Fwd: Budget Bulletin: The Three Biggest Myths About Tax Cuts and the Budget Deficit

Budget Bulletin Your source for federal budget news and analysis Recent Updates Hoyer Makes, and Misses, His Mark CBO Reveals Magnitude of Reform Needed for Sustainable Fiscal Future Obama Sings "Spend On" While Europe Acts to Dampen a Crisis Featured Research The Three Biggest Myths About Tax Cuts and the Budget Deficit By Brian Riedl The surging budget deficit will likely dominate the national economic debate for years to come. Even after the recession ends, persistent trillion-dollar deficits are projected to double the national debt by the end of the decade. In the absence of reform, the financial markets will eventually respond by withdrawing capital, pushing up interest rates, and demanding immediate budget reforms—much like Greece is currently experiencing. Putting the federal budget on a sustainable path will require drastic reforms. Balancing the budget by 2020 would require either eliminating one-third of all spending, raising taxes by 50 percent, or a combination of the two. This enormous budget constraint will set the framework for all budgeting decisions—from taxes to health care, from education to Social Security. Finding a solution to growing deficits requires first correctly diagnosing their cause. Both recent and future budget deficits have been blamed largely on the 2001 and 2003 tax cuts, and to a lesser extent on the war on terrorism, but the data contradict these myths. In reality, spending is almost exclusively the problem: The 2001 and 2003 tax cuts were responsible for just 14 percent of the swing from the projected cumulative $5.6 trillion surplus for 2002–2011 to an actual $6.1 trillion deficit. The vast majority of the shift was due to higher spending and slower-than-projected economic growth. President Barack Obama's assertion that most future deficits will result from the 2001 and 2003 tax cuts, the wars in Afghanistan and Iraq, and the Medicare drug entitlement is based on faulty methodology, but is still wrong even using that methodology. Above-average spending, not below-average revenues, accounts for 92 percent of rising budget deficits by 2014 and 100 percent by 2017. Nearly all rising spending will occur in Social Security, Medicare, Medicaid, and net interest payments. Deficit reduction efforts should focus on the source of the problem: rising entitlement spending. Any attempt to split the difference between broad-based tax hikes and spending cuts should be rejected outright as a false solution. >> Click here to read Brian Riedl's full report Chart of the Week Get more charts with Heritage's Federal Revenue and Spending Book of Charts About The Heritage Foundation Founded in 1973, The Heritage Foundation is a research and educational institute - a think tank - whose mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense. The Heritage Foundation | 214 Massachusetts Ave NE, Washington, DC 20002 | 202.546.4400