for the next two years of at least 12% of GDP, and probably closer to 14%. IOW, pretty much what Greece was doing before it cratered.

  17. If all the Bush rates expired, another $3.2 trillion would have come into the government’s hands over the next decade.

    […] when pigs fly. Taxing 39% of nothing is still nothing.

    Before any thief can think of making the jackpot, the victim has to have an actual jackpot in the first place.

  18. Does Preserving the Bush Tax Rates Doom Us to Massive Deficits? Nope!

    Correct, but it’s going to make for some damn good rhetoric come 2012. It’s just icing on the cake that the Rs actually think they negotiated some sort of concession out of me. Heh…I love this shit.

  19. I think the reason I tend to lean conservative is because I just can’t take the left seriously when they argue that we need to raise taxes to balance the budget.

    The idea that the government would spend less if they had more of our money to spend…

    The idea that squandering more of people’s paychecks on government largess is the solution to our financial problems…

    The idea that they’ll slash the budget–if only we let them raise taxes…

    I can’t pretend to be dumb for long enough to take any of those arguments seriously.

    I can’t pretend to be so dumb that I’m not offended when people say these things to me–as if I were dumb enough to believe them?

  20. Such a reduction requires 3.6% less spending per year, or a 36% reduction in total government spending by 2020. This presumes that inflation remain stagnant. In reality, we can expect a minimum 2% increase in the rate of inflation per year over the next decade. So in real terms, we are talking about a 56% decrease, in real dollars, of government spending. This is untenable unless we cut some of our highest dollar outputs substantially more than 3.6% (I’m looking at you military ground forces in Iraq and Afghanistan).

    In reality, we could easily preserve our position as hegemon by shifting our fiscal outlays on ground wars to development of military and prevention technology.

Please to post comments

Comments are closed.