Friday, June 24, 2011

Tax Hikes or Spending Cuts

Bloomberg Businessweek has an interesting article on the debt limit debate. It says

Trying to convince slash-the-government Republicans on Capitol Hill that tax increases will be necessary to bring down the nation’s federal debt is a thankless job. So is convincing them it’s in their political interest to help President Barack Obama and the Democrats raise the $14.3 trillion debt ceiling.
It also says
Republican leaders, maneuvering for advantage in the debt debate, say they’ll allow the nation to default unless the deal includes steep spending cuts and no tax increases.
And that's just in the first paragraph.

There's a lot wrong with this. Starting with the latter part first, the article's author (Julie Hirschfeld Davis) accepts without question the Obama-Geithner talking point that not being allowed to borrow massive further amounts of money automatically means a U.S. default. That is not true! Any U.S. default will be a direct and deliberate choice by the Obama Administration. If they want to claim that would be the appropriate choice to make, they should explain why. But with or without that explanation, it really offends me to have them pushing as doctrine something that is so completely not true.

So how do we get out of this mess? Treasury Secretary Tim Geithner wants the debt ceiling raised by $2.5 trillion right now. That would allow the Obama Administration to keep spending at or above the current obscene rate until after Barack Obama's re-election campaign is over. I can appreciate that Obama would like to avoid having this issue discussed during the campaign, but that seems like the wrong approach to me since it says that nothing would be done about actual deficit reduction during that time. It seems to me the most important thing to work on is actual deficit reduction, not on another band-aid to allow us to kick the can down the road and avoid dealing with the problem for a while longer.

How do we go at actual deficit reduction? A good start would be to get rid of the extra trillion dollars a year in government spending added on by Barack Obama and his friends in Congress. That, by itself, would bring the deficits down to only about 50% over George Bush's biggest deficit. Even if that's not the approach taken, however, it is clear that most of the deficit reduction must be by spending reduction.

What about the tax increases the Bloomberg Businessweek article says are necessary? Certainly the Democrats are insisting on tax increases as part of the package. In fact, the Democrats' insistence on tax hikes was the reason the Republicans left the negotiations. Even Nancy Pelosi says so, quite directly.

There's a problem with the Democrats' demand, however, and that's that they have used that same scam so often before. Time and again, the Democrats have promised spending cuts in return for tax hikes. And time and again, somehow the tax hikes happen and the spending cuts never materialize. I think the Republicans have finally realized the only way to get the spending cuts is to insist on them alone. If, as the Bloomberg Businessweek article says, tax hikes are really necessary to bring down the debt, there will be plenty of time to consider them after large-scale spending cuts are locked in.

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