Real Spending Cuts on the Table? None.
The way we talk about tax and spend numbers are a little different from each other. On the tax side, we are dealing with percentages. Individuals can change their behavior if a tax is increased or decreased. So we can increase from 15% to 20%, or cut from 35% to 25%, but we don't know what this means for the total amount of tax collected. We don't know how raising and cutting tax rates impact behavior.
For example, if a tax rate is increased, tax revenue may or may not go up depending on how many people will now choose to retire, move abroad, engage in more tax planning, or shift their income to some other field or into the future.
Spending, on the other hand, is measured in absolute dollars -- not percentages. It's therefore a lot easier to budget. Last year, the federal government spent $3.8 trillion -- not a percentage of anything. It's an absolute dollar amount. We can control it; we set it.
But apparently, not talk about it.
So let's talk about it, for a change!
The "Fiscal Cliff" negotiation, soon to be followed by the surely even trickier debt limit negotiation, is filled with talk about spending cuts. So what are these spending cuts?
I'm sure you have all heard the "spending cut" numbers: $1 trillion, $2 trillion, $3 trillion, $4 trillion... wait, did I just say $4 trillion? Wasn't ALL Federal government spending last year $3.8 trillion?
Lesson No. 1: These spending cut numbers are always talked about in 10-year terms. It's like giving 10 binding New Year's resolutions in one fell swoop. "I will lose 20 pounds per year for 10 years." But you only weigh 190 pounds, and that's 200 pounds over 10 years? You will weigh less than zero? Huh?
That brings us to the second point. Let's take a $4 trillion spending cut, over 10 years. That's $400 billion per year. Does that mean that spending now will be $3.8 trillion minus $400 billion, i.e., $3.4 trillion, per year, for the next 10 years?
The U.S. government talks about spending cuts measured against some imaginary number that it could have spent, in its fantasy land. For example, the U.S. government could have spent $5 trillion -- by starting a war with planet Mars or Luxembourg, say -- but luckily Congress and the president agreed to hold off on this expensive enterprise. They estimate this war would have cost $400 billion per year. So now we will only spend $4.6 trillion per year.