TeeJaw Blog

Here’s Why Obama’s Proposed Tax Increases Won’t Even Begin To Solve the Debt Crisis

Posted in Government and Politics by TeeJaw on Friday, July 15, 2011, 10: 52 AM

This link will take you to these three previous posts on this blog:

Revenue of 19% of GDP Will Not Sustain Spending of 24% of GDP

Hauser’s Law: Why Obama’s War On The “Rich” Won’t Help The Economy

High Marginal Tax Rates Don’t Raise Revenue For the Government

The theme of those previous posts is to show that raising tax rates will have limited effect on tax revenues. No matter what the government does it always has difficulty obtaining more than approximately 19% of GDP in revenue, no matter how high the income tax rate. The politicians can easily spend more than 19% of GDP by borrowing to make up the difference. That’s exactly what Obama has been doing, and he wants to continue. His spending binge will soon reach 25% of GDP and he wants the debt ceiling raised to enable it.

Keep that in mind as you read this excerpt from today’s Wall Street Journal:

The Obama Downgrade — The real reason the U.S. could lose its AAA rating.

So the credit-rating agencies that helped to create the financial crisis that led to a deep recession are now warning that the U.S. could lose the AAA rating it has had since 1917. As painfully ironic as this is, there’s no benefit in shooting the messengers. The real culprit is the U.S. political class, especially the President who has presided over this historic collapse of fiscal credibility.

Moody’s and the boys are citing the risk of a default on August 2 as the proximate reason for their warning. But Americans should understand that the debt ceiling is merely the trigger. The gun is the spending boom of the last three years and the prospect that Washington lacks the political will to reduce it in the years to come.

On spending, it is important to recall how extraordinary the blowout of the last three years has been. We’ve seen nothing like it since World War II. Nothing close. The nearby chart tracks federal outlays as a share of GDP since 1960. The early peaks coincide with the rise of the Great Society, the recession of 1974-75, and then a high of 23.5% with the recession of 1982 and the Reagan defense buildup.

From there, spending declines, most rapidly during the 1990s as defense outlays fell to 3% of GDP in 2000 from its Reagan peak of 6.2% in 1986. The early George W. Bush years saw spending bounce up to a plateau of roughly 20% of GDP, but no more than 20.7% as recently as 2008.

Then came the Obama blowout, in league with Nancy Pelosi’s Congress. With the recession as a rationale, Democrats consciously blew up the national balance sheet, lifting federal outlays to 25% in 2009, the highest level since 1945. (Even in 1946, with millions still in the military, spending was only 24.8% of GDP. In 1947 it fell to 14.8%.) Though the recession ended in June 2009, spending in 2010 stayed high at nearly 24%, and this year it is heading back toward 25%.

Federal debt as a share of GDP was 40% in 2008; it is estimated to be 72% this year. I’ve read commentary that cites research showing that societies begin a steep decline when their debt reaches 90% of their GDP. The WSJ piece says some analysts are predicting that U.S. debt will soon reach 90% to 100% of GDP if Obama’s spending binge is not stopped.

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