Students at The University of Alabama and Americans across the country were no doubt perturbed, annoyed and disgruntled over the government shutdown that took place in October. I can personally recall countless stories from friends whose research projects were put on hold due to cessation of funding, whose parents were furloughed and who found themselves shocked and even a little embarrassed as they watched the people elected to lead our nation fail to proverbially keep the doors open.
Even as a conservative, I thought of a government shutdown as a political and logistical nightmare, despite agreeing with the sentiments of Republicans whose actions eventually caused it.
Thankfully, the series of continuing resolutions that left our government open to this kind of political showdown-turned-crisis ended last month with a deal that passed our first actual budget in five years. However, while that may have eliminated some of the ramifications of political bickering, it did not address the real problem facing the country.
The real problem is that the federal government has run a deficit of roughly $1 trillion (often more) since fiscal year 2009. Why is that a problem? Simply put, in that time, we’ve accumulated more than $6 trillion in debt and reached a debt-to-GDP ratio of roughly 107.9 percent. To put that in perspective, Greece hit austerity and watched its economy fall to pieces when its debt-to-GDP ratio reached 148.3 percent, which we could reach within 10 years if something isn’t done.
Additionally, research from Mehmet Caner of North Carolina State University indicates a compounding detrimental effect on GDP growth rates for every debt-to-GDP ratio point beyond 77 percent, meaning that the very fact that we have such debt slows economic growth. This may at least partially explain our slow recovery from the recession spawned by the 2008 financial collapse.
So how do we solve it? This is where much of the contention over the budget issue exists. Conservatives favor budget cuts, believing that government has become too big and that any additional taxes are a strain on an already sluggish economy. Liberals favor increases in revenue by way of tax hikes, believing that it’s better to raise funds for the government than cut its services.
Interestingly enough, both sides can have their way. Why? Because tax cuts, believe it or not, actually lead to increases in revenue.
It defies reason, right? Cut rates and increase revenues? That’s not possible. At least, that’s what the Congressional Budget Office said in a report issued over the second wave of Bush-era tax cuts in 2003 when it projected said cuts would lower income tax revenues by $75 billion in 2006. Instead, those revenues increased by $47 billion. Adjusted to FY 2005 dollars to compensate for inflation, the deficit dropped from $402.8 billion in 2003 to $239.6 billion in 2006 and total tax receipts climbed $223.1 billion in the same time period. In fact, that revenue climb that began in 2003 reversed a downward trend in total receipts that began in 2000 and arguably ended the 2001 recession.
Moreover, the phenomenon is consistent, and not just in the form of income taxes. A cut in the capital gains tax rate from 28 percent to 20 percent instituted in 1983 brought revenues from $18 billion that same year to $80 billion in 1986 because of the massive increase in investment it engendered. When President Lyndon B. Johnson passed his plan for tax cuts in early 1964, the country enjoyed a drop in unemployment from 5.2 percent to 3.8 percent by 1966 and a 12 percent increase in revenues during the same time period.
If those kinds of results could be replicated, college students like us would not only have a better chance of finding a job after graduation, but we’d get to keep more of what we earn from it, too. Republican or Democrat, who wouldn’t like that?
Andrew Parks is a junior majoring in political science. His column runs biweekly on Tuesdays.
