Saturday, January 24, 2015

On the Federal US Debt - Some Comments

Indeed I am a critic of Obama (no surprise there) but I am not a fan of George Bush either. The Iraq war was a bad idea (strategically as well as economically) and did play a huge role in pumping up the debt (lets not forget though that this was a war supported by many Democrats as well so no party is clean on this front – 58% of Democrat Senators voted for the war including Joe Biden himself).

Tax Cuts work to generate revenue if they are coupled with a decrease in spending (Bush did not do this). Lets look at some evidence – In the 1920s tax rates were slashed from over 70% to less than 25%. Revenues actually rose from $700 million + change to just over $1100 million – an increase of 60% or so. Kennedy did something similar in the 60’s reducing the top rate from 90% to 70% - revenues climbed by 62% (33% if you adjust for inflation).

By the 1970s many taxpayers had been pushed into higher tax brackets (by bracket creep). Enter the Reagan tax cuts of the early 80s that saw tax revenue increase by a whopping 99%. Now I no what you are thinking…Wasn’t Reagan responsible for the bulging deficit to begin with? To some extent…yes…but remember that Reagan did not follow the cardinal rule of reducing spending at the same time as dropping tax rates. The same was true of Bush Jr. almost twenty years later. However the world of the 80s was a different place and Reagan had the menace of the Cold War to deal with. A topic for another time.

So where does this leave Obama? – Well he obviously had faith in the tax cuts, in fact he signed a bill to extend them by two years in 2010. Where Obama went wrong though was just like the Republicans he increased spending, largely through his stimulus package and other initiatives – remember he also had a war to fight in Afghanistan (and later Libya) – and so the debt went up.

In summary there is strong evidence that tax cuts increase tax revenue but it has to be coupled with substantial decrease in spending to offset deficit risk. Both Bush and Obama kept tax rates low (to their credit) but both presided over notable increases in government spending that nullified these gains and have driven up the spiralling debt.

In terms of absolute numbers the debt has increased more under Obama than Bush but both have failed to demonstrate the necessary fiscal acumen that the holder of the Oval Office justifiably owes future generations.
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