The Budget Control Act of 2011 – Tax Talk

Whenever you see big drama unfolding in congress it is a good question to ask what are they really doing?

 First let us look at some of the talk prior to the legislation. In the President’s address to the nation on July 25, 2011 tax cuts are implied to be the main reason we are in the situation. He said “In the year 2000, the government had a budget surplus.  But instead of using it to pay off our debt, the money was spent on trillions of dollars in new tax cuts, while two wars and an expensive prescription drug program were simply added to our nation’s credit card.”

Notice the remarks that we had a surplus, spent the money on tax cuts and, as he said “As a result, the deficit was on track to top $1 trillion the year I took office.”

There is a graphic that they use to tell us where the debt came from. See it here. Notice it also begins and ends with a discussion of how tax cuts have caused the increased debt.

It seems as though we are being set up to allow the “Bush tax cuts” to expire in 2012. That is the end of next year, after the elections of course.

Agreed, there are many large corporations that need to actually pay taxes or at least an equal proportion to smaller companies. Shared Sacrifice post covers some of the amazing freebies the right companies receive.

In the S&P Report on the credit downgrade, is a mention of taxes. "Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act."

The report goes on to say "Our revised upside scenario--which, other things being equal, we view as consistent with the outlook on the 'AA+' long-term rating being revised to stable--retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating." It almost seems as if they are saying that if taxes do not increase, the rating will drop again.

This point is reiterated more clearly in the overview of the report which states "if the recommendations of the Congressional Joint Select Committee on Deficit Reduction--independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners--lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government's debt dynamics, the long-term rating could stabilize at 'AA+'."

"The president has been clear that he's not going to sign an extension of the Bush tax cuts for the wealthy. So absent any kind of comprehensive tax reform, you have $800 billion, roughly, of revenue that's going to be gained through the expiration of those tax cuts," a White House official said.

On the July 10 2011 Face the Nation show, Bill Nelson, D-FL said of the deficits "It's basically a fall-off of revenues and an increase in spending. So you got to correct that imbalance; otherwise you're not doing real deficit reduction." He went on to say “you have to acknowledge that part of our deficit problem was the huge Bush tax cuts in the early part of the decade. What was handed off to the new administration of over a trillion dollars of annual deficit that accounted for almost half of it. If you're going to be real about the numbers, you're going to have to address these kinds of things."

In response Sen. Jeff Sessions, R-Ala said "The revenue went up every single year after those tax cuts were put in. The revenue is down now because of the low economy ... It's not because taxes have been cut in recent years. It's because people are not making money. They're not paying as much taxes. So increasing taxes on that weakened economy is not the way to increase revenue. "

According to the Whitehouse Office of Management and Budget it is true that tax revenue as a percentage of GDP as declined. The change (while moving slightly up or down within the range) went from 19.5% of GDP in FY 2001 to an estimated 14.4% in 2011. The GDP itself declined for two years after 2001 and then rose again for the next four years until the GDP declined again for two years and then rose again while government spending has increased over the same period of time.

What we are being told is that taxes need to increase to compensate for the massive spending increases. This same Whitehouse report shows that, I believe a more important number, spending as a percent of income has dramatically increased. In FY 2001 the government spent 93.6% of income. In 2011 it is estimated to be 175.6% of income. The last time the gap between income and expense was this wide was WWII! Even if there were a $950 billion dollar increase as mentioned in the S&P Report for FY 2011, we would still be $605 billion in the red.

Let us say you are sell cars and in 2001 you “only” spent 93% of your total income. During this past 10 years your income has been up and down slightly, as one would expect with changes in economic conditions. However, during this same period you spend more than you make by increasing margins for cable TV, new cars, boats, homes, cost of living etc. until you spend almost double your salary.  Is the problem that your boss did not pay you commensurate to your spending or because you failed to spend in line with your income?