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It’s the Spending, Stupid

By Ed Moy,

U.S. Treasury Secretary Jack Lew proudly announced that for the fiscal year ended Sept. 30, 2014, the federal government collected the most tax revenue ever: $3.013 trillion. But despite record taxes, the federal government spent $483 billion more than it took in.

To paraphrase Ronald Reagan, we don’t have a $17.8 trillion debt because we have not taxed enough. We have a $17.8 trillion debt because we spend too much.

Obviously, the federal government’s strategy of taxing our way to a balanced budget is not working. The more money that is collected, even more money is spent. Taxes aside, the budget has little chance of ever being balanced (or producing surpluses) unless the government stops spending as much.

There have been recent efforts at spending cuts. There were across the board cuts in discretionary government programs (sequestration) and capping future discretionary spending. Both helped. But they were more than offset by mandatory increases in entitlement programs, expanding populations in the entitlement programs and new programs like Obamacare.

That is because entitlements are the main driver of increased spending. Medicare, Medicaid, Social Security and other entitlements currently account for 55 percent of the federal budget. Without entitlement reform, their mandatory rate of growth will overwhelm the rest of the budget. That means crowding out the defense budget (20 percent) and all other government spending (17 percent).

And when the federal government does not have all the money to pay its bills, it borrows. Interest payments on the federal debt represent 7 percent of the federal budget. By the way, the average interest rate paid on the $17.8 trillion of debt is 2.3 percent. Imagine how much interest would be paid when interest rates normalize, say at 5 percent.

The problem is that cutting spending is hard work and requires unpleasant choices. So instead of tackling them now, the president and Congress are content to kick the can down the road. But soon that road will run out and there will be fewer choices and less time for a solution.

Big spending requires big revenues to pay for that spending. All those tax revenues take hard-earned money away from Americans, who would use their money on what they think is important. And whether they spend it, save it or invest it, the end result is a big boost to the economy.

But when the federal government gets that money, it spends it on what it thinks is important. Because of the political process and bureaucracy, it is inherently an awful and inefficient allocator of resources. Think of it this way: Are Americans better off if a family cannot buy a refrigerator so that mountain lions can be trained to walk on treadmills?

I would rather rely on the people making choices. Cut spending and taxes, and have the people decide on how best to use their money. They and our country will be better off.

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