Liberal myth

Spending cuts are unnecessary. The real problem is tax rates that are too low.

The facts

In the face of ever-increasing social spending that threatens to bankrupt our country, cuts are necessary to maintain balanced books.

• Deficits are caused by uncontrolled federal spending
• Even a modicum of fiscal discipline—holding spending increases to 4 percent annually—would cut the federal deficit by more than 50 percent in just five years.

Spending growth is out of control

The federal budget is growing at a record pace:

• Federal spending has grown twice as fast under President Bush as under President Clinton
• Federal spending has increased by 33 percent since 2001, from $1,863 billion to $2,470 billion
• Federal spending neared $22,000 per household in 2005, the highest level since World War II (inflation-adjusted)
• The federal government ran a budget deficit of $2,809 per household in 2005
• Education spending rose 100 percent between 2001 and 2005, energy spending rose 15,911 percent (yes, that’s fifteen thousand, nine hundred and eleven percent) and spending on “international affairs” rose 71 percent

A government-run economy

If entitlements are not reformed, federal spending could rocket up to more than 70 percent of GDP. Combined with spending by states and local municipalities, America’s economy would be more government-run than any European country. (See chart)

Real cuts are needed

Congress can only make a dent in the budget deficit with real cuts to spending.

• The budget reconciliation bill passed by the House in December 2005 would cut the growth in spending on social programs to 38 percent over five years, instead of 39 percent over five years.

Spending, not tax cuts, hurt in the 1980s

It has become conventional wisdom that Ronald Reagan’s tax cuts caused the deficits in the 1980s, but there is no evidence except that both tax relief and budget deficits occurred during the 1980s.
But correlation does not mean causation. The truth is, during the 1980s:

• President Reagan signed major tax cuts into law in 1981 and 1986
• Inflation-adjusted tax revenue increased by 28 percent—an even larger jump than the 27 percent revenue increase during the high-tax 1970s.1 (See charts)
• Inflation-adjusted federal spending increased by 36 percent. These budgets resulted from deals in which the Democratic Congresses agreed to pass tax relief and increase defense spending and President Reagan agreed to sign into law new domestic social spending.

A basic analysis shows that this rapid increase in spending, not any alleged revenue losses from tax relief, created the budget deficits.

Related Heritage research

• Brian Riedl, “Entitlement-Driven Long-Term Budget Substantially Worse Than Previously Projected,” November 30, 2005
• Brian Riedl, “Federal Spending—By The Numbers,” October 7, 2005
• Brian Riedl, “Ten Common Myths About Taxes, Spending, and Budget Deficits,” June 13, 2003

Footnotes

• U.S. Office of Management and Budget, Budget of the United States Government, Fiscal Year 2004: Historical Tables (Washington, D.C.: U.S. Government Printing Office, 2003), Table 1.3.