Jeremy Sawyer

Governor Romney's Tax Plan: Reducing the Tax Burden on Savings and Investment

Posted by Jeremy Sawyer on Friday, August 17th, 2012, 4:57 PM PERMALINK

This content is provided by Americans for Tax Reform Foundation.

Capital income is important to the health of the American economy. Many experts recognize that lawmakers should do everything in their power to encourage entrepreneurs to take risks by allowing them to keep more of their money when those risks pay off in the form of capital gains. Harvard economist Jeffrey Miron notes that taxing capital income “punishes labor effort and savings…savings finances capital formation and research and development, which are crucial for economic growth.”

Predictably, President Obama and Congressional Democrats are plotting a massive tax hike on capital income in 2013. Under the current law being defended by Democrats, the lowest rate on short-term capital gains would jump from 10 percent to 15 percent while the top rate would increase from 35 percent to 39.6 percent as short-term capital gains would cease to be distinguished from ordinary income. A new surtax on investment income in Obamacare is set to bring the effective top rate to an unacceptably high 43.4 percent.

Long-term capital gains, a category that includes dividends, would also see large tax hikes. A 10 percent rate would be imposed on taxpayers in the bottom two income tax brackets, the members of which currently pay no taxes on long-term capital gains, and the rate facing all other taxpayers would increase from 15 percent to 20 percent.

Governor Romney understands the need to reduce the tax burden on savings and investment. For this reason, he has proposed maintaining current rates on capital income for taxpayers earning more than $200,000 annually and eliminating the tax on those who earn less than that amount.

An examination of historical data reveals that reducing the tax burden on capital income is likely to strengthen the economy. The graph above shows that the growth of real private investment is significantly correlated with a low average effective tax rate on short-term capital gains. The data show a similar correlation for the rate on long-term capital gains as well, with a correlation coefficient of 0.45.

Investment is hugely consequential because it is the most volatile component of GDP. Consumption, roughly 70 percent of GDP, is fairly constant. Yet investment can jump rapidly and, in doing so, boost output in a major way.

In addition to correlating with higher investment, low taxes on capital income are also correlated with higher saving rates. Over the period from 1954 to 2008, the correlation coefficient for gross private saving relative to a linear model of its growth and the average effective tax rate on short-term capital gains is a remarkable 0.53. When the relative growth of private saving is compared with the long-term capital gains rate, the number is 0.49.

Saving is also good for the economy in the long run because it means capital will be available for future investments. As economist Adolfo Laurenti says, “savings are always good” because they lead to “a better and strong economy.”

The best policy with regard to taxes on capital income would be a rate of zero for all taxpayers, because eliminating the tax entirely would provide a major shot in the arm to the U.S. economy. Governor Romney’s plan would only bring the rate to zero for taxpayers in the three lowest brackets; those whose income places them in the top three brackets would not benefit from marginal incentive effects. Nonetheless, enacting the plan would reduce the average effective rate on capital income and provide the benefit of a zero marginal rate on capital gains for the vast majority of Americans.  

Economics is about incentives, and reducing the tax burden on capital income will clearly incentivize more investment and more saving. Governor Romney’s plan for capital income taxes is a step towards Reagan-style growth.

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Governor Romney's Tax Plan: Income Tax Cuts the Best Path in 2013

Posted by Jeremy Sawyer on Monday, August 13th, 2012, 5:19 PM PERMALINK

This content is provided by Americans for Tax Reform Foundation.

With the United States mired in the weakest recovery in decades, President Obama wants to raise marginal income tax rates on working Americans. Governor Romney, on the other hand, understands the profound negative consequences of high marginal income tax rates. For this reason, Romney has proposed a permanent 20 percent across-the-board cut in marginal income tax rates: taxpayers in all five income brackets, from those who pay the top rate of 35 percent to those with the lowest marginal rate of 10 percent, would see their taxes reduced on the next dollar of income they earn under Governor Romney’s plan.

Basic economic theory dictates that when individual income tax rates are reduced, workers will supply more labor and increase their production. As a result, the economy expands and jobs are created. The data are largely consistent with this explanation.

One important piece of evidence on the subject of the benefits of income tax cuts is a paper co-authored by two Treasury Department economists entitled “Income Taxes and Entrepreneurs’ Use of Labor.” That paper found that a marginal rate cut of 10 percent increased the probability of hiring by approximately 12 percent.

In addition to boosting hiring, a decrease in marginal income tax rates has also been shown to help firms grow financially. A marginal rate cut of 10 percent was found to increase receipts for sole proprietors by 8.4 percent.

The permanent nature of the individual income tax rate will also aid in eliminating the job-killing uncertainty surrounding the future of American tax policy. Ambiguity with regard to the tax system has risen to a historically high level in recent years, as Congress has battled over extending current rates and settled on short-term extensions.

According to a 2011 study by economists at the University of Chicago and Stanford University, uncertainty led to a 1.4 percent reduction in GDP in that year. Moreover, the authors found that returning uncertainty to its level prior to the 2008 financial crisis would create 2.3 million new jobs in just a year and a half. While a permanent reduction in marginal income tax rates would be unlikely to return uncertainty to pre-crisis levels, it would certainly make a major impact.

While the proposed 20 percent across-the-board reduction in marginal income tax rates is an important step, it is best viewed as part of a larger goal: structural, pro-growth tax reform. The essential components of such a plan include the transition to a territorial system, the elimination of investment disincentives, and the phasing out of many subsidies.

Under Governor Romney’s proposal to reform the individual income tax system, the top rate would be set at 28%, which is the same rate that was instituted when President Reagan signed tax reform legislation in 1986. Reagan knew something about tax policy: his pro-growth reforms led to a strong recovery from a deep recession and a period of sustained growth. Governor Romney’s plan, which echoes the legacy of President Reagan, is the right plan for America’s future.

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Governor Romney's Tax Plan: Time has come for Death Tax Repeal

Posted by Jeremy Sawyer on Thursday, August 9th, 2012, 3:37 PM PERMALINK

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The federal estate tax was adopted in 1916 as a way for the nation, which was preparing to enter a major war, to raise revenue. The tax, assessed on a stock instead of on a flow as most taxes are, amounts to double taxation because the wealth being taxed was previously subject to income taxes. The current top rate is 35% and is scheduled to rise to 55% in 2013. Full repeal of the estate tax is a key plank of Governor Romney’s plan for tax reform.

Various studies have shown that repealing the estate tax would have many benefits. The CBO found that death tax repeal would save taxpayers $516 billion over 10 years. It also would eliminate the incentive for senior citizens to spend frivolously instead of passing down their savings to the next generation. Similarly, repeal would prevent the dissolution of many family businesses.

Moreover, estate tax repeal would have significant growth effects. A report co-authored by former White House economist and CBO director Douglas Holtz-Eakin found that death tax repeal would create 1.5 million jobs by growing the economy. Unemployment would fall by 0.9 percentage points, while investment would increase by 3 percent.

The increase in growth resulting from repealing the estate tax would have positive effects on federal revenue. Republicans on the Joint Economic Committee point out that the revenue currently generated by the estate tax is meager: $7.4 billion in FY 2011 (just 0.30% of federal revenue) and an estimated $11 billion in FY 2012.

Former Treasury Department economist Stephen J. Entin wrote in a 2011 report that repeal would boost annual GDP by 2.25 percent and capital stock by 6.1 percent by the end of 10 years. The effect of this growth would be to generate $548 billion in new revenue over the 10-year baseline, leading to a total increase of $89 billion that could be used to reduce other tax rates and further enhance growth.

Permanent repeal of the estate tax is a policy proposal that has been analyzed with positive results for quite some time. It is time to implement repeal and observe the resulting increase in prosperity.

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Governor Romney's Tax Plan: Corporate Tax Cut a No-Brainer

Posted by Jeremy Sawyer on Monday, August 6th, 2012, 4:51 PM PERMALINK

This content is provided by Americans for Tax Reform Foundation.

When Japan cut its corporate tax rate in April, the United States became the nation with the highest corporate tax rate in the OECD. The current rate of 35 percent makes American businesses less competitive in the global market and clashes with America’s proud tradition of limited government. Former Massachusetts Governor Mitt Romney, the presumptive Republican nominee for president, has made reducing the corporate tax rate a central part of his tax plan.

A study by Democrats on the House Ways and Means Committee found that cutting the corporate tax rate to 28 percent would reduce the tax burden on American businesses by $717.5 billion over 10 years. While the Ways and Means Democrats believe the loss of revenue represents an argument against corporate tax reform, in reality it strengthens the case for cutting the corporate tax rate because doing so would remove some of the burdens unfairly imposed on free enterprise.

However, the Ways and Means Democrats’ study is deeply flawed for a crucial reason: it fails to account for the increase in growth that a corporate tax cut would cause. When the economy expands, everyone is better off as the economic pie grows and revenues (a fixed portion of income) rise as well.

As Congressman Paul Ryan notes in his excellent long-term budget plan, the Path to Prosperity, revenues are more closely correlated with GDP than tax rates. He points to an important 2005 study in the Journal of Public Economics entitled “Tax Structure and Economic Growth”; the study finds that a 10 percentage point reduction in the corporate tax rate increases annual GDP by 1.1 to 1.8 percentage points.

An analysis of economic projections from the Congressional Budget Office (CBO) with and without a corporate tax cut shows that the impact of a 2013 rate cut on the American economy would be dramatic. Assuming an annual increase in real GDP of 1.45 percentage points (midway between the 2005 study’s authors’ estimates), the difference in annual real GDP would reach $2.732 trillion by 2022. Over the course of ten years, the total increase in economic activity would be a whopping $13.635 trillion.

Moreover, the increase in growth generated by a corporate income tax cut would have massive effects on unemployment. The relationship between unemployment and real output is called Okun’s Law. In its most basic form, it holds that a decrease in unemployment is correlated with an increase in real GDP. An interesting formulation of this law, developed by economist Edward Knotek of the Federal Reserve Bank of Kansas City, states that the annual change in unemployment is equal to 1.20-(0.35 x annual change in real output).

This model of unemployment shows that cutting the corporate tax rate would provide a massive boost to America’s labor market. Without a corporate tax cut, the American labor market would remain mired in the malaise of the Obama recovery: the unemployment rate would stay above 8 percent for the next ten years. However, a reduction in the corporate tax rate would allow the unemployment to fall steadily and drop below 5 percent in 2020. In short, cutting the corporate tax rate would lead to full employment.

Such a significant increase in output would also lead to a growth of revenue. The CBO reasonably estimates revenue to average around 20 percent of GDP for the next ten years. Under this scenario, the annual 1.45 percent boost to GDP resulting from a 10 percentage point reduction in the corporate income tax rate would generate $2.814 trillion in surplus revenue over a ten-year period.

The gains in economic activity that would result from a ten point corporate tax cut would likely offset the lower rate and lead to a net increase in corporate tax revenue; any reduction in corporate income tax revenue would likely be insignificant. Yet even if one accepts the Ways and Means Democrats’ dubious estimates of a $717.5 billion reduction in revenue resulting directly from rate cuts and the $243 billion loss of revenue that they ascribe to “interaction with corporate rate change,” a staggering $1.854 trillion in revenue above baseline levels remains over the ten-year window. That revenue could be used to reduce other tax rates such as marginal income tax rates, which would further grow the economy, put Americans back to work, and reduce the scope of government’s intrusion into the lives of private citizens.

Cutting the corporate tax rate is a win-win proposition: it will provide a huge boost to the economy and generate surplus revenue to be used for further tax reductions. Governor Romney ought to emphasize this plan on the campaign trail, and President Obama would be wise to adopt it as well.

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July Jobs Report: We Tried President Obama's Plan and it didn't Work

Posted by Jeremy Sawyer on Friday, August 3rd, 2012, 2:54 PM PERMALINK

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Speaking about the economy recently on the campaign trail, President Obama stated, “We tried our plan and it worked.” Yet new data released this morning by the Bureau of Labor Statistics confirm that the president is living in an alternate reality if he truly believes that statement.

The Reagan recovery began in November 1982 with the end of the early 1980s recession. Through the first 37 months of that recovery, 9.817 million nonfarm jobs were added to the American economy. That represented a solid 11.06 percent change in total nonfarm employment.

Meanwhile, President Obama has overseen a far different recovery beginning in June 2009 that has now lasted for 37 months. Over that time period, a mere 2.742 million jobs have been added, a 2.1 percent change. Supporters of the president are likely to tout July’s gain of 163,000 in total nonfarm employment. However, an alternative measure, the employment level, dropped by 195,000; that drop was the largest decline in the employment level since June 2011. Even the 163,000 increase in total nonfarm payrolls is less than the gain of 168,000 that occurred at the equivalent point in the Reagan recovery, December 1985.

In enacting the stimulus, President Obama’s administration claimed to be taking actions that would hold the unemployment rate below 8 percent. However, July was the 41st consecutive month with unemployment above that level; the situation is entirely unprecedented in American history. Unemployment actually increased in July to 8.3 percent from 8.2 percent. By contrast, the unemployment rate under President Reagan in December 1985 was 7.0 percent. July’s hike in joblessness occurred even as the labor force shrunk and the labor force participation rate continued to fall steadily as it has throughout the Obama administration.

The failure of President Obama’s economic policies has left his administration grasping at straws in an effort to put a positive spin on what is clearly less than encouraging data. White House Economist Alan Krueger wrote today that the July BLS report shows that “It is critical that we continue the policies” that have led to what he calls the “progress of the last few years.” Yet historical data tells us clearly that 41 straight months of unemployment over 8 percent and average monthly job growth of only 67,000 over a so-called recovery are not progress. Any American who remembers the Reagan recovery or glances at the numbers knows the nation can do better. 

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Record Low Treasury Yields, Low Spreads Point to Crisis of Faith in Obama Recovery, Bleak Future

Posted by Jeremy Sawyer on Thursday, August 2nd, 2012, 4:33 PM PERMALINK

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The yield on Treasury bonds is largely determined by the fundamentals of the economic outlook. As Guy LeBas, chief fixed income strategist at financial services firm Janney Montgomery Scott, told US News and World Report in May, “Treasury yields are correlated with economic conditions. Better economic prospects imply higher yields.” Low yields mean that wary investors are plunging their money into low-risk, low-reward investments rather than more risky assets such as stocks that have significantly higher rates of return.

During the massive expansion of the US economy that was facilitated by the pro-growth policies of President Ronald Reagan, Treasury yields persisted at high levels. The yield on the benchmark 10-year note hovered around 10-11 percent for the first two to three years of the Reagan recovery and registered at 8-9 percent for the remainder of the Reagan presidency.

Treasury yields under President Obama, however, have been drastically lower. Throughout a period marked by economic uncertainty, yields on 10-year Treasuries have remained below 4 percent for all but one day of Obama’s presidency. The worst figures for Treasury yields have come in the immediate past. On July 25, the yield on a 10-year Treasury note dropped to 1.43 percent, the lowest rate in recorded history.

Yields on 10-year Treasury Inflation-Protected Securities (TIPS) also indicate a bleak outlook. Data on TIPS yields is not available for years prior to 2003, but the numbers over the course of the Obama administration tell a clear story. TIPS yields have hovered at low levels throughout President Obama’s tenure; they dropped below zero early in 2012 and have continued falling all the way to a record-low -0.69 percent on July 31. This means that investors are essentially locking in a loss because they lack confidence in the economy’s future.

Over the long term, one variable that predicts the future performance of the economy is the yield spread between the yield on a 10-year Treasury note and the yield for a 3-month note. A smaller spread means the economy is more likely to grow at a slower pace or contract in the future. In a 1990s paper entitled “Predicting Real Growth Using the Yield Curve,” Economists Joseph Haumbry and Ann Dombrowsky wrote, “A decline in the growth of real GDP is usually preceded by a decrease in the yield spread, and a narrowing yield spread often signals a decrease in real GDP growth.”

An analysis that includes more recent data shows that the yield spread and real GDP growth remain very much related. Figures from 1982-2011 show that when the yield spread is lagged by six quarters, it is correlated in a statistically significant way with annual growth in real GDP. While the economy expanded at annual rates greater than 4 percent in 1983-1985 under President Reagan, real GDP grew by only 2.4 percent in 2010 and 1.8 percent in 2011. Moreover, the yield spread has fallen over each of the past five quarters and the linear model predicts real annual GDP growth of below 3.5 percent in 2012 and 2013.

While general pessimism about the long-term domestic economy is crucial in explaining the historically low yields on Treasuries, a lack of confidence in Europe’s economic situation is also a huge factor. Observers of financial markets from CNBC to the Wall Street Journal have blamed the unusual yield curve on a lack of progress in the resolution of Europe’s sovereign debt crisis. Forbes writes, “Investors afraid the European Union might unravel, after Spanish bond yields spiked and talk of a Greek exit returned to the table, fled for the apparent safety of U.S. government debt.”

Yet President Obama fails to heed the lessons of infinitesimal Treasury yields: massive spending is unsustainable. As profligate European nations such as Greece and Spain become insolvent and threaten the continued existence of a unified European currency, investors look to US government debt for security. Yet if the federal continues spending irresponsibly as it has with President Obama at the helm, US government debt will cease to be a safe investment and the federal government will be unable to borrow at low rates. At that point, bondholders would impose austerity, which would be extremely painful for taxpayers.

While it is true that events in Europe are largely out of the control of America’s policymakers, there are steps that can be taken, most importantly the immediate extension of the Bush tax rates, to inject confidence into the economy. It remains to be seen whether President Obama will learn from his mistakes and reverse the growth-smothering policies that have led to a historically bleak economic outlook. 

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Obama vs. Reagan: Rising Costs of Regulations Crush Private Sector under Obama

Posted by Jeremy Sawyer on Monday, July 30th, 2012, 4:59 PM PERMALINK

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 Rep. Mike Kelly (R-PA) recently delivered a rousing speech on the House floor decrying the job-killing burdens of regulation that the federal government places on private businesses. While the left dismisses this sort of rhetoric as overblown, the facts show that it is in fact accurate.

One of President Reagan’s highest priorities in office was the reduction of regulatory burdens. To this end, he created the Task Force on Regulatory Relief and wrote a memo during his first month in office freezing the end-of-term “midnight” regulations promulgated by the Carter administration. Most importantly, Reagan brought common sense to Washington when he issued an executive order requiring regulations to be subject to a cost-benefit analysis.

The Government Accountability Office (GAO) database does not have data on major regulations before 1995, so it is difficult to quantify regulatory costs under President Reagan. Yet the indicators that are available show that costs were reduced significantly.

The regulatory excess present prior to President Reagan’s inauguration was embodied in the length of the federal register. In 1980, the list of federal regulations totaled over 87,000 pages. Under Reagan, the federal register was cut to the more reasonable length of just below 51,000 pages by 1984.

The Department of Labor states that during the Reagan administration many regulations proposed by the Occupational Safety and Health Administration (OSHA) were frozen, and the agency focused on employers with a history of non-compliance while cutting its own budget and staff. The Department of Labor saw its discretionary spending cut by 60 percent by 1985.

The only president for whom regulatory data is available across his entire presidency is George W. Bush. An analysis by the Heritage Foundation found that 28 major regulations were issued during the first three years of the Bush administration. Major new regulations from 2001-2003 added $8.1 billion in annual costs to the private sector.

In sharp contrast to historical precedent, regulators have been unleashed on businesses during President Obama’s tenure. In the first three years of the Obama presidency, 106 major regulations adding annual costs of $46 billion were issued. The data show that more than three times the regulations have taken effect across the Obama administration’s first three years than over the same period in the Bush administration, and those regulations have extracted more than five times the amount of resources out of the economy's productive sector than those issued under Bush. Not coincidentally, the length of the federal register has increased to more than 82,000 pages in 2010 and 2011.

The increase in the cost of federal regulations has been large enough to significantly impact the total regulatory burden across all levels of government. The 2012 Cost of Government Report found that Americans will work 69 days in 2012 to pay for the cost of all regulations. In each year from 2009-2011 it took 72, 71, and 71 days of work to pay for regulatory costs; those figures are dramatically elevated from the 53-54 days of work it took annually to pay for the costs of regulation throughout the Bush administration.

Unfortunately, the worst period to be a business forced to comply with onerous regulations has not been the first three years of the Obama presidency but the fourth. In just over six months since President Obama began his fourth year in office, regulatory burdens have jumped. An examination of 2012 data using the methodology from the Heritage Foundation report reveals that 21 major regulations have been issued in barely more than half a year at a staggering annual cost of $16.6 billion. That figure is actually a conservative estimate because regulatory agencies often underestimate the cost of the regulations they issue. Indeed, many regulations are not given a price tag because the relevant agencies are unable to adequately quantify new costs.

A single regulation, the new restrictions on coal plants adopted by the Obama administration’s EPA, carries an annual cost of $9.6 billion. Unbelievably, that rule alone has a greater societal cost than the sum of all regulations issued during the George W. Bush administration’s first three years.   

With red tape stifling job creators every day, the Obama administration has been anxious to pile on more barriers for businesses to overcome. Without the return of Reagan-style reform, much-needed regulatory relief appears unlikely to arrive anytime soon.

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Obama vs. Reagan: Current Administration's Spending and Deficits Make Reagan Seem Austere

Posted by Jeremy Sawyer on Thursday, July 26th, 2012, 5:01 PM PERMALINK

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The interrelated issues of spending, deficits, and debt are increasingly central to national political discourse in the United States, and with good reason. Problems that have never been given high priority must now be dealt with if America is to continue its historical rise to prosperity.

When President Reagan entered office, spending, deficits, and debt had been steadily rising for decades. Yet the nation’s fiscal situation was under control and the federal government’s spending did not pose nearly the threat it does today. The national deficit in FY 1980 was only 2.6 percent of GDP.

Faced with a Democratic Congress and the challenge of curbing the power of the evil Soviet Union, President Reagan could not adopt his full agenda for cutting both marginal tax rates and spending; he had to choose to prioritize one over the other. Reagan correctly opted to focus on tax cuts, and the Economic Recovery Tax Act, which provided for an across-the-board reduction in marginal income tax rates over three years, passed in 1981.

The tax cuts signed into law by President Reagan were wildly successful. They contributed directly to the strong growth of GDP that occurred during the Reagan presidency. Historical data from President Obama’s budget show that revenue grew dramatically over Reagan’s term as a result. The federal government’s receipts rose from $599.3 billion in FY 1981 to $991.1 billion in FY 1989, a 65.8 percent increase that far outpaced inflation.

Most importantly, Reagan kept spending close to historical averages during his presidency. Federal spending during peacetime has traditionally fluctuated between 18-22% of GDP in the post-World War II era, and the federal government’s outlays remained within the range of 22-23.5% of output throughout the Reagan presidency.

President Reagan has often been pilloried for having increased deficits and debt, but the reality of the situation is kind to the former president. The nation’s fiscal condition was never out of hand during the 1980s. The highest deficit recorded under President Reagan was $221.2 billion in FY 1986, and the highest deficit as a percentage of GDP was 6.0 percent in FY 1983. Debt held by the public was equal to a reasonable 36.5 percent of GDP.

In contrast, President Obama took office with spending, deficits, and debt far grave concerns than they were in the 1980s, and if he were aligned with the American people he would have made budget-cutting one of his highest priorities. Yet as the economy has failed to expand significantly under his tenure despite massive spending, deficits have grown.

Largely due to the stagnant economy, each year of the Obama presidency has seen federal receipts below their level in FY 2008, the last year of George W. Bush’s presidency. Moreover, President Obama has pursued irresponsible policies that have increased deficits and brought debt to previously unimaginable levels.

Under the guise of remedying the financial crisis, President Obama pushed for a $787 billion stimulus that largely consisted of long-standing liberal spending priorities. Moreover, he has ignored the recommendations of his own fiscal commission to cut discretionary spending and reform entitlements.

Crucially, President Obama has overseen a level of spending never before seen in US history. At 25.2, 24.1, and 24.1 percent of GDP respectively, the figures for federal outlays as a percentage of GDP over the first three years of his presidency are the three highest on record.

In the first three fiscal years of the Obama presidency, the national debt held by the public has increased by 2.58 trillion dollars. Since Obama took office, the federal government has recorded annual deficits greater than 1.25 trillion dollars in three consecutive years. Deficits as a percentage of GDP have risen beyond historical norms.

America has now arrived at the point at which the legacy of political leaders will be largely determined by their willingness to deal with the overspending that plagues the nation. While President Reagan’s place in history is secure on this count, President Obama will be judged a failure in this crucial area unless his administration changes its direction.

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Obama vs. Reagan: America Enters New Era of Disability

Posted by Jeremy Sawyer on Monday, July 23rd, 2012, 2:52 PM PERMALINK

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Social Security was created in 1935 in order to provide a safety net to Americans without the ability to earn income. Over the past decades, the program has proliferated to the point of insolvency. In particular, Social Security’s Disability Insurance (DI) component has grown out of control and threatens the nation’s finances as well as the fundamental principle that citizens should not be reliant on government.

Like many government programs, DI grew rapidly in the years preceding the Reagan presidency. While benefits were collected by less than 800,000 individuals in 1960, 5.22 million people participated in the program in the final year of Jimmy Carter’s presidency, 1980.

Claiming accurately that there was “widespread abuse of the system which should not be allowed to continue,” President Reagan set about curbing the growth of the Disability Insurance program. He directed his Department of Health and Human Services to conduct reviews of DI claims. At the same time, the economy grew rapidly after the early 1980s recession ended.

The result was a significant departure from the upward trend in program participants of previous years. In the first two years of Reagan’s presidency, recipients of benefits fell from 5.01 million to 4.38 million, a 12.49 percent decrease. The demographic that saw the biggest drop in dependency was not disabled workers but rather able-bodied students ages 18 and 19 whose parents were classified as disabled. Between 1981 and 1983, the number of non-disabled adult beneficiaries of the DI program decreased by almost a full two thirds from nearly 150,000 to just over 50,000.

During the Obama administration, the DI program has grown at a rate similar to that at which it expanded before the Reagan presidency as the economy has struggled and eligibility has not been limited. Indeed, more Americans have gone on disability than have found jobs in the past three months. Between 2009 and 2011, total recipients are up over nine percent to 11.74 million, and the non-disabled adult subcategory has also risen. The average monthly benefit, which was $475.70 in 1985, became $1188.80 by 2011; the growth in average benefits has significantly outpaced inflation.

The problem of the DI program’s recent growth has rightly attracted congressional attention. Senator Jeff Sessions, Ranking Member of the Senate Budget Committee, recently requested a report on this topic from the Congressional Budget Office (CBO). The report came to several unsettling conclusions, including a finding that the number of beneficiaries as a percentage of the population age 20 to 64 has risen rapidly. A press release from the Senate Budget Committee Republicans also notes that the program’s trust fund is expected to be exhausted as early as 2016 and that known overpayments to beneficiaries are common.

What has happened to the DI component of Social Security is in line with a pattern of increasing reliance on government amidst a floundering recovery under President Obama that contrasts sharply with the drop in government transfer payments that accompanied the solid growth overseen by President Reagan. As weary Americans search for solutions that will return the nation to prosperity, they ought to look to Reagan’s legacy of concurrently expanding the economy by instituting market-based reforms and reducing dependence.

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Obama vs. Reagan: Food Stamp Failure

Posted by Jeremy Sawyer on Thursday, July 19th, 2012, 11:54 AM PERMALINK

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Food stamps were once a ubiquitous symbol of destitution in America. The program, administered by the US Department of Agriculture (USDA), was instituted in 1969 with the goal of helping to stop the poorest fraction of Americans from going hungry. In that year, 2.878 million Americans received an average monthly benefit of $6.63.

By the time President Reagan had taken office, the program had expanded significantly. In fiscal year 1981, 22.43 million Americans were on food stamps and the average monthly benefit was $39.49. Yet, keeping in mind his own famous words, “No government ever voluntarily reduces itself in size,” Reagan took steps to halt the proliferation of food stamps and the accompanying culture of dependency. Many Americans substituted jobs for welfare benefits during the Reagan recovery.

After the growth that occurred and cuts that were instituted in Reagan’s first two years, the number of food stamp recipients actually fell to 21.625 million in FY 1983. Growth in the cost of benefits over those two years was a modest 4.59%, rising to $11.152 billion from $10.63 billion.

The nature of the food stamps program, newly christened the “Supplementary Nutrition Assistance Program” (SNAP), has been radically transformed under President Obama. It is not for nothing that former House Speaker Newt Gingrich labeled President Obama “the food stamp president.” When President Obama took office in FY 2009, 33.49 million Americans were enrolled in SNAP and benefits totaled $50.36 billion. By FY 2011, 44.71 million Americans collected $71.813 billion in benefits. In just two years, the number of recipients increased by 33.5 percent while benefits shot up by a whopping 42.6 percent.

The data from the Obama era look even worse when one takes into account population growth. If the population of the US were the same as it was during President Reagan’s first term and the same proportion of the population received food stamp benefits, 59.614 million citizens would be enrolled in SNAP. That number is nearly three times the figure from two years into the Reagan presidency.

Moreover, the rise of food stamps has not affected all Americans equally. In certain geographical areas such as inner cities, dependency on government has risen to shocking levels. In New York’s 16th Congressional district, for instance, more than 40 percent of households receive SNAP benefits.

Unbelievably, the USDA’s website informs visitors that “SNAP also has an economic multiplier effect with every $5 in new SNAP benefits generating as much as $9 in total economic activity.” Here lies the basic economic worldview of the Obama administration: simply spend as much as possible on transfer payments that create dependency on government and growth will come.

The trouble with this misguided view is that President Obama and his Keynesian friends have forgotten the fundamental axiom that there is no free lunch. In reality, as Nobel Prize-winning economist Robert Barro has noted, transfer payments such as food stamps increase deficits, necessitating future growth-killing taxes. Moreover, SNAP reduces the incentive to work, which depresses growth in and of itself. Unsurprisingly, economic facts continue to bear out these common sense observations as food stamp proliferation has not resulted in anything resembling rapid growth.

With the supposed magical multiplier effect of food stamps being trumpeted by important figures in the Obama administration including Agriculture Secretary Tom Vilsack, it is unlikely that the growth of the SNAP program will soon be curbed. As such, America appears to face a future in which more workers are converted to dependents of the government under President Obama.

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