How the Surplus Became a Deficit

Exactly 10 years ago, the nonpartisan Congressional Budget Office issued a report projecting that, in 2010, the federal government would run a $796 billion surplus. In reality, 2010 produced a $1.3 trillion deficit.

The difference between the two -- $2.1 trillion -- highlights two important points: Long-term forecasting is futile, and something went horribly wrong over the past decade.

But what? To find out, I compared CBO's 2001 projections with what actually occurred in 2010. Turns out, two factors alone account for the majority of the difference: tax revenue and defense spending.

Tax revenue
In 2001, the CBO estimated $3.27 trillion in tax receipts would flow into the government's coffers in 2010. The actual number ended up being $2.14 trillion. This $1.1 trillion gap makes up over half of the total difference between the CBO's 2001 budget projection and what actually occurred in 2010. The effect is even greater when you shorten the time frame: The difference between 2010's actual deficit and budget projections made in 2006 was 63% attributable to tax shortfalls.

What type of tax revenue fell short? All of it, but taxes on individual income was the largest drop. In 2001, CBO estimated personal income taxes would draw in $1.68 trillion in 2010. In reality, it was $891 billion. Corporate tax revenue was $188 billion versus a projected $303 billion. Social insurance taxes came in at $862 billion last year, compared with 2001's projection of $1.1 trillion.

Why tax revenue has fallen short isn't a mystery -- we've had tax cuts, and a deep recession. Using CBO's estimates, the 2001 and 2003 tax cuts will reduce tax revenue by $250 billion this year over what would have been collected in their absence. Other tax cuts that were part of the 2009 stimulus package reduced tax receipts by $164 billion last year.

And then there's the recession. In 2001, CBO projected GDP would be $16.1 trillion in 2010. Turns out it was $14.7 trillion. The difference between the two means there was less income to tax last year than was projected in 2001. This is a major reason recessions naturally cause deficits to rise -- a point lost upon many.

Defense spending
Discretionary spending by the government was $513 billion more in 2010 than CBO projected in 2001. This is the source of so much angst about the budget deficit; that discretionary spending is running out of control.

And it's interesting to know what type of discretionary spending is surging past previous estimates. In 2001, CBO expected defense spending would come in at $390 billion in 2010. It ended up being $720 billion. This $330 billion difference makes up over 64% of the difference between projected and actual discretionary spending. Whether this has been necessary or worthwhile is a debate for another forum. The numbers, however, speak for themselves.

Just the facts
Still with me? Here's a review: Compared with 2001's projections, tax revenue in 2010 fell $1.1 trillion short, and defense spending went $330 billion over.

Add 'em up, and you get $1.4 trillion. See where we're going here? Had tax revenue and defense spending each met CBO's 2001 projections, today's budget would effectively be balanced.

Spending in other areas has, of course, surged as well. Outlays for Social Security, unemployment benefits, and interest on the national debt -- among others -- were all significantly higher in 2010 than projected 10 years ago. But no two areas made as much a difference as tax revenue and defense spending.

The point of this isn't to place blame. It's to show that much of the debate surrounding our current deficits is misguided. The factors that took the country from surpluses 10 years ago to deficits today aren't, for the most part, those that are constantly maligned by the media and political parties -- bailouts, stimulus spending, earmarks, bridges to nowhere, foreign aid, and social causes.

It's simpler than that. We had massive tax cuts, two wars, and a giant recession. It's difficult to take seriously any deficit-reduction proposal that doesn't take these into consideration. Something to think about.

Check back to www.fool.com Friday for Morgan Housel's next column on finance and economics.

Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On February 02, 2011, at 12:34 PM, turkeybird wrote:

    Like all estimates there are assumptions -hopefully based on the best/available inputs. Too often however that old cliche "Garbage in Garbage out" rules the day. The farther out a prediction the more prone it is to be muddled. For the CBO to project beyond a year is utterly futile. There are too many unknowns and way too many assumptions.

  • Report this Comment On February 02, 2011, at 12:51 PM, TheDumbMoney wrote:

    Morgan, I believe this is a bit of a redo of an article you did about a year ago, and for that I can only say THANK YOU. Please keep reminding people of this, in as many ways possible. So many people truly think our problem is largely "runaway spending," especially since November 2008.

    Turkeybird, it is true that estimates based on current data are often not reliable as extrapolations of that current data. However, the extent of the reductions arising from A) the tax cuts and B) from the increased deficit/defense spending, are extremely easy to quantify. The only reason the CBO estimate was "unreliable" is that these two huge deficit-causing inputs that were subsequently added. There was no CBO failure to estimate them properly at the time, no garbage. I think it's circular reasoning, and wrong, to say, "we added these deficit-causing activities later, but the CBO failed to anticipate that we would do so, so the CBO estimate is garbage."

  • Report this Comment On February 02, 2011, at 12:58 PM, TheDumbMoney wrote:

    Also, congratulations on the syndication/reprint of your recent Buffet column to MSN Money.

  • Report this Comment On February 02, 2011, at 1:55 PM, zymok wrote:

    Federal revenues declined from 2001-2003. After the "massive tax cuts" of 2003, revenues increased until 2007, at which point they declined until 2009. (I don't have 2010 data). In light of this, how do attribute revenue shortfall to tax cuts?

  • Report this Comment On February 02, 2011, at 4:23 PM, TMFDiogenes wrote:

    @zymok

    Revenue may have risen (the economy was growing, after all), but it still fell short of the projections/requirements for a balanced budget because of tax cuts.

  • Report this Comment On February 02, 2011, at 5:02 PM, IsaCann wrote:

    It's pretty clear that there is no "sharing" of wealth or a "trickle down effect" of the text cuts of the wealthiest Americans, especially as they are normally intelligent folks, observing the ship going down (our economy), hoarding their tax savings, and waiting for a better day. This is tangential, I know, but arguing to maintain a tax cut for the wealthy helps assure the rest of the country not get back to work any time soon. I'll have more confidence in the next 10-year forecast without the tax cuts, thanks.

  • Report this Comment On February 02, 2011, at 5:03 PM, zymok wrote:

    @Morgan

    You're assuming that tax cuts led to revenue shortfalls. I'm saying the evidence suggests otherwise. Not only did tax receipts decrease before 2003 and increase after, the rate of growth in the GDP increased after 2003 as well. The data suggests that the 2003 tax cuts ameliorated the revenue shortfall rather than aggravated it.

  • Report this Comment On February 02, 2011, at 5:04 PM, TMFHousel wrote:

    "You're assuming that tax cuts led to revenue shortfalls."

    I'm using CBO's estimates.

  • Report this Comment On February 02, 2011, at 5:14 PM, xetn wrote:

    One point that I believe needs to be amplified, and that is the growth of government spending. All government spending relies on theft by taxation and/or borrowing (deficit spending). All government spending takes money out of the private sector, where real economic growth occurs, on a dollar for dollar basis. The largest area of employment has been in government. Why is this important? It is important because the money does not produce any real goods or services. Least you believe that government employees are paying their own way, consider: government employee Jim has gross wages of $60000/yr. After tax, for simplicity, his take-home is $50000 ($10000 for income tax, etc.) In other words, his real income, money removed from the private sector, is $50000.00 paid by taxation.

    On the other hand, although private employment has grown during 2010, the big problem is the wage rates are much lower than prior recession wages: http://money.cnn.com/2011/01/31/news/economy/low_wage_job_gr....

  • Report this Comment On February 02, 2011, at 5:26 PM, phillyarchitect wrote:

    Could someone tell me the mathematical basis for the endlessly repeated term "tax cuts for the rich"? It is my understanding that the Bush Tax Cut was 7% across the board, and a straight reduction in the Capital Gains Tax. I don't see how that targeted the rich as in you get a tax cut only if you are in a high income tax bracket. Everybody who paid taxes received a tax cut in proportion to the amount they paid. Now I never thought the tax cuts were a good idea and would favor letting them expire, however, I don't see how they were "for the rich".

  • Report this Comment On February 02, 2011, at 5:29 PM, TMFMMTInvestor wrote:

    Morgan,

    Don't dispute any of the facts you cite. Given, however, that the USA is the sovereign, monopoly supplier of a nonconvertible currency in a floating exchange rate monetary system--and thus unlike a family household or locality (currency user)--why do/should you care so much about deficit-reduction and balanced budgets? Tax revenues and bonds don't finance anything in our monetary system (though that gold standard era illusion persists in political rhetoric). Persistent budget deficits are just a reflection of the state of the economy and the private sector's net savings desires when you're running a current account deficit. So, just curious why a Federal government surplus or balanced budget is even a worthy goal in the first place, in your view. Taxes and spending, after all, should be set on what's good for the people (the economy) and not the government, which is always fully solvent in such a monetary arrangement.

    Thx,

    Scott

  • Report this Comment On February 02, 2011, at 5:32 PM, TMFHousel wrote:

    "The largest area of employment has been in government. Why is this important? It is important because the money does not produce any real goods or services."

    You're right. Firefighters, police, and teachers don't contribute any real services.

  • Report this Comment On February 02, 2011, at 5:39 PM, zymok wrote:

    Morgan,

    Could you do me a favor and post a link to the source data you're using? With projections, revised projections, on-budget projections, non-SSI projections and other miscellaneous variations it's difficult to find a common baseline.

    Thanks

  • Report this Comment On February 02, 2011, at 6:15 PM, TMFMMTInvestor wrote:

    xetn,

    I can appreciate the sentiment in your post, as I used to believe it 100%, and still do believe there is tremendous waste, fraud, abuse, and misallocation of capital in government spending (ditto in private sector spending). When you write the following, however, you're factually not correct: "All government spending relies on theft by taxation and/or borrowing (deficit spending). All government spending takes money out of the private sector, where real economic growth occurs, on a dollar for dollar basis."

    In our monetary system:

    1) All federal government spending is fiat-based and, as such, not dependent on taxation and borrowing. Taxation and bond issuance ("borrowing") drain money from the economy by (a) destroying bank reserves in the case of taxes and (b) time locking bank reserves in the case of selling bonds.

    2) [This part really precedes #1] Saying "All government spending takes money out of the private sector" belies the reality that federal deficit spending (i.e. the direct creation of the monetary unit of account) operationally precedes every transaction in the horizontal (endogenous) accounting sphere, i.e. the private sector. When the federal government spends, it adds electronic bank reserves to the private sector--the very bank reserves that you and I need to purchase goods and services and pay taxes. All money that is used to pay taxes and purchase bonds comes from prior government deficit spending, which is nothing else but the direct creation of new monetary units of account. Spending precedes reserve drains via taxes and "borrowing." Always. It's counter-intuitive, but that's how it actually happens in the world we live in.

    There is no unit of our currency used in transactions that has not already been created as a liability (think "legal tender" status) of the federal government. Therefore, when the Treasury deficit spends and pays, e.g., Lockheed Martin for a defense contract, it actually adds money to the employees of Lockheed Martin;s coffers and only taxes back what it wants. Why tax later at all is another discussion altogether.

    In conclusion, it is more correct to state:

    -All taxation and bond issuance rely upon prior deficit spending; and

    -In order for money to be taken out of the private sector, it has to be given unto the private sector first (via deficit spending-currency issuance).

    Scott

  • Report this Comment On February 02, 2011, at 6:40 PM, edallan wrote:

    "All government spending relies on theft by taxation and/or borrowing (deficit spending). All government spending takes money out of the private sector, where real economic growth occurs, on a dollar for dollar basis. The largest area of employment has been in government. Why is this important? It is important because the money does not produce any real goods or services."

    Therefore, the Internet, which was developed using taxpayer money and which you are using to post your comment, does not exist? And the fact that officers of companies in which you invest may feel some deterrence from swindling you is not a real service? Undoubtedly you can think of numerous other areas in which you personally have benefitted from taxpayer money.

    ----

    Using illustrative figures only, a 7% tax cut on a tax bill of $100 is $7, which will barely buy one Extravalue meal at McDonald's and has negligible impact on tax revenues considering that the McDonald's employees receiving their part of the $7 will recycle it very speedily.

    A 7% tax cut on a tax bill of $10,000 is $700, which may (or may NOT) be spent on something that gets recycled in the U.S. economy, or which may be saved and do essentially no good for anyone in the U.S. or invested, e.g., to buy part of a Treasury bill which is needed to offset the revenue lost by the tax diverted or invested in a company that prefers to strengthen someone else's economy while weakening ours.

  • Report this Comment On February 02, 2011, at 7:19 PM, xetn wrote:

    Morgan:You're right. Firefighters, police, and teachers don't contribute any real services.

    This belies the fact that they could be privatized, instead of socialized. In fact the costs of those services would decrease.

    edallan: the internet could just as easily be developed by private enterprise. But don't forget its original purpose was not for the public, but for government purposed.

  • Report this Comment On February 02, 2011, at 7:38 PM, IsaCann wrote:

    xetn: your confidence in an inherent integrity of the private sector [that evidently surpasses the fatih you have in those we vote into their roles in a democracy] is curious. I can not imagine a world where good ethics surpass greed. It has never existed in human history to date. Being a student of both sociology and economics, I assure you.

    "Real services" is saving lives [so that person saved may live another day to contribute to the economy], protecting us from crime [so that people who would otherwise thwart the economy are prevented] and teaching [to educate towards any manner of work that contributes to the economy]. US Government is not perfect, but especially important and necessary, and moreso in a country of our scale.

  • Report this Comment On February 02, 2011, at 8:38 PM, jfrankh57 wrote:

    OK...first of all and very importantly, where was this vaunted surplus supposed to have originated? The government in the late 1990's touted the fact that Clinton's administration gave us a surplus. Where was that figured out and by whom? Nobody even suggested they account for unfunded social programs. Social Security was and still is in a humongous hole...none of that money was invested, but instead, "borrowed" by and funneled into the general fund. That still has to be paid back... with steep interest to retiring citizens. That will be something for DEEP pockets...something the USA no longer has!

  • Report this Comment On February 02, 2011, at 9:07 PM, DonkeyJunk wrote:

    Not long ago social security was running at a surplus. The issue arose when the money going into it was taken out to fund other programs.

  • Report this Comment On February 02, 2011, at 9:10 PM, rmoreira wrote:

    It seems that there are too many people who think hard work should not be rewarded. Those who have large incomes or savings accounts had to work to get them there.

    If the shoe was on the other foot, would you like someone taking from you to give to someone who didn't plan for their future?

    If there is to be any fairness in the future, it is to have all pay the same tax rate. Then no one is paying more the anyone else.

    Those who have, do so because they wanted a future for themselves. They, just like most don't want to have to pay for others. It is not about greed, it is about planning. Get real folks!!!

    IMHO, I'm not trying to offend anyone!!!

  • Report this Comment On February 02, 2011, at 9:26 PM, TheDumbMoney wrote:

    @TMFMMTInvestor, I like you and we agree on a lot, but I confess I have a wee bit of a problem with your above post in response to xetn. And because I'm a blowhard I'm gonna go ahead and say it. Your post is premised on tenets of Modern Monetary Theory, as, I have suspected, is your handle. My problem is not with that, per se. Rather, my problem is that you don't acknowledge as much in the post. While events of the last two-ish years have done much credit to MMT, and I am beginning to come around to the view that it may be "correct," or at least a more accurate view, I find too many advocates of MMT on the web treat it as gospel, failing, for example, to acknowledge sufficiently that it actually remains (as far as I know anyway) a minority view of looking at things. (It is not how Krugman or Yellin views things, on the one hand. And it is not how Bernanke views things, somewhat on the other hand. Now..., maybe that is precisely the problem, as MMT's advocates argue.) But I am not sure MMT should be presented as 'truth' to a casual commenter, without more context on the intellectual debate that is currently underway. To do so is, ironically, to play a bit of the same game that some gold bugs seem to play, which is to attempt to shift actual reality by shifting the base-point of any discussion they choose to engage in by, for example, always talking about how much things "cost in gold". Instead, let the weight of argument shift our reality. In MMT's case, there are in fact some very, very good substantive arguments in favor of it, particularly as a description of the inherent possibilities, as opposed (perhaps) to the self-imposed reality, under our floating exchange rate fiat currency system.

  • Report this Comment On February 02, 2011, at 10:45 PM, edallan wrote:

    Dear xetn,

    While I acknowledge that certainly the Internet COULD be developed, and is certainly being expanded upon, by the private sector, the reality is that it was begun with taxpayer money and I am sorry that you believe that national defense is not a public purpose.

    I don't know why you believe that privatizing fire departments would be a more cost-effective solution than having them operated as government services. My assumption is that the owners of privately-operated fire departments would expect a profit on top of expenses and that there would be strong incentives for cutting corners without cutting prices. It is my understanding that savings from privately-operated prisons have been negligible, if any, and certainly the experience of entities such as Blackwater do not suggest that the use of private armies results in any savings whatsoever, let alone the massive harm that lack of accountability has created.

    I AM glad, however, that you implicitly do recognize that increased profitability resulting from improved productivity by American workers have essentially gone disproportionately into the pockets of corporate executives and secondarily into the pockets of the nominal owners of the enterprises and negligibly into the pockets of the people who have made it possible for everyone to do better.

    Mr/Ms Moreira writes: "Those who have large incomes or savings accounts had to work to get them there." As counter-examples, Paris Hilton and George W. Bush. I regret bitterly that Al Gore did not disabuse W and the American public when W stated that the estate tax, which affects relatively few people anyhow, results in double taxation. The reality is that, to the extent that people have to pay estate tax anyhow, unrealized capital gains don't get taxed twice, and of course amounts under the floor for estate tax don't get taxed at all.

  • Report this Comment On February 03, 2011, at 1:15 AM, MartinSamuelson wrote:

    Morgan I have 2 suggestions for this article:

    1) Add a colorful, attractive graph

    2) Place article as the main headline on every newspaper tv, and radio program in the country

    Thanks!

  • Report this Comment On February 03, 2011, at 2:28 AM, Thaeger wrote:

    Wasn't the projected "Clinton surplus" based off shady, or just invalid, assumptions anyways?

    -0% increase in government spending (ie, 0% population growth, 0% inflation, etc)

    -No major wars or disasters (Katrina, BP, etc),

    -Economic growth continuing unabated (ie, the average price of a home continuing to double every few weeks or so).

    -Shenanigans with social security

    etc etc....

  • Report this Comment On February 03, 2011, at 2:56 AM, ET69 wrote:

    Ronald Reagan started the tax cut for the rich crap and now Obama wants to dump on federal employee unions and force more pay cuts and givebacks.

    It IS time to point fingers! The military ...The Rich...The Capitalist system! Be honest!

    Tunisia ...Egypt...America? Lets hope so before the Wall St ruling class impoverishes us all!

  • Report this Comment On February 03, 2011, at 11:04 AM, TheDumbMoney wrote:

    Thaeger, no, just..., no. This is not a Clinton estimate. This was a CBO estimate. The CBO acts independently.

  • Report this Comment On February 03, 2011, at 1:14 PM, clydejazz wrote:

    It doesn't take a rocket scientist to see that launching 2 unfunded wars, creating a huge new unfunded entitlement program (rx drugs for seniors), and cutting taxes at the same time will create a budget deficit.

    Let's get rid of the tax cuts and the wars before we start cannibalizing education and social security.

    Simply restoring the taxes to what they were under Bill Clinton will help tremendously. Arguing that we can't create jobs with that level of taxes doesn't wash: the economy grew rapidly after Clinton raised taxes.

  • Report this Comment On February 03, 2011, at 1:46 PM, Melaschasm wrote:

    Based upon the original article, stated in billions:

    Deficit Difference 2,100

    Bush Tax Cuts 250 12%

    Defense Overun 330 16%

    Other 1,520 72%

    It sounds like the Bush tax cuts and wars were not a significant cause of the deficit.

    Or from another viewpoint, letting the tax cuts expire plus reversing military spending will not balance the budget.

  • Report this Comment On February 03, 2011, at 2:30 PM, griderX wrote:

    Intresting read...the COB just release their 2021 Outlook...great read if anyone want to look at it: http://www.cbo.gov/doc.cfm?index=12039

  • Report this Comment On February 03, 2011, at 2:33 PM, griderX wrote:

    Opps...meant to say CBO...another intresting fact:

    CBO's baseline projections are not intended to be a forecast of future budgetary outcomes; rather, they serve as a neutral benchmark that legislators and others can use to assess the potential effects of policy decisions. Consequently, they incorporate the assumption that current laws governing taxes and spending will remain unchanged.

  • Report this Comment On February 04, 2011, at 2:24 AM, Gfulmore wrote:

    Of interest in this excellent explanation of why we have the annual deficit we now have is the lack of mention of the "entitlements" or Social Security or Medicare. These have NOTHING to do with the annual deficit.

    As a nation we are in "deficit denial" over this annual deficit. We cannot reduce it significantly by reducing spending. That is just not going to happen. We need to add revenue, and we need to do it quickly. Some facts:

    $10 billion - The amount, on average, that our federal government spends every day of the year.

    $6 billion - The amount, on average, that our federal government collects in revenue every day of the year.

    $4 billion - The amount, on average, that our federal government adds to its total debt and has to borrow every day of the year.

    $1.5 trillion - The current projected annual deficit for the federal government, due to the difference between its annual spending and its annual revenue.

    $14 trillion - The total federal debt at the beginning of 2011.

    $15.5 trillion - The total federal debt projected for the end of 2011.

    $17 trillion - The total federal debt projected for the end of 2012.

    $45,000 - The debt, per every U.S. resident, resulting from the total federal debt at the beginning of 2011.

    $5,000 -- The approximate debt to be added each year to the obligation of every U.S. citizen, if the projected annual federal deficit of $1.5 trillion, per year, continues.

  • Report this Comment On February 04, 2011, at 12:28 PM, TheDumbMoney wrote:

    Gfulmore, the point of the post was in some sense to talk about what the unknown unknowns were as of that prior CBO projections, versus what has happened. Social Security and Medicare were known knowns as of that time, and a large portion of the deficits they are causing was therefore already incorporated into that old CBO estimate. So your points about social security and medicare are basically irrelevant to the article.

    (By the way, Donald Rumsfeld just published a memoir and has therefore elbowed his way into my head again....)

  • Report this Comment On February 04, 2011, at 4:06 PM, muddlinthrough wrote:

    My biggest problem is the lack of a '1 and 3 year cost structure' on any of these estimates, with no remediation plan if the next year target, or 2 year trailing target, wasn't hit.

    10 years' out estimating rule-of-thumb (since proven): "An estimate of surplus dollars can be doubled, and then a minus-sign inserted in front. An estimate of a negative amount will be ignored until someone comes up with a positive growth plan that allows 'discretionary spending' to grow at 7-8% compounded annually."

    Is it un-American of me to wish that China would just call our bluff today, instead of waiting until there's absolutely NO way that we'll pay it off?

    Wait. That was my wish in 2001. I think it's time for them to pull the rug--we're here.

  • Report this Comment On February 04, 2011, at 4:10 PM, muddlinthrough wrote:

    "Simply restoring the taxes to what they were under Bill Clinton will help tremendously. Arguing that we can't create jobs with that level of taxes doesn't wash: the economy grew rapidly after Clinton raised taxes."

    Disagreed. The only 'help' will be to repudiate the debt and deal with the consequences. But that won't happen.

    (Do you have any concept of how much the INTEREST ALONE on is $14T dollars? And the current bozo, no better than the last one, can't figure out where to cut anything. $400B 'over ten years, and he brags.'

    Taxes won't solve the problem. It's like the 'green-house gas back to 2001, except for developing countries.' China will continue to consider itself a 'developing country' (and building coal-fired plants at a rate that makes the rest of the world's, much less the US's, look like pikers) well into 2030.

    It's game theory, and the opponents can't be bothered to care that in this game of chicken, there's not only no lane to swerve from, there's just a cliff and we're all going over it.

    Now, just how to I make money from this deal, that's the tick.

  • Report this Comment On February 04, 2011, at 7:22 PM, SJLATTY wrote:

    The "Clinton" surplus was a real bubble...Remember the DOT COM event; taxes increased becaused of cap gains for the stupid and silly run up in stock market ptices. People were making cap gain profits out of thin air. The CBO projections were based on all this "profit" that did not exist...IT WAS ALL SMOKE AND MIRRORS.

  • Report this Comment On February 04, 2011, at 7:28 PM, SJLATTY wrote:

    The "Bill Clinton" end of term "budget surplus" existed only because of the DOT COM bubble, not real economic growth. The CBO projections are (were) backward looking. When the DOT COM bubble burst, all prior projections were out of line. The Clinton "surplus" was a fiction, never did exist unless you owned World Com or Enron.

    \

  • Report this Comment On February 04, 2011, at 8:55 PM, TMFHousel wrote:

    Muddlinthrough:

    You wrote: "Do you have any concept of how much the INTEREST ALONE on is $14T dollars? "

    A fair point. But interestingly, today's net interest cost as a % of GDP is actually among the lowest levels of the past sixty years. Debt has risen spectacularly, but keep in mind interest rates have fallen spectacularly. The government is funding most of its deficit at interest rates between 0-2%.

  • Report this Comment On February 05, 2011, at 8:53 PM, ynotc wrote:

    I come late to the debate but I couldn't pass up commenting on this article.

    so let me get this straight, all we have to do is tax people more and cut the defense budget and we'll be o.k.? How naive.

    Sounds like a political position taken by one of the parties. The real problem is faulty forecasting. Of course the CBO only regurgitates the numbers and assumptions that it was given. Same thing happened during the "debate" on healthcare. Faulty numbers + faulty assumptions + faulty conclusions.

    In an iterview recently Donald Trump (who I almost never agree with) said that if you tax the rich to highly then they will just move along with thier money.

    When the risks and costs become to high for entreprenuers to employ their capital they will just withdraw and live off of thier passive investments or move to a more favorable locale, say China, that appreciates and rewards the risk/reward ratio. Either way the recession and lack of job production in our own country is extended by this type of policy.

  • Report this Comment On February 05, 2011, at 8:55 PM, ynotc wrote:

    Bill Clinton never had a surplus. If you remove the dollars collected for Social Security and Medicare, which are supposed to be available for future generations, the government still ran a deficit.

  • Report this Comment On February 06, 2011, at 11:44 AM, brassbear wrote:

    We need to broaden the revenue base subject to federal income taxes as there is something like 40% of Americans who pay no federal income taxes at all. Also, we seriously consider adding or switching to a value-added tax system. The bottom line: Americans must be willing to pay for the government services & benefits we consume. If, as I believe is the case, we are unwilling to cut government spending equal to or even below our current level of revenue, then we must increase revenue.

  • Report this Comment On February 06, 2011, at 1:37 PM, TruthinSF wrote:

    I am never a fan of government spending - it's out of control and must be cut. But I also admit that if Pres. Bush had not pushed for tax cuts, and focused instead on the financially responsible act of prepaying debt as Bob Rubin had done, then the US debt would be a fraction of what it is today, and would we could then enjoy a huge tax cut. Eliminating debt would have been the more responsible, prudent thing to do. And Alan Greenspan lost all credibility when he argued that the US was paying it's debt off too quickly ... there is no such thing!

  • Report this Comment On February 07, 2011, at 7:12 PM, truth15freedom wrote:

    Funny thing is that I remember doing the same type of thing a few years ago and found that the two unnecessary wars were only accounting for around 1/3 of the deficit, no significant tax cutting had happened yet (and much of the projected tax cuts did not happen, unlike under Clinton, where the projected tax increase did not happen either, do to a divided government -- when the economy really started to grow), but the other 2/3 was due to domestic spending, and that was without the drug program taking effect yet.

    So I have to wonder how they are the cause of our entire budget shortfall years later?

    Making statements as fact in comparing what really happened to a 10 year old forecast is really disingenuous at best.

  • Report this Comment On February 08, 2011, at 12:55 AM, ikkyu2 wrote:

    Bring back the 91% top tax rate.

  • Report this Comment On February 08, 2011, at 7:33 AM, litons wrote:

    how a finance manager can make a bridge between surplus unit and deficite unit of fund in a corporation...? can anybody give me the answer....pls...i need it urgent...

  • Report this Comment On February 08, 2011, at 1:56 PM, NDSuperman wrote:

    This class warfare stuff drives me up a wall. I suppose when you see a fat man standing next to a skinny man, you would believe the fat man got that way at the expense of the skinny man. This is not a net sum zero game. There is room for ALL to excel and prosper in the ways they see fit. In a question of logic...if a company has more money (lower taxes), is it easier or more difficult to increase payroll (give raises)?

    And another thing...Why are the wars called "unfunded," but all the other government programs are not? It is not like there are separate accounts at the government bank with tags on them. (This account is SS...this one is for defense...this account is education...this one is for building roads...and so on.

    As far as the wars being called "unnecessary," well aside from insulting the families of loved ones lost, who can accurately say that. Looks like Iraq may now be the only democracy in the Middle East.

    Are some of you actually trying to state the case that the deficit problem had more to do with letting you keep your own money than with government spending. Well that just sounds absurd to me.

  • Report this Comment On February 08, 2011, at 4:49 PM, aggie9711 wrote:

    @Morgan

    "A fair point. But interestingly, today's net interest cost as a % of GDP is actually among the lowest levels of the past sixty years. Debt has risen spectacularly, but keep in mind interest rates have fallen spectacularly. The government is funding most of its deficit at interest rates between 0-2%. "

    So, we should assume that the federal government will continue to be able to borrow $1+ trillion per year at interest rates below 2% for the forseeable future? We should assume an unending supply of debt purchasers willing to continue to finance the deficit? Or that the Fed will keep monetizing the debt, and that won't have any effect on inflation?

    And the $800+ billion 2009 stimulus and TARP had nothing to do with higher deficits right?

  • Report this Comment On February 08, 2011, at 5:01 PM, TMFHousel wrote:

    aggie9711,

    Forever? No. Of course not. Just pointing out the current situation.

    "And the $800+ billion 2009 stimulus and TARP had nothing to do with higher deficits right?"

    Right, basically. TARP's final cost is now about $20b, which the pentagon loses in the couch cushions every Tuesday. As for the stimulus, about half the cost came in tax cuts that are included in this analysis above. The rest, about $300b spent over several years, isn't terribly significant when discussing a $1.5t annual deficit. .

    Morgan

  • Report this Comment On February 08, 2011, at 9:54 PM, NajdorfSicilian wrote:

    Bush's 2003 tax-cuts resulted in significantly MORE tax revenue collected, just like Clinton's, and Reagan's and Kennedy's.

    CBO predictions of Tax Revenue in August 2003, post the passing of tax cuts, note the 1-yr lag before things really get going, economy-wise:

    In $Billions 2004 2005 2006 2007*

    Predicted $1,825 $2,064 $2,276 $2,421

    Actual $1,880 $2,153 $2,407 $2,568 Total

    Unexpected Surplus $55 $89 $131 $147 $422bn

    The CBO was off by almost $500bn in just the past 3 years. And they projected 30% growth to begin with!

    http://www.cbo.gov/ftpdocs/44xx/doc4493/08-26-Report.pdf

    You've wrongly assumed then the tax cuts wouldn't generate incremental revenue.

    In the first 3 years of the Tax Cut, growth averaged 4%, and an ALLTIME US RECORD OF 12 quarters of 3%+ GDP growth in a row.

    The 2004 budget deficit was ~ $412bn, 2007's deficit was $160bn, or a $250bn improvement since tax cuts were passed in only 3 years!

    You're not going to be able to blame Obama and Geithner's mis-handling of the economy on tax cuts that were passed ~8 years ago.

    Not to mention the absurdity of relying on spending projections 10 years out that don't incorporate Sept 11th, which I guess you were too young to remember? It kind of changed the amount of defense spending this country needed.

  • Report this Comment On February 08, 2011, at 11:32 PM, GravityProof wrote:

    Morgan, could you revisit that surplus idea? I thought federal debt went up every year, even with Clinton's alleged surpluses. Must have been an accounting trick, I guess. But I don't see how there were surpluses if debt went up. I must be missing something.

    I think we can agree that the Treasury is a decent source of data. Here are their numbers.

    I see debt going up every year....so is your word 'surplus' a technical term I'm not getting? Thanks for your consideration of this important point of order. :)

    09/30/2010 13,561,623,030,891.79

    09/30/2009 11,909,829,003,511.75

    09/30/2008 10,024,724,896,912.49

    09/30/2007 9,007,653,372,262.48

    09/30/2006 8,506,973,899,215.23

    09/30/2005 7,932,709,661,723.50

    09/30/2004 7,379,052,696,330.32

    09/30/2003 6,783,231,062,743.62

    09/30/2002 6,228,235,965,597.16

    09/30/2001 5,807,463,412,200.06

    09/30/2000 5,674,178,209,886.86

    09/30/1999 5,656,270,901,615.43

    09/30/1998 5,526,193,008,897.62

    09/30/1997 5,413,146,011,397.34

    09/30/1996 5,224,810,939,135.73

    09/29/1995 4,973,982,900,709.39

    09/30/1994 4,692,749,910,013.32

    09/30/1993 4,411,488,883,139.38

    09/30/1992 4,064,620,655,521.66

    Here's the link for my info:

    http://www.treasurydirect.gov/govt/reports/pd/histdebt/histd...

    and

    http://www.treasurydirect.gov/govt/reports/pd/histdebt/histd...

  • Report this Comment On February 09, 2011, at 12:08 AM, TMFHousel wrote:

    GravityProof,

    The reason gross federal debt increased during the Clinton surplus years was because the Social Security trust fund was running larger surpluses than the federal budget surplus, and all surpluses from this trust fund are converted into new Treasury debt securities. Debt held by the public -- that is, net of trust fund holdings -- declined.

  • Report this Comment On February 09, 2011, at 3:47 PM, lquadland10 wrote:

    A I don't know question. Could it be a revenue shortfall because when the Tarp money went to the biggest banks car co. and Aig. they no longer had to pay the taxes? In other words did they get a tax write off as an unintended consequences? Oh and also GE. How many co. that got tarp now reap the bennies of not paying taxes. Did GE tax go to around 4%? Could someone do an article on that? Sure all of the players paid the money back but was the money actually tax money they did not have to pay. Kinda like a double dip of all co. and nothing for American main street tax payers.

  • Report this Comment On March 13, 2011, at 9:19 PM, coronalvrr wrote:

    I have read through every one of these comments and no one has addressed the sending of jobs overseas. With our companies taxed to the point they go overseas, and with treaties like NAFTA, we can no longer sell to other countries to make money. We need to produce goods and sell to other countries, but since our companies have been taxed out, we have no income as a country. Since NAFTA we have lost 4 companies to Mexico, from Springfield, MO alone. All we do is buy from other countries and send our money there. With our companies gone oveseas we have no income to tax.

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