The high cost of cutting costs

Posted Wednesday, April 25, 2012 in Analysis

The high cost of cutting costs

by Gina Hamilton

Republicans in Congress are bemoaning the fact that our national debt has climbed in the last 12 years, a fact that is inescapable. It's true, the debt is high ... now some $13 trillion. As a percentage of the gross domestic product, the debt is also high. But it's not as high as it has ever been, and if the economy recovers, it will begin to sink again.

The national debt is nothing but accumulated budget deficits. To balance a budget, there must be enough money coming into the government through taxes to balance what is being spent. Not rocket science. But increasing federal spending, for anything ... domestic or military programs, Social Security, health care, help jumpstarting a moribund economy ... means that a corresponding increase in taxation must occur. It is certainly not advisable to cut taxes when increasing spending. Right?

That simple reality has been roundly ignored for the last 12 years. 

A brief history of the national debt

At the beginning of the 20th century, debt was equally divided between federal and state and local debt, totaling less than 20 percent of GDP. There were no social programs to speak of; most of the debt was war-related and government-organization related. After World War I, in an era of high speculation in the stock market, the federal debt surged to 35 percent of GDP. But by the mid-1920s federal debt had declined to below 20 percent of GDP, with state and local debt rising to 16 percent of GDP. 

However, the Great Depression followed. Franklin Delano Roosevelt increased spending to assist out-of-work breadwinners, beginning in 1933. This boosted federal debt to 40 percent of GDP. State and local governments also increaased spending to help with increasing social needs. State debt peaked at over 5 percent of GDP and local debt peaked at over 28 percent in 1933. Government debt, including federal and state and local debt, rose to 70 percent of GDP during the Depression years.

But it was in World War II that the United States really entered new debt territory. Starting at 45 percent of GDP in 1941, federal debt zoomed, reaching almost 122 percent of GDP in 1946 after the end of the war, with state and local debt adding another 7 percent. Postwar, the debt retreated as the economy boomed and taxes were raised to new heights in the 1950s, '60s, and throughout most of the '70s. When Ronald Reagan was elected in 1980, he increased the federal debt up over 50 percent of GDP as part of his Cold War strategy. Debt began to subside again under Bill Clinton, with a five-year plan to eliminate the budget deficit. That plan did not stay on course, however.  George W. Bush increased the debt to declare war on Afghanistan and Iraq, while cutting taxes. Late in his presidency, he found himself forced into a bank bailout, which drove the debt up again. Barack Obama inherited a $10 trillion debt in 2009 during a massive recession, and increased it further to stimulate the economy. 

How to cure the deficit and the debt

Some time ago, the New York Times offered the public a chance to cure the deficit through a series of tax increases and spending cuts. It turns out, there is really no way to do it through spending cuts alone, and no real way to do it through tax increases alone, either. We solved the deficit in about 10 minutes. This is how we did it.

The New York Times figured a deficit in 2015 of $418 billion, and one in 2030 of $1.345 trillion. Our mission was to solve both problems.

Spending cuts:                                                                                                                                                                                                     

We cut 250,000 government contractors (it turns out hiring employees is cheaper) for a total of $17 billion.

We cut nuclear and space arsenals. In 2015, we saved $19 billion; in 2030, $38 billion.

We reduced the number of troops to pre-Iraq-War levels and further reduced troops in Europe. 2015: $25 billion in savings; 2030: $49 billion.

We reduced the size of the Navy and Air Force fleets. The Navy would build 48 fewer ships and retire 37 more ships than now scheduled. Overall, the battle fleet would shrink to 230 ships, from 286. In addition, the Air Force would retire two tactical fighter wings and reduce the number of fighter jets it planned to purchase. Our 2015 savings: $19 billion. Our 2030 savings: $24 billion.          

We canceled or delayed some weapons programs, specifically the F35 fighter jet and MV-22 Osprey, with less expensive equipment that the bipartisan Sustainable Defense Task Force judged to have similar capability. We would delay other purchases. Research and development spending, which the task force considered a relic of the Cold War arms race, would be reduced. Savings: 2015: $19 billion; 2030: $18 billion.

We cut the number of troops in Afghanistan to 30,000 starting next year. Savings: 2015: $86 billion; 2030: $169 billion.

We reduced Social Security for some people with high incomes. “Currently, initial Social Security benefits are determined in a way that allows them to grow with economy-wide wage growth,” says the Committee for a Responsible Federal Budget, a private group in Washington. Under this option, workers below the 60th percentile of the lifetime earnings distribution would continue to have their retirement benefits grow over time with average wage increases. But the benefits of top earners would grow more slowly – with inflation – while benefits for workers just above the 60th percentile would grow at a rate between inflation and wage growth. Savings: 2015: $6 billion; 2030: $54 billion.

Tax increases:

We returned the estate tax to Clinton-era levels. Under President Clinton, the estate tax exempted $1 million from any taxable estate. This level would not grow with inflation over time, subjecting more estates to the tax. The rate would start at 18 percent and climb to 55 percent, as it did in the 1990s. The 55 percent rate would begin at $3 million.  Increased income: 2015: $50 billion; 2030: $104 billion.

We returned investment taxes to Clinton-era levels, too: 10 percent on capital gains for low-income households and 20 percent for everyone else, while dividends would again be taxed at the same rate as ordinary income. Increased income: 2015: $32 billion; 2030: $46 billion.

We allowed the Bush-era tax cuts to expire for those earning more than $250,000. On average, the change would equal about 2 percent of a given household’s pretax income.  Increased income: 2015: $54 billion; 2030: $115 billion.

We ended the cap for payroll taxes, allowing those earning more than $106,000 to pay payroll taxes. Increased income: 2015: $50 billion; 2030: $100 billion.

We enacted a millionaire's tax. Currently, the top tax brackets starts at about $375,000. In past decades, it started at a much higher income level, after inflation is taken into account. This option – which the House passed but the Senate did not – would create a new 5.4 percent surtax on income above $1 million. Increased income: 2015: $50 billion; 2030: $95 billion.

We eliminated many tax loopholes but kept the tax rate higher than the Simpson-Bowles plan did. Increased income: 2015: $136 billion; 2030: $315 billion.

We reduced the mortgage tax deduction for some higher income households: Increased income: 2015: $25 billion; 2030: $54 billion.

We enacted a carbon tax. This would tax carbon emissions, starting at $23 per ton of CO2. The tax rate would increase at a constant annual rate of 5.8 percent, from 2012 through 2050. Consumers would receive a partial rebate. Increased income: 2015: $40 billion; 2030: $71 billion. 

We enacted a bank tax. This would tax banks based on the size of their holdings and the perceived riskiness of those holdings. Larger, riskier banks would pay more tax, both to discourage them from taking big risks and to help cover the costs of future financial crises. Increased income: 2015: $73 billion; 2030: $103 billion.

We cut some of the waste out of the military budgets.  We increased taxes on people who can afford to pay more.  Common sense changes that most Americans agree with.  What we didn't touch were entitlements, health care, or social safety-net spending. Somehow, we ended up with a balanced budget that shouldn't cause too much heartburn. (Unless you're a bank executive, oil magnate, war profiteer, or ... Republican congressman?)

Which makes us ask, why is Congress having such a hard time with this?

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