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Budgetary Facts and Fallacies: Krauthammer Edition

April 16, 2011 J

By: R.J. Moeller

In the past two weeks we have seen political fireworks in Washington D.C. over both the 2011 and 2012 federal budgets. The Obama-Pelosi-Reid Democrats that were in charge before January failed to procure a budget last year and that was what the whole hub-bub between President Obama and now-Speaker of the House John Boehner was about. That was what the controversial vote last week was all about.

But now we’re moving on to the battle over Fiscal Budget 2012. The most promising and serious plan for not only 2012, but the next decade, comes from the office (and mind) of Rep. Paul Ryan (R-WI). Aptly named “The Path to Prosperity,” Ryan’s plan received attacks from the political Left before it was even released.

As only he can, syndicated columnist Dr. Charles Krauthammer assess the strengths of Ryan’s economic road-map and the weakness of the counter-proposals being made by the president and leading Dem’s.

Krauthammer begins his insightful piece by acknowledging the primary charge levied at the Ryan plan: it focuses on spending cuts and not on raising any taxes. Democrats say that while Republicans may talk a good game about dealing with our debt, the reality of our fiscal situation is such that we must adjust tax rates.

What say you, Chuck?

But the critics miss the point. You can’t get there from here without Ryan’s plan. It’s the essential element. Of course Ryan is not going to propose tax increases. You don’t need Republicans for that. That’s what Democrats do. The president’s speech was a prose poem to higher taxes – with every allusion to spending cuts guarded by a phalanx of impenetrable caveats.

Ryan reduces federal spending by $6 trillion over 10 years – from the current 24 percent of GDP to the historical post-World War II average of about 20 percent.

Now, the historical average for revenues over the last 40 years is between 18 percent and 19 percent of GDP. As we return to that level with the economic recovery (we’re now at about 15 percent), Ryan would still leave us with an annual deficit in 2021 of 1.6 percent of GDP.

It’s very simple: tax revenues must match budgetary expenditures. Right now, and for a long time, the latter has been higher than the former. We need a way to bridge the gap.

The critics are right to focus on that gap. But it is bridgeable. And the mechanism for doing so is in plain sight: tax reform.

Real tax reform strips out exclusions, deductions, credits and the innumerable loopholes that have accumulated since the last tax reform of 1986. The Simpson-Bowles commission, for example, identifies $1.1 trillion of such revenue-robbers. In one scenario, it strips them all out and thus is able to lower rates for everyone to three brackets of 8 percent, 14 percent and 23 percent.

The commission does recommend that, on average, about $100 billion annually of that $1.1 trillion be kept by the Treasury (rather than going back to the taxpayer) to reduce the deficit. This is a slight deviation from revenue neutrality, but it still yields a major cut for the top rate from the current 35 percent to 23 percent. The overall result is so reasonable and multiply beneficial that it rightly gained the concurrence of even the impeccably conservative (commission member) Sen. Tom Coburn.

That’s the beauty of tax reform: It is both transparent and flexible. That flexibility and transparency can be applied to the Ryan plan. If you need a bit more deficit reduction to bridge the 1.6 percent GDP gap that remains after 10 years, you can get there by slightly raising the final rates.

Preach it, Dr. K!

Cut spending. Cut tax rates. Vote responsible people into office and hold them accountable.

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