The Budget
Floor Speech
Mr. GRASSLEY. Mr. President, I suppose I and a lot of my colleagues had an opportunity to hear the President's speech this afternoon. It is very nice that the President is being engaged for the first time in the budget debate and the long-term fiscal problems of this country, and the deficit problems of this country. It is good he is following on with some of the recommendations of his own deficit reduction commission. We have to remember a little less than a year ago he appointed a deficit reduction commission. They reported on December 5. It seems as though they had broad bipartisan support because the four Senators on the commission--two Democrats and two Republicans with probably very different political philosophies of the four--have endorsed it. Then, all of a sudden, since December 5 until today, there has been a lot of quiet on the part of the President of the United States about whether he likes what his deficit commission suggested.
I don't know the details of where he is coming from, whether he agrees with every detail that is in the deficit reduction commission recommendations, but at least he is getting on board along the lines of what 64 Senators--32 Republicans and 32 Democrats--said in a letter about a month ago to the President: We are ready to start tackling some of these big problems, but we need leadership. Maybe this speech today is an answer to that leadership. Or, if I want to be cynical about it, I could say maybe the President gave his speech today because of the very positive comments that Congressman and Chairman Paul Ryan got for his budget ideas that he released last week.
But the President also took advantage to renew the class warfare--the demagoguery of taxing the wealthy. It doesn't contribute much to the debate. In fact, I think it makes it very difficult to bring people together. Or, if I want to be cynical, I could say this is maybe the President's first speech about his reelection. But either way, I think there is analysis that we have to look at very carefully and see if it does the economic good that is intended in the speech, even though it is welcome that the President is being engaged at this time.
So I would give some reaction to some of the things the President said, but I want this as background: From World War II through 2009, every dollar of new Federal tax revenue coming into this Treasury resulted in $1.17 of new spending. Think of that: Every new dollar coming in wasn't a dollar that reduced the deficit, it was a dollar that resulted in $1.17 of additional spending. That is like a dog that chases its tail and never catches it. So we are sending a new dollar to Washington to do something about the budget deficit and nothing happens as a result of that, except more deficit.
The President made the point that tax reductions in 2001 and 2003 added tremendously to the deficit he inherited or the part of the deficit that now exists. But, in fact, the tax reductions of 2001 and 2003 resulted in more revenue to the Federal Treasury. The expanding economy, spurred by the Tax Relief Acts of 2001 and 2003, helped to reduce the annual budget deficit from $412 billion in 2004 to $160 billion in 2007, not because we taxed more but because we taxed less and we had more economic activity as a result. That brings me around to the principle of deficit reduction. Obviously, when I say a dollar of additional taxes doesn't go to the bottom line, that doesn't do anything about the deficit. But on the expenditure side, reducing that and the economic growth that comes from it is what reduces the deficit--more economic activity.
Even the most sincere arguments that raising taxes would reduce the deficit and the debt do not have history to back them up. Outside of Washington, it is obvious to people the problem is not that people are undertaxed but Washington overspends. The voters said this so loudly and clearly in the last election, and elections are supposed to have consequences. I think the budget agreement of midnight Friday night is evidence of words from the grassroots of America getting through to Washington, DC. I think most people at the grassroots are cynical whatever happened, and I suppose we have to do a lot more to prove to them there might be a different day in Washington. But it was pretty loud and clear the results of the last election and the message sent to Washington.
Government spending increased by 22 percent during the last 2 years, a nonsustainable level of increased expenditures. If we follow the budget proposed this year by President Obama, we would add another $13 trillion to our national debt over the next decade. This debt gets in the way of economic activity that creates jobs, and it is a terrible burden to leave to future generations. We talk dollars and cents when we talk about the deficit and the debt, but it is a moral issue of whether those of us of our generation ought to live high on the hog and leave the bill to young people such as these pages here who have to pay for it. It is a moral issue as much as it is an economic issue.
This trillions of dollars of debt gets in the way of economic activity that creates jobs, and it is a terrible burden on future generations. Washington needs to get behind policies that clamp down on spending and, as a result, we will grow the economy. Increased economic activity increases revenue to the Federal Treasury, enabling deficit and debt reduction. We know that to be a fact, because from 1997 to the year 2000, we actually, because of the growth of the economy, paid down $568 billion on the national debt during that period of time. The answer is not ways to grow government. We need to grow the economy, but we don't grow the economy by growing government.
Getting back to the issue of the President making a big deal in his speech about the 2001 tax cuts being a major cause of the budget deficit, and probably the implication of the unfairness of it because there weren't higher taxes on higher income people, I would suggest that the President is wrong in both regards.
In 2001, the tax cut included an across-the-board income tax reduction and reduced the tax rates on the lowest income people from 15 percent to 10 percent. It resulted in removing millions of low-income people from the Federal income tax rolls entirely. It increased the child tax credit from $500 to $1,000. The legislation included marriage penalty relief and the first-ever tax deduction for tuition.
Two years later, after 9/11, the 2003 dividends and capital gains tax rate cuts spurred economic growth and created jobs.
The result was more revenue to the Federal Treasury, not less. The expanding economy helped reduce the annual budget deficit--and I am repeating these numbers because they are significant--from $412 billion in 2004 to $160 billion in 2007.
I know it is counterintuitive to a lot of people to hear a Member of the Senate say if you reduce marginal tax rates, you are going to bring revenue into the Federal Treasury, because the obvious common sense tells people that if you increase taxes, you are going to bring in more revenue. As I said earlier in a speech today, it doesn't work out that way because some people in this country can decide I have paid enough taxes, I am not going to pay any more. So they disincentivize to be productive, probably do leisure or invest in nonproductive activity. When you lower marginal tax rates, it encourages those people to be productive and, at the same time, creating jobs, growing the economy, and bringing more money into the Federal Treasury.
When you look at the sources of the deficit, contrary to the President's claim, tax relief has been a small part. Unprecedented spending contributed much more to the deficit than the tax relief did and particularly in the last 2 years--a 22-percent increase in expenditures on top of the $814 billion stimulus.
Here is something that probably is counterintuitive as well and probably something the President misses from his analysis of the 2001 and 2003 tax relief bills, which he blames the big budget deficit on. Those reductions actually ended up with taxes being more progressive. The effective Federal tax rate on the top 1 percent of households is more than seven times the rate paid by the bottom 20 percent of households. That is up from less than five times as much in the year 1979.
If tax relief enacted since 2001 is allowed to expire in a little more than a year and a half--because last December we only extended the existing tax policy until December 31, 2012--if that happens at that time, a family of four with two kids who earns $50,000 today would see a $2,155 increase in their tax bill. More than 6 million low-income people who currently have no Federal income tax liability would be subject to the individual income tax, and that would be at a rate of 15 percent instead of the current 10 percent.
Washington needs to learn that leaving more money in the pockets of the taxpayers unleashes a positive chain reaction in our economy. On the other hand, government spending doesn't create wealth because government is not an institution that can create wealth. Government is an institution that can only provide an environment for people outside the government to create wealth. In fact, what the government does is it consumes wealth and, as a result, doesn't generate a stronger economy.
Instead of growing the government, Washington needs to focus on helping create private sector jobs. The President's new plan will reduce the deficit by $4 trillion over 12 years. He does that by reducing spending by $2 trillion but raising taxes by $1 trillion, and, thus, lowering interest payments by $1 trillion. The President has again failed to realize that we don't have a revenue problem, we have a spending problem.
At least a couple times since I have been in the Senate, I have heard this argument: Let's increase taxes $1, and we will reduce expenditures $2 or $3 or $4--sometimes it is $2, sometimes $3, and sometimes $4 behind those ideas. That sounds very good, doesn't it? But here is why it doesn't work and why bringing in $1 in new taxes actually leads to spending of $1.17. I often quote Professor Dave Vedder of Ohio University, who has studied tax increases and spending for a long period of time. In fact, you increase taxes until you decide to do something else with the taxes. But appropriations are reviewed annually and, for some reason or other, after that first year, appropriations tend to creep up and up and up. Consequently, the well-intentioned raising of taxes $1 and reducing expenditures by $3 or $4--as well intended as it is, it gradually is eroded on the expenditure side--that half of that proposition--so you end up not reducing expenditures as you have originally indicated.
I yield the floor and suggest the absence of a quorum.
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