The $700 Billion Price Tag

September 15, 2010 Leave a comment

This article was featured in The Bulletin (Philadelphia-area newspaper) on 9/19/10. You can read the newspaper version online here or catch the print column every other week.

During his recent speech in Ohio, President Obama made it clear his administration will soon raise taxes on those in the top marginal income tax bracket. While not surprising given the administration’s penchant for redistribution, the manner in which President Obama made his declaration brings cause for concern: “This isn’t to punish folks who are better off – it’s because we can’t afford the $700 billion price tag.” Not only will such tax-the-rich policy hamper U.S. economic growth, principally among small businesses, but the statement itself is a clear indictment of the president’s broader philosophical belief: Earned income is the Government’s, not the Peoples’.

Practically, the looming tax increase will hamper the already-struggling recovery. The wealthiest earners spend the most, especially on the margins. Their spending helps fuel demand, drive profits, and thus create jobs. This group also invests more, providing capital to companies seeking cash and driving long-term growth. But the debate over trickle-down economics has been well documented.

Perhaps more significant is the acute degree to which the tax hikes will damage small businesses. Small businesses comprise over 99% of all U.S. businesses, employing 70 million Americans, or half of the total private work force.  According to recent IRS data, an astonishing 48% of the net income of these businesses—sole proprietorships, partnerships and S corporations—went to those earning above $200,000. In other words, the tax hike will directly hit companies that drive a considerable portion of economic growth and job creation.

Significantly, a pair of studies published by economists at the National Bureau of Economic Research show exceptionally high responsiveness of sole proprietors’ business activity to tax rates. When applied to President Obama’s proposed hike, the study shows a projected 7% drop in total gross taxable revenue. Adding to this data is a study from R. Glenn Hubbard of Columbia University showing that as the progressivity of the tax code increases, entrepreneurs are further discouraged from starting new businesses. Finally, when the National Federation of Independent Business recently asked small business owners to list the most important problem they faced, a full 20% cited taxes, making it the second most named concern behind only weak sales. Perhaps this is why just 21% of economists recently surveyed by the Wall Street Journal favored the president’s decision to raise taxes on the wealthiest earners.

Beyond economic implications, it is odd that the administration expresses concern for a potential $700 billion revenue loss from extending tax cuts for top earners, but is seemingly unconcerned about the revenue loss of $2 trillion from extending tax cuts for the rest of the population. Moreover, such concern was conspicuously absent when passing the two largest fiscal budgets in U.S. history, the Cash for Clunkers program, mortgage and corporate bailouts, the wasted $800 billion stimulus, the $1 trillion healthcare bill, and massive increases in social welfare programs. With the deficit having grown 300% under its watch, the administration ought to have a difficult time claiming fiscal restraint as its driving motivation.

So, in absence of fiscal responsibility and with the economic data so exceptionally clear—falling small business revenue; increased job loss; discouraged entrepreneurs; less consumer spending—why would the administration champion such a policy? Because it believes income belongs to the government, not the people. To them, letting the tax cuts expire would be like turning away a lottery ticket.

The progressive movement, unveiled over the past 18 months, believes firmly that the potential success of the collective trumps the rights of the individual. A guided economy, redistributive tax policy, and a slew of federally dictated entitlement programs are the means by which progressives seek to accomplish an elusive social utopia. As Frank J. Goodnow, one of the founders of modern progressivism once noted, “Social expediency, rather than natural right, is thus to determine the sphere of individual freedom of action.” When the collective comes before the individual, when liberty is trumped by statism, government claims the product of your labor. If, in its great beneficence Government offers you the gift of 60% of your earned income, you ought to be thankful. Or so the story goes.

The Founding Fathers saw things quite differently. They established a Constitutionally-constrained government, centered on the idea that government should exist only where necessary. Property, earned income, and the product of private labor were the peoples’ right to keep. The people, after all, had worked for it. Government confiscation of earned wealth, they felt, should only take place with the utmost discretion and for limited, enumerated purposes.

With such clear economic implications and a marked departure from America’s original values, the Founders might have issued a clear retort to the president’s statement: “No, Mr. President, the People can’t afford the $700 billion price tag.”

-Matt Benchener is Supervisor of Newtown Township and Found of TruPolitics.net

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Independence Day

July 15, 2010 2 Comments

This article was featured in The Bulletin (Philadelphia-area newspaper) on 7/19/10. You can read the online newspaper version here or catch the print column every other week.

During our final meeting before the Fourth of July, our Board of Supervisors (the local governing body in Newtown Township, PA for which I serve as Vice-Chairman) was faced with a difficult and emotional decision: Should we fund fireworks for our community in the face of a bleak financial outlook? Celebrating our nation’s independence with fireworks is a time-honored tradition in Newtown, but escalating costs and declining revenues meant we had to make tough budgetary choices. So, do you jeopardize a key community event in favor of fiscal responsibility, or fund the fireworks and risk a future tax hike?

Moments like this occur often in local politics. Unlike the federal government, municipalities can’t print money, issue endless mountains of debt, or finish the year in the red. The mandate is clear: Balance the budget or go bankrupt.  As such, local officials must constantly face the harsh reality of either reduced services or higher taxes. There is little alternative.

However difficult, such forced balance can be a beautiful blessing in disguise. We cannot pass debt onto future generations, leaving fiscal responsibility to our successors, or delay tough decisions in favor of political pandering. We cannot say “yes” to every request, or promise voters a utopia and spend others’ money to pay for it. A local leader’s philosophy on the role of government is constantly tested.

This was one such moment. The night prior, in a Financial Planning Committee meeting, we told our police chief to reduce his request for video monitoring equipment, and asked our technology head to pare back important operational software requests. Were fireworks more important than public safety or administrative efficiency?

As our board meeting progressed, I felt anxiety over the decision. I thought, “Do we want to be the ones that take away fireworks for hundreds, if not thousands of residents? Do we want to break a revered tradition and send our residents to other municipalities (or worse, New Jersey!) for the Fourth?” I’d campaigned on strict fiscal discipline, low taxes, and constrained spending, but since taking office I’d also learned the acute human impact of each of our decisions.

Then it hit me: What day were we celebrating? Independence Day. The day our country declared its separation from overbearing government, affirmed its unwavering defense of liberty, and sought a new nation bred of individual freedom and responsibility. Who were we to spend others’ money?

Independence, in many ways, means the freedom to choose. Any dollar government spends is a dollar taken from its citizens, and when that occurs, government has made a choice. By spending our residents’ money on fireworks, therefore, we were deciding how their hard earned money would be spent. In trying economic times, perhaps they would be willing to forgo fireworks. Perhaps they would prefer to save that money to meet rent, save for a home, or buy a car. Why not let them decide?

For Independence Day, the decision was clear: If the community wanted fireworks, let’s come together and make it happen. No government, no bureaucrats, no administrators legislating choice. But a community of private citizens committed to honoring tradition, history, and Independence, willing to donate to a worthy cause.

A few nights later, as I sat with my family and watched the fireworks light up the sky in Newtown, I smiled knowing our community had met the challenge. Volunteer and private organizations had come together to raise funds, and the fireworks were magnificent. Government got out of the way, and let Independence ring.

Everyday, our leaders are faced with similar decisions. Many might seem small—the fireworks represented about .01% of our annual budget—but every decision to defend liberty is invaluable. Liberty enables communities to come together, individuals to succeed, and societies to pursue prosperity. It is a fundamental human right, unalienable and foundational to our nation’s exceptional success. Too often, however, our leaders forget the creeping pull of government control. They forget that government is not a self-sustaining entity; it is funded directly by citizens. They forget that government action does not occur in a vacuum; it replaces individual choice and responsibility. They forget that as government grows, liberty shrinks.

That is why, as we begin to head into election season, it is every citizen’s responsibility to champion small government and freedom. Let our actions tear to shreds empty rhetoric and false promises. This Fourth of July, we decided that Independence is best honored not by fireworks, but by Liberty.

-Matt Benchener is Supervisor of Newtown Township and Founder of TruPolitics.net

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It’s The Economy, Stupid

June 16, 2010 1 Comment

This article was featured in The Bulletin (Philadelphia-area newspaper) on 6/20/10 and the Bucks County Courier Times on 8/17/10. You can read the Bulletin version here or the Courier Times version here.

The United States recently reached an ominous milestone: The national debt surpassed $13 trillion. Numbers with “illions” attached to them are thrown around so regularly that debt of this magnitude is numbingly abstract to the average American. But consider it this way: How long would it take to pay off just $1 trillion if we paid back one dollar every second? 5 months? One year? Politicians use the term “trillion” rather casually when they discuss a new national program or our mounting debt, but they never make it concrete. The answer: It would take 31,688 years to pay off just $1 trillion of the national debt if we paid off a dollar a second. Now multiply that number by 13.

Nine years ago, President Bush took office with a national debt of $5.73 trillion, a number that was rapidly shrinking following the Clinton Administration. Between 1998-2000, the publicly held debt was reduced by $363 billion—the largest three-year pay-down in American history—and President Clinton left office with a $237 billion budget surplus (debt is the accumulation of past deficits). So how has the national debt nearly tripled in the decade since?

Those on the far right will tell you we didn’t cut taxes enough. Those on the far left will say we didn’t raise taxes enough. They are both wrong. The Bush Administration saw the national debt rise 72% under its watch, and turned a multi-billion dollar surplus into a nearly half-trillion dollar deficit. The Obama Administration, in just 18 months, has grown the national debt by over 30%, and widened the deficit by nearly 300%. If President Obama truly ushered in “change,” why are the results so strikingly similar?

Because both sides shared the deadly common denominator of profligate spending. The Bush Administration embraced the philosophy of “compassionate conservatism”—focusing on select social and entitlement programs—under which its non-discretionary spending was the most since 1977. President Bush was a part-time conservative, cutting taxes but spending heavily.

President Obama doubled down on the spending habits of his predecessor. He passed the largest spending bill in U.S. history (the $787 billion so-called “stimulus”), a 2010 budget of $3.5 trillion (at the time a record high), and a 2011 budget of $3.8 trillion, marking the first ever post-World War II  budget set at 25% of GDP. This, of course, all came on the heels of a $1 trillion healthcare bill, various bailouts of large corporations, massive expansions of domestic entitlement programs, and the TARP program for Wall Street. For President Obama, spending is justified through faulty Keynesian economics and funded through redistributive taxation.

The result for both administrations has been the same: Explosion of the national debt and with it, economic volatility. That’s because massive spending, no matter what the tax policy, grows deficits.

In the 1990s, the Hoover Institution’s W. Kurt Hauser demonstrated that tax cuts and tax increases have no correlation with revenue growth or deficit reduction. According to economist David Ranson, head of research at H.C. Wainwright & Co. Economics, Hauser’s work shows that, “Changes in marginal tax rates do not make a perceptible difference to the ratio of revenue to GDP.” In other words, according to “Hauser’s Law,” tax policy in either direction cannot reduce the deficit.

So what can reduce the deficit? Hauser’s study also found an empirical link between GDP growth and revenue growth. Simply put, the only predictor of increased federal revenue is economic expansion. So, to get more revenue to reduce the deficit, government must grow the economy.

To do this, it must aggressively reduce federal spending. Harvard economist Alberto Alesina recently found that strong deficit reduction policies have been followed by large increases in GDP growth: “Spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.” That’s significant. Alesina is saying that spending reductions actually grow GDP, while Hauser’s Law demonstrates that GDP growth reduces deficits. The formula, then, is simple: Cut spending; GDP grows; revenues increase; deficits fall; the economy expands. Repeat.

Why? Because fiscal restraint does two important things: First, it allows for tax relief (when the government spends less, it can tax less). Low tax rates keep more money in the free market for investment, consumption, and spending. Second, it balances the budget by keeping spending within its means. A balanced budget creates long-term economic stability by removing uncertainty, volatile interest rates, and leveraged debt from the marketplace. That combination fuels powerful growth.

This was something the Clinton Administration (and its Republican-lead Congress) understood exceptionally well. President Clinton’s stated theory upon taking office was that growth would come through stability. Get rid of the deficit, he said, and the economy will have stable interest rates, higher bond ratings, and a strong foundation of financial certainty.

To get there, he started where his successors did not: By cutting government spending. Congress implemented a “pay-as-you-go” system that enforced strict fiscal discipline, reformed government entitlement programs to reduce waste, and reduced federal spending to its lowest level since 1966. The administration held the line on taxes to encourage investment and consumption from the private sector, placing more dollars into a dynamic capitalist economy. By doing what neither President Obama or President Bush did—shrink government, reduce spending, and moderate taxes—the Clinton Administration encouraged an economic environment that created 22 million new jobs, brought unemployment and inflation to their lowest levels in 30 years, and turned a deficit into a multi-billion dollar surplus. For all the Clinton Administration did wrong, it got the economy and deficits right.

The lesson for our leaders is clear: To reduce the deficit, you must grow the economy. To grow the economy, you must first embrace fiscal restraint. As James Carville once told then-Governor Clinton, “It’s the economy, stupid.”

-Matt Benchener is Supervisor of Newtown Township and Founder of TruPolitics.net

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Does The Deficit Matter?

May 14, 2009 Leave a comment

“Number one, we inherited a $1.3 trillion deficit. …That wasn’t me.”

-President Barack Obama 

For almost a decade, one of the most impactful economic and fiscal issues of our time has simply been ignored. At best, it has been the elephant in the room that nobody wants to acknowledge, but everybody knows is there: By the end of this year, the United States government will have an estimated $1.84 trillion budget deficit. That forecast, released Monday by the White House, represents nearly 13% of GDP. Simply put, as a nation we owe more than we have–substantially more. This debt is damaging the economy, increasing U.S. risk abroad, and placing a great burden on future generations. Leaders from both parties are complicit, and President Obama’s newly proposed budget shows little regard for the weight of the deficit.

The foundation for the present deficit was forged during the Bush Administration. When President Bush took office in 2001, he inherited a $128 billion budget surplus, one of the shining achievements of the Clinton Administration (or at least of the Congress he led). At the end of the federal budget year for 2008, the Congressional Budget Office reported a deficit of $438 billion, representing the fastest eight year deficit growth in the history of the country. The Bush Administration was hurt by the post-9/11 recession, which greatly impacted tax revenues, as well as massive spending on the Iraq War. However, a huge portion of the deficit was controllable, as a small majority came from costly congressional spending. Expensive programs like No Child Left Behind and Medicare drug supplementation, combined with President Bush’s reluctance to veto Republican earmarks on social programs, created an environment of spending far from fiscal conservatism.

Federal Deficit

President Bush’s successor, Barack Obama, has decided to double down on that debt.  He recently pushed through the $787 billion spending stimulus and signed a $410 billion omnibus spending bill.  His bailouts of the auto, financial, and housing industries are yet to have a final price tag, but most analysts expect it to be upwards of $250 billion. Finally, his recently proposed $3 trillion budget widens non-wartime government spending to levels not seen since Lyndon Johnson’s Great Society.  Many analysts now expect the deficit to double by 2010. Obama has responded to critics of his wild spending by saying he will gain $17 billion in savings from his budget by cutting waste in weapons systems and education. The cuts in those 121 programs, however, amount to less than one-half of 1 percent of the total budget for 2010.

The question then arises, if both administrations have simply embraced the deficit, does it really matter? Unquestionably. When a government has a deficit, it must raise money to pay for its spending initiatives, and each step in that process has potentially devastating results. There are three ways that the U.S. government funds its debt and spending initiatives: 1. Increased debt to foreign countries; 2. Higher taxes; 3. Printing of money.

First, one of the most commonly used revenue generators is the sale of U.S. debt to foreign nations. The current national debt stands at $10.6 trillion, meaning the U.S. owes close to 75% of its current GDP to foreign nations. This should be worrisome. When a foreign nation holds a substantial amount of U.S. debt, it increases its economic and financial leverage over the U.S., especially when so deeply entrenched in treasury bonds. This gives a nation like China (which now holds close to $1 trillion in U.S. debt) tremendous leverage in the U.S. financial system, as a massive sell-off of government debt would lead to hyper-inflation, immediate  revenue loss, and wide-spread instability in the market. This financial weapon may be the most potent in future questions of national security.

Second, the government can generate revenue through increased taxation on its citizens. Raising taxes pulls money from the private sector into the government revenue stream, and temporarily provides funding for a variety of spending initiatives. The problem here, however, is that a higher tax rate pulls more money out of the economy, where it can be consumed, saved, or invested, and into the government, where a true marketplace does not exist. The more money the government charges businesses and consumers to invest, the less they will invest. The more money the government takes from consumers’ earned income, the less those consumers have to spend. As a result, consumers have less money to pour into businesses, which create jobs and quality products, and businesses have less money to invest in their own development.

The final option to finance government debt is for the treasury to print money.  This is a unique power reserved by the federal government (local governments and states cannot print money, and therefore must declare bankruptcy when they cannot pay back their debt), and is perhaps the most frequently used of all the options. In small doses, printing money can provide a healthy level of monetary supply for an economy. However, as this process accelerates to meet the demands of increased debt and spending, hyper-inflation results. The more money circulating in the economy, the less each dollar is worth. As this imbalance grows, the value of the money taxpayers worked so hard to earn falls rapidly, and consumption again stalls.

The bottom line is that the budget deficit matters both in the present and the future. A balanced budget is indicative of a prudent government and a healthy economy. A deficit damages economic growth and threatens national security.

The solution to the deficit problem is simple: fiscal responsibility. This means reigning in spending, aggressively eliminating earmarks and pork, and shrinking government bureaucracy. We have gone nearly a decade without fiscal responsibility, and past Administrations, from Reagan to Clinton, proved that economic prosperity comes with fiscal conservatism. Our current exposure will only lead to greater economic deceleration, increased leverage from foreign nations, and market instability. We can no longer ignore the elephant in the room.

-Matt Benchener from TruPolitics.net

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