The 2013 budget being released Monday will propose public works spending while seeking tax increases on the wealthy and corporations to claim progress on the federal deficit in his upcoming budget. The spending plan projects a deficit for this year of $1.3 trillion, the fourth straight year of $1 trillion-plus deficits, and $901 billion next year.

Jacob Lew, the president’s chief of staff, said the new budget would put the country on track to achieve $4 trillion in deficit reductions over the next 10 years, achieved by raising taxes on the wealthy and trimming government spending. Lew said the president’s budget would cut spending by $2.50 for every $1 it raises in new taxes.

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Back in 2010, I crunched the numbers from the Congressional Budget Office and reported that the budget could be balanced in just 10 years if politicians exercised a modicum of fiscal discipline and limited annual spending increases to about 2 percent yearly.

When CBO issued new numbers early last year, I repeated the exercise and again found that the same modest level of budgetary restraint would eliminate red ink in about 10 years.

And when CBO issued their update last summer, I did the same thing and once again confirmed that deficits would disappear in a decade if politicians didn’t let the overall budget rise by faster than 2 percent each year.

Well, the new CBO 10-year forecast was released this morning. I’m going to give you three guesses about what I discovered when I looked at the numbers, and the first two don’t count.

Yes, you guessed it. As the chart illustrates (click to enlarge), balancing the budget doesn’t require any tax increases. Not does it require big spending cuts (though that would be a very good idea).

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Maryland Gov. Martin O’Malley last week proposed a budget that would raise taxes by $311 million.

From the Washington Post:

The Democrat outlined a $15.3 billion general fund budget plan that includes about $311 million in new revenue. About $182 million will come from capping income tax deductions and phasing out exemptions.

[...]

The governor’s plan would cap income tax deductions at 90 percent for incomes above $100,000 and 80 percent for incomes above $200,000.

It also would reduce exemptions from $2,400 to $1,200 per person for singles who make between $100,000 and $125,000 and couples who make between $150,000 and $175,000. Exemptions would be eliminated for singles who make more than $125,000 and couples with incomes above $175,000.

[...]

About $19 million will come from aligning the state’s cigarette tax with other tobacco products. Tax on cigars and smokeless tobacco is 15 percent of wholesale, which was comparable to the 36 cents per pack cigarette tax in 1999. The governor’s proposal would make it 66 percent of wholesale, which would make it comparable to the present $2 per pack cigarette tax.

The proposal also would require online sellers to begin collecting sales tax, which the governor projects would raise about $19 million, but there are questions about enforcement.

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I don’t blame the Democrats for wanting to seduce Republicans into a tax-increase trap. Indeed, I completely understand why some Democrats said their top political goal was getting the GOP to surrender the no-tax-hike position.

I’m mystified, though, why some Republicans are willing to walk into such a trap. If you were playing chess against someone, and that person kept pleading with you to make a certain move, wouldn’t you be a tad bit suspicious that they weren’t trying to help you win?

When I talk to the Republicans who are open to tax hikes, they sometimes admit that their party will suffer at the polls, but they say it’s the right thing to do because of red ink.

I suppose that’s a noble sentiment, though I find that most GOPers who are open to tax hikes also tend to be big spenders, so I question their sincerity (with Senator Coburn being an obvious exception).

But even if we assume that all of them are genuinely motivated by a desire to control deficits and debt, shouldn’t they be asked to provide some evidence that higher taxes are an effective way of fixing the fiscal policy mess?

I’m not trying to score debating points. This is a serious question.

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President Obama has officially requested an increase to the statutory debt limit.

The formal request gives both chambers 15 days to vote on whether to approve of the $1.2 trillion hike. The House plans to vote on this request on Jan. 18, a spokeswoman for House Majority Leader Eric Cantor (R-Va.) said.

In a letter to House and Senate leaders sent Thursday, the president informed the Congress that the federal government had come within $100 billion of the existing limit and that another increase is “required to meet existing commitments.” The boost will be the third and final increase to the ceiling under the debt-limit deal struck in August, and is intended to cover the government’s borrowing through the 2012 elections.

The United States reached the $15.194 trillion debt limit on Jan. 4, according to Treasury statements. Since that time, Treasury has employed the “extraordinary measure” of tapping into its Exchange Stabilization Fund to avoid exceeding the limit.

Read more at The Hill.

We were so full of “hope” for “change.” No, I am not talking about the election of Barack Obama, one of the most effective Progressive presidents in American history. I am speaking of the excitement felt within the Conservative, Libertarian and Center Right and Left political communities after the 2010 election delivered the House and a non-filibuster proof Senate to the American people. Finally, most of us thought, some balance in the federal government. Maybe, just maybe, the Progressives and Liberal Democrats in federal government would be forced to the table of true and honest compromise; compromise fitting of a truly free people. But, as we look back over the year, what did we really get for all that so-called “compromise?”

With Republicans in control of the US House of Representatives, the body where – by the mandate of the US Constitution – all legislation relating to revenue is to begin, many on the Right and in the Center believed that the reckless and spendthrift fiscal actions of the 111th Congress would be constrained if not reversed. With a sizable number of new members identifying with the oft demonized TEA Party, there was high hope for a glimmer of fiscal sanity to emerge from the halls of Congress. And while the TEA Party members of Congress are to be congratulated for doing exactly what their constituents sent them to Washington to do, in the end, they were thwarted by establishment, inside the beltway Republicans and the despotic obstructionism foisted upon them by Senate Majority leader Harry Reid, D-NV, (to be fair, Reid was aided by a less than reform-minded Republican leadership in the senate, led by Mitch McConnell, R-KY).

The Budget
In absolute defiance of the fact that it is law that Congress must pass an annual budget for the federal government, Senate Democrats – once again, led by the indignant political disgrace that is Harry Reid – refused to abide by said law in passing, reconciling and advancing to the President an annual budget. It has been over 900 days – almost three years – since the last budget has been presented to the President for his signature or veto.

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From AFP:

The US government will hit its debt limit in the first week of January, the Treasury Department said on Tuesday, as it pointed to an imminent request for $1.2 trillion increase.

The government is expected to come within $100 billion of the current $15.2 trillion ceiling by the end of the year, Treasury Department officials said.

That effectively puts lawmakers on notice that they will have until mid-January to oppose a fresh increase.

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This is the second installment of a multi-part series on suggested economic policies for the next government to consider.  These are meant to be long-term solutions.  Our current economic downturn has some short-term causes but a large part of the explanation lies in the worldview that governments of both parties have adopted, in small ways since maybe Abraham Lincoln but in significant ways since Franklin Roosevelt and in exaggerated extremes since Lyndon Johnson.  The federal deficit, the mess we call a tax code and so forth were created over a long time and while the solutions can be implemented with greater haste it will take some time for the transition and full effects to be felt and the returns to be realized.  The political class has seldom shown signs of long term thinking and the greater population seems less so, we can only pray and hope the message gets through.  My second installment is on federal spending.

The brilliant and humorous French politician and economics writer, Frederic Bastiat may have summed up how government works as well as anyone:

The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else.

In line with Bastiat, the three largest expenditure categories in the federal budget are programs that transfer wealth from some people to other people. Federal expenditures (since there is no enacted budget) totals approximately $3.6 trillion.  Over half of that goes to the big three; Social Security, Medicaid/Medicare and income stability (welfare) programs.  Eliminate these three and the budget is in surplus, which is a fascinating statement since these three programs have parallels in the private sector that are profitable.

However, it is not reasonable to make extreme changes to programs people have on which people have counted and planned.  But, that reasoning cannot prevent the sort of long term changes that are needed.  There is no denying the budget math:

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In 1776, three powerful words, “Taxation without representation!,” incited a small faction of brave American colonists to take up arms against the world’s greatest superpower, the British Empire. In this old regime, our early forefathers were politically voiceless and therefore unable to influence how the State spent its money. Yet they were still taxed to pay for government expenses that they never approved or voted for. In order to ensure that none of their descendants would ever undergo that same injustice, these colonists established a new, democratic society where the government would serve the interest of the nation’s citizens, both contemporary and future, not the other way around.

Nevertheless, 235 years and 15 trillion dollars later, the United States government has abandoned that moral foundation, instead preferring to pile all its expenses on top of the only demographic in this nation largely without a vote — youth and future citizens. Through record annual deficits and unsustainable debt, this President and members of his ideological faction have passed on the ruinous results of their fiscal irresponsibility to future generations (which never voted for or approved such financial imprudence). Just as the British Empire did not consider the needs or grievances of its colonists when drafting legislation, this current administration no longer takes into account the adverse affects its actions will have on American citizens in years to come. Whether debating energy policy, immigration policy, tax rates, or federal spending, this government does not consider our future prosperity to be an important priority, yet they still expect us to pay for their fiscal malfeasance after we reach adulthood.

When the British crown began abusing their repressed subjects across the Atlantic, our forefathers rose up and produced the Declaration of Independence in order to voice their demands and needs. Today we, the youth of America, are the repressed subjects that are witnessing our future prosperity being mortgaged away due to our current government’s inability to live within its means. Hopefully by outlining bold, new conservative reforms for the nation’s future, this organization can be our Declaration of Independence. We want to restore the voice and hope of America’s youth and lead us on to victory in our revolution against “deficits without representation!”

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From The Hill:

The Senate on Wednesday defeated each party’s version of a constitutional amendment that would have required a balanced federal budget.

The rival proposals would have prohibited Congress from spending more each year than it receives in revenue.

But each one fell well short of the two-thirds majority needed to send them to the states for ratification.

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Our national debt has soared past $15 trillion- forcing a historic debate about the proper size and scope of our government. This debate is an enduring one in our great Republic. It will define who we are as a nation – about our future for our children and grandchildren.

The American people are demanding dramatic action. But standing in the way is a President who refuses to back away from his failed agenda of higher taxes and higher spending. This is a President who has presided over the single largest reduction in employment in modern times. This is a President who has tried to tax almost anything that moves. This is a President who has increased the national debt by 35 percent on his watch.

There is only one response to this President and to our spending-fueled debt crisis – that is a constitutional balanced budget amendment that would put a straightjacket on our nation’s addiction to spending money we simply do not have.

This week, the Senate will once again consider a balanced budget amendment, backed by all 47 Republicans in the Senate, to make sure we never face this level of debt again. It requires Washington to balance its budget every year like American families do, ensures that any tax increase only occurs with supermajority approval in Congress, limits Congress’ ability to raise the debt ceiling, and caps spending at 18 percent of our nation’s economy.

It will be a divisive debate, because the President and his liberal allies in Congress cannot allow a balanced budget amendment to succeed. They want to grow government, encroach on liberty, and expand our debt to levels we simply cannot sustain.

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Europe is in the midst of a fiscal crisis caused by too much government spending, yet many of the continent’s politicians want the European Central Bank to purchase the dodgy debt of reckless welfare states such as Spain, Italy, Greece, and Portugal in order to prop up these big government policies.

So it’s especially noteworthy that economists at the European Central Bank have just produced a study showing that government spending is unambiguously harmful to economic performance. Here is a brief description of the key findings.

…we analyse a wide set of 108 countries composed of both developed and emerging and developing countries, using a long time span running from 1970-2008, and employing different proxies for government size… Our results show a significant negative effect of the size of government on growth. …Interestingly, government consumption is consistently detrimental to output growth irrespective of the country sample considered (OECD, emerging and developing countries).

There are two very interesting takeaways from this new research. First, the evidence shows that the problem is government spending, and that problem exists regardless of whether the budget is financed by taxes or borrowing. Unfortunately, too many supposedly conservative policy makers fail to grasp this key distinction and mistakenly focus on the symptom (deficits) rather than the underlying disease (big government).

The second key takeaway is that Europe’s corrupt political elite is engaging in a classic case of Mitchell’s Law, which is when one bad government policy is used to justify another bad government policy. In this case, they undermined prosperity by recklessly increasing the burden of government spending, and they’re now using the resulting fiscal crisis as an excuse to promote inflationary monetary policy by the European Central Bank.

The ECB study, by contrast, shows that the only good answer is to reduce the burden of the public sector. Moreover, the research also has a discussion of the growth-maximizing size of government.

… economic progress is limited when government is zero percent of the economy (absence of rule of law, property rights, etc.), but also when it is closer to 100 percent (the law of diminishing returns operates in addition to, e.g., increased taxation required to finance the government’s growing burden – which has adverse effects on human economic behaviour, namely on consumption decisions).

This may sound familiar, because it’s a description of the Rahn Curve, which is sort of the spending version of the Laffer Curve. This video explains.

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Former Illinois Gov. Rod Blagojevich was sentenced this week to 14 years in prison, but the real sentence is the one taxpayers will serve many years after. He mastered the art of pairing populist rhetoric with expensive new programs directed toward his core constituencies.

To pursue his highly visible programs and agendas, Blagojevich needed money. He found it by diverting billions from the state’s pension system. By taking “holidays” from required pension system contributions and by nearly doubling Illinois’s debt, he burdened future generations to support favored groups in the present.

Perhaps worst of all, as CEO of Illinois, Blagojevich institutionalized a culture of deficit spending. He accomplished this so effectively that Blagojevich’s successor, Gov. Pat Quinn, and today’s lawmakers feel comfortable perpetuating the ruinous habits of spending and borrowing more than the state can afford. Fiscal ineptitude is the new norm.

The Illinois Policy Institute has a new report out that details Blagojevich’s lasting effect on Illinois’ fiscal condition. Read it at www.illinoispolicy.org/blago. Here’s the “top ten” list:

No. 1: Disregarded obligations to state pensioners

Policy: Blagojevich diverted billions of dollars from the pension funds of future government retirees to pay for his own spending priorities.
Problem: Blagojevich ballooned existing spending programs, ignoring his responsibility to ensure the health of the state’s pension systems. Retirees and taxpayers are on the hook for his political expediency.
Program cost: Excess of $3 billion for future taxpayers

No. 2: A culture of deficits

Policy: Grow spending to appease Blagojevich’s core constituencies.
Problem: While Blagojevich was creating and expanding unaffordable programs, the state’s financial position deteriorated year after year.
Program cost: Worst rating of net assets in the nation.

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Our nation will spend more than $40 trillion over the next ten years with at least $15 trillion in deficit spending, while Congress is arguing about how to reduce that deficit by all of 8% – really?  With this nonsense debate going on, Mr. Obama has abdicated his presidency and is now campaigning for reelection on a full-time basis.  The rest of the world, meanwhile, is simply falling apart.

The Muslim Brotherhood is coming to power in Egypt, Iran is moving deliberately toward nuclear armament and Europe is proving that socialist democracies will fall at their own hand.  In the midst of this turmoil, the media has our people focusing on why the top 1% paying 50% of all federal taxes falls short of “their fair share” and why entitlements and government needs to keep growing.  We are missing the point – eliminate the noise and the real debate is simply whether our children live free or for the benefit of the state?

Let’s forget all the facts and figures about our growing debt and the increasing involvement of government in our lives and focus on the fundamental definition of liberty: liberty is the freedom from arbitrary control; it is freedom to exercise the unalienable rights endowed upon us by our Creator; it is freedom from oppressive power exerted by government; and it is freedom from all forms of tyranny.  While people demand that their neighbors who may be better off economically should be ordered – by law – to share their success with them, what they are really promoting is the ascendancy of the state over the people.  What they are missing is that they are demanding the suppression of liberty for their neighbors, themselves and their own children.

The systematic destruction of our economic strength through increased regulation, increased taxation on the job creators, a 50% increase in the national debt in just the last three years and an equal increase in the dependency on foreign governments to fund our debt has turned our nation upside down.  We have gone from the world’s last hope to a sideshow and find our great country powerless to help prevent ally nations from economic decline and powerless to stop the rise of tyrannical regimes.

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From The Hill:

Supercommittee member Sen. Pat Toomey (R-Pa.) accused Democrats on Monday of torpedoing the deficit supercommittee because a success would have “stepped on” President Obama’s campaign narrative.

Speaking Monday on CNBC’s “Squawk Box,” Toomey said there’s “something to” suggestions that Democrats had an incentive to see the supercommittee fail.

“That goes to the asymmetry of the incentives and I think there was something to that,” Toomey said. “The president’s fundamental campaign message was to run against Congress — never mind the fact that half of Congress is controlled by the Democrats, but that’s his purpose, and certainly an agreement in this committee would have stepped on that narrative for the president.”

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The Congressional “Super Committee” tasked with cutting the debt has failed. Good. Embrace the joy of failure. Sometimes failure works out for the best. Because in this case “failure” leads to the Holy Grail: $1.2 Trillion in forced spending cuts. That’s the best thing that could have ever come out of this unconstitutional “Super Committee.”

Congress is now forced to accept automatic across the board cuts to spending- including defense spending. This is what the GOP should have been aiming for from day one. Play out the clock and force $1.2 Trillion in spending cuts.

But our GOP friends never miss an opportunity to miss an opportunity. They are scared, spineless weaklings. They are actually panicking because there wasn’t a compromise that raised taxes. Could they possibly be this dumb?

The GOP had the perfect campaign message tailor-made for a 2012 landslide. “The GOP stands for smaller government, lower taxes, less spending. Obama is for bigger government, higher taxes, more spending.” The same simple clear contrast that led to a historic Tea Party landslide in 2010. All they had to do was play out the clock and let the spending cuts take effect.

Instead the GOP “super committee” members were so scared of actually forcing real, honest-to-goodness, spending cuts that they desperately tried all last week to compromise with Democrats. They practically begged Democrats to increase taxes on the wealthy (by taking away deductions). The GOP was anxious to sell out every small business owner, homeowner, and GOP contributor in America. Listen carefully- it was the GOP who offered a deal based on Obama’s philosophy to punish successful Americans for their hard work, sacrifice, and financial risk-taking.

Republicans offered a deal to Democrats that included only slightly larger spending cuts versus tax increases. And guess where all the tax increases were aimed- at wealthy taxpayers. Even as GOP Presidential contenders lied to our faces during televised debates, all agreeing they would not even accept a deal of 10-to-1 spending cuts versus tax increases, the GOP Super Committee members attempted to sell out the entire conservative base for close to 1-to-1.

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Since I’ve written before about Canada’s remarkable period of fiscal restraint during the 1990s, I am very pleased to see that the establishment press is finally giving some attention to what our northern neighbors did to reduce the burden of government spending.

Here are some key passages from a Reuters story.

“Everyone wants to know how we did it,” said political economist Brian Lee Crowley, head of the Ottawa-based think tank Macdonald-Laurier Institute, who has examined the lessons of the 1990s. But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth. It would eventually oversee the biggest reduction in Canadian government spending since demobilization after World War Two. …The turnaround began with Chretien’s arrival as prime minister in November 1993, when his Liberal Party – in some ways Canada’s equivalent of the Democrats in the U.S. – swept to victory with a strong majority. The new government took one look at the dreadful state of the books and decided to act. “I said to myself, I will do it. I might be prime minister for only one term, but I will do it,” said Chretien. …The Liberals thought their first, rushed budget – delivered in February 1994, three months after taking office, was tough. It reformed unemployment insurance entitlements, and cut defense and foreign aid… The upstart Reform Party, then the main national opposition party, had campaigned on “zero-in-three” – balance the budget in three years. “We were always trying to go faster,” said Reform’s leader at the time, Preston Manning. …The Liberals were stung by the criticism and, at first reluctantly but then with gusto, they got out the chain saws. …Cutting government spending programs went against the Liberal grain. Contrary to the Reform Party, the Liberals saw a more important role for government. Paul Martin now has a lasting reputation as the finance minister who slayed Canada’s deficit, but the conversion from spender to cutter was painful. His father, also called Paul, had helped create Medicare, Canada’s publicly funded health care system, and suddenly here was Paul Junior contemplating massive cuts.

This is a remarkable story. My only real quibble is that the fiscal restraint actually started the year before the Liberal Party took power, as the chart (click to enlarge) illustrates.

But the key thing to understand is that Canada enjoyed a five-year period when government spending increased by an average of only 1 percent each year.

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Despite all the talk of fixing it, California’s budget is still a mess. One of those “fixes” was implemented last summer when the state Legislature increased revenue projections by $4 billion to avoid balancing the budget. Of course, the problem with using such “phantom money” is that it often has a habit of disappearing when you need it most. And it has disappeared just when money for schools is needed. Now deep cuts are on the table. The people lose again.

Naturally the nonpartisan Legislative Analyst’s Office recently reported that the state will receive virtually none of the $4 billion in projected revenue, forcing the state to make some tough decisions in the coming weeks. On the table are major cuts to the education budget, including shortening the school year by a week, not to mention cuts to in-home healthcare programs, and programs for people with developmental disabilities.

Obviously Californian’s budget needs all the help it can get but it looks like it’s business as usual in Sacramento. For instance, an upcoming ballot measure sponsored by a career politician would baffle anyone that truly understands the mess California is in. The so-called California Cancer Research Act coming before voters in June, asks California voters to raise taxes by nearly $1 billion for a whole new perpetual bureaucracy. That is unacceptable to voters. Maddeningly this new program doesn’t even guarantee that the money will be spent in the state! Apparently former state Sen. Pro Tem Don Perata, the career politician pushing the measure, thinks Californians who already paying some of the highest taxes in the nation should reach deeper into their pockets just to potentially send that money across state lines to benefit others. And all the while the budget for the education for those same taxpayer’s kids is about to be slashed.

So, what is the “solution” proposed by Democrats in Sacramento? Raise taxes, of course.

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It would be a great tragedy if a super tax hike came out of a supercommittee compromise deal. It would do great harm to the economy — just as much harm as President Obama’s various tax-hike threats. And on the Republican side, a super tax hike would irreparably split the GOP.

Okay. Here’s the good news. In a CNBC interview this week, I asked supercommittee co-chair Jeb Hensarling about an idea of the Democrats to raise taxes by $600 billion to $800 billion. About $300 billion of that might be up-front, with $500 billion later from some tax-reform overhaul. This would be an unmitigated economic disaster.

But Hensarling was blunt: “Not going to happen, Larry.” He said no such deal has been presented to him. And if it were, he and other Republicans on the supercommittee would not support it.

Hensarling then added, “We put $250 billion of what is known as static revenue on the table, but only if we can bring down rates. We believe we can bring the top individual rate down to 28, 29, maybe at most 30 percent, and bring the corporate rate down to the median of the EU, 25 percent.” For emphasis, he said, “We have gone as far as we feel we can go.”

The Texan was referring to the Sen. Pat Toomey plan, which would lower the personal tax rate to 28 percent and head down from there, while at the same time putting limits on personal deductions (such as mortgage interest) for upper-income taxpayers. In other words, flatten the rates and broaden the base.

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I’ve written about the fiscal implosion in Europe and warned that America faces the same fate if we don’t reform poorly designed entitlement programs such as Medicare and Medicaid.

But this new video from the Center for Freedom and Prosperity, narrated by an Italian student and former Cato Institute intern, may be the best explanation of what went wrong in Europe and what should happen in the United States to avoid a similar meltdown.

I particularly like the five lessons she identifies.

1. Higher taxes lead to higher spending, not lower deficits. Miss Morandotti looks at the evidence from Europe and shows that politicians almost always claim that higher taxes will be used to reduce red ink, but the inevitable result is bigger government. This is a lesson that gullible Republicans need to learn – especially since some of them want to acquiesce to a tax hike as part of the “Supercommitee” negotiations.

2. A value-added tax would be a disaster. This was music to my ears since I have repeatedly warned that the statists won’t be able to impose a European-style welfare state in the United States without first imposing this European-style money machine for big government.

3. A welfare state cripples the human spirit. This was the point eloquently made by Hadley Heath of the Independent Women’s Forum in a recent video.

4. Nations reach a point of no return when the number of people mooching off government exceeds the number of people producing. Indeed, Miss Morandotti drew these two cartoons showing how the welfare state inevitably leads to fiscal collapse.

5. Bailouts don’t work. This also was a powerful lesson. Imagine how much better things would be in Europe if Greece never received an initial bailout. Much less money would have been flushed down the toilet and this tough-love approach would have sent a very positive message to nations such as Portugal, Italy, and Spain about the danger of continued excessive spending.

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