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274 IRET Congressional Advisory 1 (2011)

handle is hein.taxfoundation/iretcgadv0271 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. April 5, 2011 Advisory No. 274 HOUSE REPUBLICAN BUDGET RESOLUTION House Budget Committee Republicans, led by Chairman Paul Ryan (R-WI), have presented their 2012 Budget Resolution. It seeks to accomplish two goals: avert a debt crisis by slashing projected deficits; and permit, even encourage, more rapid economic growth and job creation. It would achieve the deficit reduction by curbing federal spending. It would achieve the higher growth by reducing tax rates and otherwise restructuring the tax system to make it less of an impediment to production and employment. The added growth would also assist in reducing the deficit by raising incomes and the associated tax revenue. Why the urgency The Congressional Budget Office projects that federal spending will total nearly $46 trillion over the next ten years under current law. Deficits would be nearly $7 trillion. Government spending would remain above 23 percent of GDP, sharply higher than the post-war historical levels of about 20 percent before 2008. Revenues are projected to increase to nearly 20 percent of GDP, above the historical level of about 18.5 percent, but still leaving a wide budget gap. The portion of the national debt held by the public (outside of government trust funds) would soar from $9 trillion in 2010 to $18 trillion in 2021, or from 62 percent of GDP to 76 percent, a level not experienced since 1952 as we reduced the debt from the Second World War. These projected deficits would leave the budget vulnerable to very large increases in debt service costs as interest rates return to more normal levels. Higher interest payments on the debt would make it even harder to fund other federal programs. Doing nothing to control the deficits is not an option. Why this approach The country faces two basic choices. Should taxes be raised to 23 percent of GDP to support a larger role for the federal government on a permanent basis? Or should spending be eased gradually to about 20 percent of GDP or less to fit within current levels of taxation? The choice is not merely one of arithmetic. If growth of jobs and incomes is one of the objectives, in addition to budget balance, then the choice is obvious. A bigger government means a smaller economy and a poorer population. A smaller government means a bigger economy and a richer population. Government activity does not add to total output. Rather, it displaces other production. Transferring manpower and material to government use makes them unavailable for other uses. In addition, taxes create dead weight losses that shrink the private sector and reduce incomes and employment further. At higher tax rates, fewer people join the work force; people in the work force work fewer hours; people save and invest less, create less capital, and employ less labor. Raising taxes to fund a larger role for the federal government would curb total production and reduce incomes. Much of the expected revenue increase would be lost due to a lower tax base. Each dollar g~*m 6 I 86~ 6 ~.

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