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Magazine 24
The
Fiscal Cliff: Another Crisis
the Dems Won’t Let Go to Waste
by Bruce Thornton
As
the economy hurtles towards the
Fiscal Cliff, President Obama on Wednesday scheduled a campaign event.
There he
recycled the class warfare rhetoric of rich people paying their “fair
share”
and the need to take a “fair and balanced” approach to the looming
disaster.
Ignored was the biggest driver of our impending bankruptcy: the runaway
entitlement spending that for decades has been identified as our
biggest fiscal
challenge. Yet so far, the Democrats have taken a hard line against any
reforms
of entitlement programs, and Obama has threatened to veto any agreement
that
doesn’t raise taxes on “millionaires and billionaires.” To switch
metaphors,
it’s as though the captain and crew of the Titanic had been watching
the
iceberg approach for four hours but steamed full-speed ahead anyway.
We
all know the massive trauma our
economy will suffer when the Bush tax-cuts, the 2% reduction in payroll
taxes,
emergency unemployment benefits, and certain tax-cuts for businesses
all expire
at the end of the year, at the same time the Alternative Minimum Tax
sweeps
millions of taxpayers into higher brackets, Medicare providers face a
27% cut,
and Obamacare’s 3.8% surtax on investment income kicks in along with 4
other
taxes. And don’t forget the automatic cuts mandated by the 2011 debt
ceiling
deal, $1.2 trillion over 9 years, half of that amount coming from the
defense
budget.
The
effects of these cuts will be
dramatic, as the Wall Street Journal reported in May: “In all,
according to an
analysis by J.P. Morgan economist Michael Ferule, $280 billion would be
pulled
out of the economy by the sunsetting of the Bush tax cuts; $125 million
from
the expiration of the Obama payroll-tax holiday; $40 million from the
expiration of emergency unemployment benefits; and $98 billion from
Budget
Control Act spending cuts. In all, the tax increases and spending cuts
make up
about 3.5% of GDP, with the Bush tax cuts making up about half of that,
according to the J.P. Morgan report.” An economy struggling through a
sluggish
recovery could slip back into recession as GDP is reduced by 4%, and
unemployment could top 10%. Cuts to the defense budget will degrade our
ability
to protect our interests and security in a world where the Middle East
is
imploding and China is flexing its hegemonic muscles.
This
combination of increased taxes
and spending cuts was created by the need to reduce the monstrous $16
trillion
debt, which the Tea Party movement and its electoral success forced
upon our
political consciousness. And everyone knows what is driving the
deficits
expanding the debt: out of control entitlement spending. Between 1960
and 2010,
entitlements exploded from 28% to 66% of federal spending, and more
than 34% of
households were receiving means-tested benefits. Just the costs of
funding the
83 federal programs dedicated to alleviating poverty are approaching $1
trillion a year. Under Obama this expansion has accelerated, as has the
deficits needed to fund them, $5.5 trillion in his first term. Food
stamp
spending, for example, doubled during Obama’s first administration, and
will
reach $82 billion next year, and almost $1 trillion over ten years. If
unreformed, Medicare, Medicaid, Obamacare subsidies, and Social
Security are on
track to devour 19% of GDP by 2050, a figure roughly the same as the
historical
average for tax revenues as a percentage of GDP. Overall federal
spending will
reach 43% of GDP, approaching the levels that are strangling many
European
economies. This trajectory is fiscally unsustainable, and if
uncorrected will
seriously damage our economy and the quality of life of following
generations.
Yet
despite the fact that our
problems arise from too much spending, and despite the graphic warnings
daily
issuing from Europe where the wages of unrestrained spending and
extravagant
entitlements are obvious, Obama and the Democrats have nothing to offer
but
class warfare magical thinking about making the rich “pay their fair
share,”
and vague promises of future spending cuts that history shows us never
materialize. The “fair share” meme, of course, is a dodge. By any
objective
standards, the “rich” already pay more than their fair share. In 2009,
the
bottom 20% of taxpayers earned approximately 5% of the nation’s income
but paid
just 0.3 percent of all federal taxes. Households in the middle 20%,
which
earned almost 14.7% of national income, paid only 9.4% of federal
taxes.
Americans in the top 20%, who earned 51% of the nation’s income, paid
almost
68% percent of all federal taxes.
Not
only in terms of taxes paid in
proportion to share of income, but also in terms of benefits received
for those
tax dollars, the U.S. has a highly progressive and redistributive tax
system.
According to Scott A. Hodge of the Tax Foundation, “The lowest-income
Americans
paid less than $1,700 in total taxes, but received $17,617 in spending
benefits. In other words, they received more than $10 in spending
benefits for
every $1 they paid in taxes of any kind. Remarkably, middle-income
families
––whom Obama says government does not do enough for––got $1.15 in
spending
benefits for every $1 they pay in taxes. By contrast, the top 40
percent of
families pay far more in taxes of all kinds than they receive back from
government in benefits. For example, families earning between roughly
$86,000
and $110,000 paid an average of $23,289 in total taxes, but received
$22,938 in
benefits––equal to about 0.98 cents on the dollar. The wealthiest
families, those
earning over $712,000, paid more than $660,000 in taxes but received
$283,000
in spending benefits––equal to about 0.43 cents on the dollar.” These
disparities mean that the cost of entitlement spending is borne in the
main by
the top 40% of income earners. How much more “fair” can you get?
As
for a “balanced approach” that
makes raising tax revenues part of a plan to reduce the deficit, the
numbers
just don’t add up. Raising rates on those earning more than $250,000 a
year––the threshold for “millionaires and billionaires” in Obama’s
lexicon––would generate about $80 billion next year, when the deficit
is
projected to be about $1 trillion. That’s a scant 8%, the equivalent of
couch-cushion change. More important, historically every dollar of tax
hikes
leads to more than one dollar of spending. The tax raise is always a
fact,
while the spending cut remains an unfulfilled promise. As Stephen Moore
writes
in The Wall Street Journal, both Ronald Reagan and George H.W. Bush
negotiated
between $2 and $3 of spending cuts for every dollar in raised taxes,
but the
cuts never happened. Now Obama and the Democrats, according to House
Ways and
Means Committee Chairman Dave Camp, have offered $5 in tax increases
for every
$1 in spending cuts––$340 billion in spending cuts in exchange for $1.6
trillion in tax hikes. And if history is a guide, even that lousy deal
is
unlikely to happen.
We
have two explanations for what
Obama is up to. The least likely is that he’s massively ignorant about
economics and really believes that he can reduce the deficit by taxing
the
“rich.” I think it more probable that he and the progressive Dems know
exactly
what they’re doing: not letting the economic crisis go to waste, but
using it
to attack and weaken the Republican Party, and expand the reach of the
federal
government and their own power by redistributing wealth to fund
entitlement
programs that benefit their political clients. That’s how Obama will
fulfill
his pledge to “fundamentally transform America.”
Source:
FrontPageMag
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