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Taxes and Presidential Math

Tuesday, October 5, 2010

Let’s compare the size of the tax cuts to the total amount of spending over the next ten years and see how ‘drastically’ it would expand the deficit.

Here is President Obama, talking on September 29 in Richmond, Virginia:

"Now, I'm not a math teacher. But I know a little bit about math. They're proposing about $4 trillion worth of tax cuts. About $700 billion of those tax cuts are for people who typically are millionaires and billionaires, and on average would get $100,000 in tax relief—$700 billion that we don't have, we'd have to borrow in order to provide these tax cuts. And 98 percent of Americans wouldn't see any benefit from it. And keep in mind that because we don't have it, it would actually end up costing more than $700 billion, because we'd end up having—since we're borrowing it, we'd have to pay interest on it. . . So when you add it all up, essentially their proposal would drastically expand the deficit instead of shrinking it."

This is very misleading. Very likely for effect, the president is using aggregate numbers to talk about the tax cuts rather than annual numbers.

According to Congressional Budget Office (CBO) data, extending the tax cuts on top earners would create a budget shortfall of $700 billion over ten years. That’s $70 billion a year. Meanwhile, extending the tax cuts on the middle class would create a budget shortfall of $3,000 billion over ten years.

Now, thinking like a government official, this means that extending the tax cuts would “cost” the government $3.7 trillion over ten years. This sounds like a lot of money, but let’s put it in perspective and look at how much the federal government will be spending over the course of the next ten years.

Picture2.png

Using CBO data, the chart above shows that the government will spend more than $41.9 trillion over ten years. It will pay for that spending with our taxes and some borrowing. On the part that’s borrowed—roughly 40 percent of the amount spent—we will pay interest too. The total interest paid on the debt for the next ten years will reach $4.5 trillion.

Now compare the size of the tax cuts to the total amount of spending and you will see where the problem lies. Compare $700 billion—the tax cut the president said “would drastically expand the deficit”—to $41.9 trillion ($41,911 billion).

If Washington is serious about reducing the debt level it could easily extend the tax cuts—it’s spending that must be cut.

Veronique de Rugy is a senior research fellow at The Mercatus Center at George Mason University.

FURTHER READING: De Rugy explores what happens “When Debt Flies Off the Charts,” assures us that “It Depends on What the Definition of ‘Austerity’ Is,” and declares that we are an “In-the-Red State.” Derek Kan denounces “TARP Without Strings” and Andrew Biggs asserts that “Spending, Not Tax Cuts, Is the Real Driver of the Fiscal Mess.”

 

Image by Rob Green | Bergman Group.

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