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The Bush tax cuts and deficit reduction nonsense

By Peter Morici
web posted December 6, 2010

Debating tax cuts and deficit reduction both parties are blind to facts and deaf to reason.

President Obama and his Democrats stubbornly argue the economic recovery will collapse if $40 billion in long-term unemployment benefits are not approved. Yet, they reason a $60 billion annual tax increase on families over $250,000 will not impose a greater loss in spending and economic growth. No accident that those collecting unemployment are more likely to vote for Democrats and those President Obama wants to tax include a heavy concentration of small business owners more likely to vote Republican.

More troubling, the President has convinced leading Republicans taxes must go up to reduce the federal deficit, as evidenced by GOP endorsements of the Chairmen's report of National Commission on Fiscal Responsibility.

Nonsense!

In 2007, the year before the recession, with Bush tax cuts in place and wars in Afghanistan and Iraq at full tilt, government spending and the deficit were was 19.6 percent of GDP and $161 billion, respectively. For 2011, with the economy recovered, President Obama's budget projects 25.1 percent and $1.3 trillion.

The Democrats took control of the Congress in 2007 and used the recession as cover to permanently increase spending on the federal bureaucracy, entitlements and industrial policies.

Americans can afford the Bush tax cuts, but can't afford free spending Democrats and Republicans who are so easily cooped by them. Witness the gems served up by the National Commission, now embraced by self-proclaimed conservative Republicans like Idaho Senator Mike Crapo.

To cut the deficit, the Commission recommends new entitlements—automatic extension of long-term unemployment benefits, early retirement under social security for workers in physically vigorous occupations, and new social security benefits for low income Americans.

The commission proposes higher income and Social Security taxes, a 15 cent gasoline tax, higher user fees, and pushing down federal health care spending responsibilities onto the states and municipalities, which will result in higher sales and property taxes.

The nation has long term budget issues but this Commission lacked the courage to address them.

When Social Security was established, life expectancy was 64 and the Social Security retirement age was set at 65, whereas today life expectancy is 78 and the retirement age reaches 67 in 2027 under current law. The brave souls on the Commission recommended increasing the age to 69 in 2050—most affected Americans are too young to vote.

Time to get serious. Increase the retirement age to 70 for everyone under age 55. Ten years is plenty to plan for that. Set aside jobs in municipalities—for example, maintenance positions at the schools or clerking in county offices—for those individuals over 60 in physically rigorous occupations that can't find alternative work.

The United States spends 19 percent of GDP on health care, while Germany with a system of mandatory private insurance—note the similarity to Obama Care—spends 12 percent. The United States simply can't afford that competitive disadvantage.

The Commission sets the unheroic target of controlling health care spending to the rate of growth in GDP plus 1 percent—that would widen the gap with our competitors and further tax economic growth and jobs creation.

It is high time for real reform. Limit prices Americans are charged for drugs to what the Germans pay, slice doctors' salaries and overhead paid to hospitals and private health insurance bureaucracies to German levels, and implement genuine malpractice reform.

Alas, members of the AMA, pharmaceutical and health executives, and tort lawyers contribute generously to campaigns of Donkeys and Elephants alike, making Mules of the rest of us.

Americans admire honesty and integrity and will do what genuinely needs to be done, but minds are weak and souls are cheap on Capitol Hill and at the White House.

Sadly, most Americans are going to wind up paying higher taxes and not getting much for it but more budget troubles, high unemployment and limited futures for their children. ESR

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.

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