The United States has set itself on a path of unsustainable debt levels with little political prospect to implement the policy mix that will turn this tide. What America needs is a government committed to generating real and sustainable economic growth and a real lowering of the fiscal deficits through strong commitments to (1) permanently lower tax rates on households and businesses and (2) stricter responsibility and control on government spending.
Recent research by two Harvard economists highlights the link between regaining a balanced budget by the federal government, lower tax rates, and the economy. This research supports the model of economic growth where a reduction in the tax rates faced by households and businesses stimulates an economy much more than a model relying on more government spending.
Printing more money to pay off our debt (by creating inflation so the fixed debt is worth less in real terms) is out of the question because of the possibility of losing control of the high inflation. Hence, our only remaining option is to pay off the debt the old fashioned way, by creating budget surpluses and paying a bit of our debt every year.
Moreover, the research recommends that a strong commitment to cost-cutting measures will also contribute substantially to lower and sustainable deficit- and debt-to-GDP levels. A critical step we could take to decrease spending is to cut costs of largely inefficient government-sponsored programs, allowing lawmakers to cut back tax rates across the board accordingly.
And yet this is easier said than done. Government-sponsored entitlement programs have no end in sight, making it hard to significantly cut spending and by extension to refrain from raising taxes to fund these entitlement programs. The stimulus bill and the current health care bill will make it even more difficult to achieve fiscal solvency. These authors conclude:
Health care reforms seem to imply large increases in spending, the retirement of the baby boomers is not too far, and in the pressing time of the crisis the issue of Social Security has been in the background, but it has not disappeared. A relatively high unemployment for a couple of more years will require spending on subsidies. The budget outlook looks rather grim on the spending side. The Congressional Budget Office predicts deficit of 7 per cent of GDP up to 2020. This is not a rosy scenario.”
Aleksey Gladyshev currently is a member of the Young Leaders Program at the Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/About/Internships-Young-Leaders/The-Heritage-Foundation-Internship-Program
Government Dependency Grows As “Non-paying” Taxpayers Hits Record Level
Author: Curtis Dubay
The Tax Foundation recently released its annual report on the number of tax returns filed that have no tax liability, and the study shows a record number of “nonpayers” in 2008. Taxpayers become “non-payers” when credits and deductions wipe out any income tax they owe.
According to the Tax Foundation report, of the more than 142 million returns filed in 2008, almost 52 million have no tax liability. That means more than 36 percent of tax filers paid no income taxes in 2008 – a new record high. This was a steep increase over 2007 when fewer than 33 percent of filers paid no taxes. As the table below shows, the growth of non-payers is a long-term trend that has been accelerating in recent years. For instance, 21 percent of taxpayers were non-payers in 1990.
The amount of income that a family can earn and still be non-payers is also alarming. In 2010, a family of four can earn up to $51,000 and still pay no income taxes.
Not only do a record number of taxpayer’s pay no taxes, but many of them actually receive cash payments through the tax code because of refundable credits like the Earned Income Tax Credit (EITC) and the Child Tax Credit. According to the Tax Foundation, cash payments from these two credits alone totaled over $70 billion.
President Obama’s policies will add to the numbers of non-payers and the amount of income redistributed because he wants to expand and add even more refundable credits.
Like the Tax Foundation’s report, the Heritage Foundation’s Index of Dependence on Government shows a growing dependence on government and a substantial increase in recent years. According to the report, the average recipient of government aid received over $26,000 in assistance in 2008 – a record high.
The growing dependency on government and shrinking number of taxpayers is troubling and will lead to an even faster rise in unsustainable government spending unless the trend is reversed. Congress should start by ceasing the expansion of refundable tax credits. It should then reform entitlement programs like Social Security and Medicare before baby-boomers start collecting benefits from them and dependency on government explodes even further. If Congress starts soon perhaps it won’t be too late to stop the impending fiscal implosion.