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February 2013 Brief: Volume 20, Number 4

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The Economic and Fiscal Crisis Continues

 

by John Hendrickson

 

 

The economic and fiscal crisis, in addition to policy uncertainty, is still causing a weak recovery from the Great Recession. Unemployment still remains high at 7.8 percent and the economy is plagued by the albatross of our dangerous escalating national debt. More Americans are also becoming more dependent upon government programs, and it is estimated that 41.3 percent of the population receives some form of government assistance.[1] As the 2012 election demonstrated, the nation is politically and culturally divided over how to solve the issues of government spending, paying down the debt, and reforming entitlement programs. It is certain that uncertainty will continue as policymakers delay implementing sound public policy ideas that consist of spending and tax reform.

 

At the heart of the fiscal crisis is the national debt, which is over $16 trillion. In addition, the federal government is running annual trillion-dollar deficits and still operating without a budget. It is estimated that the federal government may produce another $1 trillion deficit.[2] President Obama has already added over $5 trillion to the national debt. The negotiated fiscal cliff compromise failed to address the serious need for spending reduction and tax reform. Although the fiscal cliff compromise did manage to avoid some tax increases, the end result was a setback for taxpayers. Some of the tax increases include:

 

•Payroll tax - increase in the Social Security portion of the payroll tax from 4.2 percent to 6.2 percent for workers.
•Top marginal tax rate - increasing from 35 percent to 39.6 percent for taxable incomes over $450,000 ($400,000 for single filers).
•Tax rates on investment - increase the rate on dividends and capital gains from 15 percent to 20 percent for taxable incomes over $450,000 ($400,000 for single filers).
•Death tax - increase in the rate (on estates larger than $5 million) from 35 percent to 40 percent.[3]

 

Curtis Dubay, who serves as a Senior Tax Policy Analyst at The Heritage Foundation, identified 13 tax increases for 2013, which “will slow the economy, meaning that businesses will create fewer jobs.”[4] The spending problem remains as President Obama continues to call for more revenues and oppose efforts to seriously cut spending.

 

It has been said that “the fiscal disease in America is excessive government spending and an unsustainable welfare state, not insufficient taxing,” which is causing the fiscal crisis.[5] Michael Tanner, a Senior Fellow at the Cato Institute, wrote that “this year, the federal government will spend at least $3.62 trillion, an increase of $92 billion from last year. Of that amount we will borrow $941 billion, or 26 percent.”[6]

 

Tanner wrote that “our debt currently exceeds 102 percent of gross domestic product (GDP), if one considers both debt held by the public and intragovernmental debt (such as the Medicare and Social Security Trust Funds).”[7] A major factor driving the debt crisis is entitlement programs such as Social Security, Medicare, and Medicaid. As Tanner wrote:

 

If one includes the full future unfunded liabilities of Social Security and Medicare, this country’s real indebtedness could run as high as $129 trillion (in current dollars). Even under the most optimistic scenarios, our real debt approaches $80 trillion.[8]

 

Slow economic growth, high unemployment, and the debt crisis are all driven by the same failed policies being advanced by President Obama. In addition, the Patient Protection and Affordable Care Act will be implemented and regulatory activity upon the economy will increase, both of which will add to the continual uncertainty in the economy.

 

The solution to this problem rests in not only cutting government spending, but also tax reform.
Jeffrey Miron, a Senior Fellow at the Cato Institute, wrote:

 

The United States has a simple path to a brighter economic future: slash expenditures and keep tax rates low. Lower expenditures will improve the debt outlook and make the economy more productive, implying higher levels of output and further debt reductions for any given tax rates. Keeping tax rates low will improve the incentives for labor effort, savings, and entrepreneurship, which also promotes a more productive economy.[9]

 

It is clear that the current uncontrolled levels of government spending cannot continue. The $16-trillion national debt and the deficits are not only an albatross on the economy, but also threaten the value of the dollar. The fiscal crisis is a serious threat to the survival of the Republic, and policymakers would be wise to return to principles rooted in constitutional limited government.

 

Endnotes:
[1] Patrick Tyrell and William W. Beach, “U.S. Government Increases National Debt — and Keeps 128 Million People on Government Programs,” Backgrounder, No. 2756, The Heritage Foundation, January 8, 2013, <http://www.heritage.org/research/reports/2013/01/us-government-increases-national-debtand-keeps-128-million-people-on-government-programs> accessed on January 8, 2013.
[2] Editorial, “In Obama’s America, Only Debt and Dependency Grow,” Investor’s Business Daily, January 9, 2013, <http://news.investors.com/ibd-editorials/010913-639961-debt-and-dependency-skyrocket.htm> accessed on January 10, 2013.
[3] Curtis Dubay, “13 Tax Increases in 2013,” Morning Bell, The Heritage Foundation, January 8, 2013, <http://blog.heritage.org/2013/01/08/tax-changes-2013/?roi=echo3-14181064834-10894935-5f536652e5dda10f02fc7f2d774481e0> accessed on January 8, 2013.
[4] Ibid.
[5] Richard M. Salsman, “The Lopsided Fiscal Cliff Deal: All Tax Hikes, No Spending Restraint,” Forbes, January 8, 2013, <http://www.forbes.com/sites/richardsalsman/2013/01/08/the-lopsided-fiscal-cliff-deal-all-tax-hikes-no-spending-restraint/> accessed on January 9, 2013.
[6] Michael Tanner, “The Fiscal Facts of Life,” National Review Online, January 9, 2013, <http://www.nationalreview.com/articles/337215/fiscal-facts-life-michael-tanner> accessed on January 9, 2013.
[7] Ibid.
[8] Ibid.
[9] Jeffrey Miron, “Should U.S. Fiscal Policy Address Slow Growth or the Debt? A Nondilemma,” Policy Analysis, No. 718, Cato Institute, January 8, 2013, <http://www.cato.org/publications/policy-analysis/should-us-fiscal-policy-address-slow-growth-or-debt-nondilemma> accessed on January 9, 2013.

 

John Hendrickson is a Research Analyst with Public Interest Institute, Mount Pleasant, Iowa. Contact him at Public.Interest.Institute@LimitedGovernment.org.

 

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