Campion: Tax plan, schmax plan — it’s the spending, stupid

By Chris Campion

The GOP has recently been working on tax reform, and both the House and Senate have versions of tax reform that are currently being hashed out in conference between the two houses. Aside from the caterwauling on the left side of the House and predictions of our moon exploding and destroying all life on the planet because taxes might be cut, reform of one kind or another is inevitable. Why?

Chris Campion

Chris Campion

Because it’s not really the revenue side of the equation that’s the bulk of the problem. It’s the spending.

Why does spending go through the roof, annually? Because the government can. Because politicians are rarely penalized for spending money. They’re typically rewarded for it, by being re-elected.

They’re rewarded because they brought some of that federal pork back to their home states, and not coincidentally, their names are often found on the outsides of buildings that other people paid for. Some states are even proud of their Congressional representatives “bringing home the bacon” for them, as if there’s just a pile of magical money in D.C. and the job of senators and representatives is to back U-Hauls up to the pile and shovel as much in as they can (or pay their staffs to shovel), then call it a day.

The result of all this shoveling is $20 trillion in debt. That’s a $170,000 debt burden for every taxpayer – not every American, mind you, but just those who actually pay net income taxes.  As the debt has doubled in the last eight years, and the annual federal government’s spending has followed that same doubling, what’s happened to economic activity?  Based on the hysteria of the left over tax reform, our very lives depend on government spending, because apparently all economic activity will come to a halt if we spend one less dollar next year.

But the reality of the economy is much different from those idiotic rants. In fact, if you take a look at the data, the opposite is true. As federal spending goes up, the M2 velocity of money goes down.

What’s the velocity of money? Let’s let Fred tell you. He’s got all the answers here: “The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.”

If you take a look at federal debt alongside the same M2 indicator, the idea that federal spending is what keeps the economy going (according to permanently-ensconced chowderheads like Nancy Pelosi), goes “poof.”  It’s an idiotic assumption, that all federal spending is a net positive, and to even challenge that piece of it is something that’s off the left’s table.

So as spending and debt go up, economic activity goes down. This is apparently news to Democrats in Congress.

But that’s the crux of the argument. You can’t have tax cuts, because we’ll be able to spend less, even though spending goes up, annually, regardless of tax revenues. The gap between spending and tax revenues is a permanent one, and any change to the status quo is Armageddon.

As the tax bill currently stands, the corporate tax rate reduction to 20 percent would put the United States on a much more level playing field with other countries, even if the effective rate is always lower than the official rate (which is another argument to strip down the tax code and carve-outs, but that’s a longer conversation). If you’re looking to free up capital that companies would use to expand and invest, that’s a very quick way to do it.  At the very least, it would bring our rate nearer to the average of the G20 countries, which improves the ability to compete:

While the tax reform bills are a small step forward, the really tough work is on the other side of the table, and not the ideological one.  The toughest challenge will be spending, and reducing it, so the debt above doesn’t crowd out all other economic activity, and dampen growth.  Since debt is now over 100 percent of GDP (below), and the economy, while growing, is growing at historically low levels, especially coming out of recession, one is left wondering if Congress has the ability to stop this descent into madness.  They don’t seem to be willing to even slow it down.

It’s an abdication of responsibility. Considering the incumbency rate, we are going to continue to let them fail, and not hold them accountable. Then it becomes our fault, not theirs.

Chris Campion is a business analyst who worked for decades in leading organizations in Vermont. Reprinted with permission from the Ethan Allen Institute Blog.

Images courtesy of Flickr/401kcalculator.org and Chris Campion
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4 thoughts on “Campion: Tax plan, schmax plan — it’s the spending, stupid

  1. Right On !! I have been shouting this into exhaustion. We wouldn’t need out of control TAXES if we did not have out of control $PENDING.

    The first 5 paragraphs (edited) of this should be sent as OP-ED to every daily paper in Vermont.

    A further comment is that spending under Obama grew at twice the rate of growth in taxes, further hiding the true cost of “modern” guvmint.

    .

  2. I don’t know how you can cut taxes when you already owe $20 Trillion.

    I also don’t know how you can cut spending when the largest segment of our population,namely “Baby Boomers” are all coming to retirement age,needing income and health care.Do you really want seniors dying in the streets before touching the $700 billion in defense that’s more than the next 7 highest defense spending countries combined?

    Do you really think we should be in Afghanistan or Africa?

    ’cause I don’t

    • I disagree with a lot of what you are saying, but I will just address one item. Taxes are already beyond the point of diminishing returns (the Laffer curve). Even Obama’s economists admitted that point is somewhere around 30%. Hence cutting taxes expands the economy and results in higher revenues. Unless you believe that the real purpose of taxes is to punish money makers, there is no reason not to cut taxes. IT REALLY IS THE SPENDING. The government in total is more than 5 times the size it was just 30 years ago. No spending amount will EVER be enough for the political class, since spending is power.

  3. Chris,

    The RE chickens are coming home to roost.
    Federal and state investment tax credits will be decreasing in future years.
    The production tax credit may be cancelled.
    Renewable Energy Credit prices are down, so more of the excessive cost/kWh of wind and solar has to be added to GMP rates.

    The 7-y total subsidy cost (2010 – 2017) was at least (48,867 kW/2000 kW) x $3.5 million = $85.5 million, just for the Standard Offer solar projects.

    NOTE: The turnkey capital costs/kW of earlier SO solar projects were higher, and they had feed-in tariffs of 24 – 30 c/kWh, versus about 13.5 c/kWh at present. That means: 1) State and federal taxes not paid due to write offs, and 2) State and federal ITCs, and 3) Excess paid above midday wholesale prices, were much higher. That means, the above $85.5 million of subsidies is the rock bottom minimum.

    Ridgeline wind: 9 – 10 c/kWh, heavily subsidized, 15c/kWh, unsubsidized
    Large-scale solar: 13.5 c/kWh, heavily subsidized, 18 c/kWh, unsubsidized
    Rooftop solar: 19 c/kWh; heavily subsidized, 25 c/kWh, unsubsidized
    Hydro Quebec, per latest GMP contract: 5 – 7 c/kWh; no subsidies required

    GMP’s “microgrid/islanding” adventure is expensive, requiring much capital with little return.
    If all its cost items were fully identified and accounted for, the Stafford solar/battery combo project would be drowning in red ink.

    But that does not matter, because GMP likely would add any costs to the rate base. Google windtaskforce for details.

    It would be good to appoint an independent investigator, BEFORE the microgram mania gets out of hand.

    GMP is claiming increased regional transmission services, RTS, fees, imposed by ISO-NE, and increased build-outs of residential and Standard Offer solar systems have increased its costs, and therefore it needs a 5% rate increase to raise $80 million in revenue per year until the next rate increase.

    http://www.windtaskforce.org/profiles/blogs/subsidized-solar-systems-cause-chronic-budget-deficits-in-vermont

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