Retirement and Social Security Reform
Washington Must Avoid Tax Trap That Will
Send Economy To Brink
Investor's Business Daily
January 28, 2010
By Ernest S. Christian and Gary A. Robbins
This is the first installment of a two-part article
focusing on the Congressional Budget Office's "Budget
and Economic Outlook: Fiscal Years 2010 to 2020," released
Tuesday. The second part will take an expanded look after
the actual "Budget of the United States Government for
Fiscal Year 2011" is released next Tuesday.
Despite the president's efforts to put a better face on the
disaster, the Congressional Budget Office tells a frightening
story of an already-too-large public debt rising precipitously
from 41% of GDP in 2008 to at least 92% in 2020 largely because
(1) About $2.7 trillion of what was essentially "optional"
debt incurred in 2009, when the president and the Congress
took advantage of the situation to enact long-term legislation
on top of temporary economic stimulus measures.
(2) An additional $5.7 trillion of still-optional debt attributable
to the president's proposals for future legislation detailed
by CBO in June 2009 in "An Analysis of the President's
Budgetary Proposals for 2010." (It is not too late.
He can still back out in the interest of fiscal sanity.)
We can't tax our way out of the hole the president
and the Congress are digging for us. Tax increases cost the
economy more than they yield to the Treasury in revenue -
and especially so in a recession.
We've already proved we can't spend our way out. It's a rare
dollar of spending with a "multiplier effect" of
as much as a dollar - usually it's less - so borrowing to
spend only digs the hole deeper.
And we can't count on a miraculous surge in economic growth
to rescue us from a debt crisis that, among other things,
further depresses an already depressed economy.
It is the looming $5.7 trillion of additional debt attributable
to presidential proposals not yet enacted that turns an already
dangerous fiscal situation into a crisis scenario so severe
that it cannot in reality be allowed to occur.
Therefore, the president should forgo these new initiatives
or offset their costs with immediate cuts in spending elsewhere.
Debt as a percentage of GDP would then be 66% in 2016 through
2019 and 67% in 2020 - obviously still unacceptably high,
but potentially within the "solvable" range.
For example, just for starters, spending cuts sufficient to
reduce debt by $2.7 trillion (the extra amount incurred in
2009) would get the debt-to-GDP ratio down to 62% in 2016,
61% in 2018 and 59% by 2020.
Call For Fortitude
The president and the Congress should go further and curb
spending sufficiently to get debt down to no more than 60%
of GDP by 2016 and headed rapidly downward thereafter. That
task alone will require a degree of political fortitude not
seen in Washington for many a day.
Creative accounting or some multitrillion- dollar "plug"
figure representing hypothetical budget savings to be recommended
in the future by an extracurricular commission or stacked-deck
congressional panel will not be sufficient. Real and immediate
changes in the law to cut spending are required.
The alternative is for the president and Congress to lead
us into a "tax trap" that works like this: continue
to spend, force the economy to the brink with debt, a plummeting
dollar and a decline in America's credit worthiness - and
then rush to the rescue with gigantic tax increases.
Cumulative tax increases of about $1.4 trillion over the period
2011 to 2020 would be necessary to bring the public debt down
to 60% of GDP by 2016 under CBO's current-law baseline and
hold it there. This implies a 4.5% increase in all tax rates
except for payroll taxes.
$6.7 Trillion Tax Increase
If the president's proposals for further legislation are also
enacted, a cumulative tax increase of about $6.7 trillion
would be required. This larger amount implies a 21% increase
in all tax rates except payroll taxes.
According to our Newclass economic model, the cost to the
private-sector economy of the $6.7 trillion tax increase would
be about $17.4 trillion or roughly $2.60 for every $1 of revenue
yield. The economy would be permanently smaller by a whopping
5%, and the unemployment rate would be 2% higher.
Tax-induced economic hardship of such magnitude would doubtless
call forth more spending, more debt and, ultimately, more
taxes in an ever-worsening, self-propelling downward spiral.
Let us hope that this Congress and this president reject the
tax trap and - instead - step up to the plate by cutting spending,
putting the nation's finances in order, lifting the heavy
hand of government and letting the private-sector economy
resume doing its job of producing goods and services and making
everyone better off.
That will be "change we can believe in," and a grateful
nation will applaud.
Christian, an attorney, was a deputy assistant secretary
of the Treasury in the Ford administration. Robbins, an economist,
served at the Treasury Department in the Reagan administration.