Bush, Congress Make a Farce of the Debt Ceiling: John M. Berry
Feb. 23 (Bloomberg) -- The scary, totally unfunny debt ceiling farce is playing once again in Washington.
With the federal government debt about to hit the $8.18 trillion legal limit, the Treasury Department last week suspended sales of special securities bought by state and local governments so that regular auctions of Treasury bills and notes could continue.
More such steps undoubtedly will have to be taken in coming weeks until Congress screws up the courage to increase the debt limit. At some point next month, Treasury will run out of such stop-gap measures and regular securities auctions may have to be postponed.
F. Ward McCarthy of Stone & McCarthy noted that Treasury officials said they were confident Congress would act ``because it would be in `nobody's interest' to fail to do so.''
``Let's hope that this confidence is not misplaced, because it could be very disruptive,'' McCarthy told his clients on Feb. 17. ``While it was in nobody's good interest, prior debt ceiling impasses have resulted in Congress orchestrating intentional delays in passing increases in the debt ceiling, temporary increases in the debt ceiling, interruptions to the Treasury financing calendar, the threat of government shutdowns, and the attachment of questionable parasitic legislation to increases in the debt ceiling.''
The problem, of course, is that voting to increase the debt ceiling is approving profligate behavior, even though they have little choice because of earlier tax and spending decisions.
Alternate Reality
The reality is that taxes and spending are badly out of whack, and hardly anyone -- certainly neither President George W. Bush nor Vice President Richard Cheney -- wants to admit it. If the White House won't acknowledge what's happening, why should an ordinary member of Congress?
Instead, Bush continues to push Congress to extend earlier tax cuts that lowered the maximum personal income tax rate on dividends and long-term capital gains to 15 percent. Those cuts are set to expire at year-end.
Meanwhile, Cheney, in a Feb. 9 speech, called for extending not just that pair of rate cuts, but all of the Bush-era cuts that under current law would expire in 2010.
``In the last five years, the Bush tax relief has left $880 billion in the hands of American workers, investors, small businesses, and families,'' Cheney said. ``They have used it to help produce more than four years of uninterrupted economic growth.''
``Yet the tax relief is set to expire in the next several years. So if we do nothing, Americans will face a massive tax increase. That would be counterproductive, it would be irresponsible, it would be bad for the economy. Congress needs to make the Bush tax cuts permanent,'' he said.
Less Is More
Irresponsible? Bad for the economy?
Not nearly as irresponsible as Cheney's claim in the speech that ``despite forecasts to the contrary, the tax cuts have translated into higher federal revenues.''
The vice president clearly wanted his listeners to assume that the higher federal revenues were due to the tax cuts, not some other factor.
In fact, total federal receipts in fiscal year 2005 were higher than in each of the prior two years. On the other hand, receipts as a share of gross domestic product were only 17.5 percent last year. Except for fiscal 2003 and 2004, that was the lowest share at any time since 1992.
`Nobody's Perfect'
And since most of the cuts involved personal income taxes, the more telling comparison is in those receipts as a share of GDP. In fiscal 2005, individual income tax receipts were equal to just 7.5 percent of GDP. Again, except for the prior two years, that was the lowest share in 29 years.
In the speech, Cheney went on to say that receipts from capital gains taxes rose after the maximum rate was cut to 15 percent, even though a revenue decline had been predicted.
``Nobody's perfect, but when revenue projections are off by 180 degrees, it's time to reexamine our assumptions and to consider using more dynamic analysis to measure the true impact of tax cuts on the American economy,'' Cheney said.
Actually, many tax economists have long agreed that cutting capital-gains tax rates can temporarily raise revenue through the ``unlocking effect.'' That is, taxpayers who have unrealized capital gains may be encouraged to sell the appreciated assets given the reduction in tax liability.
Unfortunately, that's largely a one-time gain. There is no reason to expect revenues to be permanently higher. If capital gains tax rates are cut in half, then realizations would have to be permanently twice as great in the future to keep revenue from declining.
Analyze This
Nevertheless, the administration is greatly enamored with the notion that tax cuts can more or less pay for themselves. For instance, the fiscal 2007 Bush budget would create a new Dynamic Analysis Division within the Treasury Department, at a cost of more than a half-million dollars, to analyze major tax proposals along those lines.
Analyze? Why waste the money?
As Cheney said in the speech, ``The evidence is in, it's time for everyone to admit that sensible tax cuts increase economic growth and add to the federal treasury.''
What if you don't want to increase growth because the economy might be nearing full employment? That's more than a passing concern at the Federal Reserve right now, as officials there keep raising interest rates to make sure inflation stays under control.
May Not Last
If tax cuts were a good way to stimulate the economy after the 2001 recession hit, might raising taxes be a good way to help restrain it when needed? Certainly the tight fiscal policies and budget surpluses of the late 1990s helped the Fed keep interest rates lower than they otherwise would have been.
And then there is the fundamental issue of balancing revenues and spending. At the moment, investors and analysts seem largely unperturbed by large continuing deficits, presumably because other forces are helping keep interest rates low.
That's not likely to be the case indefinitely, and Federal Reserve Chairman Ben S. Bernanke gave this warning in his congressional testimony on Feb. 15.
``I am concerned about the prospective path of deficits,'' Bernanke said. ``I believe that that does reduce national savings and therefore imperils, to some extent, the future prosperity of our country and increases the burden that'll be faced by our children and grandchildren.''
Bush and Cheney should keep it in mind.
Last Updated: February 23, 2006 00:07 EST quote.bloomberg.com |
