Another Bogus Budget
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| Tue, 02-03-2004 - 2:51pm |
By PAUL KRUGMAN
ell, whaddya know. Even as the Republican leadership strong-armed the Medicare drug bill through Congress, the administration was sitting on estimates showing that the plan would cost at least $134 billion more than it let on. But let's not make too much of the incident. After all, it's not as if our leaders make a habit of faking their budget projections. Oh, wait.
The budget released yesterday, which projects a $521 billion deficit for fiscal 2004, is no more credible than its predecessors. When the administration promises much lower deficits in future years, remember this: two years ago it projected a fiscal 2004 deficit of only $14 billion. What's new this time is that the administration has decided to pay lip service to conservative complaints about runaway spending.
Over the past few months, many pundits have obediently placed the onus for rising deficits on "a vast increase in discretionary domestic spending," or words to that effect. By the way, the Heritage Foundation, which has orchestrated this campaign, is cagier than those pundits; it covers itself by relying on innuendo, never saying outright that domestic discretionary spending is the source of the deficit.
To mollify these critics, the new budget purports to shrink real domestic discretionary spending. This won't happen; even if it did, it would have a negligible impact on the deficit. But it isn't just a fake solution — it's a response to a fake problem.
The prime cause of giant budget deficits is a plunge in the federal government's tax take, which fell from 20.9 percent of G.D.P. in fiscal 2000 to a projected 15.7 percent this year, the lowest share since 1950. About 45 percent of this plunge can be attributed to the Bush tax cuts. The rest reflects the end of the stock market bubble, the still-depressed economy and — probably — growing tax sheltering and evasion.
It's true that increased spending also contributes to the deficit, and that there has been a substantial increase in discretionary spending — spending that, unlike such items as Social Security payments, isn't automatically determined by formulas. But the bulk of this increase has been related to national security.
Traditional budget measures distinguish between defense and nondefense discretionary spending. Even by these measures, defense accounts for most of the increase in recent years. But a better measure would group homeland security and other costs associated with 9/11 with defense, not domestic programs. The Center for American Progress — confirming related work by the Center on Budget and Policy Priorities — estimates that from 2000 to 2004 security-related discretionary spending rose to 4.7 percent of G.D.P. from 3.4 percent, while nonsecurity spending rose to only 3.4 percent from 3.1 percent.
In other words, the role of nonsecurity spending in the plunge into deficit is trivial, compared with tax cuts and security spending. (Credit where credit is due: the administration's budget numbers show the same thing.) And even severe austerity on nonsecurity spending won't make a significant dent in the deficit.
So what will it take to get the budget deficit under control? Unless Social Security and Medicare are drastically cut — which is, of course, what the right wants — any solution has to include a major increase in revenue.
Many Democrats have called for a partial rollback of the Bush tax cuts, preserving the "middle class" cuts — those that convey at least some benefit to the 77 percent of taxpayers in the 15 percent tax bracket or below. Such a partial rollback would have reduced this year's budget deficit by about $180 billion; that would help, but one hopes politicians realize that it's not enough.
Another major source of revenue could be a crackdown on tax loopholes and tax evasion, which has reached epidemic proportions. In particular, what's going on with the tax on corporate profits? That source of revenue is down, as a percent of G.D.P., to 1930's levels. No, that's not a misprint. And receipts are not growing nearly as fast as one would expect, given an economic recovery that has bypassed workers but given big gains to their employers. An administration that actually tried to make corporations pay their taxes might be able to find $100 billion or more each year.
An eventual budget solution will involve all this, and more. But the first step is to stop looking for villains in all the wrong places.

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Conservatives have traditionally been the conscience of America's checkbook (and, to their credit, many now are screaming). If Mr. Bush were a genuine conservative, he might cut taxes, but he would cut spending to match. If he were an honest liberal, he might increase spending, and taxes as well. Instead, the president is inviting us out for a wild night on the town and leaving us — and our children — with the bill."<
>"Dishonesty is a strong word. But the new book about former Treasury Secretary Paul O'Neill discloses that Mr. Bush's 2001 speech to a joint session of Congress about his budget contained a falsehood — about paying off all possible American debt — even after Mr. O'Neill pointed it out.
"That night, Bush stood before the nation . . .," recounts the book, "The Price of Loyalty," "and said something that knowledgeable people in the U.S. government knew to be false." I've excerpted that speech at nytimes.com/kristofresponds (look for Posting No. 266), and it makes painful reading."<
>"The reality is that under Mr. Bush, surpluses have completely vanished. Granted, he had help from a bad economy. But spending has increased more rapidly than under any president since Lyndon Johnson, and Mr. Bush refuses to pay for it. I've seen that story before — in Argentina.
Now the I.M.F. has warned that the U.S. budget and trade deficits are a threat to the global economy.
A new study from the Brookings Institution, "Restoring Fiscal Sanity," estimates that by 2014 the average family's income will be $1,800 lower because of slower economic growth caused by these budget deficits. A family with a 30-year $250,000 mortgage will be paying $2,000 more per year in interest costs alone."<
>"Mr. Clinton had egregious personal failings, and I deplored what I felt was his dishonesty. But as a steward of the economy, he combined fiscal conservatism with a willingness to stand against protectionism. No leader today, Democrat or Republican, is so forthright about the economy, and it's sad to see Democrats retreating from free trade.
Compared with Mr. Bush, John Kerry and most other Democratic presidential candidates are paragons of responsibility — but only compared with Mr. Bush. The reality is that promises by Democrats like Mr. Kerry to start new health care programs, keep some of the tax cuts and restore black ink are nonsense. But it's less nonsense to say 2 + 2 = 5 (Mr. Kerry) than to say 2 + 2 = 22 (Mr. Bush)."<
Quotes from op-ed
>"The federal government's gross debt — the accumulation of its annual deficits — was about $7 trillion last September, which works out to about $24,000 for every man, woman and child in this country. But that number excludes items like the gap between the government's Social Security and Medicare commitments and the money put aside to pay for them. If these items are factored in, the burden for every American rises to well over $100,000."<
>"A national education campaign to help the public understand the nature and magnitude of the long-term financial challenge facing this nation is essential. After all, an informed electorate is indispensable for a sound democracy. Young Americans especially need to become active in this discussion — because they and their children will bear the heaviest burden if today's leaders fail to act.
Absolutely. What got me is Bush is intending to propose another big tax cut for the wealthy (because they pay the bulk of taxes, never mind that get the bulk of the GDP).
This is a transfer of the tax burden from those who have to those who don't have. This is one way to get rid of social services and social security--bankrupt the country. Coupled with the effect of globalization we are really headed for HARD times. What will we think of Bush then--But of course he won't admit he had anything to do with the decline; it's the fault of those who follow him--or better yet Clinton! What Bush excells at is pointing the finger at others.
Clinton's higher taxes is partially what got us into the recession.
When taxes go down, the economy does better, and that means more revenue for the government. Revenue will increase. Just give it a little time.
This is true, but to a much smaller degree, and only if you take into consideration the fact that the economy that Clinton enjoyed (the dot.com boom, the tech boom, the IPO boom) came falling down around him during his final 18 months in office (through no fault of his own) The tax increase was not severe enough to really do a lot of damage to the economy, especially if all of the above failures did not exist.
<< When taxes go down, the economy does better, and that means more revenue for the government. Revenue will increase. Just give it a little time
It worked under Reagan, but lets also remember that the top tax tier under Reagan was in the low 70% range.
We can only keep cutting taxes for so long. You can't cut what is no longer there.
I think that this tax cut should be the last one for a while, unless there is such growth in the economy where the Government will have great surpluses and can afford to provide another tax cut but this, however, is extremely unlikely.
In response to hayashigs notion of the tax structure in this country, these are the following facts directly from the IRS. (Please note that the income levels are for both single and combined income families)
The top 1% of wage earners (making $300,000 or more) pay just over 34% of the total federal income tax burden
The top 5% of wage earners (making $110,000 or more) pay just over 53% of the total federal income tax burden
The top 10% of wage earners (making $85,000 or more) pay just over 79% of the total federal income tax burden.
The top 10% of wage earners received just under 34% of the total tax cut by the Bush administration.
If the tax cut were unfair as many Democrats have stated, dont you think that the top 10% of wage earners would have received a larger portion of the pie considering how much more of the total pie they are actually responsible for?
No, higher taxes decreased our deficit
Your right it is a notion. However to refute it you would have to compare the percentage of GDP going to each tier with the percentage of taxes paid. So far I haven't seen any statistics.
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