Debt needs more than spending cuts

02/17/2013 4:00 PM

02/16/2013 5:04 PM

Rep. Tom Rice says Washington is broken and it’s time to pick a plan and get moving to solve the nation’s fiscal problems. Specifically, Rep. Rice says the endless crises will continue until we address the real underlying problem, we spend far more than we take in, and all the while, we are drowning in debt.

What does drowning in debt mean? A common measure of the degree of government indebtedness is the ratio of debt-to-Gross Domestic Product. The growth in the debt ratio can be traced to the contraction of business activity during the Great Recession. Two things happened: 1) the amount going into the government coffers shrank to the lowest level since 1950 and 2) GDP declined. Even without any increase in government spending, less revenue in the government coffers meant that additional debt was needed for funding and the debt ratio would increase as the GDP side decreased. From a historic perspective, the 2011 debt ratio was 67.7 percent, which is roughly the same as it was in the late 1940s following World War II. The lowest debt ratio was 24 percent in 1974, so although high, the debt ratio in the aftermath of the Great Recession was not outside the historic range.

Rep. Rice claims that raising all those taxes on the same day, six weeks after the election, places a huge drag on an already weak economy and points out that our infrastructure is decaying, we continue to lose millions of American jobs to more competitive countries overseas and as a tax attorney and CPA, he has never seen a business run this way succeed. The analogy of the government to a business is misguided because the government is not a business. The government is responsible to all of its citizens, whereas a business is responsible to its owners or shareholders. The government has a much bigger area of concern than a business and in some sense, fewer options. For instance, as Rep. Rice points out, a business can leave one country for another if it finds that profitable. The government does not have that option.

The solution is a growing economy, but the economy continues limping along. The future may be a new normal of decreased expectations, but as I write this, the Dow is nudging close to its all-time intraday high set in October 2007. The Dow is a fickle measure at best, but the additional news is that retail sales rose 0.1 percent in January as tax increases and higher gasoline prices restrained spending. Given the higher gas prices, the conclusion that the actions taken six weeks after the election place a huge drag on the already weak economy may be premature.

Cutting government spending does nothing to improve infrastructure nor does it help retain jobs in the United States. Fortunately, cutting government spending is not the only option to address the debt issue. Taxes can be raised without much notice to average Americans. For instance, as part of the fiscal cliff compromise, taxes were raised on individuals making more than $400,000 per year and it’s unlikely that impacts many of Rep. Rice’s constituents. There are other options, such as closing the “carried interest” loophole that allows private equity and hedge funds managers to pay lower capital gains rates, ending special oil, coal and gas tax breaks and ending tax subsidies for Agribusiness. It has been reported that there were 26 major corporations, such as General Electric and Verizon, recording billions of dollars of profit between 2008 and 2011, yet they paid no income taxes. There may be more options worth investigating.

The writer lives in Myrtle Beach.

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