Washington, we have a spending problem

Barack Obama

The debate over the “fiscal cliff,” particularly the tax hike for higher-income earners being push by President Barack Obama, is one that is based on an entirely false premise. The argument from Obama and Senate Democrats is that these taxpayers need to pay more to help bring the budget back to a sustainable path. However, the Wall Street Journal explains that tax revenue has been climbing and the real issue is that spending has gotten out of control under Obama:

The nearby table lays out the ugly details. The feds rolled up another $1.1 trillion deficit for the year that ended September 30, which was the biggest deficit since World War II, except for each of the previous three years. President Obama can now proudly claim the four largest deficits in modern history. As a share of GDP, the deficit fell to 7% last year, which was still above any single year of the Reagan Presidency, or any other year since Truman worked in the Oval Office.

Tax revenue kept climbing, up 6.4% for the year overall, and at $2.45 trillion it is now close to the historic high it reached in fiscal 2007 before the recession hit. Mr. Obama won’t want you to know this, but this revenue increase is occurring under the Bush tax rates that he so desperately wants to raise in the name of getting what he says is merely “a little more in taxes.” Individual income tax payments are now up $233 billion over the last two years, or 26%.
Now let’s look at outlays, which declined a bit in 2012. That small miracle was achieved thanks to a 4% fall in defense spending, a 24% fall in jobless benefits, and an 8.9% decline in Medicaid spending.

Note, however, that federal spending remains at a new plateau of about $3.54 trillion, or some $800 billion more than the last pre-recession year of 2007. One way to think about this is that most of the $830 billion stimulus of 2009 has now become part of the federal budget baseline. The “emergency” spending of the stimulus has now become permanent, as we predicted it would.

When Beltway politicians claim they want a “balanced” approach to reducing the deficit, what they really mean is raising taxes to finance this new higher spending level. And the still-higher level that is coming with ObamaCare.

The reality is that the fastest way to raise revenue is with faster economic growth. To the extent that raising tax rates will reduce the rate of growth, it will slow the flow of tax revenue and increase the deficit.

Bingo. Anytime politicians raise taxes, it puts economic growth at risk. Some will point to Clinton-era tax rates and the economic boom of the late 1990’s, but the economy didn’t take off until the Republican-controlled Congress passed a capital gains tax cut. And with all the panic that is coming with the “fiscal cliff,” which eerily reminiscent to when TARP passed Congress in 2008, it pales in comparison to what we face if Obama and Congress continue to kick the can down the road on entitlements.

Elections have consequences, there is no avoiding that. But just because President Obama won doesn’t mean that he was right the last four years, nor does it mean that he’ll be right in his second term. Whether it’s a false notion of “fairness” or he really believes that the relatively small amount of revenue that would come with raising taxes on higher-income earners, President Obama is, once again, putting economic growth at risk because he believes government is the answer to all of the United States’ problems.

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