Every time there is a budget debate, politicians from both parties will discuss the deficit and spending as if the first one did not matter and the latter could only increase. However, the main problem of the US budget in the past four decades is that total outlays rise significantly faster than receipts no matter what the economic growth or revenue stream does. For example, in fiscal years 2018 and 2019, total outlays rose mostly due to mandatory expenses in Social Security, Medicare, and Medicaid. No tax revenue measure would have covered that amount.
Total outlays were $4,447 billion in 2019, $339 billion above those in FY 2018, an 8.2 percent increase. No serious economist can believe that any tax increase would have generated more than $300 billion in additional revenues every year.
The idea that eliminating the tax cuts would have solved the deficit has been clearly debunked by history and mathematics. There is no way that any form of revenue measure would have covered a $339 billion spending increase.
No serious economist can believe that keeping uncompetitive tax rates, well above the average of the Organisation for Economic Co-operation and Development (OECD), would have generated more revenue in a global slowdown. If anything, a combination of higher taxes and weaker growth would have made the deficit even worse. How do we know that? Because it is exactly what has happened in the eurozone countries that decided to raise taxes in a slowdown, and because it is also what all of us witnessed in the United States when revenue measures were implemented.
The US was maintaining a completely uncompetitive and disproportionately high corporate income tax rate (one of the highest in the world), and all it did was make it similar to other countries, such as Sweden and Denmark, which have corporate income tax rates of 21.4 percent and 22 percent, respectively.
What happened to corporate tax receipts before the tax cut? The evidence shows a weakening operating profit environment: corporate tax receipts fell 1 percent in 2017 and 13 percent in 2016. The manufacturing and operating profit recessions were already evident before the tax cuts. If anything, reducing the corporate rate helped companies hire more and recover, which in turn allowed total fiscal revenues to rise by $13 billion to $3,328 billion in fiscal year 2018, and by $133 billion to $3,462 billion in 2019, both above budget, according to the Congressional Budget Office (CBO). Remember also that critics of the tax cuts expected total receipts to fall, not increase.
Mandatory spending is now at $2 trillion out of $4.45 trillion in total outlays for the fiscal year 2019. This figure is projected to increase to $3.3 trillion by 2023. So, even if discretionary spending stays flat, total outlays are still estimated to increase by more than $1 trillion, significantly above any measure of tax revenues, and that is without considering a possible recession.
Any politician should understand that it is simply impossible to collect an additional $1 trillion per year over and above what are already record-high receipts.
For 2020, tax receipts are estimated to be $3,472 billion compared to $4,473 billion in outlays, which means that there is a $1,001 billion deficit. With outlays consistently above 20 percent of GDP and tax receipts at 16.5 percent on average, anyone can understand that any recession will widen the gap and make deficits even higher.
Deficits mean more taxes or more inflation in the future. Both hurt the middle class the most. More government spending means more deficit, more debt, and less growth.
When candidates promise more “real money” for higher spending, they are not talking of real money. They are talking about real debt, which means less real money going into future schools, future housing, and future healthcare at the expense of our grandchildren’s salaries and wealth. More government and more debt mean less prosperity.
Anyone who thinks that this gap can be reduced by massively hiking taxes is not understanding the US economy and the global situation. It would lead to job destruction, corporate relocation to other countries and lower investment. However, even in the most optimistic estimates of tax revenues coming from some politicians, the revenue-spending gap is not even closed, let alone showing a net reduction in debt. The proof that the US problem is a spending one is in the fact that even those who propose massive tax hikes are not expecting to eliminate the deficit, let alone reduce debt. That is why they add mass money printing to their magic solutions.
Now, let us ask ourselves one question: if the solution to the US debt and deficit is to print masses of money, why do are increased taxes proposed? If printing money was the solution, the Democrats should have massive tax cuts in their program. The reality is that neither tax hikes nor monetary insanity will curb the deficit trend.
No tax hike will solve the deficit problem. Those tax hikes will help even less when they are supposed to finance even more expenses. No amount of money printing will solve the financial imbalances of the US; they will only worsen the problem. If money printing was the solution, Argentina would be the highest-growing economy in the world.
If the US wants to curb its debt before it generates a eurozone-type crisis leading to stagnation and high unemployment, the government needs to really cut spending, because deficits are soaring due to ballooning mandatory outlays, not due to tax cuts.
Originally published at dlacalle.com
The Mises Institute exists to promote teaching and research in the Austrian school of economics, and individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. These great thinkers developed praxeology, a deductive science of human action based on premises known with certainty to be true, and this is what we teach and advocate. Our scholarly work is founded in Misesian praxeology, and in self-conscious opposition to the mathematical modeling and hypothesis-testing that has created so much confusion in neoclassical economics. Visit https://mises.org