Spending Cuts and Tax Increases Pushed by House Majority Leader Steny Hoyer

This morning, House Majority Leader Steny Hoyer (D-MD) spoke out for a long-term deficit reduction effort combining spending cuts and tax increases. He chided those who would rule out any tax increases saying:

“Conservative economics used to be in touch with fiscal reality—remember that even President Reagan raised taxes in 1982, 1983, and 1984. Today, Ronald Reagan would be kicked out of the Republican party. Conservatives abandoned the first President Bush after the successful 1990 budget agreement. For the same reason, anti-tax crusader Grover Norquist said this about the possibility of a budget compromise today: ‘At some point conversations about unicorns are tedious, because they don’t exist in the real world. Budget deals where they actually restrain spending and raise taxes are unicorns.’ I’ll only say that a budget agreement is entirely possible between two parties that look at reality as it is, not through the prism of 30-year-old ideologies that lead to defeatist falsehoods like ‘budget deals don’t exist.’ ”

Economists often prefer spending cuts to tax increases, but there’s no immutable theory to that effect. We just recognize that higher taxes curtail investment and growth. Spending cuts can curtail growth too, particularly if investments in education or infrastructure are involved, but tax increases usually have a larger and more immediate negative impact on the economy than spending cuts.

The larger issue is how much slower our economy would grow in a year or two in the face of the sharply higher interest rates if we don’t embark on a large and credible deficit reduction. Like most important decisions in life, it comes down to a judgment call. How much deficit reduction we need to do to maximize future economic growth? I would argue that we need a fair amount, at least 2% or 3% of GDP by Fiscal 2015, when the baseline deficit is estimated to be 5% of GDP.

Mr. Hoyer summed up our fiscal history since 1980:

“Nevertheless, I’m still fairly hopeful that we can reach a balanced solution—in large part, because we have a history of success to draw from. In the 1980s, President Reagan and Speaker Tip O’Neill agreed on Social Security reform, and Reagan and Chairman Dan Rostenkowski agreed on tax reform. In 1990, the first President Bush agreed with congressional Democrats on a compromise to raise the top marginal tax rate and cut spending. Three years later, President Clinton enacted a similar spending-and-revenue agreement, even though Republicans unanimously said ‘no.’ What happened? Spending fell from 22% of GDP to 18%, revenues rose from 17% to 21%, and the Reagan-Bush deficits were wiped out. President Clinton and Speaker Gingrich also took our country in a more fiscally responsible direction by agreeing on the reauthorization of PAYGO. So let’s not pretend that what I’m proposing can’t be done—it was done, within the lifetime of every Member of Congress.”

Now, we’re talking about political economy. Can we and Congress agree on deficit reduction of only spending cuts or only tax increases, or will a combination be the way we go? As Mr. Hoyer noted, historically, we have legislated an equal mix of spending cuts and tax increases. One lesson I learned in Congress’ deficit reduction efforts of the 1980s was that the public will support broad spending cuts and tax increases that are viewed as hitting everyone equally. Once you lean too hard one way or the other or allow to many exceptions, public support vanishes. With most incumbents hunkering down in an attempt to survive November’s election, it’s refreshing to find a political leader with the courage exhibited today by Steny Hoyer.

His conclusion is worth putting on the wall:

“We can keep making easy choices and hoping that the crisis clock just keeps ticking. But sooner or later, if that’s what we choose, there will be a time when we find that we have hardly any choices left at all.”

About Pete Davis 99 Articles

Affiliation: Davis Capital Investment Ideas

Pete Davis advises Wall Street money managers on Washington policy developments that affect the financial markets. President of his own consulting firm since 1992, Davis Capital Investment Ideas, he draws on 11 years of experience as a Capitol Hill economist with the Joint Committee on Taxation (1974-1981), the Senate Budget Committee (1981-1983), and Senator Robert C. Byrd (1992). He worked in the House and Senate, and for Republicans and Democrats.

Davis brought the first computer policy model, the Treasury Individual Income Tax Model, to Capitol Hill in early 1974, when he became a revenue estimator on the Joint Committee on Taxation. He formulated the 1975 rebate, the earned income tax credit, the 1976 estate tax rates, the 1978 marginal tax rates, and the Roth-Kemp tax cut. He left Capitol Hill in 1983 for the Washington Research Office of Prudential-Bache Securities, where he advised investors for seven years.

Davis has long written a newsletter on the Washington-Wall Street connection for his clients; Capital Gains and Games is his first foray into the blogosphere.

Visit: Capital Gains and Games

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