White House - $455B Budget Gap

[MTAtech]

"WASHINGTON, July 15 — The White House today projected a $455 billion budget deficit in the current fiscal year, by far the government's largest deficit ever and $150 billion higher than what the administration predicted just five months ago."
http://www.nytimes.com/2003/07/16/politics/16BUDG.html

"'Had Congress not enacted the president's three tax relief packages,'[OMB Director] Mr. Bolten added, 'the economy would be substantially weaker than it is, and there would have been substantially greater job losses.'

With statements like that, Mr. Bolten seemed to be saying that reducing taxes actually led to increased revenues for the government, a view prevalent in some conservative circles 20 years ago but basically discredited by economists since then."
http://www.nytimes.com/2003/07/17/politics/17BUDG.html

Excerps from Paul Krugman's column, 7/18/03, NYTimes

'Here's another sentence in George Bush's State of the Union address that wasn't true: "We will not deny, we will not ignore, we will not pass along our problems to other Congresses, to other presidents and other generations."

In its first budget, released in April 2001, the administration projected a budget surplus of $334 billion for this year. More tellingly, in its second budget, released in February 2002 — that is, after the administration knew about the recession and Sept. 11 — it projected a deficit of only $80 billion this year, and an almost balanced budget next year. Just six months ago, it was projecting deficits of about $300 billion this year and next.

There's no mystery about why the administration's budget projections have borne so little resemblance to reality: realistic budget numbers would have undermined the case for tax cuts. So budget analysts were pressured to high-ball estimates of future revenues and low-ball estimates of future expenditures. Any resemblance to the way the threat from Iraq was exaggerated is no coincidence at all.

And just as some people argue that the war was justified even though it was sold on false pretenses, some say that the biggest budget deficit in history is justified even though the administration got us here with cooked numbers.

Some point out that Ronald Reagan ran even bigger deficits as a share of G.D.P. But they hope people won't remember that in the face of those deficits, Mr. Reagan raised taxes, reversing part of his initial tax cut.

Furthermore, this time huge deficits have emerged just a few years before the baby boomers start retiring and placing huge demands on Social Security and Medicare. The Social Security system is running a surplus right now, in preparation for future demands; the rest of the federal government is paying one-third of its expenses with borrowed money. That's a record.

But haven't administration officials said they'll cut the deficit in half by 2008? Yeah, right. I could explain in detail why that claim is nonsense, but in any case, why bother with what these people say? Remember, just 18 months ago they said they'd more or less balance the budget by 2004. Unpoliticized projections show a budget deficit of at least $300 billion a year as far as the eye can see.

The last defense of the budget deficit is that it helps a depressed economy — to which the answer is "yes, but." Yes, deficit spending stimulates demand — but tax cuts for the rich, which have dominated the administration's economic program, generate very little employment bang for the deficit buck. Of the 2.6 million jobs the economy has lost under the Bush administration, 2 million have been lost since the 2001 tax cut.

And yes, deficits are appropriate as a temporary measure when the economy is depressed — but these deficits aren't temporary (see above).

Still, do deficits matter? Some economists worry, with good reason, about their long-run effect on economic growth. But I worry most about America's fiscal credibility.

You see, a government that has a reputation for sound finance and honest budgets can get away with running temporary deficits; if it lacks such a reputation, it can't. Right now the U.S. government is running deficits bigger, as a share of G.D.P., than those that plunged Argentina into crisis. The reason we don't face a comparable crisis is that markets, extrapolating from our responsible past, trust us to get our house in order.

But Mr. Bush shows no inclination to deal with the budget deficit. On the contrary, his administration continues to fudge the numbers and push for ever more tax cuts. Eventually, markets will notice. And tarnished credibility, along with a much-increased debt, is a problem that Mr. Bush will pass along to other Congresses, other presidents and other generations. '

[Mr. Goodbytes]

I get bored saying this over and over again, but why not waste my breath one more time? TAX CUTS DO NOT CAUSE DEFICITS--SPENDING DOES!!! They don't cost anything, yet you hear liberals whining about the "cost" of a tax cut, yet they never utter a peep about the cost of a new program, which by definition will cost more than proposed and cost more every year.

BTW, Reagan didn't raise taxes, he increased the number of people paying taxes and eliminated some tax shelters--Tax Reform Act of 1986.

[MTAtech]

In the movie 'Amadeus,' the emperor criticizes Mozart’s opera by saying it had, "too many notes." Mozart responded with, 'which ones would you cut out?"

The same holds here, which part of spending would you cut out? Are you proposing that Bush cut the billion per week we are now spending in Iraq that we didn't put in the budget?

You have previously stated that you would cut out benefits for those that don't pay taxes. Does this include the airline industry that got a huge subsidy but doesn't pay taxes because on the books they don't make money. There are billions of federal dollars either paid out in subsidies to various businesses or foregone in revenue due to tax breaks. The airlines are already hugely subsidized by federal monies for airport construction and have been since nearly the beginnings of civil aviation in the 1920s.

There is also huge corporate welfare programs that are larger than the programs designed for the poor.

Reagan didn't raise taxes, he increased the number of people paying taxes and eliminated some tax shelters--Tax Reform Act of 1986.

One person's 'tax shelter' is another person's deduction. In any case, a tax increase. Before 1986, I use income averaging, since I had some college jobs then got full-time employment, then got better jobs. I never made big money back then and income averaging saved me a lot of taxes. It is interesting spinning this a TAX SHELTER. In addition, another TAX SHELTER, as you put it, eliminated by the 1986 law was deducting credit-card interest which many low and middle income people pay. Those people would laugh if they heard it called a 'tax shelter.'

[Mr. Goodbytes]

Great musical--'Amadeus'

And speaking of spending, the Republicans are just as bad as the Democrats in this Congress. SPEND SPEND SPEND. Bush said he'd sign pretty much any presciption drug bill too. His whole liberal-lite new tone crap is pissing me off.

[Mr. Goodbytes]

You have previously stated that you would cut out benefits for those that don't pay taxes.

Don't ever recall saying that. I do remember talking about the extra $400 child tax subsidy that people will get even though they pay no federal income taxes already. People at that level already get the Earned Income Credit, we don't need another welfare program.

And yes, the airlines have in recent years gotten fat subsidies and loans, thanks in part to Linda Daschle (Tom Daschle's wife). She is Boeing's lobbyist, and with the help of her husband, who was an illegitimate Senate Majority Leader at the time, she scored a major leasing contract with the government for some 747's or something. LEASE-- government spends taxpayer money, then gives back planes. Why not just buy the jets?

And I fully support tax breaks to businesses, if it keeps them where they are. If a company finds that tax burdens are too high, then they will either move, or close down entirely displacing numerous workers who need the income. My town has been handing out all sorts of tax abatements to get new businesses to open up here. You gotta give a business incentive to operate where it does, or to move to your location. Profits are number one, and companies will go where they can make the largest gains.

[MTAtech]

I was going by memory instead of looking up a quote. The tax credit is probably what I was thinking of and it fits my comments.

You can't blame the airline bailout on the Democrats. The bill passed overwhelmingly. "In rapid succession the Senate by a 96-1 vote and the House by a 356-54 vote approved the proposal."
http://www.pbs.org/newshour/updates/...ines_9-22.html
Besides, the Republicans control the Senate and the House. Nothing passes these days without the Republican blessing. It wouldn't even get out of committee if the Reps didn't like it. Moreover, the Reps. also control the White House - that could veto it if it wanted to.

[MTAtech]

Corporate income tax in the U.S. is one of the lowest in the world.

I also forgot to mention other subsidies, like the farm subsidies. Remember those 'red states'? Those are the one's on the presidential election map that went for Bush. They get huge subsidies and this president is in favor of them.

http://www.usatoday.com/news/washing.../farm-bill.htm

Want to cut gov't spending? Talk to your president.

Oh, by the way, I'd love to cut the 11% of the budget that is interest but that's not going to happen as long as Bush is in power as deficits require interest payments.

http://w3.access.gpo.gov/usbudget/fy2001/guide02.html

[Max50]

I find it amusing a writer for the NY Times comments (link on first post) tax cuts don't stimulate the economy as believed by a small group of conservatives 20 years ago. JFK cut taxes and he wasn't a conservative.

Any economist worth his salt knows a tax cut would stimulate the economy, but the Economic Policy Institute in Washington D.C states federal spending in the current situation with low interest rates and a high level of unused capacity to produce has significance. With that circumstance, it would be better to stimulate the demand side by putting tax cut money into the pockets of middle and low income people and increase gov. spending rather than on the supply side and a tax cut to the higher income payers. Faster and more efficient and for some insight from the Economic Policy Institue:

A wage bonus from general revenues of $65 billion in early 2003 could quickly increase demand and boost production and employment. As mentioned above, tax cuts may have less effect than spending measures, because some of the money provided goes into savings, or goes toward buying imports as opposed to domestically produced goods and services. However, a wage bonus is included in this stimulus plan because government spending, in some cases, may take longer than tax cuts to take effect. Experience with the tax rebate in 2001 showed that rebates can be readily handled administratively. The 2001 rebate, however, would have had greater stimulus effect if it had been targeted more heavily toward lower- and middle-income households: they tend to spend more of a tax rebate, rather than putting much of it away in savings, as higher-income households tend to do.

A tax rebate tied to payroll tax payments in 2002 would reach a broader population and therefore be a more effective stimulus. However, the rebate should come from general revenues, so that payroll taxes earmarked for Social Security are not diverted. Thus, a wage bonus of 3.5% of earned wages, up to a maximum of $15,000, would benefit 149 million workers and provide $65 billion worth of stimulus without reducing the funds needed to keep Social Security solvent. This rebate would provide $525 to every worker earning $15,000 or more, and households with two such workers would receive $1050. A worker earning $10,000 (who did not receive the last rebate) would receive $350.

These wage bonuses could be received in early 2003 and therefore provide a quicker boost to spending than changes to the tax code, such as changes to marginal income taxes or payroll tax rates (whose effect is throughout the year).

Impact on the federal deficit
The tax and spending proposals outlined here will no doubt increase the federal deficit in the short term, but, by expanding the nation’s growth rate, they will actually improve fiscal stewardship in the long run. As we learned during the late 1990s, faster growth is the surest road to deficit reduction. By using temporary measures to prime the pump of the economy now when we need to do so, we can lessen unemployment and achieve greater prosperity while at the same time promoting fiscal integrity.
...And MTA you should take special notice as I stated in a prior post a deficit isn't all that bad if there is an increase in GDP and there is some inflation, the pay back is minuscule in later years. Additionally, a 4-5% deficit is a small price to pay for homeland security and a war on terrorism. There will be a peace dividend in the long run.

[MTAtech]

Read it again, Max. Nobody said tax cuts didn't stimulate the economy. They said the notion that reducing taxes led to increased revenues for the government was discredited. Gov't revenues, not economic stimulus. The point being that you can't cut taxes to run a deficit and think that the economy will grow so much that you will make up lost tax revenues. It's an entirely different point than you are making.

In addition, nobody, even the White House is predicting that we will grow out of the deficit. Basically< we are a third world country>

[Max50]

MTA,
No, I didn't misread, and I am on point. For every stimulated dollar spent and depending on the velocity of money (willingness to spend) the GDP (total revenue) will increase. If velocity (money supply {M1}) divided into GDP, for example, a velocity of 4 will increase GDP $4 for every dollar spent.

Very important: There is an assumption money will be spent. It is postulated that money with a tax cut to lower to middle-class taxpayers will be spent more quickly and as a consequence a higher GDP (growth). It is postulated a return of tax money to the higher income will not increase revenue as quickly because the money will not be spent as quickly.

"Lost tax revenue" is not money lost. Money is in the hands of the taxpayer and not the govt. Both entities spend money and will increase the GDP but some believe velocity is more when in the hands of lower-middle tax payers rather than the govt. There is a danger of over stimulation that brings on inflation (to much money and little savings, high velocity, and not enough supply to meet demands). But lower interest rates gives the FED the ability to raise interest rates that would curtail inflation (hopefully).

Presently, there is a recovery (growing economy only at 1.5%), but the recovery is not providing enough employment and that is the problem. A well behaved economy will grow at least 7% (real terms) on average. Add a couple of points for inflation, cut waste and unnecessary spending and a 4% debt can be quickly paid off. That is the scenario for the recovery. You are suggesting the 1.5% (present growth) will stagnate, grow less or not at all and debt will grow faster than the 1.5% rate of growth in the long run. I don't share that view, nor does the govt. expressed or not.