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September 07, 2010

Obama's Former OMB Director: Yeah, We Should Keep All The "Bush Tax Cuts" For Awhile. Then We're Going To Have To Raise Taxes On The Middle Class

Peter Orszag says, you can keep your damn tax cuts for two years then it's back to work for your masters at the federal government.

In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.

Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.

Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets donít seem at the moment to view the budget deficit as a problem ó take a look at the remarkably low 10-year Treasury bond yield ó there is little reason not to extend the tax cuts temporarily.

So much for not raising taxes for anyone making under $250K.

Orszag is also nuts about the politics of this. It will be just as hard to raise taxes in 2 years leading up to the '12 elections.

Here's the thing I never get about liberals, if taxes are bad in a recession because they do bad things to the economy, why is raising taxes ever a good thing? And oh, I thought whenever conservatives talk about cutting taxes the cry is always that there's no proof they stimulate the economy? It seems liberals want to have it both ways when it's convenient.

The real truth is they are simply more interested in increased government influence over the market and individuals. If you have to run more of your money through them just to get by on what you are allowed to keep and the "services" you are given (with your own damn money), then government is more and more important and powerful.

In Orszag's telling of it, cutting the federal budget is simply a non-starter, there's nothing left to cut.

Letís look at the facts. The projected deficit for 2015 is 4 percent to 5 percent of G.D.P., depending on whose assumptions you use. A sustainable level is more like 3 percent or lower. So we need deficit reduction of 1 percent to 2 percent of G.D.P., or about $200 billion to $400 billion a year by 2015. These figures are uncertain, but theyíre the best we have (and they may well turn out to be too optimistic).

How much savings is plausible on the spending side? Medicare, Medicaid and Social Security will account for almost half of spending by 2015. Even if we reform Social Security, which we should, any plausible plan would phase in benefit changes to avoid harming current beneficiaries ó and so would generate little savings over the next five years. The health reform act included substantial savings in Medicare and Medicaid, so there arenít further big reductions available there in our time frame.

The other half of the budget is mostly net interest (which is not negotiable unless we renege on our debt) and discretionary spending. Discretionary spending is split roughly equally between defense and non-defense spending. The defense component already assumes a phase-down in both Iraq and Afghanistan; saving an additional 5 percent of the Pentagonís base budget would be a substantial accomplishment and would yield about 0.2 percent of G.D.P. Cutting 5 percent out of non-defense discretionary spending, a stretch politically, would save about as much.

Put aside the farce of the health care bill saving any money and consider the rest.

He says we need to save between 200 and 400 billion dollars a year over the next 5 years. Unpossible! Raise taxes to the levels of the 1990s and everything will be fine!

How about we cut spending back to the horrible days of...2007 and 2008? How could this miracle be accomplished? By rolling back the spending increases that the so-called "stimulus" bill baked into the cake moving forward.

All of the major news outlets are reporting that the stimulus bill voted out of conference committee last night has a meager $789 billion price tag. This number is pure fantasy. No one believes that the increased funding for programs the left loves like Head Start, Medicaid, COBRA, and the Earned Income Tax Credit is in anyway temporary. No Congress under control of the left will ever cut funding for these programs. So what is the true cost of the stimulus if these spending increases are made permanent?

Rep. Paul Ryan (R-WI) asked the Congressional Budget Office to estimate the impact of permanently extending the 20 most popular provisions of the stimulus bill. What did the CBO find? As you can see from the table below, the true 10 year cost of the stimulus bill $2.527 trillion in in spending with another $744 billion cost in debt servicing. Total bill for the Generational Theft Act: $3.27 trillion.

Ignore the debt service number on the added spending and focus on the $2.527 trillion over the next decade. Let's see, divide by 10, carry the two, ah yes. that's $250 billion in cuts per year over the next decade. That's right in the 200-400 billion range, right?

Of course, I'm interested in cutting back below the level of the Bush years but this seems like a good start.

budgetdebt.jpg


Let's be honest, economics has nothing to do with the Democrats tax positions. They simply want to 'spread the wealth around' to their favorite groups and increase federal power. Nothing more, nothing less.


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posted by DrewM. at 03:57 PM

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