TeeJaw Blog

New Taxes Won’t Fix The Downgrade — Only Spending Cuts Will

Posted in Government and Politics by TeeJaw on Saturday, August 6, 2011, 1: 40 AM

The U.S. needs to cut the debt from $14 Trillion to $10 Trillion to get its prime grade credit rating back. This cannot be accomplished by tax hikes because any tax increase at this time is likely to reduce revenue to the Government rather than increase it. The economy is teetering on the brink as it is and raising taxes will further stifle economic growth and lower GDP. It has been shown that no matter what the Government does it cannot get more than about 19% of GDP in total revenue. It can raise tax rates but the lower GDP that will result will also reduce revenue and make the credit rating worse, not better.

Taxing the “rich” won’t work because the rich already pay 70% of all taxes collected. Raise their rates and they will still be paying the same 70% of a smaller tax take.

On the other hand a tax cut would likely result in more revenue to the government because businesses would invest and expand and add jobs.  Consequently, GDP would grow. Nineteen percent (more or less) of a larger GDP equals more revenue to the Government. If politicians simply used the additional revenue to increase spending the country’s fiscal condition would remain in the tank.

The bottom line is that the only way out of the current mess is drastic cuts in spending. S&P says at least $4 Trillion must be trimmed off the current $14 Trillion national debt, which is now dangerously near 100% of GDP. Spending cuts are not in the DNA of any Democrat nor some Republicans, so the current downgrade from AAA to AA+ could soon be further downgraded to AA-, even if there were an increase in revenue.

If Obama confiscated all of the 2011 income of all citizens whose income is $10 Million or more it would gain the Government only about $240 Billion. It’s already getting about 25% of that income, so the net increase from confiscation would be only $180 Billion. The Obama administration is currently spending a little over $300 Billion a month. Confiscating all of the income of those making over $10 Million would only run the government for a little over 2 weeks. In fact, since the debt deal was signed Obama has borrowed more than that in just one day. So again, taxing the rich won’t help, and neither would outright confiscation of all their income. [Forgetting for the moment that it is impossible to take 100% of anyone’s income because they will cease to have any income at that point. No one will work to earn income that is going to be confiscated.]

Democrats will be trying to blame the Tea Party for this mess but the fact is that the Tea Party is the only one that offered a plan that would have avoided the downgrade. Here is Professor Jacobson’s assessment:

Democrats own the downgrade. They fought Republicans and Tea Party supporters every step of they way, and forced a deal which was insufficient. They played class warfare and race politics against arguments that we needed to drastically change our spending habits.

This is Barack Obama and Harry Reid’s crowning achievement.

If Obama cannot bring himself to agree to deeper spending cuts, there is one other thing he could do to fix the debt problem and stimulate economic growth.  He could announce that he will not run for reelection in 2012.  I was going to say that he could go one better and resign right now, but on second thought, that might result in a further downgrade because Joe Biden would become president.  That would just be laying another catastrophe on top of the current one.

No fiscal restraint means no getting out of the hole, ever. We have finally run out of other people’s money. Think, just a few years ago most people had never heard the word “trillion.”

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