Tuesday, July 19, 2011

The Improper History of Tax Cuts and Budget Surpluses

What I hate more than anything is talking heads taking little pieces of history that reinforce their narrative, leaving things out of the larger historical context. The one that has me on edge at the moment is the whole “Clinton left us with a surplus and Bush squandered it with his tax cuts” line. This of course goes to the whole “raise the taxes on the wealthy to save us from our debt”. We keep hearing about “fair share” and how raising the rate from 35% back to the golden years of 39% is what is needed. The rich are doing so well why can’t we tax their ill-gotten gain to solve the problem? This plays nice to talking points, and in the tiny microcosm they want to focus on it may seem proper, yet it takes things out of their historical context to make the case.
Yes, Bill Clinton left office with a budget surplus, that is undeniable, and deserves some recognition, but this was not the result of some grand Liberal vision of the fair distribution of wealth. So we are clear, I am not an economist. To be completely clear, you could probably fit everything I know about macroeconomics in a tiny little thimble and still have room for all I know about astrophysics, Indian cuisine and women, but I can read. If you examine the Federal budget for the years 1995 to 2000 and the associated
This is not an attempt to laud George W. Bush, that isn’t ever going to happen here, but it is important to examine the whole package in our present debate. Federal revenues are crashing with a recession as he comes into office, and in an attempt to spur the economy he asks for tax cuts. You can, if you would like, disagree with the fundamental principles behind this, it is a free country after all, but the tax cut law was passed in June of 2001, and we all know what happened after that. The September 11th attacks essentially ended all economic activity in this country for over a month (remember the airlines and the insurance industry) which further depressed tax revenues. Then there is the build up for war in Afghanistan and the associated hand-outs and bribes that were necessary to attack a landlocked country in an unfriendly area, and your budget surplus is gone. Yes, when having the discussion we need to remember, and remind Republican blowhards, that in the years afterwards there are Trillions of dollars flushed away on Medicare prescription drug benefits and a war in Iraq and not many Republicans seem concerned with debt or future generations or anything else for that matter. All I am trying to say here is that to laud over this little nugget of “there was a budget surplus that was destroyed by tax cuts to fat cats” is disingenuous and never takes into account the full picture.
It is especially disingenuous when you fast forward to today and use it as your talking point on how we can simply have it all with the proper tax rate. The Federal budget is over $1.5 Trillion overdrawn this year ($2.17T receipts vs. $3.82T in expenditures is the White House estimate) If you look at the housing bubble and the 2007 capital gains taxes collected, even at the old Clinton rate, we would have still been overdrawn. If your answer is to include the affect of income taxes in the equation you have to remember that everyone paid higher taxes under Clinton, not just the rich, and no people in charge are advocating rolling back all the tax cuts. We are spending more money then we could possibly take in. At present the government is spending, and plans to continue to spend, 25% of GDP while collecting slightly over 14% of GDP in tax revenues. With 9% unemployment that revenue figure is not to be unexpected. But even under the Clinton tax regimen the government only collected 20.6% of GDP in tax revenue, the second highest percentage ever (and that was with the afore mentioned Tech Boom Bubble). So even with that 20.6% rate in place, if you could forward the notion it would have no negative effect on the economy as a whole, we would still be well overdrawn. Most projections have this disparity in percentage shrinking, yet staying in the negative for years to come (go
tax revenue you see some interesting things. If you look down the capital gains section you notice a 150% increase over that period. When you examine a table of just capital gains and taxes paid you see that there is a 187% increase in tax revenue paid on capital gains. What is with that crazy increase you ask? It is the Tech Bubble, remember that? I have a grand memory of it, because my friend and roommate at the time was a technical recruiter. Every day he would tell me stories of prospective job candidates demanding $100 per hour, full moving expenses and company credit cards, and they were getting everything they demanded. Things were definitely crazy at the time and employees and investors were riding high. Then the bubble burst when all those jobs were sent overseas. You can see that reflected in the 48% drop in capital gains tax revenue 2000 to 2001, which is almost exactly the same percentage drop in the budget surplus ($236B to $128B). Riding this bubble, coupled with welfare reform and keeping defense spending flat (and actually cutting in a few of those years) kept the Federal government in the black. This windfall did not last though, and this is where the complete historical package comes into play.here to check the associated charts for yourself). The only short term solution that would save face for everyone would be to ride some out of whack bubble again to bring a yearly budget back to near black (doing nothing about the $14T deficit), but save for that we need to spend less money across the board. There is no magic ideological silver bullet that will save us by only eliminating the EPA or only raising taxes on the Koch brothers. When we focus on the tax issue, or make the tax issue the central point, we miss the larger picture. The need to restructure spending and entitlements needs to be first and foremost in everyone’s mind. Hopefully we can stop spending money in Iraq and Afghanistan sometime pre-2020, but even if we do under the present system retiring baby-boomers are going to add that money and more into the Medicare and Social Security burden. Reality needs to set in not only in Washington, but with everyone at home; for until they start realizing not only the need for change, but what change entails, then dingbat politicians will continue to read poorly done polls about wanting higher taxes on “them” yet all the programs for “me” and somehow try to govern and lead without upsetting that ridiculous notion.

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