Monday, May 18, 2009

It's the wrong time for 'tea parties'

Published in Standard-Examiner, Ogden, UT, May 17, 2009

By Vijay K. Mathur

It is ironic that the tea party movement is taking place now when our country is facing a severe financial crisis, housing market collapse and worst recession in memory. The main grievances of the political leaders of the movement, like former House majority leader Dick Army and other conservative tea-party-leaders, are not clear.

The catch phrases heard in the news media are burden of national debt on children, less tax and spending and limited government. These phrases may sound appealing to those hurt by the current recession and/or sympathetic to conservative causes. However a close scrutiny of facts will show that these protests at this time represent an emotional outburst and hence can not be logically justified.

Americans should have started protesting against the national debt during the Reagan administration. During 1981-89 federal debt held by the public, as a percentage of Gross Domestic Product (GDP), increased from 26 percent to 42 percent. This upward trend in debt reversed only during Clinton administration, but gained upward momentum again under President George W. Bush; debt increased from 27.8 percent to 41.3 percent when the inflation — adjusted GDP was growing at the average rate of 2.4percent per year. This was the time to have mass rallies against debt and spending on the Iraq war and other mandated programs.

President Obama, confronted with the economic crisis and the legacy of large debt, is making a bold attempt in his proposed budget to reduce the ratio of budget deficits to GDP during the next four years. Austerity measures in the federal budget at this time could lead the economy in a downward spiral, causing more harm to future generations than the accumulation of more debt at this time. Debt will decrease once the economy is growing, and Congress uses that opportunity to make some hard choices in mandatory and discretionary spending programs, and tax havens and subsidies.

In this recession most people have realized that government has a significant role even in the market based economy and thus, requires revenues. Over time people and businesses have placed more demand on government services and support programs including national defense. Individual income tax is the largest generator of revenues followed by payroll tax and corporate income tax. The progressive nature of income tax draws the ire of many conservatives. Progressivity of the tax (marginal tax rates) increases the average tax rate (tax as proportion of income), assuming no changes in exemptions, deductions and tax credits.

Computations by the Tax Policy Center (TPC) of the Urban Institute and Brookings Institution show that marginal tax rate declined from 23.7 percent to 15 percent and average tax rate declined from 11.79 percent to 9.38 percent during Reagan administration (1981-89) for a four-person median income family at the same relative income distribution. Rates also declined for lower and higher income families. Basically, the downward trend in average tax rates for all income groups continued in all administrations since 1989.

President Obama has proposed a reduction in the tax burden on middle and lower middle income families. The proposal reverts top two marginal tax rates back to pre-2001 level, but lowers tax rates for couples earning less than $250,000 and individuals earning less than $200,000 per year. In all likelihood the average tax burden will fall. At present the grievance that Americans pay too much tax does not hold water when compared to many other countries.

As regards to direct government spending, now is the time to spend when the economy is suffering financial and housing crises and a severe recession with unemployment rate of more than 8 percent and climbing. It is hard to imagine that without fiscal and monetary policy, markets could revive themselves to full health in the foreseeable future. Some estimate full recovery in 2011. The time for reduced spending and balanced budgets will come when the economy has robust economic growth and full employment.

Since 1962 the mandatory portion of Federal government spending controlled by laws is increasing. According to TPC, in Fiscal 2007 mandatory spending, discretionary spending and interest was 53 percent, 38 percent and 9 percent respectively; of the discretionary spending 53 percent was on national defense. Hence, there is less room for spending cuts unless Congress changes and/or modifies laws and reduces defense spending. During all the Republican administrations, from Reagan in 1981 to George W. Bush in 2008, the federal budget deficit to GDP ratio has gone up significantly. It seems there is disconnect between conservative rhetoric and action.

Tea party leaders and supporters should reexamine their actions and join the current administration in implementing policies which will help this nation recover from the deep recession. Tea party time will come when the economy has fully recovered. Limited government is a fine idea as long as people and businesses are willing to diminish their expectations for government services and subsidies, and act responsibly to pay their fair share of taxes without engaging in tax-dodging behavior and seeking tax havens. As former Sen. Barry Goldwater said, “A government that is big enough to give you all you want is big enough to take it all away.”

Mathur is former chairman of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. At present he resides in Ogden.

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