Rational Politics Chapter 2: The Federal Budget

The Federal Budget is one of the most consistently misunderstood documents in American life. The vast majority of Americans have no real idea of the process involved in the budget's adoption, or the scale (in terms of real money) of the thing itself. This is a major impediment to sound participatory democracy; a basic understanding of how our government plans for the harvest and allocation of tax dollars is a necessity. The good news, I believe, is that the basics are within the grasp of all Americans; it really isn't rocket science folks (except for the NASA budget...that is rocket science).

In order to quickly see the fundamental points that a voter needs to understand, I will use a two-part example; the 2009 Federal Budget (George W. Bush's last), and the campaign platform of Republican Senatorial candidate Sue Lowden (running in my home state of Nevada). As always, I would encourage the readers of this post to follow the logic using your own primary source material; just pick a budget year and play with the numbers, then compare what you have learned to the campaign promises (and folks, that process reveals that stretching the budget truth is a bipartisan deal). For this excersise, the budget data comes from the Government Printing Office and Mrs. Lowden's positions come from her site.

Sue Lowden is running on a straight Republican Party platform. While I have been critical of her in open sources in the past, she is an intelligent, well-educated, and well-seasoned veteran of party politics, the media, and business. Her stated positions on the budget are as follows:

1. Balancing the budget is the goal, with an immediate spending freeze along with a 5% reduction in the expenses of all departments
2. Make the Bush tax brackets permanent (they are currently due to expire)
3. End the capital gains tax
4. End the estate tax (she calls it the "death tax")

In the presentation of her website and speaking engagements, these seem to be very reasonable steps. But let us due our Constitutional duty and work her numbers. Again, we will use the 2009 budget, which contains both a smaller (and easier to close) deficit, and includes the Bush tax cuts (so we don't have to guess). In working this exercise, I will use percentages whenever possible, because sometimes the billions and trillions get in the way (it is hard for most of us, including me, to get our heads around the idea that $1 billion is a small number, but it is in this case...if you make $50,000 per year then $1 billion is the same for our national budget as $170 is for yours!!!)

Can the Lowden Plan work....let us see. The 2009 budget had $3.1 trillion in spending and $2.7 trillion. All else equal, it would take a spending decrease of roughly 13% to balance.  Mrs. Lowden is proposing a 5% reduction on non-military discretionary spending. It is already clear that her 5% is inadequate, but how much of a reduction is a 5% cut in non-military discretionary spending? In the 2009 budget, there was $467 billion in non-military discretionary spending, meaning that the Lowden Plan would save about 0.75%. Now remember that this budget was projected to have a much smaller and much easier deficit to close than our current budget. So her plan doesn't seem to work from the very first point....but we are not done yet friends.

Mrs. Lowden, again echoing the consistent refrain of the Republican Party, champions tax cuts. Cutting taxes friends, does not add money to a budget any more than working less hours adds more money to your household budgets. But let us see how much further in the hole the Lowden Plan would have put the 2009 budget. The values of tax cuts are fairly easy to measure; we know how much was collected, so we can make a good estimate of the future that won't be collected once the tax is cut. For this exercise we have made it easy on ourselves; the Bush tax cuts are already in the budget. For the rest, The Center on Budget and Priorities has calculated the totals.

The repeal of the estate tax will cost the budget about $68 billion per year, almost three times the savings in the Lowden Plan and 2/3 as expensive as the new health care law! Capital gains tax values are harder to calculate, but federal revenues grew at a slower rate after the capital gains reductions of 2003 despite a more robust economy. What is clear is that capital gains tax cuts do not lead to higher federal revenues. So where, if the spending cuts won't balance the budget, and the tax cuts will only add to the deficit, does Sue Lowden propose to find the means to balance the budget?

This folks, is the nub of the issue, we Americans like free stuff and will be friends with any who promise free stuff. This reality applies to all Americans without qualification by race, color, creed, religion, disability, national origin, or sexual orientation. Sue Lowden may very well win a Senate seat on a platform that is a mathematical impossibility that any 5th grader can understand. Democrats and Republicans engage in this, not because they are fundamentally dishonest, but because we don't take the time for a basic fact check....and because we enjoy being lied to! Democrats promise programs and try to pay for them by coming up with ever more creative ways to apply a tax without calling it a tax. Republicans promise tax cuts and tell us we can have our cake and eat it too. ENOUGH!!!!!

No more willful ignorance, and no more Tea Party fantasies. The roads, levees, bridges, locks, dams, docks, harbors, jobs, and our children's academic abilities are CRUMBLING! These institutions fall, while we sit fat and happy in a country with the fifth-lowest effective tax burden in the world and complain about taxes. Our competitive capacity falters, while we reject meaningful capital investment in our infrastructure. The deficit and debt are large and need to come down over time, but they have been climbing at precisely the moment in our history, where we have enjoyed the single largest amount of tax cuts in our history. Is this a coincidence? To add insult to this injury, our failure to invest has put us in a position where we are chasing other countries...productive wind capacity, as an example, in our nation is largely being developed with foreign money....from China!

The 5% cuts and spending freeze are impressive sounding steps that amount to a figurative hill of beans. These steps, which you will hear and see ad nauseum over the next several months, are not only ineffective, but miss the point of deficit reduction entirely. We have a deficit for two reasons; our dollar is overvalued and our workers are under-payed as a group. The 5% cuts and the spending freeze (what, ask yourselves, is entailed in a "freeze"...do yo assume it will be some other less deserving individual that will lose essential services or benefits?) never include an attachment describing what gets cut. I described this phenomena in an earlier post entitled, Other People's Big Government.

If you really want to fix the budget, insist that your representatives tell you the truth, and then don't punish them for doing so. Let lawmakers make the tax code clear, by letting them talk about rational taxation without voting them out. Force lawmakers to describe what will be cut when a tax is cut or a deficit is addressed. State budget battles are much more visible to the average voter because governors and legislators must be specific about what is on the block. President George H.W. Bush lost his job, in no small part, because he knew that a tax increase was needed and appropriate and said as much.

One pleasing side effect of the recent battle for health care, is that the law was forced to be an over-funded mandate; that is its revenues will exceed its expenses if all goes to projection. If something goes wrong, the law has some breathing room. In 2003, the Bush tax cuts were not required to meet that standard, and the result was a law that has cost the American enterprise more than twice as much per year than the health law will. All of that cost, because it comes from a tax decrease, goes directly to the debt. It sure did sound nice at the time though, didn't it?

Tax cuts always do....

The Rational Middle hopes this hot potato inspires dome discussion....