Why don’t we Link Spending and Revenue

Google Plus user +Paul Clayton Smith asked a fundamental question yesterday, which I’ll paraphrase here: “Are the dollar figures we see coming out of Washington DC taking into account the nature of the wealthy to avoid taxes, or do the assumptions of revenue gained by tax take into account only present day figures of GDP, incomes, taxes and other inputs into the economy?”

Budget
The question is key because to understand the way politicians and the Beltway play with our money is to understand the fundamental disconnect between the amount of that money they take from us and how much they spend on things that benefit only portions of society. For instance, the current “budget” for the Federal Government is over $3.79T, while current revenues only make up around $2.47T. Simple math would indicate the nearly $1.32T in deficit spending the Government takes out of hide based on these numbers. With all the talk in DC about the deficit and how it is a potentially crippling black hole that must be dealt with at some point, one would think that meant there should be a mechanism that would force Congress to keep spending to within a manageable range compared to revenue, but if you take our current “budget” numbers into consideration you’d find there isn’t much in a way of a link between taxes and spending at all.

What is the problem?
Why should there be a correlation between spending and revenue? What difference does it make whether or not the Federal Government balances its budget? Can’t the Treasury just print the money it doesn’t have to make up the difference, or borrow against the credit of the United States in order to keep the bills paid?

Technically, the Federal Government can’t ever “run out of money”. The Treasury can simply print every dollar that is required to fund the Government above and beyond tax revenues, or the Federal Reserve can borrow the money. Many Liberals believe this is acceptable as a course of action, and in fact, a combination of printing and borrowing has been the make-up of over $0.40 of every dollar the US Government has spent for the majority of the last four years.

Printing devalues the currency because it increases supply when there is not a corresponding increase in demand. Demand, in this case, is the productivity of the economy creating money out of products and services. The US Government requiring funding to accomplish its agenda doesn’t constitute demand for the dollar because there is no corresponding product or service created by the Government when the money is created.

Borrowing is expensive, and, if uncontrolled, as it has been for decades, can put the Government in a situation where its interest liability is so high that the revenues brought in by taxes are not enough to cover both spending goals and the mandatory servicing of the debt. Servicing the debt is the primary concern in every budget because to default is to damage the full faith and credit of the US Government on the world stage. If we don’t pay our bills no one will want to continue lending to us. What we’ve done, though, instead of paying our bills, is effectively taking out a loan to pay down only the interest on another loan. This is not a sustainable track.

Whats the solution?
We borrow and print over half the value of revenues into the Treasury every year (in the present budget model, which isn’t actually a budget, but a continuing resolution). In order to solve the fiscal problems the Government has this funding activity must be reversed. Currently the budget is set up so that safety net entitlement programs like Social Security and Medicare/Medicaid, which politicians have convinced voters are the Government’s responsibility, are considered mandatory spending. Items the Federal Government is actually Constitutionally charged with providing for its citizenry, for example, a strong defense, are considered discretionary spending. In order to reverse the overspending we’ve seen over the course of the last several decades there must be a concerted effort by all in Washington DC to stop spending more money than the Government can generate in tax revenue. To do this our politicians must come to terms with what the Government is required to provide for its citizenry and what it can afford to provide for its citizenry.

Why not just raise taxes?
Over the course of our Nation’s history there have been attempts in both local and Federal Government to increase revenues through higher taxation as a means of reducing deficit spending. The idea is that the increased taxes will bring more money into the coffers, and the spending can continue at its present rate, unabated. One major problem with tax rate increases is that the individual is free to make choices that will impact the overall revenue generated by the increased taxes. A prime example of this is the exodus of wealthy individuals from California following the recently passed Proposition 30 tax increases. The State decided to increase income tax rates for individuals with incomes over $250k/yr, up one percent to 10.3% (the increase is retroactive all the way back to January, 2012, due in April, 2013), while those making over $1M/yr will see their tax rates increase to 13.3% (again, retroactive to January 1st, 2012). These tax increases on the wealthiest in the state have made many consider taking action that will reduce or eliminate their tax liability in this regard. There are also considerations that need to be taken into account in terms of property taxes and other, locally generated government revenues, which are not able to be voted on directly by the citizens under the local government.

Human beings will all avoid pain, given the opportunity to do so and no motivations to do otherwise. As noted in the linked article, the financial planner being interviewed commented that until the tax rates reset down in seven years he will make sure his clients incomes are less than $1M/yr. Those who can shelter their incomes from the tax man will do so. Those who cannot may have no choice but to leave the state.

What about at the Federal level? The Federal Government has a captive audience when it comes to tax increases because its much more difficult to simply leave the country to avoid taxes than it is for Californians to go to South Dakota or Texas, right?

Well, when taxes, an inversely proportional input into the overall economy, are increased, overall economic growth decreases. This stems from the fact that when an individual or entity is forced into a liability that is payable before their income is realized that liability is taken into account when the individual or entity budgets their remaining income for a period of spending. For the micro scale, simply put, if the tax man takes X from individual Y based on income Z, net income Zn is the remaining spending power of the entity. If X is increased there is an inversely proportional decrease in Zn.

For the macro scale, when the economy sees a collective decrease in Zn, across all entities and individuals, the entire economy stalls. Since taxes are a function of a percentage of the Nation’s GDP, if GDP growth stalls so does tax revenue.

Conversely, when taxes are decreased, Zn increases, causing entities to purchase more, which causes producers to produce more, sell more, and the engine runs faster. When the engine runs faster tax revenue increases because the overall number of entities with tax liabilities increases along with GDP. As indicated before, tax rates being a function of a percentage of the Nation’s GDP, when GDP grows quickly Federal revenues grow quickly.

Coupling lower taxes with decreased spending will solve our Nation’s fiscal problems. The path to this lies in
the hands of the politicians we vote for. They won’t do it on their own, though. Once most politicians find themselves enjoying life in the Beltway they learn quickly that they need only give their constituents gifts from the public trust in order to continue their employment. Every dollar they earmark or bring home to their district is a dollar spent by the Federal Government on something that benefits a few, but is paid for by everyone.

To claw our way back from the brink of fiscal collapse we Americans must hold our elected officials accountable for not only their responsibilities to their constituents, but also their responsibilities in being proper stewards of the public trust. Until this happens, we’re going to repeat recent history every year until it is no longer sustainable to do so. Once it is no longer sustainable, we will find out very quickly what government services are luxuries and what services are necessary. We’ll also find out very quickly how to live with neither.

The Truth About Taxes

While all the wrangling in Washington about tax rates is important to our wallets, when it comes to government revenues, it is absolutely meaningless.

The fact is, our tax code has become less about raising revenue and more about buying votes, creating class tensions, and control over the lives and behaviors of US citizens.

As far as the federal government is concerned, it doesn’t matter what the tax rates are, nor does it matter how much money comes into the treasury. Congress will spend every single dime of it. And when our tax dollars inevitably run out before the year does, they will borrow or print more money and keep on spending.

Keep that in mind as our fearless leaders debate over the upcoming Fiscal Cliff.

(“Fiscal cliff.” I hate that phrase. This is no cliff…we’ve been flirting with the edge of the abyss for years. We’re just closer to it now, our president says, “Forward,” and the only response from House leadership is, “How fast?”)

Budget Negotiation 101: Avoiding The Fire

Many in the media are proclaiming President Obama’s ‘nonoffer’ offer for a solution to the erstwhile fiscal cliff as ‘brilliant‘ and ‘courageous‘.

No, I am not kidding… read the New York Times or Washington Post.

The left seems to believe they have Republicans where they want them.  And actually, they may be right.  Republicans took a drubbing in the elections, and polls show the public will blame them, and not Democrats, if the fiscal cliff occurs.  And moreover, they don’t think that Republicans have any counter offer that will matter.

So, in answer, I present to you the Bowles-Simpson commission of 2010.

Look, the above commission is not ideal; far from it.  It raises taxes far more than I like and cuts some programs like Medicare far less than I would.

But the reality is we are in a deep dilemma as a party.

We have two choices:  one, walk away from the talks, let the fiscal cliff occur, and take the blame.  In which case we either get lucky and the public forgets their anger at the GOP by the time the 2014 elections roll around (unlikely), or we get crushed and Obama has two years where he is a lame duck but has control of all segments of Washington, D.C. A frightening thought.

The second choice is to present something that may pass that may solve at least a few of our problems.  For all the problems with Bowles-Simpson, it would start to put the country on a track to some fiscal sanity.  It restrains entitlements significantly enough that we have the prospect of avoiding a debt crisis, and forces long term changes to programs that have so far been untouched.

One side benefit:  Liberals hate it.

Sure, it raises taxes.  Tremendously.  But we better start to realize that is coming anyway.  If we walk away from the talks, the Bush tax cuts expire, in which case we actually get a scenario where we raise taxes more than the Commission ever would have.

Of course, the right wing of the party would have to get behind this, which is unlikely but possible.  We should unite as a party, and say we will vote for this solution, lock, stock and barrel.  No one in the media can state this isn’t a serious proposal, after two years of anointing Erskine Bowles and Alan Simpson as the ‘Guardians of deficit sanity’.  Furthermore, it would show Obama for what he really is:  a paper tiger, and nothing more.  Obama is as unserious about deficit control as any man on the planet, and putting this up would show his true colors.

Sure, passing Bowles-Simpson would hurt.  The economy might take a hit from the tax increases alone.  But the GOP is a party with few open paths before it.  And among the very bad choices we have at hand, this may, at the very least, be a viable path forward.

Cross posted from Neoavatara. 

How I Came To Love The Fiscal Cliff

President Barack Obama sent his chief negotiator, Treasury Secretary Timothy Geithner, to Congress yesterday with his glorious plan for deficit control and to avoid the fiscal cliff.

Treasury Secretary Timothy F. Geithner presented the House speaker, John A. Boehner, a detailed proposal on Thursday to avert the year-end fiscal crisis with $1.6 trillion in tax increases over 10 years, $50 billion in immediate stimulus spending, home mortgage refinancing and a permanent end to Congressional control over statutory borrowing limits.

What is magical about this?  Note what is missing:  spending cuts.  Basically, Obama wants $1.6 trillion in new taxes, another $1 trillion in new spending, a permanent lifting of the debt limit (a power no President has ever had)…and says he will promise to cut spending later next year.

Heh.

Credit Mitch McConnell…he can be a doofus sometimes, but don’t call him stupid.  He laughed in Geithner’s face…literally.

I am what many conservatives may call a moderate.  I am, reluctantly, willing to give up some tax revenues if we get some real entitlement reform.  I think increasing taxes now is terrible fiscal and economic policy, but the American people gave the White House to Mr. Obama, so I live within that reality.  But, if we take Obama at his word, we should expect $3-$4 of cuts for every $1 of taxes.  That is what he himself promised on the campaign trail, as well as in the Presidential debates against Governor Romney.

This proposal?  At best (and this is an actual stretch) he proposes $1 of spending cuts to $4 of tax increases.  In other words, exactly the opposite of his prior promise.

Liberals applauded Obama’s courage, taking a stand for grand progressive ideology. That is ludicrous.  What Obama did is marginalize the centrists in the Republican party who were willing to at least consider tax revenues, while giving the Right more power to control the debate.  In short…Obama overplayed his hand. Obama does have some political capital here, but not as much as liberals would like to think.  They have argued that he won a huge mandate on November 6th.  And although I am willing to admit he deserves some leeway (one reason I am giving up the huge concession of tax revenues to begin with), defining his electoral victory as a mandate is laughable.  And more to the point, delusional.

So what Obama has done is forced the minority party into a corner.  What possible reason would Republicans have to talk to Obama about a proposal like this?  There frankly is none.  Obama seems set not to get a victory for the American economy, which would include some tax increases but also spending and entitlement reform; instead, he seems to be aiming for a short term political victory by blaming Republicans for going over the fiscal cliff.  Clearly, this is what will occur; the polls are quite clear on who the public will blame if that eventuality occurs.

For me personally, giving up tax revenues in the debate was for a simple reason:  I am deeply concerned about the American economy.  Obama is playing not with fire, but with nuclear fissionable material.  Our economy is languishing, and has been on the precipice of a recession for well over a year, and if anything things are getting worse.  Going over the fiscal cliff could easily push us into a recession.

But Obama simply doesn’t seem to care.  His priority is small minded political victories at this moment in time.  So I say, lets give it to him.

This ends up to be a simple calculation on my part, that has virtually nothing to do with politics; in fact, if I had political goals in mind, I would completely reverse course and surrender to the Democrats.  Is there a compromise that puts American on better footing going forward, looking longterm?  Short term, the tax increases will hurt.  Liberals can fool themselves all they want, but there is NO economic theory in which raising taxes during a recession helps create jobs.  Whether you are from the Austrian School or Keynesian, tax increases during a slow economic period stagnates economic growth.

But long term, if we got some entitlement reform, the tax increases, as painful as they would be, would be worth it.  But right now, Obama has only put the pain on the table, and nothing to gain.  At which point, why even bother?  Democrats’ calculation is that this would be so politically bad for Republicans, they will fold.  I say hell with it.  If the American people want to follow the path of other failed nations (Greece, Spain, Portugal) by raising taxes and spending with no fiscal reforms whatsoever, let them vote the GOP out in 2014.  I would rather go down swinging.

I am not a reactionary at heart.  I am pretty down to earth, look for practical solutions, am willing to compromise for the greater good, even at times it pains me to do so.  I was not the type that would protest in college, would get all riled up at the simplest insults, would be looking for my next cause to get fired up about.  So calling for us to ignore Mr. Obama’s proposal, walk away, and say hell with it?  It is not in my nature.  But at some point, a line is crossed…and that line seems to be hardening in the sand as I speak.  So if liberals really want to follow this path to fiscal ruin, I have only one answer.

Let it burn.

This was cross posted at Neoavatara.