Tuesday, December 28, 2010

Spending Cuts Are The Only Way To Successfully Balance The US Budget: Tax Increases Fail To Balance The Budget

From The Wall Street Journal article "The Right Way to Balance the Budget: The experience of 21 countries over 37 years yields a simple truth: Cutting spending works, and raising taxes doesn't" by Andrew G. Biggs, Kevin Hassett And Matt Jensen:
The data also clearly indicate that successful attempts to balance budgets rely almost entirely on reduced government expenditures, while unsuccessful ones rely heavily on tax increases. On average, the typical unsuccessful consolidation consisted of 53% tax increases and 47% spending cuts.

By contrast, the typical successful fiscal consolidation consisted, on average, of 85% spending cuts.
Consistent with other studies, we found that successful consolidations focused on reducing social transfers, which in the American context means entitlements, and also on cuts to the size and pay of the government work force. A 1996 International Monetary Fund study concluded that "fiscal consolidation that concentrates on the expenditure side, and especially on transfers and government wages, is more likely to succeed in reducing the public debt ratio than tax-based consolidation."
While tax hikes slow revenue growth, policies that credibly reduce government spending in the long run boost economic growth by more than their simple effects on deficits might imply. Any attempt to address the federal government's budget shortfall that relies on less than 85% spending cuts runs too large a risk of failure.
Read the complete Wall Street Journal article here.

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