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President Obama’s interpretation of the debt-reduction deal he made with Congress twists the terms to favor entitlement programs and assure higher taxes on the rich. A White House “fact sheet” on the deal reveals these crafty terms showing Obama’s attempt to rig the agreement. Obama’s fiscal fancies, however, conflict sharply with approaches other countries have used successfully to rein in debt.
Actions by England and Sweden have shown dramatically that cutting spending worked better than raising taxes. They found that deficit and debt can be reduced by cutting, not boosting, taxes. A new study by the Tax Foundation, released July 29, notes that international experiences have occurred quite similar to the recent drawn out, bitter struggle involving Congress and the White House over raising the nation’s debt ceiling.
The agreement at the final hours prior to a probable default on the U.S. credit included the promise to create a special congressional debt committee. Its task is to handle the hot potatoes of entitlement reforms, such as for Medicare and Social Security, cuts in sensitive government programs, and possible tax reforms.
The tough budget cuts will be handed to this special committee made up of six Democrats and six Republicans, who will have to recommend debt reductions of $1.5 trillion over 10 years and report back to Congress by Thanksgiving. Congress is supposed to act on the recommendations by Dec. 23.
Studies have been made by Goldman Sachs (GS) and the European Central Bank (ECB) comparing the experiences of countries which have tackled the complex task of bringing under control debt and deficit problems like those of the U.S. The conclusions of the two studies are “remarkably similar,” Tax Foundation Economist David Logan explained.
Spending cuts are more effective than tax hikes, the Goldman Sachs Global Economics Paper No. 195 in April 2010 stated. Deficit and debt reduction can occur while taxes are being cut, according to the European Central Bank working paper No. 634, May 2006. “Perhaps the most striking and counterintuitive result of the literature is that spending cuts and tax decreases can yield a successful reduction of a nation’s deficit and debt.” According to the 2010 Goldman Sachs report, since 1975, some 20 countries have needed large deficit/debt reductions. Reductions driven by “government expenditure cuts, rather than tax increases…proved successful.” Each “positively affected the deficit, reduced public debt, generally boosted economic growth” and resulted in “significant bond and equity market performance.” Is anybody listening?
In contrast, the deficit/debt reduction attempts driven by tax increases typically failed to correct imbalances and, furthermore, generally proved damaging to growth. “Successful episodes were three and a half times more likely to use tax decreases than increases. Contrary to the conventional wisdom in the United States, the international experience indicates that pairing spending cuts with tax cuts produce meaningful debt reduction and improved economic performance,” Logan concluded in his report.
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