I'm A Deficit Hawk

I'm a Deficit Hawk - Or Why I am Against the Dubyah Tax Cuts.

(See here) a New York Times article that discusses the Dubyah taxcuts and just which portions of society benefited the most.

I am in favor of some taxcuts. I am in favor of rolling back the effects of the Alternative Minimum Tax on the middle class, continuing with the elimination of the "marriage penalty" and continuing increases in the child tax credit. I wish to point out I do not personally benefit from any of these changes, but I am still in favor of them.

As for all the other Dubyah tax cuts, I say "roll 'em back". I believe that this would result in my paying at least $1,000 additional in taxes every year, possibly as much as a couple thousand. But I am willing to shoulder my portion of helping to balance the budget, as long as the greedy, wealthy segments of society are required to pay what I consider to be their fair share.

The strongest argument those in favor of extending the tax cuts for our most fortunate citizens have is that these cuts encourage investment and strengthen the economy. Perhaps there is some truth to this statement, which is why the American people are so receptive to it. However I feel there is at least some false logic behind it, that the argument is being twisted so as to justify cutting taxes by so great an amount for those who already have so much.

Let us look at the effects of the tax cuts. Cutting taxes spurs investment in America they say. But what guarantee is there that the additional money landing in the pockets of the wealthy ends up being invested in America? What is to keep this money from being invested in a new manufacturing plant in China or a snow cone stand in Iceland? Seems that with the tax cuts the American economy has continued to hemorrhage jobs to over seas.

What happens if we roll back the tax cuts? Well immediately the size of the deficit would decrease. The Treasury would need to borrow less money from the capital market, which should tend to drive down long term interests rates. Foreign investors who have benefited from the current large trade imbalance will have to find something new to invest in as the US Treasury markets fewer treasury bills due to a decreased deficit. The foreign investors are going to have to find something to invest their wealth in. What are they going to do? Build up a mountain of greenbacks in their back yard and allow inflation to erode their wealth?

There is some danger to this. Tightening up the supply of treasury bills might encourage foreign investors (like the Chinese government) to start trying to buy up American corporations. However the degree of foreign ownership of American corporations could be limited. China seems to be successful in limiting foreign ownership of Chinese corporations without anyone crying foul after all.

If foreign investors no longer have the quick and easy choice of investing in treasury bills, they will have to find new ways to invest or spend their money. Did anyone else fail to notice that when the American economy took off at the end of the Clinton years it was as the federal government was successful in starting to decrease deficit spending? This resulted in a snowball effect as the increased economic activity yielded increased tax revenue, further closeing the deficit gap, further limiting investment choices etc etc.

While not every dollar that leaves America necessarily has to return to America, there is not going to be an endless demand for dollars in the world economy unless some of those dollars find their way back into the American economy. Right now the method of return is through treasury bills that fuel the deficit spending. But what happens if we close up the spigot a little bit on this path of return and we start decreasing the federal deficit? Is it not possible that some of this money will be used to purchase something actually (gasp) "Made in America" because they have got to spend the money somewhere? (This contention becomes more realistic if "Mexican guest workers" are restricted to occupations that face direct foreign competition as I have previously put forth.) An alternative path of return might be the increasing availability of start up money for new entrepreneurs in America who want to see if a new, great idea, might pan out to produce respectable profits.

As I said before, count me amongst the deficit hawks. Also count me against those who, like George Dubyah Bush, want to try to get us to believe that deficits are good for the American economy. I'm saying they (Dubyah included) are full of shit.


Blogger Michael said...

The "trickle-down" justification of cutting the rate of personal income tax for the most wealthy is bogus.

If you want to cut taxes in a way that stimulates the local economy, then changing the tax base so that it beneficially affects small to medium businesses is the best way. Of course, using fiscal policy in such a manner is inflationary.

Cutting the taxation of the super rich (top 1%) while simultaneously cutting social services to help lessen the impact of a substantial budget deficit is nothing more than giving a handout to the wealthiest part of the community.

Michael Tam
vitualis' Medical Rants

4/10/2006 10:59:00 PM  
Blogger Little David said...

Well I am personally familiar with some of the abuses and weaknesses of the "welfare state". I believe there is a need for a safety net in society, however if the safety net is made too broad and too comfortable, you end up with too many people intentionally jumping into it rather then falling in despite their best efforts not to.

What brought that paragraph on? Your including "while simultaneously cutting social services" in your comment. I am a bigtime deficit hawk. I am unwilling to commit to not cutting social services if that is what is required to balance the budget. Personally, at least in the short term, I do not think raising (restoring?) taxes alone would be enough to balance the budget. Some cuts, somewhere, are probably going to be needed. Perhaps some cuts, everywhere, will be needed.

I see too much to be gained in the long term from balancing the budget. Balancing the budget should, in the long term, create the greatest opportunities to the largest portions of our society.

Do we still need some kind of safety net? Yes I think we do. Even Ronald Reagan felt the least fortunate of our society deserved one. However when the safety net becomes too broad and too laden with benefits, some people are motivated to make a living by milking the system.

I personally have witnessed examples of where this has occurred. I will not give specific names, but will give a location. I witnessed this happening in the state of New York and no it was not in New York City, it was "upstate" New York. In New York, the social services benefit package was so lavish that people spent their days scheming how to qualify for the benefits.

Taxes within New York state were so high that businesses were packing up and moving out of the state rather then pay the taxes.

This started a snowball effect. As businesses moved out, tax revenue fell, resulting in further tax increases to pay for the social services, which resulted in even more businesses moving, resulting in further revenue shortfalls and further tax increases etc etc.

Even private homeowners and farmers packed up and abandoned their property without even trying to sell what they owned! Why? Because they owed so much in back taxes, they probably could not find a buyer who, due to the high tax rates, would be willing to pay even as much as was owed in back taxes. The owners would just walk away.

Even today upstate New York lacks anything that resembles a prosperous economy. I know that from personal experience, too. Plenty of good freight goes in, as the people still need to eat and need to clothe themselves, but there is a dearth of good freight coming back out.

4/11/2006 09:26:00 AM  
Blogger Michael said...

There are two ways to stimulate the economy with fiscal policy.

One is to reduce taxation. The second is to increase government spending. In essense, to increase the spending power of the consumer. Budget deficits are not necessarily a problem as long as expenditure is used in such a way that it will lead to economic gains in the future.

Getting a loan and going into debt to buy machinery that is vital for your business (i.e., capital expenditure) is not a problem -- it will pay itself back. Getting a loan to buy yourself a luxury car could be a problem.

Government expenditure that stimulates the economy is not necessarily a problem -- as it will be recouped in future taxation.

What is Bush and co doing?

Decreasing social services, particular those who need it the most (the sick, the poor and the old). That is, reducing the spending power of a large portion of the population.

Redistribution of the tax base to benefit the wealthiest; who are unlikely to spend more domestically - and furthermore, represent a very small part of the US population.

He is also increasing government funding into the military. Arguments on foreign policy aside, this spending is not "capital" expenditure (not unless the US government is going to start leasing out it's armed forces to earn money).

My opinion is that Bush's budget is economically irresponsible.

Michael Tam

4/11/2006 08:01:00 PM  
Blogger Little David said...

While we are in agreement that Bush economic policies are wrong, I choose to disagree with you on one minor, but related, issue.

You stated budget deficits are not necessarily a problem. While occassional deficits probably are OK to, for example, keep the economy going in bad times, continuous, large scale budget deficits are not good for society. Future generations are going to have to pay these debts back. They are going to have to repay them through higher taxes or through inflation, possibly hyper inflation, as they print money to repay the debt.

Right now the government can not balance its budget, and this is before the baby boomer generation starts retiring and putting increasing strains on the Medicare and Medicaid system.

While there are complexities to this comparison, compare American economic policy to that of Argentina and Brazil. Both economies faced near collapse. Why? Because the governments of both countries insisted on spending more money then they took in from taxes.

One day the same economic "truths" are going to come calling at America's doorstep if American economic policy does not change. As I stated, there are complexities involved, complexities that would take all day to discuss, complexities that will allow the US government to pursue unsound policies for awhile. However even these complexities are not going to last forever, at least not under current economic realities.

We have got to balance the budget. If we want a government that includes rich social services we have got to be willing to pay for it. My own belief is that we are going to at least have to "restore" the taxes cut by Dubyah and accompany this with cuts to federal spending.

As I said before, I am a deficit hawk. I want a balanced budget. I am open to suggestions on how to achieve this. A balanced budget used to be one of the reasons a person might decide to vote Republican. Republicans used to rail agains "tax and spend" Democrats. Now it turns our what Republicans are is "borrow and spend", and in my judgement, that is even worse then the Democrats.

4/12/2006 08:38:00 AM  
Blogger Michael said...

I'm in general agreement. However, the other thing to look for is the size of the foreign debt and the current account deficit. As long as it is within a certain percentage of GDP (? 20%), the runaway effect probably won't occur.

I think that the US is still in the "safe" zone though as before, the current spending is on short term goals and "unwise".


4/12/2006 08:52:00 AM  
Blogger Little David said...

I think part of the problem is that American politicians try to mislead the American public on just how large the current deficit spending is.

(See here) where I discuss/prove that the true rate of deficit spending is just about 640 billion per year. That means that every 1 and 1/2 years another trillion dollars (almost) is added to what the American people owe. It is my opinion this is unsustainable.

It is also important that it be pointed out this level of deficit spending has been achieved even before America faces up to the challenge of the baby boomer generation starting to reach retirement age. If this level of deficit spending is necessary now, just how much will be required then?

4/12/2006 10:06:00 AM  

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