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Countdown to Deficit Cuts – But Still a Deficit: Update III


07.20.2011 UPDATE III

Countdown to Deficit Cuts – But Still a Deficit: Update III

original article written by Net Advisor

Reader Note: This article is a 5-part series that began HERE. This is Update III of our Countdown to Deficit Cuts article series.

All those who Liked, Tweeted, and otherwise shared this article, the social networking counts were reset to zero because we added “Update III” to the title. The 1-5 “Star” system did not change with the extended title. We apologize for any inconvenience. Thank you for reading!

UPDATE III: The Plan Seems to Be a Sham

Waiting to Exhale
Former President Clinton suggested that President Obama take unilateral action citing the 14th Amendment and raise the debt ceiling with or without congressional approval. Clinton also said to “force the courts to stop me” (Source: ABC News).

We’re not sure what Mr. Clinton was thinking. We’re not Constitutional scholars, but the Constitution seems to be pretty clear stating:

“The Congress shall have power to enforce, by appropriate legislation, the provisions of this article.”

— Section 5 of the 14th Amendment, United States Constitution

(Source: Cornell University Law School)

We previously argued on 07-13-2011, Update III, that CONGRESS, not the President has the sole authority to raise taxes, increase spending, etc., under Article 1 Section 8 of the United States Constitution (Sources: Cornell University Law School, and U.S. Constitution.net).

“Gang of Six” Big Tax Increases and Trivial Spending Cuts Still Lead to Deficit Spending
Members of Congress referred to as the “Gang of Six” are reportedly leading the issues over the debt ceiling. Both parties have repeatedly said that the debt ceiling must be raised or the U.S. will default on some of its obligations. The current plan would implement “$3.75 trillion in savings over 10 years” (Source: Chicago Tribune).

One of the good things about the plan is that it may lower taxes across the board, yet at the same time increases revenues (meaning taxes) by $1.2 Trillion (Source: Reuters). So government plans to cut spending, cut taxes, and raise taxes all at the same time? The Wall Street Journal seems to be on page with us:

“The Gang of Six, a bipartisan group of senators, threw its deficit-reduction package into the arena Tuesday and it is variously described as increasing tax revenues by $1 trillion over 10 years and also decreasing them by $1.5 trillion over 10 years. Huh?”

— Source: The Wall Street Journal

It should be interesting to see how the government can cut spending, cut taxes, and raise taxes, and not increase spending all at the same time. First some tweaking at the tax code.

Revise the Tax Code from Six Tax Brackets to Three Tax Brackets.
Currently for 2011, the tax brackets range from 10% to 35% (Source: Bankrate.com).

The “Plan” would change the tax brackets to a range of “8–12 percent, 14–22 percent, and 23–29 percent.” This seems pretty good depending on where the exact brackets are set. But overall taxes seem to go down.

Lowering taxes and decreasing government spending tends to stimulate the economy as it did in under the Economic Recovery Tax Act of 1981 which got us out of the late 1970’s recession. This similar strategy also got us out of the 2000-2002 Recession (further reading).

The only problem here is that this includes $1.2 Trillion in new taxes along with spending cuts. We believe this will still amount to deficit spending for the next 10+ years. Here is the break down and our analysis on how to get to these numbers.

“Gang of Six Plan”

  • $1.2 Trillion in New Taxes
  • $2.55 Spending Cuts over 10 years

Since Government wants to add $1.2 Trillion in new taxes, that means government only needs to cut $2.55 Trillion in spending in 10 years or $255 Billion per year. (Math: Add $1.2 Trillion in new taxes + $2.55 Trillion in proposed cuts = $3.75 Trillion total deficit spending reduction goal.)

How to get to $2.55 Trillion in deficit spending cuts over 10 years
Remember, we don’t need to get to $3.75 Trillion in deficit cuts, because government plans on adding $1.2 Trillion in new taxes. We just need to make up the difference that new taxes won’t give, thus the $2.55 Trillion figure over 10 years.

  • “Ending Afghanistan alone can save $1.1 Trillion off the deficit over the next 10 years” (Source: Army Times).
  • It is assumed that $500 Billion will be saved every year through 2015 by tagging the government’s own inflation gauge to the “Consumer Price Index (CPI), freezing congressional pay and selling federal property (Source: The Hill.com). At $500 Billion per year over four years, that would amount to $2 Trillion in savings, but not necessarily via spending cuts. These two items alone reduce deficit spending up to $3.1 Trillion over 10 years, but there are a ton of problems being left out of this equation.

Kick the Can: Now here are the “funny parts” to deficit reduction.

  • The plan only requires that Social Security remain solvent for 75 years. In other words, after this time government will have used up all of Social Security’s trust funds and Social Security will be bankrupt for all those who will be paying into it for the next 75 years, whether they are currently born or not. There is supposed to be a plan to make sure its solvent, but that is not a guaranteed outcome in this Gang of Six Plan.
  • Healthcare spending and costs are expected to equal CPI plus 1% annually and would not be fully reviewed again until 2021.

“Review total federal health care spending starting in 2020 with a target of holding growth to GDP plus one percent per beneficiary and require action by Congress and the President if exceeded.”

— Source: Gang of Six Plan

The only problem here is that healthcare costs are rising at 8.5% for 2012 alone. These higher healthcare costs are partially attributed to the Obama HeathCare plan. To say that healthcare costs will rise in the future by just slightly above consumer inflation (CPI-June 2011 at annual rate of 3.6%) is like saying college tuition won’t go up in the next 10 years. This Congressional math just doesn’t pan-out.

Kick the Can Part II:  Sign the Bill, Figure it out Later?

  • Most of the deficit reduction will be figured out later in “committees” after the bill is signed, assuming committees can agree on the deficit spending reductions.
  • This plan does not put government spending under control (Source: Heritage.org).

Assumptions

  • The plan assumes that a total of $1.133 Trillion of increased revenue must come as a result of lower taxes.
  • “Tax reform must be estimated to provide $1 trillion in additional revenue to meet plan targets and generate an additional $133 billion by 2021, without raising the federal gas tax, to ensure improved solvency for the Highway Trust Fund” (Source: “Gang of Six Plan,” Local PDF).

Government is effectively assuming using unknown math that taxes will just increase by this amount and within 10 years.

  • This plan also assumes all government math and economic forecasts are correct over the next 10 years. The Obama Administration and the Congressional Budget Office has been wrong on just about every forecast we have found, especially since Obama took office. The President’s own 2012 “Budget” shows the U.S. deficit will more than double – 130% increase – in just 10 years:

The Obama Administration’s own budget numbers project that the National Debt is expected to INCREASE to $24.633 Trillion by 2021, up from $10.7 Trillion when President Bush left office. This is a 130% or $13.933 Trillion increase in the National Debt in just 10 years.

— Source: WhiteHouse.gov, PDF, P171 (Further reading)

  • There are many other assumptions, but we picked out just a couple that are likely going to have a difficult time in economic reality.

Fantasyland
Government seems to think that using the aforementioned spending cuts and new taxes will somehow,

“Reduce our publicly-held debt to roughly 70% of our economy by 2021.”

— Source: “Gang of Six Plan,” Local PDF

There is no way in hell that this said objective will ever be achieved under this plan. If the deficit is say $14.4 Trillion as of post date, and government wants to reduce that public debt by 70% in 10 years, that means one needs to cut $10.8 Trillion off the deficit not including the interest cost on $14.4 Trillion.

[Math: $14.4 Trillion (current deficit) x 70% (reduction goal) = $10.8 Trillion required to tax or save in order to meet the goal of reducing the public debt by 70% in 10 years.]

Oh, this $10.8 Trillion? It also doesn’t factor the interest costs on the $14.4 Trillion debt. Thus, the saving would have to well exceed $10.8 Trillion over 10 years. Using “ball park numbers,” we figure government probably would need to cut $1.5 Trillion a year for 10 years and have little to no inflation, and interest rates can’t go up for 10 years.

This also assumes that government does not ever spend $1.00 more than they take in for at least the next 10 years. Thus, the government “Plan” can’t run a deficit at all. Government must balance the budget every year for at least the next 10 years in order for this to try and work.

This is pure fantasyland. It is shocking that this is not being discussed more broadly.

The “Plan” also would eliminate the Alternative Minimum Tax (AMT) reducing that revenue to the Treasury by $1.7 Trillion. That means government needs to save another $1.7 Trillion, or raise taxes by another $1.7 Trillion to balance this out.

But wait, aren’t we supposed to be cutting the deficit and lowering taxes?

That’s what we are told.

So which is it?

Is the government raising tax or lowering taxes?

Are they decreasing spending or are they really increasing spending?

The “Plan” doesn’t show how government came to their math. After breaking their numbers down a little bit here, it just doesn’t add up right. All we know is they want to raise the debt ceiling. This means more debt, and likely more new taxes. Thus, this plan seems to be a sham.

UPDATE IV: Continues HERE

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Cartoon: Michael Ramirez – Creators Syndicate

Original content copyright © 2011 Net Advisor™

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