With the death of Osama bin Laden fading from the front pages, the focus in Washington is turning once again to the prosaic problem of how to wrangle the country's massive and growing debt problem.
On Tuesday, Vice President Joe Biden held a second round of talks with a bipartisan group of lawmakers hoping to find some common ground.
But the battle lines are clear: Republicans want to focus on spending — House Speaker John Boehner said Monday night that tax hikes were off-limits but that spending, including Medicare, must be on the table. Meanwhile, President Obama and his fellow Democrats want a mix of tax hikes and spending cuts that leave Medicare, Medicaid and Social Security largely untouched.
Which approach will get the country out of its debt mess? The answer depends on understanding how the nation got into its current mess to begin with.
An IBD analysis of spending and tax data going back to the Truman administration shows that it's out-of-control spending, not taxes, that is driving the country's current fiscal mess.
As the chart nearby shows, revenues as a percentage of GDP have remained remarkably constant at around 18% since the mid-1940s, regardless of whether a Democrat or a Republican was in the White House, and despite numerous tax hikes, tax cuts and endless tax-law changes that saw the top income tax bracket go from a high of 94% in 1945 to a low of 28% in 1988, and up and down ever since.
Even President Obama's 2012 budget plan, which would raise taxes on families making more than $250,000, wouldn't alter this trend. According to the CBO, the president's budget would produce tax revenues averaging 18.7% of GDP over the next 10 years.
What has changed dramatically over these years is federal spending. As the chart shows, average spending fluctuated as a share of the economy since Truman. But Obama's 2012 budget calls for federal spending to average 23.5% of GDP over the next decade — higher than at any time since World War II. Spending would top 24% of GDP by 2021.
Unless taxpayers are willing to see their tax load permanently raised, it means that spending cuts will have to carry the load to get deficits under control.
It's almost axiomatic among Democrats that President Bush's 2001 and 2003 tax cuts are responsible for a large share of the huge annual deficits. As former Obama budget director Peter Orszag put it: "If we actually ended the Bush-era tax cuts, that would pretty much do it" in terms of fixing the deficit problem.
One problem with that statement: It's not quite accurate.
While revenues as a share of GDP did fall immediately after Bush's tax cuts went into effect, they began steadily climbing again, reaching 18.5% of GDP by 2007.
And the Bush tax cuts aren't to blame for the massive fiscal hole that opened up over the past three years. That was partly due to the unavoidable recession-caused drop in revenues. But the big driver was the massive increase in federal spending, which reached an astonishing 25% of GDP between 2009 and 2011.
In fact, according to IBD's analysis, even if Clinton-era tax rates had remained in effect during the recession — an unrealistic assumption — the country still would have added more than $1.5 trillion in debt because of all that extra spending.
And even with Clinton-era rates in effect over the next decade (higher than even Obama proposes), the U.S. would still be more than $6 trillion deeper in debt, based on current spending projections.
Budget forecasts also make it clear that the debt monster cannot be slayed without taking on so-called entitlement programs like Social Security, Medicare and Medicaid. All the spending growth relative to GDP over the next decade comes from entitlements, and by 2030 those three programs will eat up more than 17% of the economy.
But Obama's debt plan leaves the programs largely untouched. And while the plan by Rep. Paul Ryan, R-Wis., tackles Medicare and Medicaid spending, it doesn't address Social Security.
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