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Thursday, October 7, 2010

Taxes Alone Don't Tell the Whole Story

During tonight's debate between Steve Kagen and Reid Ribble, Kagen made the point that taxes are the lowest they've been since 1950. He held up an article from USA Today trumpeting this news. While this makes for a great debate soundbite, it doesn't begin to offer a complete picture of the fiscal state of the country.

The trick is that there is something that is a very close substitute for taxes: debt.

So while Kagen may want to trumpet the historically low tax bill, I doubt he will be reminding us anytime soon that the national debt in 2010 was six times larger than it was in 1950.

Annual budget deficits tell much the same story. In 1950 the deficit was 0.43% of GDP, in 2010 it was almost 11%. In 2006, prior to the financial crisis, the deficit was 1.85% of GDP, or about four times what it was in 1950.

Substituting debt for taxes allows politicians to tell you they've lowered taxes even while they keep spending on all the programs that are near and dear to the hearts of important constituencies.

Republicans are not innocent in all this. Many of them were deluded by the idea that low taxes would shrink the size of government, the so-called "starve the beast" strategy. The only trouble was that the beast didn't just eat taxes, it also liked to eat debt.

In the end it really is all about the spending. Whether we pay for that spending today through taxes or in the future through debt is a secondary question. Voters need to be vigilant against headlines that sound great, but give a distorted picture of the reality Americans face. Especially when promoted by politicians seeking re-election.

4 comments:

J. Strupp said...

"Many of them were deluded by the idea that low taxes would shrink the size of government, the so-called "starve the beast" strategy."

Sorry but that’s false. They believed that tax cuts paid for themselves.

J. Strupp said...

BTW, you can play the debt soundbite just as easy:

Simply recite the debt/GDP ratio of the last 2 years and say that spending has exploded. Nevermind that the bulk of the increase in debt/GDP is the collapse in tax receipts, UI extensions for the 8+ million people out of work, and backstops to a financial sector on the cusp of all out collapse in the fall of 2008.

Those never get mentioned in the soundbite of course.

Jeremy R. Shown said...

Strupp - the starve the beast phenom. wasn't real? I think you are off base there.

The self-financing tax cut story was a separate issue.

Looking at debt/GDP just over the last two years misses my point entirely. That number has been growing steadily since 1980 or so. This isn't just a comment on Obama, but on all of us.

Dad29 said...

the beast didn't just eat taxes, it also liked to eat debt

Very nice turn of phrase.

At the rate it's going, however, you might want to substitute "devour" for "eat."