A popular topic of conversation lately is how to come up with the tax revenue to cut the federal government budget deficit or at least reduce the growth in it. Years of debt ceiling battles, fiscal cliffs and sequestration debates have left many peoples’ heads reeling.
All these headline-grabbing gimmicks and the uniform drum beat for more revenue disguise the true nature of the problem. It’s spending. The Federal government spends nearly 50 percent more today than it did in 2007 while overall revenues have remained fairly stagnate. Before the financial crisis, the federal government spent roughly $2.7 trillion a year, compared to $3.8 trillion annually now.
This is huge unprecedented growth in the size of our government. To try to come up with more revenue to fill this gap is preposterous. To do so would be to ask this increased burden on the public to be institutionalized and perpetual. The federal government once again has used the event of a crisis to grow its size and never recede once the exigency subsides.
Using baseline spending in 2007 as a guide, it would be rather mechanical to reduce overall expenditures. However, there are some changes in the composition of spending that would make sense given demographics and the status of military activities. The cessation of exercises in Iraq and the drawdown of troop levels and the scheduled withdrawal from Afghanistan should provide room for additional budget reductions in the neighborhood of $200 billion per annum from the 2007 baseline. This would allow for growth against the baseline in entitlements (Medicare and Social Security) of that amount and keep within our overall spending cap.
Areas that serve no economic purpose and little utility, such as Homeland Security, could be cut to the bone. The unemployment extensions for 2 million Americans that have occurred for the last five years can be ended. The continuing $100 billion a year shortfall in the budgets of the government-run mortgage agencies can be done away with. The $100 billion a year of corporate subsidies to the likes of General Electric, the automotive industry and the alternative energy industry (to name a few) could be brought to an end.
The point is there is lots of fat to trim. No one said in 2007 that the government wasn’t big enough.
Would ending certain deductions and credits possibly increase tax revenue? Possibly. But not by much.
Former Hoover Institute board chairman W. Kurt Hauser published a work 20 years ago that shows federal government revenues could not exceed 20 percent of GDP. This work was re-published by David Ranson in an October 2008 issue of the Hoover Digest. What they showed is attempts to increase revenue beyond that point diminished economic growth and tax revenue collection.
Now, one could certainly argue that we could make the tax code less cumbersome by eliminating deductions and credits and offsetting those projected revenue increases with lower overall rates, making the adjustments revenue neutral. This seems to be the right thing to do. Politicians make careers of offering special tax credits and abatements to favored constituencies and lobbyists.
By eliminating thousands of pages of tax law and making the practice less acceptable, government could be fairer and more transparent.
In the long run, entitlement spending, particularly Medicare, will have to be curtailed. The demographics dictate this. Otherwise, the vibrant free enterprise economy of America’s past is dead. The drug companies are just going to have to learn to live without massive government subsidies such as Medicare Part D. Despite this, we can nearly balance the federal budget today without a tremendous amount of pain.