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Posted at 11:11 AM ET, 03/ 2/2011

How to increase the deficit by cutting government spending

By Ezra Klein

I get the argument against new revenues. Tax increases are a drag on the economy, and they transfer funds from the private sector, which would use that money productively, to the public sector, which will use that money unproductively. What I don't get is the argument against collecting the revenues the federal government is already owed:

Every dollar the Internal Revenue Service spends for audits, liens and seizing property from tax cheats brings in more than $10, a rate of return so good the Obama administration wants to boost the agency's budget.

House Republicans, seeing the heavy hand of a too-big government, beg to differ. They've already voted to cut the IRS budget by $600 million this year and want bigger cuts in 2012...IRS Commissioner Doug Shulman told the committee Tuesday that the $600 million cut in this year's budget would result in the IRS collecting $4 billion less through tax enforcement programs.

This is yet one more way in which cutting government spending can substantially increase the deficit. And this is why I have trouble taking Republican deficit hawkery seriously. John Boehner justifies firing public-sector workers by saying "we're broke," but then pushes policies like permanent tax cuts and reduced IRS funding that make us, by any measure, broker. If you run the numbers on the agenda the GOP is pushing, we see higher, not lower, deficits over the next few years. Cutting spending and making us "not broke" are not the same thing.

By Ezra Klein  | March 2, 2011; 11:11 AM ET
 
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Comments

well ezra, i am having a hard time with this statement, "Tax increases are a drag on the economy, and they transfer funds from the private sector, which would use that money productively." the only outcome i see is when taxes are reduced - especially on the wealthy and corporations from paying their fair share - it only deepens the divide between the have and the have nots. large multi-national corporations like GE and the oil and gas industry pay no taxes into the U.S. coffers and individuals like warren buffet pay less taxes than their secretaries.

each time from reagan to george w. taxes on the wealthy and corporations go down, the country declines. i'm not talking about reduced taxes for those who actually plow the money back into the economy; but the middle class are the only ones who do that. large banks and corporations sit on the money, pay their ceo exorbitant salaries multiple times higher than their workers and dividends go back to their investors.

the economy has become two separate spinning wheels. one where the wealthy and corporate keep theirs and one much smaller, shrinking wheel that barely turns around.

Posted by: sbvpav | March 2, 2011 11:25 AM | Report abuse

"Tax increases are a drag on the economy, and they transfer funds from the private sector, which would use that money productively, to the public sector, which will use that money unproductively."

That's not always true, and indeed it s not the problem we currently face.

Tax increases can instead cause more money to be invested in the economy....

- High end tax cuts have had a negative and provable effect on big business R&D and other business related spending that improves the economy (before the Reagan tax cuts, execs had incentives to keep money in the company instead of letting the gvmt get it because of high end personal income taxes) AND...

- ...probably HALF of money saved by wealthy people due to high end tax cuts are going to overseas investments which do not aid the US economy.

If we raised high end taxes, more money would be preserved in the businesses, less to exec pay, and end up in the US economy. The reason we now commonly see $100 million+ bonuses and other lucrative salaries for execs is precisely because of steady decline of high end tax rates.

This side of the story will never get on mainstream TV news though, because millionaire journalists and their corporate masters want to preserve their low taxes.

Posted by: lauren2010 | March 2, 2011 11:43 AM | Report abuse

Why wouldn't they want to cut the IRS? Rich people have to engage in more fraud to avoid paying taxes. With fewer audits, more rich people will be able to get away with not paying taxes.

The Republicans and Democrats serve only the rich. That's why they got together in December to continue the billions of dollars in giveaways that Bush started. Those tax cuts will never, ever expire because rich people love them and rich people control government. The only time there will be change is if there's 50% unemployment (we're on our way!) and America turns into Egypt. And at that point, the right-wing military will happily fire on the protesters, I imagine. They've done it before, right here in the USA. Same for firing at strikers.

The government serves the rich.

Posted by: cassander | March 2, 2011 11:46 AM | Report abuse

"High end tax cuts have had a negative and provable effect on big business R&D and other business related spending that improves the economy (before the Reagan tax cuts, execs had incentives to keep money in the company instead of letting the gvmt get it because of high end personal income taxes) AND"

I'll call this the "I"ll invest more because taxes are crippling" theory. There is no evidence to support it. The best investment in this type of tax climate is tax avoidance.

Business investment in equipment and software was much higher as a share of the economy post 1980 than pre 1980. From 1960-1980, the average was 6.73%. From 1981-2010, the average was 7.83%.

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=14&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1960&LastYear=2010&3Place=N&Update=Update&JavaBox=no

Adjusted for prices, total private investment was 11.9% of GDP on average before 1980 and 14.3% after 1980. From 2001-2010 the average was 15.5% of GDP, higher than the 14.8% from 1992-2000.

Nonresidential investment was a larger share of the economy from 2001-2010 (10.8%) than 1995-2000 (10.2%).

Software and equipment? Also higher over 2001-2010 (7.7%) than 1995-2000 (6.6%). The three years with the highest percentage shares for real software and equipment spending were 2007, 2006 and 2008.
http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=6&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1960&LastYear=2010&3Place=N&Update=Update&JavaBox=no

We also know that R&D spending has increased in recent years relative to a generation ago, so much so that the BEA is considering adding it to the GDP numbers as investment:

http://www.bea.gov/newsreleases/general/rd/2010/rdspend10.htm

"R&D accounted for about 6.3 percent of average annual growth in real GDP—that is, GDP adjusted for inflation—between 1998 and 2007, and 6.6 percent between 2002 and 2007. To put the contribution of R&D in perspective, the business sector’s investment in commercial and other types of structures accounted for just over 1.3 percent of average annual growth in real GDP between 1998 and 2007."

" The reason we now commonly see $100 million+ bonuses and other lucrative salaries for execs is precisely because of steady decline of high end tax rates."

The error in your thinking is that this money doesn't leave the economy - it largely goes back towards funding investment via savings.

Posted by: justin84 | March 2, 2011 12:31 PM | Report abuse

Shouldn't a post like this at least include a hasty dismissal of the Laffer curve concept?? If tax cuts can bring in more revenue, then so can lax tax enforcement. So you would at least need to refute the former idea, no?

Posted by: noumenalself1 | March 2, 2011 12:41 PM | Report abuse

Democrats simply have no skill at distilling their message like Republicans are.

What is the Dem response to "We're broke" that can be stated in 3 words?

Posted by: will12 | March 2, 2011 1:00 PM | Report abuse

It's weird that many of these conservatives love to vilify the poor as welfare cheats and organized labor as parasites but they don't seem to have a problem with tax cheats. Yes, it's true that "small businesses" and the wealthy have the most opportunity to cheat under our system but is tax cheating now part of Repubs agenda for growing the economy and starving the government?

Posted by: wswest | March 2, 2011 1:30 PM | Report abuse

-----Business investment in equipment and software was much higher as a share of the economy post 1980 than pre 1980. From 1960-1980, the average was 6.73%. From 1981-2010, the average was 7.83%.-----------

You're lying growth in equipment and software was almost double in the 50's/60's then in the 80's. Also real GDP growth was considerably higher in the 50-70
then the 80's-2010.

------Adjusted for prices, total private investment was 11.9% of GDP on average before 1980 and 14.3% after 1980. From 2001-2010 the average was 15.5% of GDP, higher than the 14.8% from 1992-2000.----

And how much of that was due to housing and stock bubbles?
And partly why private investment was higher was because during the 40-70's we had considerably higher government investment.

-----Nonresidential investment was a larger share of the economy from 2001-2010 (10.8%) than 1995-2000 (10.2%).---------
And? the economic period from 2001-2010 was the shittiest since the end of ww2.


------" The reason we now commonly see $100 million+ bonuses and other lucrative salaries for execs is precisely because of steady decline of high end tax rates."----
------The error in your thinking is that this money doesn't leave the economy - it largely goes back towards funding investment via savings.------

Yes and a lot more of that money would be invested in America rather then China if actual American workers got more of the money.
It's also about priorities do we want a society were the CEO's get 7 houses, 3 sports cars, 2 yachts, and diamond necklaces, while millions of Americans struggle to buy food food, or do we instead want a society were Americans don't struggle for food but as a result CEO's only have 4 houses, 2 sports cars, 1 yacht and a few diamond necklaces.

Posted by: mynameisblehbleh | March 2, 2011 2:26 PM | Report abuse

-------------It's weird that many of these conservatives love to vilify the poor as welfare cheats and organized labor as parasites but they don't seem to have a problem with tax cheats. Yes, it's true that "small businesses" and the wealthy have the most opportunity to cheat under our system but is tax cheating now part of Repubs agenda for growing the economy and starving the government? -----------------

That is because according to conservatives the poor, teachers, cops, civil servants, and workers are worthless, and owe everything they have to the rich. Therefor the rich should take every measure possible to screw the aforementioned groups because well the rich are the only people contributing to society. According to conservatives the poor are useless idiot who should just die off.

Posted by: mynameisblehbleh | March 2, 2011 2:30 PM | Report abuse

will12
What is the Dem response to "We're broke" that can be stated in 3 words?

How about, "Quit giving it away!" Okay, 4 words.
But tax credits to Big Oil, Big Farming, even making an SUV deductible as a truck are giveaways that could/should stop.

Posted by: paulyheins | March 2, 2011 2:31 PM | Report abuse

Ezra, come to the light like Jonathan Chait did: Republicans aren't interested in the deficit whatsoever. They never have been and never will be. The only thing they are for is lower taxes. That's it. That's why nothing they say or do regarding the deficit makes any sense.

Posted by: workmonkey | March 2, 2011 3:03 PM | Report abuse

"Tax increases are a drag on the economy, and they transfer funds from the private sector, which would use that money productively, to the public sector, which will use that money unproductively"

Oy, at least say Republicans think that. I know you don't really think that.

Empirically, tax increases in anywhere near this range have little, or even positive effect on work hours due to the long established in economics income and substitution effects and the backward bending labor supply curve. And Trillions spent on mansions, yachts, and $20,000 suits are hardly more productive than education, infrastructure, and basic scientific research.

Posted by: RichardHSerlin | March 2, 2011 3:05 PM | Report abuse

Well, first of all it is important to realize that the majority of Republicans are not motivated by deficit reduction, but are rather motivated to shrink government down until it is small enough to be drowned in a bathtub (I forget which hard right pundit said that). What-ever their protestations and justifications are to the contrary, their end-game motivations are clear.

Also, taxes being a drag on the economy is the big lie that has become conventional wisdom, even to the likes of the otherwise informed and skeptical (such as Ezra Klein). Taxes may indeed end up as a drag on the economy, but it depends entirely on how those taxes are spent. If a giant tax increase was passed today and the revenues were immediately poured into infrastructure, R&D and energy efficiency projects, the tax would at worse be economy neutral, and would be more likely to be stimulative.

I read several years ago that it was estimated it would take about a trillion dollars to fix every deficient bridge in the country. Since that time, we have spent a trillion plus on an ill advised adventure in Iraq. The Iraq expenditures were probably not stimulative overall to the economy, although certainly some of those military expenditures meant jobs for military suppliers. If that trillion had instead gone into a crash program to repair every bridge in the country, you don't need to be an economist to see how that would have created jobs and long term value for the country. Not only would the immediate jobs provide significant stimulus, but the improved infrastracture would be the gift that keeps on giving for many decades into the future.

Posted by: truthwillout | March 2, 2011 3:06 PM | Report abuse

First, we are not broke. We are the richest nation that has ever existed on the face of this earth. Anyone who says we are broke is a bald-faced liar, and should be called on it. Our governments are only "broke" because we charge ourselves one of the lowest tax rates in the industrialized world, not because America is poor.

That being said, even if we were almost broke, the last thing we should do in order to get out of the hole is cut education, R&D and infrastructure spending. That's like a family deciding to quit maintaining their car and going in for check-ups, while raiding junior's trust fund in order to pay for a trip to Aruba.

Posted by: brickcha | March 2, 2011 9:55 PM | Report abuse

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