The Debt Debate: Spending Cuts or Tax Increases to Cut the Deficit?

Which approach is the better way in this debate?

Some history first is appropriate. Spending was increased nearly without bound in the January 2007 to December 2010 time frame (4 years) under the Democrat Party rule in Congress. It went from about 18-19% of GDP to 25% of GDP. Now Obama calls for a balance approach to reducing the deficit. This means that both spending cuts and tax increases are proposed in a “balanced” approach to cutting the deficit. So by these rules we get to spend a lot of money first and then collect increased tax revenues for at least a part of this spending. Net effect: Taxes go up! MY MESSAGE: NO NEW TAXES!!!

Obama now wants it both ways on tax increases. In the current debt ceiling debate Obama is now calling for $1 trillion in tax increases along with spending cuts. In 2009 his response to the question of increased taxes was: “… Normally, you don’t raise taxes in a recession, which is why we haven’t and why we’ve instead cut taxes. So I guess what I’d say to Scott is – his economics are right. You don’t raise taxes in a recession. We haven’t raised taxes in a recession.” So, for Obama, taxes would hurt the economic recovery in 2009 and now it is implied new taxes help the economic recovery in 2011. Which is it Mr. President? MY MESSAGE: NO NEW TAXES!!

Next we are told that the wealthy do not pay enough in taxes. Yet over the past 20 years the proportion of personal income taxes paid by the top 10 % of all wage earners have increased steadily and now amount to just under 3/4ths of all personal income taxes collected. So we have a very progressive tax structure today. MY MESSAGE: NO NEW TAXES!

Increase taxes on the purchase of luxury items to raise income. Remember the increased taxes on luxury boats and yachts some years ago? The reaction of the rich was that they did not buy them. So the luxury boat market crashed. The effect is the loss of sales for the boat builders and corresponding loss of jobs for those who build and service these luxury boat items. The result is lost middle class jobs and very little new income for the government which made things worse that before the new tax went into effect. Somehow things turned around after the tax was dropped. MY MESSAGE: NO NEW TAXES!

Changing the income tax marginal rate from 28 to 70+% does not really change the percent of GDP taken in by the Federal government. It is fairly constant in the past few decades at about 18% of GDP. The rich always find ways of not paying taxes until it is expedient for them. Do we think it will change now? MY MESSAGE: NO NEW TAXES!

Remember the Laffer curve? When tax rates are high, reducing them will incur more income to the government. This seems to contradict the point above except if the economy has expanded as a result with the resultant tax revenue increase, which is the general response. But growth rates after economic recessions have become more and more muted over time as the level of debt rises in the economy. Hence, the economic expansion after the most recent recession is the most muted in 50 years, and in my opinion this is because the debt levels are by far the highest they have been in 50 years. So cutting spending to reduce the debt is preferred. MY MESSAGE: NO NEW TAXES!

The American people’s opinions in Rasmussen polls on taxes and spending cuts support the no new taxes position. In a July 9th Rasmussen poll, 55% of likely voters think decreases in spending help the economy and only 24% of likely voters say increases in taxes help the economy. The American people’s message: NO NEW TAXES!

Now suppose there is no deal at the Aug 2nd deadline, will the US default? The answer is no, as Senator Toomey aptly pointed out. There is plenty of revenue each month to pay the interest on the T-bonds or bills. So all the creditors will get paid and there will be no default! What will happen is that the government will de facto have to cut spending and cut spending by large amounts in other areas. This will mean that “non essential” government services will be cut and cut drastically. Isn’t this what we the people all want anyway? So why is there any need to give in on the NO NEW TAX pledge in the debt ceiling talks??? No deal means that the American tax payers get what they want; drastically reduced spending!!

Tell the Republicans to stand tall, we the people are behind them!! Spending cuts are the only answer in the debt ceiling increase discussions. The unlimited credit card mentality on spending in Washington must be severed and it must be severed now. Even if it is severed, it will be forgotten in a few weeks and the spending spree will be in full swing again anyway. So a smaller debt ceiling increase is preferred that a larger one. Why? It continually keeps the problem front and center giving we the people increased say it what is transpiring in Washington which is only a good outcome.

What can you do? Send a letter, E-mail, twitter, etc. or call your Representatives and Senators and tell them what you want. We the people can still get what we want but only if we continuously speak out and speak out loudly and clearly. Be passionate about the confrontation, it is your country you are fighting for!

About the Author: William J. Michie, Jr. has a BS and MS degree in Chemical Engineering from Drexel University and an MBA degree from Rutgers University.  He has had a 32.5 year career in Polyethylene Product Development with Union Carbide and Dow Chemical Corp. and is the holder of a number of patents. H. Marsman and D. Madio also contributed to this article.

About The Author: William has a BS and MS degree in Chemical Engineering from Drexel University and an MBA degree from Rutgers University. He has had a 32.5 year career in Polyethylene Product Development with Union Carbide and Dow Chemical Corp. and is the holder of a number of patents.