How Much Does Washington Really Need To Cut?

As of this article’s publication, Washington pols are completing a debt ceiling deal. The fluid negotiations suggest that Pres. Obama will get a debt ceiling extension that will last beyond his reelection bid, Sen. Reid and Rep. Boehner will abdicate their budgetary responsibilities to a faceless committee, and the Tea Party will not have to swallow very many tax increases. Everyone wins, except there are no real spending cuts or plans to keep the US Government solvent for more than perhaps a decade. The US is racking up a frightening debt load, but how much spending must really be cut to prevent the collapse of the US Government?

As Shout Bits mentioned, Federal revenue has returned to nearly its pre-recession levels, only about $100bln short of its all-time high. The $1.5 trillion deficit problem is caused by the fact that Federal spending kept climbing at its normal pace while tax revenues took a three year break. There is no solution to the US Government’s crisis that does not rely on increased economic growth, and that must involve the rich.

Contrary to Obama’s demagoguery, the US tax system is highly progressive, meaning that the fate of the rich is the fate of the Federal Government. The poor’s income taxes have never been lower in modern times. Tax receipts as a percent of the economy rise and fall with economic growth, but the government’s take has fallen to a level not seen since the 1950’s. Considering the myriad services such as Medicare that have been added since then, tax revenues must return to their historic highs to fund taxpayer expectations. Because the top earners pay most of the taxes, the US needs a resurgence of the rich. The rich need to invest and employ so they can become richer and pay more taxes.

Of course there is no guarantee of such a windfall given oppressive new laws such as Obamacare that are stifling the economy. Still, if tax receipts returned to about 18% of GDP, the Bush era peak, tax revenues would increase by $450bln. Considering that is more than twice the illusory savings from the latest debt talks, Washington’s top priority should be a restoration of the US economy. If tax revenues returned and the economy grew at a rate of 3.5% for a decade, tax revenues would further grow by an average of $460bln per year. The US’s history suggests that when government oppression is relaxed, such prosperity is possible, and often exceeded. Still, that leaves $590bln annually to be cut to balance the budget over a decade, less than half of the current plan.

The US spends $159bln per year on the Iraq and Afghanistan wars, so assuming they end soon, the magic number could fall to $431bln, about the deficit Pres. Bush was running as he left office. It is not curious that bad economic policy amounts to the bulk of Obama’s woes.

As Shout Bits mentioned, wasteful spending and Washington corruption account for a small part of the required cuts – perhaps $90bln. With Sen. Reid defending cowboy poetry, and Rep. Pelosi disallowing any cuts whatsoever, eliminating entire departments such as the DOE and DOC seems impractical. Even assuming the elimination of entire wasteful departments and general bureaucratic belt tightening, the budget must be cut by $330bln per year while capping Social Security and Medicare.

There is no way past substantial military cuts. There is no way past increasing the eligibility ages of Medicare and Social Security. There is no way past cutting welfare entitlements. As every libertarian and realistic conservative has been harping for years, the US must redefine the Federal Government’s role to be a much smaller part of everyday life. The US Government cannot solve every problem, and everyone cannot have everything – a tide change in the Washington paradigm.

The prescription of $330bln in annual cuts to basic government services is more than enough to bring Greek style riots to the streets. Such tough cuts could dissolve the union separating states with economic growth from those that have been declining. Still, these cuts will happen; the only question is whether the US will choose them or they will be imposed when the wolf is at the door. Tea Party voters know this, even if intuitively, and they are unlikely to back down.

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