A reminder from yesterday – Budgets have two activities: revenue (income) and costs (spending). With taxes being a popular campaign topic and an important concern to voters, let’s look at some big picture points.
1) Unquestionably, raises taxes increases revenue. On the other hand, this is extremely unpopular. Besides, raising taxes during difficult economic times could be disastrous.
2) Without question, everyone desires less taxation. Although both candidates offer tax cuts, the main difference is found with $250K+ income, which Senator Obama taxes more. The Reagan approach to taxes was to cut the percentage paid while making more taxable. So is a tax cut defined by a percentage paid or the amount paid? Is Senator McCain planning a similar approach with health care benefits?
The Tax Policy Center projects a reduction in revenue in both plans: 3.6 trillion (Mc) to 2.7 trillion (Ob) over the next ten years. Again, can one balance a budget with reduced income?
“Historically, tax revenues have averaged about 18 percent of GDP. (The president’s fiscal 2009 budget projects receipts of 18.8 percent of GDP in 2013.) Senator McCain’s proposals, if fully phased in by the end of his first term, would reduce revenues to about 17.6 percent of GDP, while Senator Obama’s proposals would cut revenues less—to about 18.5 percent of GDP.”
Think about a tax cut this way: would you personally take a pay cut if you were in financial trouble? Is there any doubt why deficits grew the most during the tax-cut years of the Reagan and GW Bush administrations? Although GHW Bush’s “Read my lips – No new taxes” statement was politically unpopular, was it the responsible thing to do? Was the deficit reduction (and eventual surplus) policies of the Clinton years the responsible thing to do?
3) The recently-passed bailout/rescue plan has a revenue component. Once the financial sector and the economy returns to better footing, the government’s plan is to sell the bought mortgages; thus the chance to make a profit. Warren Buffett supports this notion. The 1989 S&L bailout turned a profit, as did the 1979 Chrysler bailout/loan ($350 million).
4) Both candidates aim at increasing revenue through job creation. This noble cause faces a business environment favoring downsizing the U.S. workforce and outsourcing work to foreign locations. Will the presidential winner and Congress be able to create enough work to make up the decrease in revenue and the current deficit?
Next: Budgets and Spending