Taxes, Spending, the Fiscal Cliff, and Austerity

Wiseacre

Retired USAF Chief
Apr 8, 2011
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In this thread I want to talk about these things; what has Europe done and how did it work, and what we should do with our own fiscal problems. Someone wanted to know how I got the idea that various European countries have raised taxes more than they cut spending, so let's start with that.

Below is a chart done by Veronique De Rugy from the Mercatus Center, but I found it at the Cato.org website. Note that taxes outpaced spending cuts by a factor of 9 euros to 1. And many of those spending cuts were really reductions in spending increases. The tax hikes were not just to the upper crust; middle incomes got hit too in some places, as well as higher VAT taxes that everyone pays and taxes on cigarettes, alcohol, fuel, and property taxes, and other things too.

European Politicians Share Obama

Here's the problem: this approach has not worked. The snippet below is looking at the question of which hurts an economy more, a tax increase or spending cuts.

Over at EconLog, George Mason University’s Garett Jones provides the answer: Tax increases. He looks at an IMF paper, often used by anti-spending cuts advocates to say that spending cuts hurt the economy, to show that actually fiscal adjustment based mostly on tax increases will hurt the economy the most. Here is Jones:

Quick summary of the method: The economists looked at 173 “fiscal consolidations” in rich countries, times when governments decided to reduce the long-run deficit. They then checked to see whether consolidations based mostly on tax hikes turned out better or worse than ones based on spending cuts (Inside baseball: They followed a version of the Romer and Romer event study methodology, but applied it to exogenous-looking fiscal tightening instead of exogenous-looking monetary tightening). . . .
Both GDP and consumer spending tell the same story: Spending cuts are the less painful path to fiscal rectitude. When countries tried to get right with the bond markets, this IMF study found that nations that mostly raised taxes suffered about twice as much as nations that mostly cut spending.

This is consistent with a new paper called “The Design of Fiscal Adjustments,” by Harvard economists Alberto Alesina and Silvia Ardagna. Building up on their previous work, they provide even more evidence that fiscal consolidations based mostly on the spending side result in smaller recessions, or none at all, when compared to tax-based adjustments. Additionally, they find that private investment tends to react more positively to spending-based adjustments. Thus, they argue that spending cuts are more sustainable and effective in reducing debt and raising economic growth; expansionary fiscal consolidation is possible.


Which Hurts More, Tax Increases or Spending Cuts? - By Veronique de Rugy - The Corner - National Review Online
 

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So you ask, what does this have to do with our fiscal cliff? Well, the president is asking for tax hikes and the republicans are asking for spending cuts. Hard to say what we'll end up with, but I'm pretty sure it'll be weighted more to the tax hike side than the spending cut side. In a recent article appearing the USAToday by Matthew Melchiorre of the Competitive Enterprise Institute, the current fiscal cliff as it is now calls for 4 times the amount of tax increases than spending cuts.

snippet:

Beginning next year, $136 billion of spending cuts are scheduled to take place according to the Congressional Budget Office (CBO). These include the mandatory sequestration of defense and discretionary spending resulting from the failure of last year's bipartisan "supercomittee" to agree on a 10-year plan to cut the federal budget by $1.5 trillion. They also include the end of unemployment benefit extensions and reductions in Medicare reimbursement rates. Keep in mind these aren't real cuts in overall government spending, but merely reductions in its rate of growth.

They are also trivial compared to the $532 billion of scheduled tax increases that CBO also reports. Most of this comes from income tax rates reverting back to pre-2001 levels and the alternative minimum tax expanding deeply into middle-class households. That's roughly four dollars of tax increases for every one dollar of so-called spending cuts.

Column: America must avoid Europe's toxic tax remedy

It is true that significant spending cuts will hurt short term. But it needs to be done, the big deficit drivers are defense, medicare and medicaid, and social security. These programs must be reined in to be sustainable not just for the seniors who need them now but also for younger generations who will need them later. Combine that with tax reform that increases revenue and a cap on gov't spending and we're in business. I think this is Obama's big chance to make his mark in American history; if he can lead us to reasonable and workable solutions that will succeed long term, he could go down as one of our best presidents. If he doesn't, he'll take his place next to Jimmy Carter.
 
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This debate is like arguing about what procedures would have saved the Titanic (hint: none). Demographics are overwhelming every quasi-socialist country, and we are joining that list. Private sector job growth (and inflation) is the only available solution. The rest is pure sophistry.
 
Clinton raised taxes on the rich in '92. And the economy cratered, right? Not quite. Longest sustained economic boom in our naton's history.

Then Bushie Baby cut taxes, while engaged in two wars. And the economy did great, right? LOL. 16 trillion in homeowners value and 401Ks lost in two years, from 2007 to 2009.

So, what are we to believe? Recent history or rightwing ideology?
 
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This debate is like arguing about what procedures would have saved the Titanic (hint: none). Demographics are overwhelming every quasi-socialist country, and we are joining that list. Private sector job growth (and inflation) is the only available solution. The rest is pure sophistry.

The dishonesty of the left is the major tombstone in the cemetary too.
 
Clinton raised taxes on the rich in '92. And the economy cratered, right? Not quite. Longest sustained economic boom in our naton's history.

Then Bushie Baby cut taxes, while engaged in two wars. And the economy did great, right? LOL. 16 trillion in homeowners value and 401Ks lost in two years, from 2007 to 2009.

So, what are we to believe? Recent history or rightwing ideology?

So if you want to go to the Clinton era tax levels are you willing to go with the Clinton spending cuts too? Yes? or NO?
 
In this thread I want to talk about these things; what has Europe done and how did it work, and what we should do with our own fiscal problems. Someone wanted to know how I got the idea that various European countries have raised taxes more than they cut spending, so let's start with that.
You cover a lot of ground in this post, and I think by the time I think it all through and do the neded research, it might be Janaury. So I'll take points one at a time.

Below is a chart done by Veronique De Rugy from the Mercatus Center, but I found it at the Cato.org website. Note that taxes outpaced spending cuts by a factor of 9 euros to 1. And many of those spending cuts were really reductions in spending increases. The tax hikes were not just to the upper crust; middle incomes got hit too in some places, as well as higher VAT taxes that everyone pays and taxes on cigarettes, alcohol, fuel, and property taxes, and other things too.
I went to the Cato Institute website and this is apparently a paper delivered in a symposium but not made available on the website. The graphic you used from her presentation is indeed startling. My problem is that I cannot find anything that shows how the numbers were derived, nor could I find a database that clearly would either confirm or debunk it. The Cato Institute has an agenda, which does not mean than any research they use is wrong, but it does mean it's good to check out their numbers.

I spent about three hours looking at databases and apparently if anybody is breaking down austerity plans into revenue and spending components, I haven't found it. The 9:1 ratio, however strains credulity. All the descriptons of austerity programs in Greece, Italy, Spain, and Britain mention both broadly based tax increases (especially the VAT, taxes on "luxuries" and import taxes) and spending cuts (most frequently in government pensions, wages of government workers, and reduced subsidies to state enterprises).

So for now I believe that the role of tax measures is probably less than stated, that you are correct tha many of these taxes fall very broadly and some are regressive, and that austerity in atleast southern Europe has definitely involved direct cuts in many workers income.
 
In this thread I want to talk about these things; what has Europe done and how did it work, and what we should do with our own fiscal problems. Someone wanted to know how I got the idea that various European countries have raised taxes more than they cut spending, so let's start with that.
You cover a lot of ground in this post, and I think by the time I think it all through and do the neded research, it might be Janaury. So I'll take points one at a time.

Below is a chart done by Veronique De Rugy from the Mercatus Center, but I found it at the Cato.org website. Note that taxes outpaced spending cuts by a factor of 9 euros to 1. And many of those spending cuts were really reductions in spending increases. The tax hikes were not just to the upper crust; middle incomes got hit too in some places, as well as higher VAT taxes that everyone pays and taxes on cigarettes, alcohol, fuel, and property taxes, and other things too.
I went to the Cato Institute website and this is apparently a paper delivered in a symposium but not made available on the website. The graphic you used from her presentation is indeed startling. My problem is that I cannot find anything that shows how the numbers were derived, nor could I find a database that clearly would either confirm or debunk it. The Cato Institute has an agenda, which does not mean than any research they use is wrong, but it does mean it's good to check out their numbers.

I spent about three hours looking at databases and apparently if anybody is breaking down austerity plans into revenue and spending components, I haven't found it. The 9:1 ratio, however strains credulity. All the descriptons of austerity programs in Greece, Italy, Spain, and Britain mention both broadly based tax increases (especially the VAT, taxes on "luxuries" and import taxes) and spending cuts (most frequently in government pensions, wages of government workers, and reduced subsidies to state enterprises).

So for now I believe that the role of tax measures is probably less than stated, that you are correct tha many of these taxes fall very broadly and some are regressive, and that austerity in atleast southern Europe has definitely involved direct cuts in many workers income.

I could not find anything to substantiate the 9:1 ratio, nor could I find any competing numbers from anywhere else. I do know that there are/were many proposed spending cuts over there that never actually went into effect or got reduced or removed when the ruckus got too severe. Pretty sure most of the tax cuts survived though. Most liberal sources decry austerity but don't give you any details, so it's difficult to know what the real numbers are.

Whatever the true ratio is, I think it's safe to say that tax hikes have been the major part of the various european austerity measures. There are studies that show that approach is generally unsuccessful, primarily because when you raise taxes you stunt economic growth. Consider the following snippet from an article written again by de Rugy:

" The “balanced approach” has proven a recipe for disaster. In a 2009 paper, Harvard University's Alberto Alesina and Silvia Ardagna looked at 107 attempts to reduce the ratio of debt to gross domestic product over 30 years in countries in the OECD. They found fiscal adjustments consisting of both tax increases and spending cuts generally failed to stabilize the debt and were also more likely to cause economic contractions. On the other hand, successful austerity packages resulted from making spending cuts without tax increases. They also found this form of austerity is more likely associated with economic expansion rather than with recession.

While the “balanced approach” may give the appearance of pursuing fiscal solvency, in practice it stagnates the possibility of growth. Real fiscal reform comes from a commitment to cut spending and from structural changes to taxation and the regulatory environment. "

Austerity By the Numbers | Mercatus

One can dispute whatever de Rugy writes, but she didn't have anything to do with the paper by the two Harvard professors.
 
Column: America must avoid Europe's toxic tax remedy

It is true that significant spending cuts will hurt short term. But it needs to be done, the big deficit drivers are defense, medicare and medicaid, and social security. These programs must be reined in to be sustainable not just for the seniors who need them now but also for younger generations who will need them later. Combine that with tax reform that increases revenue and a cap on gov't spending and we're in business.


Don't include social security on your list of deficit drivers. That programs is funded separately through payroll taxes and has nothing to do with the Federal deficit! Don't take my word for it, listen to this live interview from the right wing guru himself, Ronald Reagan!

Ronald Reagan: ‘Social Security has nothing to do with the deficit.’ | MoveOn.Org

I think this is Obama's big chance to make his mark in American history; if he can lead us to reasonable and workable solutions that will succeed long term, he could go down as one of our best presidents. If he doesn't, he'll take his place next to Jimmy Carter.

If he messes with social security the consequences might be far more serious than anything that happened to Jimmy Carter. I am not a Reagan fan but in this instance I hope Obama is as informed as Reagan on social security and leaves it off the deficit reduction negotiation table. Medicare is also funded by payroll taxes but so-called Obamacare could offer better coverage with lower premiums.

BTW, Obama has already surpassed anything Carter did or, for that matter, most of the other presidents! As a two term president he should never be compared to Jimmy Carter again!
 
Column: America must avoid Europe's toxic tax remedy

It is true that significant spending cuts will hurt short term. But it needs to be done, the big deficit drivers are defense, medicare and medicaid, and social security. These programs must be reined in to be sustainable not just for the seniors who need them now but also for younger generations who will need them later. Combine that with tax reform that increases revenue and a cap on gov't spending and we're in business.


Don't include social security on your list of deficit drivers. That programs is funded separately through payroll taxes and has nothing to do with the Federal deficit! Don't take my word for it, listen to this live interview from the right wing guru himself, Ronald Reagan!

Ronald Reagan: ‘Social Security has nothing to do with the deficit.’ | MoveOn.Org

I think this is Obama's big chance to make his mark in American history; if he can lead us to reasonable and workable solutions that will succeed long term, he could go down as one of our best presidents. If he doesn't, he'll take his place next to Jimmy Carter.

If he messes with social security the consequences might be far more serious than anything that happened to Jimmy Carter. I am not a Reagan fan but in this instance I hope Obama is as informed as Reagan on social security and leaves it off the deficit reduction negotiation table. Medicare is also funded by payroll taxes but so-called Obamacare could offer better coverage with lower premiums.

BTW, Obama has already surpassed anything Carter did or, for that matter, most of the other presidents! As a two term president he should never be compared to Jimmy Carter again!

Re Social Security, you do know that things have changed in the last 30 years, right? The trustees who are responsible for managing and overseeing the SSA fund have said the program will not be solvent in another 20 years or so, I forget the most recent estimate. Talk to people in the 20s and 30s, many of them don't believe the system will be there for them when they retire. And for good reason, these days the SSA is paying out more than they are taking in, as we've got more old guys retiring than new guys coming into the workforce. We've got like 3 workers paying for one retiree's benefits, and it could drop to 2 for 1. I see no reason why we can't raise the minimum age for collecting benefits for those who are at least 10 years away from retirement. Or whatever solution the pols come up with, but something must be done to make the SSA sustainable and restore confidence in it.
 
Re Social Security, you do know that things have changed in the last 30 years, right?

Well... umm, NO! Social Security STILL has nothing to do with the federal deficit. That fact has NOT changed, nor has the funding for it through payroll taxes!

The trustees who are responsible for managing and overseeing the SSA fund have said the program will not be solvent in another 20 years or so, I forget the most recent estimate. Talk to people in the 20s and 30s, many of them don't believe the system will be there for them when they retire. And for good reason, these days the SSA is paying out more than they are taking in, as we've got more old guys retiring than new guys coming into the workforce. We've got like 3 workers paying for one retiree's benefits, and it could drop to 2 for 1. I see no reason why we can't raise the minimum age for collecting benefits for those who are at least 10 years away from retirement. Or whatever solution the pols come up with, but something must be done to make the SSA sustainable and restore confidence in it.

Great dodge but no cigar! We were talking about deficit reduction and you included social security as one of the programs that should be put on the table in reducing it. That was just plain wrong. BTW thanks for serving!
 
Clinton raised taxes on the rich in '92. And the economy cratered, right? Not quite. Longest sustained economic boom in our naton's history.

Then Bushie Baby cut taxes, while engaged in two wars. And the economy did great, right? LOL. 16 trillion in homeowners value and 401Ks lost in two years, from 2007 to 2009.

So, what are we to believe? Recent history or rightwing ideology?

There are so many problems when looking at this from any perspective. First off, there is some merit to the idea that raising taxes will hurt more than help, at least in the short term. The problem is that we have gotten ourselves into a severe pickle because we have used tax cuts over the past decade plus as a way to stimulate the economy. Problem is, the tax cuts only helped in short stints, but in the long run, it did nothing. We can't cut taxes any further to stimulate the economy because revenue has hit rock bottom due to the already low tax rates.

So what about spending? Well, we could cut some here and there, but nobody can agree where to cut. In the end, there is not going to be a simple solution, and this storm is going to be with us for some time; we're going to just have to ride it out. My thoughts are that we end the payroll tax cut, and raise the tax rate on anyone making over $100,000 per year. The rate increase does not need to be massive. Secondly, raise the tax rate on capital gains to 20% with the idea of raising it higher once the economy gets rolling again, if necessary. As for cuts, the easiest way to cut spending is to freeze it across the board, other than for SS and Medicare. As for the long term, SS and Medicare spending must be reduced in comparison to what we are expecting to pay out. We can't cut spending on those programs because we have more and more people retiring. What we can do is raise the retirement age gradually for everyone until we hit a point where revenue and payouts are close to being balanced for the long term.

One thing nobody thinks about is that if we do what needs to be done to get spending under control, even if it is done slowly, the economy is going to pick up eventually. There are two factors to look at that have nothing to do with politicians, taxation, or government spending. The baby boomers are all retiring. Even if they haven't retired yet, they are downsizing and not spending as much money anymore. This wouldn't be such a problem but for the fact that their kids have delayed starting their own families. While there are reasons for this, mostly economic, they are starting to hit the age where they have to begin getting married and having kids. My thought is that within the next ten years, we are going to see a boom in child births which will lead to a lot of younger people needing to buy homes and bigger cars. The spending cycle will kick into high gear once again, and then we will see things improve dramatically.
 
Re Social Security, you do know that things have changed in the last 30 years, right?

Well... umm, NO! Social Security STILL has nothing to do with the federal deficit. That fact has NOT changed, nor has the funding for it through payroll taxes!

The trustees who are responsible for managing and overseeing the SSA fund have said the program will not be solvent in another 20 years or so, I forget the most recent estimate. Talk to people in the 20s and 30s, many of them don't believe the system will be there for them when they retire. And for good reason, these days the SSA is paying out more than they are taking in, as we've got more old guys retiring than new guys coming into the workforce. We've got like 3 workers paying for one retiree's benefits, and it could drop to 2 for 1. I see no reason why we can't raise the minimum age for collecting benefits for those who are at least 10 years away from retirement. Or whatever solution the pols come up with, but something must be done to make the SSA sustainable and restore confidence in it.

Great dodge but no cigar! We were talking about deficit reduction and you included social security as one of the programs that should be put on the table in reducing it. That was just plain wrong. BTW thanks for serving!

You're welcome. SS spends more in benefits than it takes in as income. The problem will worsen over time. Sounds like a deficit to me.
 
Hello Everybody.

This problem being discussed here has been in my heart lately.

I suggest the best source of information is the Congressional Budget Office itself. It is nonpartisan and made to help the government know the consequences of actions.

Let me just state facts, from the panel on the website about the fiscal cliff. If we extend tax cuts, GDP might go up by about 2%, but we'd end up being poorer later on as the debt catches up to us.

If we go off the so-called cliff, unemployment rate would rise by 1%, we'd pay down the debt too, but it would also go down to an unemployment rate of about 5% later.

Spending cuts are twice as effective as Tax increases.

Well, be happy. We have some good choices that everyone can make.
 
Re Social Security, you do know that things have changed in the last 30 years, right?

Well... umm, NO! Social Security STILL has nothing to do with the federal deficit. That fact has NOT changed, nor has the funding for it through payroll taxes!

The trustees who are responsible for managing and overseeing the SSA fund have said the program will not be solvent in another 20 years or so, I forget the most recent estimate. Talk to people in the 20s and 30s, many of them don't believe the system will be there for them when they retire. And for good reason, these days the SSA is paying out more than they are taking in, as we've got more old guys retiring than new guys coming into the workforce. We've got like 3 workers paying for one retiree's benefits, and it could drop to 2 for 1. I see no reason why we can't raise the minimum age for collecting benefits for those who are at least 10 years away from retirement. Or whatever solution the pols come up with, but something must be done to make the SSA sustainable and restore confidence in it.

Great dodge but no cigar! We were talking about deficit reduction and you included social security as one of the programs that should be put on the table in reducing it. That was just plain wrong. BTW thanks for serving!

You're welcome. SS spends more in benefits than it takes in as income. The problem will worsen over time. Sounds like a deficit to me.

Well Sarge, If you can't agree with your former Commander in Chief, president Reagan, there is nothing I can do to convince you that SS has nothing to do with the national deficit. The future of SS may need to be addressed but that debate ought not to be mixed up with debates about the national deficit. Keep em separate.
 
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Well Sarge, If you can't agree with your former Commander in Chief, president Reagan, there is nothing I can do to convince you that SS has nothing to do with the national deficit. The future of SS may need to be addressed but that debate ought not to be mixed up with debates about the national deficit. Keep em separate.

As an after thought, I see why you might see a nexus between SS and the national deficit.
It has been widely reported that Congress has borrowed extensively from the SS trust fund to finance other programs. If so, that money has to be paid back as it belongs to the SS trust fund. Perhaps that IOU, if indeed it exists at all, would represent a connection to the national deficit. However, that paradigm puts the onus on the recipients who paid into it to have their benefits lowered because of looming insolvency caused by congress's borrowing from it, NOT an increase in recipients! That is out right thievery. If the foregoing is true, that part of the national deficit should be the first to be paid. Anything less is unacceptable.
 
Well... umm, NO! Social Security STILL has nothing to do with the federal deficit. That fact has NOT changed, nor has the funding for it through payroll taxes!



Great dodge but no cigar! We were talking about deficit reduction and you included social security as one of the programs that should be put on the table in reducing it. That was just plain wrong. BTW thanks for serving!

You're welcome. SS spends more in benefits than it takes in as income. The problem will worsen over time. Sounds like a deficit to me.

Well Sarge, If you can't agree with your former Commander in Chief, president Reagan, there is nothing I can do to convince you that SS has nothing to do with the national deficit. The future of SS may need to be addressed but that debate ought not to be mixed up with debates about the national deficit. Keep em separate.


I'll take another stab at it, just for the heck of it. Up until the last few few years the SS Trust fund has always taken in more than it pays out. By law, that surplus goes into the US Treasury's general account for virtually everything else we spend money on. The SS Trust Fund gets an IOU, which essentilly means the Treasury will cover any deficits up to the total amount of IOUs. After that, the SS Trust Fund becomes insolvent.

Here's the deal: When the Treasury has to make good on those IOUs, we have to borrow money from somebody for the transfer. I don't care how you spin it, that is a deficit. It isn't on par with the other big ticket spending programs, but I think it's unwise to wait until all the IOUs are gone before we address the problem.
 
[I'll take another stab at it, just for the heck of it. Up until the last few few years the SS Trust fund has always taken in more than it pays out. By law, that surplus goes into the US Treasury's general account for virtually everything else we spend money on. The SS Trust Fund gets an IOU, which essentilly means the Treasury will cover any deficits up to the total amount of IOUs. After that, the SS Trust Fund becomes insolvent.

Here's the deal: When the Treasury has to make good on those IOUs, we have to borrow money from somebody for the transfer. I don't care how you spin it, that is a deficit. It isn't on par with the other big ticket spending programs, but I think it's unwise to wait until all the IOUs are gone before we address the problem.

I have a bit different take on it. No society in the long run can consume much more than it produces. When it tries to provide for the future in financial markets (people save and buy bonds) what the result will be really depends on what the bond issuers do with the money. Suppose the government of Beckystan is worried about providing for an aging population. It raises money by marketing retirement bonds to its citizens. It uses the money to build medical schools, train medical personnel, encourage housing adaptable for conversion to wheel-chair accessibility, zoning and public transportation with an aging population in mind and so forth. When in fifteen years the public begins to redeem the bonds, the government can raise taxes or borrow the money. But the curcial point is that the supply of physical and human capital needed to support the aging population IS ALREADY IN PLACE. If the Beckystan government had invested in an unsuccessful war with its neighbors over water rights, there would be nothing to show for it, the government would still be confronted with the problem of bond redemptions, but when it redeemed the bonds the main effect would be inflation in the price of all those goods and services needed by the aging population. This is what I am afraid we are doing.

You are correct that when the current accounts surplus of Social Security was invested in Treasury bonds, that excess de facto became available to support spending. If we got into a bunch of expensive wars and let our infrastructure and research capability deteriorate, (which we did) we are up shit creek without a diaper. Had we made public investments rather than "give back" revenue in the form of tax cuts, we would be better off. There ain't no such thing as a free lunch. That applies to government functions as well. If the idea is that the private sector does a marvelous job, much better than the public sector, and that by restraining government spending the private sector would magically do the proper infrastructure and long-term growth investing for us, you can blame all of Interstate bridges that fall into the Mississippi River on Goldman Sachs. A sane society would blame it on magical thinking. Markets are not designed to handle social investment (defined as investment with large portions of positive externalities) and they suck at it.
 
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