WASHINGTON - Like a person packing on pounds, the United States keeps adding to its flabby budget deficits, endangering the nation?s economic health and the pocketbooks of ordinary Americans.

 

Here?s the worry: Persistent deficits will lead to higher borrowing costs for consumers and companies, slowing economic activity.

 

As Uncle Sam seeks to borrow ever more to finance those deficits, rates on Treasury securities would rise to entice investors. That would push up other interest rates, such as home mortgages, many auto loans, some home equity lines of credit and some credit cards.

 

?That?s the pocketbook risk to the American consumer,? said Greg McBride, a senior financial analyst at Bankrate.com, an online financial service.

 

For businesses, rates on corporate bonds would climb. It would become more expensive to borrow to pay for new plants and equipment and other capital investments.

 

With a succession of budget deficits, ?you do expect to see higher interest rates. Where we fight about this is over how big the effects are. But they are definitely there,? said James Feyrer, assistant economics professor at Dartmouth College.

 

The government?s budget deficit last year was $319 billion. While smaller than the record $413 billion in 2004, it still was the third-highest ever.

 

A White House budget official now predicts that the deficit in the current budget year will top $400 billion, pushed up by the costs of the Gulf Coast hurricanes. The red ink is expected to keep flowing for years.

 

The nonpartisan Congressional Budget Office forecasts deficits every year through 2015; that is as far out as the office projects. The White House forecast, which runs to 2010, also expects annual shortfalls.

 

?The budget deficit is like gaining weight. You are not really aware of it until at some point, all of a sudden you can?t do what you want to do because you are heavier. Interest rates go up and slow things down,? said Brian Bethune, economist at Global Insight. ?Then you go to your check up and the doctor tells you you got to lose 25 pounds.?

 

America?s economic doctor is Federal Reserve Chairman Alan Greenspan.

 

Greenspan, who retires Jan. 31 after 18-plus years at the central bank, repeatedly has urged Congress and the Bush administration to get the country?s financial house in order.

 

Bloated budget deficits, if not curbed, could endanger the economy over the long term, Greenspan warned. Increased government borrowing would drive up interest rates and weigh down economic activity.

 

?In the end, the consequences for the U.S. economy of doing nothing could be severe,? he said recently.

 

The looming retirement of 78 million baby boomers will put massive strains on the country?s finances, Greenspan said.

 

In 2008, the oldest of the boomers will reach 62, the earliest age at which they can tap Social Security retirement benefits. Three years after that, in 2011, they will reach 65 and become eligible for Medicare.

 

Ben Bernanke, chosen by President Bush to succeed Greenspan, also believes the situation is troubling and that the deficits need to be controlled.

 

?Budget deficits are a problem,? he said. ?I think it?s important to continue to reduce budget deficits.?

 

The administration has a goal of cutting the deficit in half by 2009 and plans to do that by restraining spending. The president, meanwhile, is continuing to press Congress to make his tax cuts permanent.

 

Democrats mostly blame Bush?s tax cuts for the government?s red ink. The last time the government recorded a surplus was in 2001.

 

In a worst-case scenario, foreigners who finance the U.S. budget and trade deficits would sour on U.S. investments and unload their holdings. The prices of U.S. stocks and bonds could plunge. Interest rates, including those for mortgages, could soar. A financial crisis could confront the country.

 

Economists are troubled by the prospects of budget deficits as far as the eye can see and want to see them trimmed. But the size of the current budget deficits, while unwelcome, do not signal that a crisis is imminent, they said.

 

An important barometer is the size of the federal debt ? now about $8 trillion ? relative to the overall economy, as measured by gross domestic product. Under that measure, this debt accounts for around 63.2 percent of GDP, Bethune said.

 

?Generally speaking, when it is over 75 percent of GDP, then the yellow flag goes out. I would say 95 percent of GDP and over is definitely a red flag,? Bethune said.

 

The government produces a budget deficit when its total spending exceeds its total revenues. Budget deficits cause the government to borrow more money by selling Treasury securities to domestic and foreign investors. That additional borrowing increases the government?s debt.

 

Despite the recent string of large budget deficits, long-term interest rates in the U.S. have behaved well. In fact, relatively low long-term rates around the world have puzzled economists and spawned a number of theories. Some experts believe too little investment worldwide may be behind this; others believe too much savings is the reason.

 

From an economic point of view, there is more concern about higher borrowing costs over time crimping business investment and ultimately the production of goods and services, economists said.

 

?Low investment is bad. That?s going to mean lower productivity and lower production in the future, which has a cost on society,? said Erik Hurst, associate professor of economics at University of Chicago?s Graduate School of Business.

 

People who save would benefit, assuming inflation stayed under control. If the deficits fanned inflation, then the Fed would need to boost interest rates, pushing a whole range of borrowing costs even higher.

 

Anyone notice the irony of the President wanting to reduce the federal deficit, but also wanting to make his unnecessary tax cuts permanent? :mischief2

I would be in favor of raising taxes if it was necessary.

make his unnecessary tax cuts permanent?

I've got a nickel that says you don't even know what that means.

I'll raise it to a dime.

you mean this stupid war is leading to the biggest deficits we have ever faced.

 

WOW.

 

oh well, forget about it now, let our kids worry about it. i just love that pass the buck philosophy we always see. its so awesome. Thanks!

 

Look there is no logic behind making tax cuts permanent when you are facing the largest deficits in history, regardless of what they do, its stupid to reduce taxes on a permanent basis. You need all the cash flow you can have.

 

Weren't we just at a budget surplus just a few years back? Wow that must be just a distant memory now.

 

Thanks for this utterly stupid 'war on terrorism' in Iraq Bush. Wake me when you catch the first terrorist not named Saddam Hussein who was zero real threat to our national security.

 

Lord knows for all this cost they need to catch a few to at least justify this war.

 

BTW where is Bin Laden's dead body again?

I love how the primary response to the enlarging budget is to insult futuregm. And then he gets accused of undermining healthy debate on the bullpen.

There's a difference between throwing out names as is often done here, and alky questioning FutureGM's knowledge of the information he is presenting. Big difference, and I'd say over the course of topics here it's a question that isn't without merit.

You can disagree with FutureGM but I think it's ridiculous to try to undermine his arguments by saying, "I bet you don't even know what that means." That's a cop-out if I've ever seen one.

You can disagree with FutureGM but I think it's ridiculous to try to undermine his arguments by saying, "I bet you don't even know what that means." That's a cop-out if I've ever seen one.

 

I'm not exactly sure what argument I'd be trying to undermine here.

 

Increasing spending while simultaneously cutting taxes is dumb, particularly in the face of a growing budget deficit and a war that's hemorrhaging dollars out of all of our pockets.

 

I'd say most of us can agree on that....I didn't realize there was a debate going on here.

As a matter of fact, I'm a business major myself. Yes, I do understand exactly what I posted. I do my best to try and have some civilized discussion on these boards, and I get blasted for it.

As a matter of fact, I'm a business major myself. Yes, I do understand exactly what I posted. I do my best to try and have some civilized discussion on these boards, and I get blasted for it.

 

So what exactly does making a tax cut 'permanent' mean?

 

Educate us.

As a matter of fact, I'm a business major myself. Yes, I do understand exactly what I posted. I do my best to try and have some civilized discussion on these boards, and I get blasted for it.

 

So what exactly does making a tax cut 'permanent' mean?

 

Educate us.

Bush wants Congress to create a law forcing the government to continue to issue tax cuts to citizens in the future, instead of having to propose legislation every time politicians want to offer tax cuts. It's a really bad idea to make these permanent, especially with Katrina and Iraq ballooning the current deficit to record levels. I just find it extremely ironic that on one hand, Bush says he wants to reduce the federal deficit, but on the other hand, he wants to make these tax cuts permanent.

As a matter of fact, I'm a business major myself. Yes, I do understand exactly what I posted. I do my best to try and have some civilized discussion on these boards, and I get blasted for it.

 

So what exactly does making a tax cut 'permanent' mean?

 

Educate us.

Bush wants Congress to create a law forcing the government to continue to issue tax cuts to citizens in the future, instead of having to propose legislation every time politicians want to offer tax cuts. It's a really bad idea to make these permanent, especially with Katrina and Iraq ballooning the current deficit to record levels. I just find it extremely ironic that on one hand, Bush says he wants to reduce the federal deficit, but on the other hand, he wants to make these tax cuts permanent.

 

By permanent I think Bush refers to one of two things. Either 1) the tax cuts do not have an expiration date (usually they're set to expire at some future date, say Fiscal Year 2010, after which tax levels will go back up to where they used to be) or 2) he makes the expiration date further into the future (2020 instead of 2010). It doesn't mean Congress and the President can't change their minds, it just means that there's a longer term commitment to the tax cuts. A truly "permanent" tax cut (that could never be repealed) would have to be written into the Constitution.

Ill admit my knowledge of economics is not too strong, but tax cuts during high debt are "supposed" to reduce the debt, theoretically. The idea is that the American people either finance the yearly deficits for the government by buying bonds or that American companies finance it by providing goods and services and then being owed. Since the government owes the American people, it can either directly pay them back with their own taxes or it can reduce their taxes, have them reinvest the tax cut, improve the production of the economy so that the same tax rate provides more money, and thus reduce the deficit while boosting the economy.

 

Now like I said, my knowledge of economics is not that great so someone can probably help me. But doesnt a permenant tax cut only lead to so much of an economic surge such that the returns on the tax cuts through tax revenue could only pay so much of teh debt? I mean it seems like when the debt is this high, you have to add in a combination of a tax increase and spending reduction in addition to economic growth. Those are two things that Bush seems absolutley unwilling to do. Of course since I dont know much economics, I could be absolutley wrong.

 

But that situation is an ideal one for the "tax cuts to reduce debt" argument. The problem with the current deficit is that a good degree of it is owed to foreign investors who finances the debt. I think someone told me China owns like 25% of the debt. In that situation, the American people just take their taxes and pay it to the Chinese, not themselves.

 

In addition, this article points out that the deficits lead to higher interest rates(obviously because the government taking loans means big demand means high rates). The higher interest rates screw companies because they have to finances their expansions. More interest rates means less economic growth. And that undermines the whole argument. The article points out that this hasnt happend yet but moreso because of lick. Permenant tax cuts while we are at war would just need more financing hence increasing the chances that interest rates go up.

 

Where futuregm hits it on the head is that he wants to get tax cuts while claiming to want to reduce the debt. It's funny because they state that the they want to reduce the deficit by half by 2009. Thats a good timing for the president because he will just be leaving office. And he says he wants to accomplish this by reducing spending. I suspect this is what he means:

 

Ill cut domestic spending only. Then Ill cut taxes. Then Ill leave the bill for the Iraq war and the tax cuts to the subsquent president. That way I can appease my base with upper class tax cuts while at the same time having my war while at the same time claim I helped reduce the deficit(without raising taxes of course). Without much leeway for domestic spending and with the tax cuts already having their positive affect, wouldnt the next president have to cut military spending or increase taxes. Works out well.

The problem with the theory that these tax cuts will stimulate the economy, is that it assumes that Americans will put the money right back into the economy through spending, rather than saving. If we go into a period of economic decline, people will be more likely to save that money, according to basic economic theory.

 

Bush has several good reasons to make those tax cuts permanent. First, at least saying that he wants to do so will maintain support for his administration from big business, which he and his advisors all have close ties to. Second, like F_M said, he can also just leave the bill for the Iraq war and the tax cut program to whoever takes over for him in 2008/2009. That way he can't take any blame for what happens afterward, the new President will.

The problem with the theory that these tax cuts will stimulate the economy, is that it assumes that Americans will put the money right back into the economy through spending, rather than saving. If we go into a period of economic decline, people will be more likely to save that money, according to basic economic theory.

 

Thats a good point. The effect of one of Reagan's tax cuts was not too great if I recall.

I would be in favor of raising taxes if it was necessary.

 

 

Make an excise tax on tobacco mandatory. Increase public education fees. Something.

 

 

There are PLENTY of Americans that can spare another 1% of sales tax, perhaps. That equates to billions, but it comes down to the individual avoiding a miniscule burden, rather than contributing to the greater good of a nation.

The problem with the theory that these tax cuts will stimulate the economy, is that it assumes that Americans will put the money right back into the economy through spending, rather than saving. If we go into a period of economic decline, people will be more likely to save that money, according to basic economic theory.

 

Thats a good point. The effect of one of Reagan's tax cuts was not too great if I recall.

Although Reagan's dramatic increase in spending in the 1980's may have helped us beat the USSR, it may have caused the economic downturn in 1991/1992 that hurt George HW Bush's chances of reelection.

The problem with the theory that these tax cuts will stimulate the economy, is that it assumes that Americans will put the money right back into the economy through spending, rather than saving. If we go into a period of economic decline, people will be more likely to save that money, according to basic economic theory.

 

Thats a good point. The effect of one of Reagan's tax cuts was not too great if I recall.

Although Reagan's dramatic increase in spending in the 1980's may have helped us beat the USSR, it may have caused the economic downturn in 1991/1992 that hurt George HW Bush's chances of reelection.

 

Actually, rather than the consumption of goods and services, a tax cut is indeed intended to stimulate the economy through savings and investments. The savings and investments are invested in capital, which then expands the economy.

 

So far as meeting the needs of stimulating the economy, the aforementioned tax cuts were like taking a cup of water out of the ocean. Our current tax code is stifling. In 2000, Merrill Lynch's World Wealth Report found that even then were there was $11 trillion dollars in US wealth sitting in foreign bank eurodollar (not to be confused with euros) accounts, not doing squat to help our economy. That number is probably quite a bit higher now, but I haven't yet seen the 2005 update. Those funds were legally moved offshore to avoid the our assinine tax code. What we need is a tax overhaul in order to get those funds (and the same overhaul would likely bring massive foreign investment) into our economy. Further, that $11 trillion would turn over several times each year (you spend a dollar today at Wal-Mart, they spend it in 2 weeks purchasing something, that purchaser spends it in another 2 weeks, etc.) resulting in sevaral time that amount to our economy. Even at a minimal tax rate, the economic growth would result in a huge surplus.

 

Unfortunately, such a tax overhaul would entail eliminating the ability for Congress to offer tax breaks to the highest bidders, and eliminate its ability to manipulate the tax code (and falsely alledge opponents of altering the code unfavorably) as it does now in order to buy votes and maintain power.

The problem with the theory that these tax cuts will stimulate the economy, is that it assumes that Americans will put the money right back into the economy through spending, rather than saving. If we go into a period of economic decline, people will be more likely to save that money, according to basic economic theory.

 

Thats a good point. The effect of one of Reagan's tax cuts was not too great if I recall.

Although Reagan's dramatic increase in spending in the 1980's may have helped us beat the USSR, it may have caused the economic downturn in 1991/1992 that hurt George HW Bush's chances of reelection.

 

Actually, rather than the consumption of goods and services, a tax cut is indeed intended to stimulate the economy through savings and investments. The savings and investments are invested in capital, which then expands the economy.

 

 

That's supply-side economics. One can easily argue that our economy is demand driven. This means that you can give investors all the tax cuts that you want but that won't do a thing if there is no demand for goods and services. Even if you give millionaires tax cuts why would they invest that money in capital if there isn't enough demand for the goods and services they are investing in? That's like asking them to throw away their money. On the flip side, one can argue that the tax cuts make investment costs cheaper and in turn that increases demand by reducing the costs of goods and services.

 

A more balanced and realistic approach is to give tax cuts to both the middle and investor classes - this will simultaneously reduce the costs of investment and increase demand.

 

If I had to choose between supply-side economics or demand-driven economics I would choose the demand-driven economics. But realistically our economy depends on both.

The problem with the theory that these tax cuts will stimulate the economy, is that it assumes that Americans will put the money right back into the economy through spending, rather than saving. If we go into a period of economic decline, people will be more likely to save that money, according to basic economic theory.

 

Thats a good point. The effect of one of Reagan's tax cuts was not too great if I recall.

Although Reagan's dramatic increase in spending in the 1980's may have helped us beat the USSR, it may have caused the economic downturn in 1991/1992 that hurt George HW Bush's chances of reelection.

 

Actually, rather than the consumption of goods and services, a tax cut is indeed intended to stimulate the economy through savings and investments. The savings and investments are invested in capital, which then expands the economy.

 

 

That's supply-side economics. One can easily argue that our economy is demand driven. This means that you can give investors all the tax cuts that you want but that won't do a thing if there is no demand for goods and services. Even if you give millionaires tax cuts why would they invest that money in capital if there isn't enough demand for the goods and services they are investing in? That's like asking them to throw away their money. On the flip side, one can argue that the tax cuts make investment costs cheaper and in turn that increases demand by reducing the costs of goods and services.

 

A more balanced and realistic approach is to give tax cuts to both the middle and investor classes - this will simultaneously reduce the costs of investment and increase demand.

 

If I had to choose between supply-side economics or demand-driven economics I would choose the demand-driven economics. But realistically our economy depends on both.

 

I believe in supply side as the catalyst to start the ecomonic expansion, and the demand side to join the supply side to sustain the expansion (pretty much exactly as you said). Demand side is incapable of starting an expansion (unless everybody wins the lottery), and, in and of itself, is inflationary. Also, in and of itself (which is taking it out of context as supply and demand cannot exist without one another), the demand side will actually slow down an economy. In short, demand cannot create supply, but supply can (not will) create demand.

 

The biggest problem with supply side it that there is a relatively small optimum area for the marginal tax rates to expand an economy and simultaneous generate an increase in tax revenue (if the tax rates go too low, althought the economy expands, tax revenues could decline). As, in the late 1990's, for the first time in history, the average American spend more than half their income on our wide variety of taxes, and we had an enormous outflow from our economy to offshore financial centers, there is no question that tax cuts are necessary. I just don't think the styles of tax cuts that are being implemented are cutting the right taxes. The cuts we've seen have had some measurable impact on the supply side, but have only a minimal impact on the demand side.

 

What most people don't realize is that for most Americans, their payroll taxes exceed their income taxes. If the payroll taxes were eliminated, the cost of labor would decline dramatically, and the American consumer would have more funds available to fulfill the "and able" requirement to create the demand side. Then, the economic growth could create additional revenues in order to fund the social security and medicare taxes that were associated with payroll. Thus the idea of a tax overhaul.

 

The problem with the current payroll tax system right now it that it take 3.2 workers to pay for 1 retiree's annual social security. However, at today's payroll tax rates anything less than 7.1 workers/retiree is a deficit. From today's payroll tax rates, it will take a 92% increase in payroll taxes in order to make them balance. The rate of worker/retiree is dropping rapidly, and will drop will accelerate once the baby boomers retire. If the current systems stays in place, with the baby boomers retiring, by 2015, the rate will be 2.9 workers per retiree - which would require about a 107% increase in payroll taxes from today's rates in order to balance. The only way we can sustain the current system is to dramatically raise payroll taxes, which will move even more of our jobs out of the country, reduce our supply, and with more Americans out of work, reduce our demand. Our economy will collapse in our livetimes if the tax system isn't fixed. While the original ideas of social security and medicare may have been sound in their orignal intent, their implementation is a dismal failure. We've been hearing a lot of talk, and seen no action for decades. We have squandered a lot of valueable time. These deficits are gonna bite our collective @ss if we don't get a tax overhaul in the very near future.

I wonder if we won't see more serious consideration being given to scrapping income taxes altogether & instead going with some form of national sales tax or consumption tax... I've seen some pretty interesting versions of them. I have my doubts over whether they'd be any better in the long run, but the current system is such a mess that we may eventually just see change for the sake of change.

I wonder if we won't see more serious consideration being given to scrapping income taxes altogether & instead going with some form of national sales tax or consumption tax... I've seen some pretty interesting versions of them. I have my doubts over whether they'd be any better in the long run, but the current system is such a mess that we may eventually just see change for the sake of change.

 

 

Current system is a mess, but I don't think we'll see the national sales tax any time soon. That's actually a regressive tax system and will probably never be approved. Perhaps a flat tax rate.

I wonder if we won't see more serious consideration being given to scrapping income taxes altogether & instead going with some form of national sales tax or consumption tax... I've seen some pretty interesting versions of them. I have my doubts over whether they'd be any better in the long run, but the current system is such a mess that we may eventually just see change for the sake of change.

 

 

Current system is a mess, but I don't think we'll see the national sales tax any time soon. That's actually a regressive tax system and will probably never be approved. Perhaps a flat tax rate.

 

 

That was my problem with a federal sales tax, too. However, if you look at S. 25 (or H.R. 25 in the House), there is a bill that actually makes some sense for a national sales tax to replace the current system. Between both houses, it has over 50 co-sponsors. It give a sales tax pre-bate (paid at the beginning of each month) to the lower income groups to cover the sales taxes. They, for all intents, come completely off the tax rolls. Actually, everybody gets the prebate, so only those who consume above poverty level pay any taxes at all. It's not perfect, but very very good, the best I've seen, and immensely better than what we have now.

 

I don't like the flat tax because its also an income tax, and the top earners can easily exclude their income. As a percentage of total income, the lower and middle classes would pay a higher percentage of their income in taxes than the wealthy - just as they do today. Odds are you and I already pay a higher percentage of our income in taxes in various taxes than Warren Buffett, whose income is exempt from all payroll taxes.

I wonder if we won't see more serious consideration being given to scrapping income taxes altogether & instead going with some form of national sales tax or consumption tax... I've seen some pretty interesting versions of them. I have my doubts over whether they'd be any better in the long run, but the current system is such a mess that we may eventually just see change for the sake of change.

 

 

Current system is a mess, but I don't think we'll see the national sales tax any time soon. That's actually a regressive tax system and will probably never be approved. Perhaps a flat tax rate.

 

 

That was my problem with a federal sales tax, too. However, if you look at S. 25 (or H.R. 25 in the House), there is a bill that actually makes some sense for a national sales tax to replace the current system. Between both houses, it has over 50 co-sponsors. It give a sales tax pre-bate (paid at the beginning of each month) to the lower income groups to cover the sales taxes. They, for all intents, come completely off the tax rolls. Actually, everybody gets the prebate, so only those who consume above poverty level pay any taxes at all. It's not perfect, but very very good, the best I've seen, and immensely better than what we have now.

 

I don't like the flat tax because its also an income tax, and the top earners can easily exclude their income. As a percentage of total income, the lower and middle classes would pay a higher percentage of their income in taxes than the wealthy - just as they do today. Odds are you and I already pay a higher percentage of our income in taxes in various taxes than Warren Buffett, whose income is exempt from all payroll taxes.

 

 

That does sound interesting. It will still be regressive for those that are above the poverty line. It won't pass anytime, soon, though.