The deficit’s benefactor
The AP has an article reporting that the White House’s efforts to cut the deficit in half are on track, but that “the cost of wars in Iraq and Afghanistan will help drive this year’s shortfall to a record $427 billion.” While this is true, it’s a bit misleading.
The cost of Iraq and Afghanistan operations are certainly helping drive the deficit up. Indeed, the president requested another $80 billion for Iraq in the new budget, bringing the total cost to $300 billion. However it is non-military, non-Homeland Security costs that are the biggest contributor. Here’s a graph of military spending relative to discretionary spending. Non-military spending increased by 8.2% per year under Bush, higher than any president since Johnson.
The wars have certainly helped feed the deficit, but they’re actually a very small portion of the increase. The AP’s lede is misleading, and so too are liberal criticisms that the war is the main culprit. It is Bush’s liberal fiscal philosophy in other areas that deserve the most blame.
What happened to the posts that were here?
greg
I accidentally posted an earlier version of the post, and this was the one intended to go up. Your earlier Medicare points were correct, which is why I did not intend to post that point.
But the underlying thesis here remains - most of the deficit is due to non-military spending increases.
I agree with JC’s basic point here, though I would object somewhat to describing Bush’s fiscal proclivities as “liberal”. “Profligate”, yes, and “irresponsible”, definitely, but it’s not like he’s mostly putting the money towards classical liberal programs or anything like that; a lot of it is being spent on programs that are neither liberal nor conservative, such as the farm bill. Also, running a big honkin’ deficit in large part because you want to keep cutting taxes on the wealthy … well, that hardly counts as “liberal” either, I would think.
Indeed “liberal” might not be the best term to use. My thinking was Bush’s willingness to use government dollars to better society was liberal, although what he thinks should take priority will be different than most liberals’, although not always (see Medicare and education spending).
Regarding your other point, early numbers seem to indicate that many of Bush’s specific tax cuts did bring in more revenue for those tax entities, suggesting that some cuts did actually increase revenue (though not all). But when you boost spending so much more than revenue is coming in, you’re obviously still left with a deficit.
early numbers seem to indicate that many of Bush’s specific tax cuts did bring in more revenue for those tax entities,
Where would I find those numbers? The Laffer curve has been debunked three ways to Sunday already, no reason not to make it four.
greg
The Laffer curve has been debunked three ways to Sunday already, no reason not to make it four.
This is hardly true at all. The Laffer curve is solid economic theory. The problem comes in determining where we are on the Laffer curve. If we are to the left of the optimal tax rate, tax cuts decrease revenue. If we’re to the right, it increases revenue. The problem is that we don’t know where we are because all of that assume ceteris paribus, which never happens.
As for your specific comment, with 50 percent cash-bonus expensing for the purchase of plant and equipment, productivity-driven corporate profits ranging around 20 percent have generated a 45 percent rise in business taxes. There’s one example of increased revenue from tax cuts. It doesn’t happen in all brackets, and its hard to measure in the aggregate (there’s no ceteris peribus), but in some specific areas cuts did increase revenue.
generated a 45 percent rise in business taxes.
That would be great, if it were true. In 2000 corporate income tax receipts were $207 billion. In 2001 they were $151 billion. In 2002 they were $148 billion. In 2003 they were $132 billion.
Source: 2005 Budget of the United States, Historical Tables, page 30.
I think you meant “Supply-side sillyness has generated a 47 percent drop in business taxes.”
greg, trying very hard not to use a stronger word than sillyness.
Greg, you’re simply wrong, and over-simplifying something that’s highly complex. Here’s are some good graphs to consult.
Corporate tax receipts did rise from 43.2 to 62.4 billion (in October to December 2005) for a rise of nearly 45 percent. However, they are only up about 12 percent from their level of $55.7 billion in the same period of 2001. Personal tax revenues also rose from $198.7 billion to $216 billion, an increase of about 8.7 percent (although they are still down about 4.6 percent from their level of $226.3 billion in October to December of 2001).
But none of this matter, quite frankly, because none of it is ceteris peribus.
I’m happy to grant that sometimes a tax-rate-cut can result in a tax-revenue-gain. But it doesn’t seem to be that, overall, this has been true of the cuts of the last few years, since revenues have in general been down. (See, e.g., the CBO forecasts just out that have a much steeper deficit curve for the “tax cuts made permanent” assumption than for the futures where they are allowed to lapse.) I don’t see where we have any good reason to think that we’re on the cut-taxes-to-raise-revenues side of the curve, and it’s more likely that we’re on the raise-taxes-to-raise-revenues side.
Moreover, it sure looks to me like Bush’s motives (and the GOP leadership more generally) here are more to cut taxes no matter what, and not any real concern for raising more revenues. So, again, not very liberal.
I think you mean ceteris paribus.
I like your graphs but, frankly, couldn’t make heads or tails of what the heck they meant, what data they used, etc.
I may be over-simplifying, but I don’t think the concept of receipts and expenditures is terribly complex — even when it involves numbers the size of those used in the United States economy.
Again, supply-side economics holds that a cut in taxation (properly taxation rate) will produce a rise in tax revenues — assuming we’re on the right side of the Laffer curve. I assume we’re on the right side of it, else the Bush administration wouldn’t have been so stupid as to implement a tax cut.
Therefore, the Bush tax cuts, ceteris paribus, will produce a tax revenue increase.
However, according to the Budget of the United States — which may be “simply wrong” but you’ll have to supply me with a little more data — exactly the opposite has occurred. In the three years since the Bush tax cuts were implemented, tax revenue from business has dropped dramatically. Year over year.
Now it may be that things are not ceteris paribus (this is fun, I haven’t taken Latin since 1975 when I was in fifth grade at the La Jolla Country Day School) in which case we’re confronted with the usual hurricane of excuses as to why supply-side works all the time except for now because of [insert special exception #6734 here].
greg
I’m happy to grant that sometimes a tax-rate-cut can result in a tax-revenue-gain. But it doesn’t seem to be that, overall, this has been true of the cuts of the last few years, since revenues have in general been down.
I’m inclined to agree with you philospher, but I don’t feel comfortable saying it’s conclusive because of other variables. But generally, I think you’re right.
Greg, you write, “Therefore, the Bush tax cuts, ceteris paribus, will produce a tax revenue increase.” This is only true if we’re on the right of the curve, and I’m not convinced we are, nor am I convinced things are ceteris paribus.
Also, we must remember that tax policies often take 2-3 years for results to take hold and be seen. And, as I said, this past year business tax receipts have risen dramatically, and so too have personal tax receipts. That’s why I said you’re wrong - you ignore this past year, which is quite important. However, I’m not willing to point to the cause of it, only to speculate.
JC: Yeah, I agree — if there’s anywhere that the word “conclusively” should basically be banned, it’s macroeconomics!
Well put me in the camp of those who agree that it is possible to raise tax receipts by cutting tax rates. I don’t think it takes a genius to understand that, at some point, government hasn’t the capacity to invest additional tax receipts in a productive way and thus their collection becomes a drag on economic productivity. This would be at the extreme end of the Laffer curve.
Now if we’re not on the right of the curve (don’t you mean left, actually?) then, yes, dropping taxes will result in dropping tax revenue. But if that’s the case then doesn’t it represent just another colossal f*ckup on the part of this administration?
Finally, sure it takes a while for things to kick in — which is a little why I’m surprised that you’re so focused on near-term numbers, like the month/month variability in corporate tax receipts. On the other hand, it’s been roughly three years now, surely the positives would be evident by now?
And be careful as to just how much you crow the positives. Although tax receipts have been dropping, even if they reverse themselves and start rising it’s not necessarily a cause for celebration. The question has to do with the rate of rise.
During the Reagan administration tax receipts, after dropping precipitously, did after a time start rising again. Supplysiders saw this as vindication while ignoring that Reagan came into office at the tail end of one of the country’s worse recessions — what goes down, eventually has to go up.
And they also ignored the rate of the rise. Although tax receipts eventually started increasing, they never increased at the historic annual rates that were seen during the 1950s-1980s. You remember the 50s and 60s, right? When the highest personal marginal tax rate was above 90% and the corporate tax rate was double (or triple, I can’t remember) what it is today?
greg
So true, the war isn’t responsible for the deficit, it’s responsible for this.
http://www.nytimes.com/imagepages/2005/01/19/international/19iraq.ready.html
I’m obviously out of my league here in economics, but doesn’t the $300 billion for Dubya’s Crusade not include what the military has already budgeted? $420.7 billion in 2005? The US spends about as much on the military as the rest of the world combined.
FWIW I haven’t been seeing nearly as many liberals or conservatives blaming the war for the deficit as much as the tax cuts.
Bush is liberal when comlpared to Ronnie. Ronnie tried very hard to cut non defense spending, using the veto over a dozen times (some of which were over riden) to stop spending increases. Bush has not once used the veto and has proposed some of the biggest government increases himself. He actually is liberal when compared to Clinton in terms of personal freedom vs. government control.
Thanks for the links.
I agree with John in that most of us economic and social liberals see the tax cuts as far more culpable in the deficit situation than either the wartime or the social spending.
Indeed, wartime spending has a great deal of appeal to our inner Keynes. It’s just when it’s financed by great gobs of general international indebtedness, as opposed to a special instrument like War Bonds or increased taxation, that we get a little wiggy.
In other words, the rise in government spending on domestic programs, along with the great globs being thrown at the war machine, aren’t terribly troublesome. There’s a bit of disquietude over the character of the social programs but that’s about it.
greg
1. If one were to believe that gov’t income from taxes would increase after a tax cut, one would probably believe that the moon was made of cheese. (The “moon landings” took place on Warner’s back lot).
2. Reagan did indeed have a much bally-hooed tax cut. 1981, I think. Much less well known is that the tax cut was follow by 4 or 5 tax increase during the Reagan years with 2 of them in 1986.
3. Liberal/conservative - when there is a budget deficit, it makes not one whit whether it is caused by spending on the military or unemploymwnt insurance or Head Start or whatever. Deficit spending is still deficit spending. The administration should have the courage to either raise taxes or cut spending. Or Congress should have the courage to reallocate spending.
4. War. You got to be kidding me. This is a made up term to satisfy a bunch of Neo-cons (a cult) that has taken over our government. You say this “war” is a response to airplanes flying into the World Trade Center. I say the air planes were in response to the globalization effort, the WTO, the World Bank and the ExIm Bank and their policies re: cultures in what some would call “third world countries.” Others would call it economic colonialism.