The only way to win is to be willing to lose.

https://www.cbo.gov/ftpdocs/120xx/doc12039/HistoricalTables%5B1%5D.pdf

It would appear that the ratio of federal revenues to domestic product, at 14.9%, is lower than has been the case at any time in the last 40 years.

Dr. Gregory Mankiw, who chaired the Council of Economic Advisors during the previous administration, has suggested that the Republican's modify their position to say that changes in marginal rates are non-negotiable, but agree to increases via the elimination of deductions. All things considered, I cannot see why one should not agree to that.

"All things considered, I cannot see why one should not agree to that."

If it solves the complete and total deficit issue, including the having of monies available to start retiring portions of the national debt, neither do I.

From what I understand there were two deal-breakers: 1) the GOP is wants tax reform by way of lowering rates across the board and closing loop-holes, thus letting individuals keep more of their own money while increasing the pool of those paying in; the WH and Democrats want to raise taxes on households making over $1 million/year (which Republicans say will be a huge hit on small and medium businesses in particular and employers in general). 2) Speaker Boehner and the GOP wanted to reform, or at least begin the process of reforming, our entitlement system, which is undoubtedly the driver of our public debt; Democrats said absolutely not and President Obama put some half-hearted measures on the table which Speaker Boehner has rejected.

I don't recall the Congressman who mentioned Waterloo a couple years ago, but his timing was off: this is closer to that moment. This debt-limit debate may well be the culminating event in Speaker Boehner's public life and possibly the beginning of the end of President Obama's. If anyone is seen to have clearly "won" the show-down, he and his party will gain substantial political capital going into November 2012. If a Republican wins the WH, Speaker Boehner's work will not be difficult as he passes off legislation to a tightly contested Senate and a friendly administration. If President Obama wins reelection, there is little a Republican House can do in the face of government by fiat as the czars and federal agencies such as the EPA decree this-or-that illegal and this-or-that must be purchased.

The Speaker of the House has an awesome responsibility and a great burden resting on his shoulders, and I do not envy him the next few weeks.

It's not about revenue, it's about consumption. The GOP should insist that any deficit reduction package exclude any new taxes. You should never raise taxes in a recession -- how many times have we seen higher rates yield smaller revenues? It's self-defeating.

You should never raise taxes in a recession -- how many times have we seen higher rates yield smaller revenues? It's self-defeating

Our split legislature enacted a tax increase in 1982, signed by Mr. Reagan.

Arthur Laffer is an oddball among economists of all dispositions. He sold his nostrums to Ronald Reagan and Jack Kemp and the Republican Party has been addled ever since.

Listen to David Stockman and Bruce Bartlett on the subject of 'supply-side economics'. They were present at the creation:

1. It was public relations. The principal object was to reduce tax rates to achieve other objectives.

2. It has some theoretical validity, just not at marginal tax rates which have been in effect in the post-war period, even those in effect in 1980, hence the chasm of federal deficits which appeared in 1982 after Mr. Reagan's legislation was passed the previous year.

You are playing fast and loose with the facts, AD. Assuming you are talking about the TEFRA of 1982, Reagan signed it only on the congressional pledge to match every new tax dollar with $3 in spending cuts. There is disagreement about whether Congress held up its part of the bargain. Far more importantly, TEFRA had been preceded by the ERTA of 1981, which was a massive tax cut. At worst, the TEFRA reduced these cuts by about a third to a half (it did not actually increase pre-Reagan taxes). Reagan's first term was characterized by sharp tax cuts, in short. So, if you are saying that the Reagan years proved that tax hikes are good for economic growth, you are plain wrong.

I am paying fast and loose with nothing. Mr. Reagan, Robert Dole, et al. agreed to a large tax hike in response to an unanticipatedly large deficit, something to which Bruce Bartlett has called attention. Since I explicitly mentioned the 1981 tax bill, I can hardly be accused of concealing that.

I believe state and local income taxes currently account for about 11% of domestic product, which would mean total income tax collections are now about 26% of domestic product. What you implictly asserted - that the effect of income taxes on productive activity is such that the maxima of revenue collection cannot exceed 26% of domestic product - is something wild enough that Arthur Laffer my balk at it. If the marginal rate structure concerns you, you can effect the tax increase by excising deductions (which is what Gregory Mankiw suggested).

The whole tone of Richard Adams post - essentially pumping his fist and shouting 'fight!fight!fight!' as the political class drives the school bus over the embankment - is most dismaying. If the proprietors of this blog which to put evidence in the file that all components of the political tapestry are unfit to govern, you are doing a dandy job.

Why are facts so unwelcome to you, Deco? The Reagan cut in tax rates had the effect intended, which was to encourage entrepreneurs to plow more money into their businesses. We had nearly two decades of steady economic growth. Lower rates generate more revenue because the wealthy persons being taxed have less incentive to shield their income from taxation when unrrealistically high rates are in effect. Nobody ever paid 91 percent of their income in taxes (1946-63), which was why JFK recommended lowering them to 70 percent. That rate did not help either, for it was soon overwhelmed by the combined cost of the Vietnam War and the Great Society. We drowned in inflation during the 1970s, remember, and we didn't come out of it until the early 1980s. We would have had lower annual budget deficits but the Democrats reneged on the promise of $3 in spending cuts for every $1 of tax cuts.

The Democrats who dominated the dot.com boom of the late 1990s invested like the caricatures they make of businessmen. Remember Hillary's $1000 cattle futures investment that remarkably was parlayed in $100,000? (Is that how the men do it?) The big investment houses on Wall Street, again, dominated by Democrats, similarly drove the housing market over the cliff in 2008, facilitated by Fannie Mae and Freddie Mac. This is a pattern going back to Jacksonian days when Democrats railed against the "evil" National Bank but poured their money into state banks, which were generally corrupt and the national bank was honest and well run.

There will always be people who seek great wealth, divided between those who invest in the market and those who game the political system. Currently, investors are doing pretty well in a low-interest market but they have little or no incentive to lend at those low rates, and the Obama administration and the Federal Reserve don't want higher rates because the foreign debt would become even more formidable. Meanwhile, the federal government has spent money like a multitude of drunken sailors and has run up a debt of more than $14 trillion.

It makes absolutely no sense to raise taxes on the multitude of businessmen (who lack political connections) that want to expand their businesses and hire the necessary additional workers, or bring them back. Low taxes did not bring us to this crisis: excessive spending did. We need to reduce spending and let free people, not government bureaucrats and politicians, bring us out of this recession.

What facts, Richard Reeb?

Many factors will affect the quantum collected in tax revenue, and a number of factors will affect rates of economic improvement. Redwald's general point - that, all else being equal, the devotion of resources to public expenditure is inversely related to economic dynamism - is one that has a good deal of empirical support. I was objecting to his assertions about the effect of statutory tax increases on revenue collection. That has bearing as to what to do in our current situation.

Arthur Laffer has advanced a couple of arguments in his public advocacy. It is understood theoretically that income taxes have a depressive effect on the supply of productive labor. There comes a point where the additional increment to the marginal rate produces no additional increment in revenue. Laffer's idea that this theoretical maximum was a good deal lower than other economists might have posited, so you could actually have an increase in revenue (or at least no loss in revenue) by lowering marginal rates. He had a second argument to the effect that the timing of taxation was of considerable importance in influencing rates of economic improvement.

Dr. Laffer managed to sell these notions to Ronald Reagan and other Republican bigwigs and they have now acquired the status of unquestioned axioms in discussions like this. Problem: Laffer was making his arguments in a context where the ultimate marginal rate assessed by federal tax collectors was 70% (not including payroll levies). On top of that, you had what was assessed by state tax collectors. That simply is not our situation, given that the ultimate marginal rate is now around 34%. The large deficits registered in the years after 1981 (which continued even as the economy reached output levels consistent with long-term trends) suggest Laffer miscalculated badly. Again, our ultimate marginal rates are much lower than they were in 1979, so invoking Laffer's original argument is odd.

There are quite a number of economists of a libertarian bent who would dispute Laffer's idea that the timing of taxation (as opposed to the overall level of public consumption) is much of a determiner of economic dynamism (Jeremy Greenwood to name one). The improvements in per capital income registered in the business cycle running from 1982 to 1990 were comparatively high. Lots of things affect growth rates, so attributing them to the real time tax and regulatory regime in that limited temporal frame requires a quite involved argument. It ought be noted that the post-war business cycle which featured the most rapid improvement in living standards was that running from 1949 to 1954. I do not make too much of that, but a partisan Democrat might.

As for whether low taxes or excessive spending 'brought on this crisis', see my remarks above. Congress has behaved irresponsibly for the last four years, but there has also been a large fall in tax collections. Again, total federal tax collections, at 14.9% of domestic product, are lower than they have been since the beginning of the Congressional Budget Office's published data series. I think you would have to go back to the period prior to the Korean War to find a time when the federal government was collecting so little. The notion that it would have a devastating effect on economic activity to raise collections to what would have been ordinary levels throughout the last sixty years cannot be taken seriously.

If you want to close the deficit just through spending reductions, you are going to have to reduce levels of federal spending by 40%. Which 40% did you have in mind, and over what time frame?

Reality ain't optional.

Save your breath, Richard. AD is on one of his pro-liberal jags. He fails to understand that the 1981 Reagan tax cut was two to three times larger than the subsequent increase in 1982, and that the overall effect (which is what would influence economic growth) proves the exact opposite of what he was claiming. Reagan and his supply-siders understood that, while they were giving back some of their gains, they were keeping the lion's share of it.

What's happening today is far different. These people want ALL of the Bush tax cuts eliminated, and they wait the affluent to pay even more of an already-outrageous tax burden. I'd rather the government go into default that fall for this bait-and-switch again. Lower spending, dammit.

And AD, if income tax is 26% of domestic product, and then we add property taxes, fees, and the myriad of other forms of wealth-siphoning, don't we end up with something like 40% of the peoples' wealth going to government? And doesn't it strike you as a little odd that they consider this a paltry amount and not nearly enough to get the job done? Face it, they will never be happy until they own us.

Save your breath, Richard. AD is on one of his pro-liberal jags.

I am insisting that we have to pay our bills, whatever they may be, that tax collections do not decline when you excise deductions and exemptions, and that they do not decline when you increase rates unless the marginal rates are a great deal higher than we have had at any time in the last 30 years (or perhaps higher than we have had in the post-war period).

Pay our bills, indeed! Democrats, like medieval monks, are at war with all sorts of imaginary Shylocks who have the money they covet, but overlook the Antonios in their ranks who spend money like there is no tomorrow. If a relative got control of your credit card and ran up a mountain of bills and, when you objected, began to moralize about how important it is that bills be paid, you would realize just what a sleaze your relative was. There is nothing wrong with dealing on credit, so long as you have the resources to sustain it and it does not threaten your existing obligations, especially the ones most essential to your family's preservation and perpetuation.

The Democrat Congress elected in 2006 and partially ejected last year, in company with Barack Obama, are like one's spendthrift relative who simultaneously spends your money and then browbeats about how you ought to cover for him. It is time now to make the hard decisions that have for too long been avoided. If it doesn't contribute to the common defense (broadly defined) or the general welfare (narrowly defined), it must be cut. The Republicans have a list adding up to $2.5 trillion over the next 10 years. That's a good start. Paul Ryan's plan for reining in entitlements is the necessary concomitant to these budget cuts.

Once more around the block:

1. Your analogies are inapt. Public policy may be wise or silly. However, those duly constituted to make policy, as was the Democratic Congress over a period of four years, have not arrogated to themselves anything belonging to anyone else. The debts they contracted are 'national' debts and the obligation to satisfy them rests with all succeeding Congresses. The same applied to debts contracted in the service of purposes to which many Democratic caucuses did not (by and large) assent (such as Mr. Reagan's additions to the military or the Iraq War).

2. The deficits we face have several sources: the extant structural deficit such as it was in 2007, declines in revenue collection due to the recession, the momentum of service charges, demographic evolution which increases claims on programs for the elderly, unemployment claims, and increases in spending from discretionary budgeting and the assumption of new obligations. The last is the Administration's fault. The rest, not so much.

3. You can reverse the Democratic Party's policy choices made after 2006 and the spending patterns associated with them. It is not going to get you back to any sort of prelapsarian state because these choices are not the only sources of the deficit. In particular, the large additions to the national debt have created a considerable service obligation bound to get worse as interest rates on Treasury issues returns to more normal levels.

4. There is a great deal of dreck in the federal budget, but the obtrusive dreck (e.g. the Departments of Agriculture, Housing & Urban Development, and Education) might be 15% of the total, not 40%. Debt service is untouchable and reductions in benefits to the elderly have to be made on a graduated cohort-by-cohort basis if they are to be done responsibly. Debt service and benefits to the elderly constitute about 40% of the total, so if you are planning to close the deficit with out tax increases you will have to slice everything else by about 2/3.

Let the slicing begin!

No one quarrels with paying debts per se. But for the Dems to insist that we cover for them is equivalent to being an accessory to crime. Sure, there was $9 trillion before the party changeover, but more than half that has been added since. Thanks for the detailed accounting, which budget cutters are as competent to do as the rationalizers; but when you face a debt that must be paid, then all that stands in the way of paying that is not essential should be cut. That is what Republicans are asking the nation to begin doing now.

Again, federal tax collections amount at this time to 14.9% of domestic product. The post-war norm is around 18% of domestic product, so a considerable tax increase could be effected without siphoning off any more household income than the central government usually has. In service of this shtick that we must never, ever increase taxes, you are willing to reduce by two-thirds expenditures on...

1. The military
2. The diplomatic corps and the espionage services
3. The federal police and courts
4. Veterans' hospitals
5. Unemployment compensation

Roughly 30% of the federal budget consists of these items, or half what remains when you exclude debt service and benefits for the elderly. I am having a hard time figuring what is 'non-essential' about these expenditures at this time and place.

AD, you act like taking 18% of GDP is OK because it's the norm. We disagree, and this is our opportunity to lower it. It's low now because we are in a nasty recession, and raising taxes on the very people who could provide jobs is a really stupid idea. Can you give me any logical mechanism whereby more heavily taxed people will desire to invest, all else constant?

Much of the waste in the Federal budget is WITHIN all those high-sounding categories you list. Federal workers are now compensated far better than employees in the private sector, which should never happen.

I think what it comes down to is this: You are content with a large, interventionist government. Most of us on this website are not.

AD, you act like taking 18% of GDP is OK because it's the norm

Whether it is advisable or not is outside the scope of my remarks. I have pointed out the following:

1. The deficit is a consequence not just of increased propensity to spend but from a loss of tax revenues of a customary dimension.

2. Implacable refusal to raise taxes in these circumstances is a refusal to collect taxes to a customary degree, not a refusal to finance extraordinary spending.

3. It is not plausible, given that collecting 18% of domestic product is customary, that it will be economically devastating to do so. (As opposed to economically disagreeable over a period of a few years).

4. Arthur Laffer's recommendations were in error when we had marginal rates extending to 70%; it stands to reason they would be in error with marginal rates half that, pace the assertions you both have made about the response of tax collections to rate increases.

---

You have a split legislature and the opposition controls the presidency as well. Whatever opportunities one has are circumscribed, as Sen. McConnell has acknowledged.

If you would like to reduce the share of domestic product accounted for by the central government's spending, you are going to have to have a free hand (and the Republican Party has not had a free hand in 80-odd years) and a well-considered idea of what is to be excised and what is to be retained. Implicit in that idea will be a tax rate to fund the desired expenditures. Between now and then, you gotta pay your bills. A sovereign default is not going to be pretty.

Deco,

Let's take your points in order.

1. The disparity between spending and revenues is huge due to the $5 trillion spent between 2007 and 2011. Revenues were up until the recession hit, which will not turn around if taxes go up.

2. There is nothing outrageous about refusing to raise taxes when spending has massively overtaken revenues. The solution is to cut spending.

3. Taking more than 18 percent of GDP is devastating enough without taking still more. The point now is to draw a line in the sand against further taking. We should get out of the pot of hot water before it starts to boil.

4. Laffer's theories have been confirmed in the Reagan and Bush II administrations, which showed that lower rates bring in more revenue, particularly since over half of American adults pay no income tax and the wealthiest people in the country pay the lion's share. Taxing the "rich" (which includes people who are not billionaires or millionaires) more will encourage more tax avoidance and drive more corporations out of the country.

Sen. McConnell's "acknowledge[ment]" of the split in government is actually an attempt to induce an ideological President to "eat his peas." Obama's stubborn refusal to admit that there is a budget and debt crisis, to which he has contributed more than anyone, has brought us to this pass.

As to what should be cut, this is not a question of whether Republicans have the wherewithal. Consider below:

These are all the programs that the new Republican House has proposed cutting:
Corporation for Public Broadcasting Subsidy. $445 million annual savings.
Save America 's Treasures Program. $25 million annual savings.
International Fund for Ireland . $17 million annual savings.
Legal Services Corporation. $420 million annual savings.
National Endowment for the Arts. $167.5 million annual savings.
National Endowment for the Humanities. $167.5 million annual savings.
Hope VI Program.. $250 million annual savings.
Amtrak Subsidies. $1.565 billion annual savings.
Eliminate duplicative education programs. H.R. 2274 (in last Congress), authored by Rep. McKeon, eliminates 68 at a savings of $1.3 billion annually.
U.S. Trade Development Agency. $55 million annual savings.
Woodrow Wilson Center Subsidy. $20 million annual savings.
Cut in half funding for congressional printing and binding. $47 million annual savings.
John C. Stennis Center Subsidy. $430,000 annual savings.
Community Development Fund. $4.5 billion annual savings.
Heritage Area Grants and Statutory Aid. $24 million annual savings.
Cut Federal Travel Budget in Half. $7.5 billion annual savings.
Trim Federal Vehicle Budget by 20%. $600 million annual savings.
Essential Air Service. $150 million annual savings.
Technology Innovation Program. $70 million annual savings.
Manufacturing Extension Partnership (MEP) Program. $125 million annual savings.
Department of Energy Grants to States for Weatherization. $530 million annual savings.
Beach Replenishment. $95 million annual savings.
New Starts Transit. $2 billion annual savings.
Exchange Programs for Alaska Natives, Native Hawaiians, and Their Historical Trading Partners in Massachusetts . $9 million annual savings. (What the hell is this anywayŠ?)
Intercity and High Speed Rail Grants. $2.5 billion annual savings.
Title X Family Planning. $318 million annual savings.
Appalachian Regional Commission. $76 million annual savings.
Economic Development Administration. $293 million annual savings.
Programs under the National and Community Services Act. $1.15 billion annual savings.
Applied Research at Department of Energy. $1.27 billion annual savings.
FreedomCAR and Fuel Partnership. $200 million annual savings.
Energy Star Program. $52 million annual savings.
Economic Assistance to Egypt . $250 million annually.
U.S. Agency for International Development. $1.39 billion annual savings.
General Assistance to District of Columbia . $210 million annual savings.
Subsidy for Washington Metropolitan Area Transit Authority. $150 million annual savings.
Presidential Campaign Fund. $775 million savings over ten years.
No funding for federal office space acquisition. $864 million annual savings.
End prohibitions on competitive sourcing of government services. Repeal the Davis-Bacon Act. More than$1 billion annually.
IRS Direct Deposit: Require the IRS to deposit fees for services it offers (such as processing payment plans for taxpayers) to the Treasury, instead of allowing payments to remain as part of its budget. $1.8 billion savings over ten years.
Require collection of unpaid taxes by federal employees. $1 billion total savings. WHAT THE HELLŠ?! WHY DO THEY HAVE THE JOB TO BEGIN WITH?
Prohibit taxpayer funded union activities by federal employees. $1.2 billion savings over ten years.
Sell excess federal properties the government does not make use of. $15 billion total savings.
Eliminate Mohair Subsidies. $1 million annual savings.
Eliminate taxpayer subsidies to the United Nations Intergovernmental Panel on Climate Change. $12.5 million annual savings.
Eliminate Market Access Program. $200 million annual savings.
USDA Sugar Program. $14 million annual savings.
Subsidy to Organisation for Economic Co-operation and Development (OECD).$93 million annual savings.
Eliminate the National Organic Certification Cost-Share Program. $56.2 million annual savings.
Eliminate fund for Obamacare administrative costs. $900 million savings.
Ready to Learn TV Program. $27 million savings.
Eliminate death gratuity for Members of Congress.
HUD Ph.D. Program.
Deficit Reduction Check-Off Act
TOTAL SAVINGS: $2.5 Trillion over Ten Years
My question, what THE Devil is all this doing in the budget in the first place? Is there anything listed you cannot do without?

I note, AD, that you did not provide the mechanisms whereby tax increases translate into more employment for work-a-day Joes. Isn't that the first priority, to let the economy heal (if it can)? Or are you a believer in Keynesian economics, and that we need to have government loot the people and spend it for them?

And Richard makes a wonderful point - there is so very much to cut, why in the world do we need 18% of our income to go to the central government? This is the time to roll back the inevitability of socialism. Or, more cynically, this is that swing of the pendulum when we restore some fiscal responsibility to the government.

I do not doubt there is much you can excise from the federal budget.

Some of these excisions are obtrusive and can be effected over a modest span of years, perhaps even in one year. That is, a passably informed individual with a passable conception of what is within the advisable functions of the federal government can make a satisfactory judgment just by reading a spare description of an agency's function. About 95% of the expenditures of the U.S. Department of Agriculture fall into one of two categories: 1. subsidies to agribusiness and 2. subsidized groceries for the impecunious. The former is simply unjustified and the latter can be readily replaced by instituting a tax credit and adjusting rates (but do not tell Mr. Cantor or Dr. Laffer or Richard Reeb about the latter part).

Other agencies large and small perform legitimate functions but you have to have much more granular knowledge of how an agency goes about its business to cut its budget with a degree of confidence. That is most likely to be had from within the executive and you need to put trusted officials in charge of these agencies or have knowledgeable specialists in Congress who are not advocates for these agencies in order to reform them.

Once more around the bloc, reduction of federal spending to 14.9% of domestic product is not something that can be effected on a time scale that addresses the problems we have with the bond market. You can likely reduce expenditure to about 21% of domestic product quite readily, but the rest requires time and or granular knowledge. Neither are much in abundance in this discussion.

And Richard makes a wonderful point

Richard Reeb's 1st four points merely restate errors he proffered earlier in the thread. Nothing wonderful about that.

Well, I guess this all boils down to what each of us thinks is the appropriate role of government. You seem to have a taste for nanny-statism, and I don't. And the notion that the Federal government must have 20 to 25% of our national economy is absurd in the extreme. America is (or was) a grand experiment to see if people could run their own affairs with minimal interference from political and religious authority. I guess some people simply don't believe that people can govern themselves.

It does not matter what I have a taste for and what I do not. Reconstructing state-society relations is something which requires focus and time. We do not have much of either at the moment. Also, your sums gotta match, whether or not you favor the nanny state.

Common provision of certain services which could conceivably be vended by commercial concerns or distributed by philanthropies is not a novelty. Public education and state asylums well antedated the New Deal. Comparative resource commitments and modes of delivery have changed, and that placed us in new corners of and older realm. Common provision can be had without employing armies of social workers, erecting a thousand-and-one discretionary grant programs funding this or that 'intervention', and comically regulating consumer choices.

Well, perhaps our disagreement is on tactics. I see this "crisis" as a great opportunity to change things. You shouldn't believe that "reform" will come in a placid, logical process. It won't. There are far too many vested interests in place. It will take semi-catastrophe and an iron political will to bring about necessary changes.

I for one am not in favor of doing away with public education or even a (sensible and smallish) social safety net, but things will have to change to make those systems work (e.g., no public-sector unions of any kind, strict limits on the duration of welfare benefits). If those things can't be changed, then we may have to do away with them entirely. Their abuse leads to a monstrous and obnoxious governmental sector.