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Just a reminder: this is a spending crisis, not a revenue crisis
December 6, 2012 by Ed Morrissey
Were hearing a lot of nostalgia for the Clinton era in this debate over the upcoming fiscal cliff. Democrats argue that we need to return to the Clinton-era tax rates in order to get back to Clinton-era budget stability, but that argument utterly founders on the facts and Im not the only one to notice that. Michael Barone points out a few inconvenient truths in todays New York Post about revenues and tax rates from the Clinton era to show that the current fiscal crisis comes from the other side of the ledger:
Over that period of nearly three-quarters of a century, federal receipts have never exceeded 20.9 percent of gross domestic product. That was the number for the war year 1944.
The highest number since was the 20.6 percent of GDP in 2000, the climax of the dotcom boom. In the Obama years, federal receipts have hovered at 15 percent of GDP.
Thats just because tax rates are too low, Obama backers reply. Just raise the rates on high earners, and the problem will be solved.
Actually, high earners dont make enough money to close the current budget deficit. Youd need to raise taxes on middle-income earners too.
But we have had higher income tax rates in most of the years since World War II. What history and Table B-79 show is that even much higher rates like the 91 percent marginal rate on top earners imposed from the 1940s to the 1960s have never produced federal receipts higher than 20 percent of GDP.
Why is that? As the late Jack Kemp liked to say, when you tax something, you get less of it. When the government took 91 percent of what the law defined as adjusted gross income over a certain amount, not many people had adjusted gross income over that amount.
The highest number since was the 20.6 percent of GDP in 2000, the climax of the dotcom boom. In the Obama years, federal receipts have hovered at 15 percent of GDP.
Thats just because tax rates are too low, Obama backers reply. Just raise the rates on high earners, and the problem will be solved.
Actually, high earners dont make enough money to close the current budget deficit. Youd need to raise taxes on middle-income earners too.
But we have had higher income tax rates in most of the years since World War II. What history and Table B-79 show is that even much higher rates like the 91 percent marginal rate on top earners imposed from the 1940s to the 1960s have never produced federal receipts higher than 20 percent of GDP.
Why is that? As the late Jack Kemp liked to say, when you tax something, you get less of it. When the government took 91 percent of what the law defined as adjusted gross income over a certain amount, not many people had adjusted gross income over that amount.
Lets say, though, that a return to Clinton-era tax rates would produce 20.6% of GDP in federal revenue. Wed still have massive deficits, because were spending twenty-five percent of GDP at the federal level. In order to return to the Clinton era, I argue in my column for The Fiscal Times, wed have to undo the spending spree that took place in both the Bush and Obama presidencies:
In his eight years as President, Clinton reduced federal spending to 18.2 percent of GDP from 22.1 percent, thanks in large part to a Republican-controlled Congress that forced the issue. Defense spending as a portion of GDP declined by 1.8 points, but non-defense spending dropped by 2.2 points. Clinton and the Republicans in Congress cut spending on domestic discretionary programs as well as entitlement spending through welfare reform.
What followed afterward is instructive to the real problem of our current trillion-dollar trajectory of deficit spending. George Bush increased federal spending as a share of GDP by 2.6 points in two terms, and it wasnt just spent on defense; the increase was split evenly between defense and non-defense spending, a remarkable statistic considering the two wars waged in those eight years.
Barack Obama managed to hike it 3.5 points in just one term, with 3.2 points going to non-defense spending. Under Obama, federal spending now exceeds 25 percent of GDP, and his has been the biggest increase of any of his predecessors over the last 60 years even for two-term Presidents.
The real debate over deficits isnt over whether to go back to Clinton-era tax rates. Its how to get back to Clinton-era spending levels, and then create a tax system that will adequately fund it. The 18.2 percent level of federal spending is one piece of Clinton-era nostalgia worth recalling as well as the bipartisanship that eventually produced it.
What followed afterward is instructive to the real problem of our current trillion-dollar trajectory of deficit spending. George Bush increased federal spending as a share of GDP by 2.6 points in two terms, and it wasnt just spent on defense; the increase was split evenly between defense and non-defense spending, a remarkable statistic considering the two wars waged in those eight years.
Barack Obama managed to hike it 3.5 points in just one term, with 3.2 points going to non-defense spending. Under Obama, federal spending now exceeds 25 percent of GDP, and his has been the biggest increase of any of his predecessors over the last 60 years even for two-term Presidents.
The real debate over deficits isnt over whether to go back to Clinton-era tax rates. Its how to get back to Clinton-era spending levels, and then create a tax system that will adequately fund it. The 18.2 percent level of federal spending is one piece of Clinton-era nostalgia worth recalling as well as the bipartisanship that eventually produced it.
The column should have included a link to the analysis provided by Catos Steve Hanke in his fact-check of the roundtable on Meet the Press this week. Professor Hanke (Johns Hopkins University) developed this table from OMB source data, which clearly shows how, when, and where we dug ourselves into this debt and deficit trap. Heres a hint it didnt come from defense spending on wars:
Just a reminder: this is a spending crisis, not a revenue crisis « Hot Air
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