Tuesday, September 28, 2010

a relatively easy way to balance the budget in a decade

From Edward Lazear in the WSJ...

As Washington debates the fate of the 2001 and 2003 tax cuts, many lawmakers have fallen into a logical trap of their own making. Although they recognize that tax increases hurt the economy, they argue that our huge deficit requires Congress to raise revenue through a tax hike.

This argument rests on the flawed premise that we can reduce the deficit only by increasing taxes, as if high levels of spending are a given. Not so.

To reduce spending and reignite growth, this Congress or its successor should take two actions. First, immediately cut the level of spending that has been increased so dramatically since 2008. Second, institute an "inflation-minus-one" rule to constrain future spending increases...

Much public discussion focuses on the deficit, which is indeed at critical levels of around 10% of GDP. But even if President Obama succeeds at lowering the deficit to 4% of GDP by 2013, our public-debt-to-GDP ratio will still be dangerously high, at over 70%, or nearly twice what it was during the Bush years. As the economists Carmen Reinhart and Kenneth Rogoff have shown in the journal American Economic Review, such high debt-to-GDP ratios are associated with low growth.

Tax increases—which some suggest in order to reduce the deficit—also impede growth. But Americans don't have to choose between an enormous deficit or high taxes. If we returned to the relative fiscal restraint that prevailed during the Clinton and Bush years, when spending was 19.7% and 19.6% of GDP, respectively, we could avoid the entire mess....

2 Comments:

At September 28, 2010 at 6:56 PM , Blogger William Lang said...

Eric, how do marginal income tax rates today compare to the rates years ago, say in the 1960s when the US had such a strong economy?

 
At September 28, 2010 at 6:59 PM , Blogger Eric Schansberg said...

JFK cut the top MTR from 91% to 70%.

I'm not sure about the proportion of people who were exposed to various levels of MTR.

I know it got a whole lot worse in the 1970s with "bracket creep"-- where (high) inflation was moving people into higher tax brackets because their nominal incomes were higher (even though their real incomes were constant).

 

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