Moody’s and the boys are citing the risk of a default on August 2 as the proximate reason for their warning. But Americans should understand that the debt ceiling is merely the trigger. The gun is the spending boom of the last three years and the prospect that Washington lacks the political will to reduce it in the years to come.

On spending, it is important to recall how extraordinary the blowout of the last three years has been. We’ve seen nothing like it since World War II. Nothing close. The nearby chart tracks federal outlays as a share of GDP since 1960. The early peaks coincide with the rise of the Great Society, the recession of 1974-75, and then a high of 23.5% with the recession of 1982 and the Reagan defense buildup.

From there, spending declines, most rapidly during the 1990s as defense outlays fell to 3% of GDP in 2000 from its Reagan peak of 6.2% in 1986. The early George W. Bush years saw spending bounce up to a plateau of roughly 20% of GDP, but no more than 20.7% as recently as 2008.

Then came the Obama blowout, in league with Nancy Pelosi’s Congress. With the recession as a rationale, Democrats consciously blew up the national balance sheet, lifting federal outlays to 25% in 2009, the highest level since 1945. (Even in 1946, with millions still in the military, spending was only 24.8% of GDP. In 1947 it fell to 14.8%.) Though the recession ended in June 2009, spending in 2010 stayed high at nearly 24%, and this year it is heading back toward 25%.

(more…)

The idea is that once taxpayers earn a certain amount of money (say, $200,000), they would begin to lose the value of the various deductions they’re entitled to under the law. These include such IRS Form 1040 line items as the personal exemption, the deductions for state taxes and charitable contributions, even those for spouses and children. Earn enough money and soon the value of those deductions goes to zero.

The political point of this exercise is to raise marginal tax rates without appearing to do so. The top statutory individual rate would remain at 35%, so the politicians could claim they hadn’t raised rates. But for those losing their deductions, the marginal rate would increase by between one and two percentage points until the phase-outs were complete.

We raise the alarm now because this sneaky bit of political fiddling last became law during a previous bipartisan budget summit—in 1990. Democrats proposed it then, too, and President George H.W. Bush and his budget chief Dick Darman agreed to it so they could appear to be raising tax rates less than they really were. (more…)

Media reports in recent weeks say that Senate Democrats are considering a 3% surtax on income over $1 million to raise federal revenues. This would come on top of the higher income tax rates that President Obama has already proposed through the cancellation of the Bush era tax-rate reductions.

If the Democrats’ millionaire surtax were to happen—and were added to other tax increases already enacted last year and other leading tax hike ideas on the table this year—this could leave the U.S. with a combined federal and state top tax rate on earnings of 62%. That’s more than double the highest federal marginal rate of 28% when President Reagan left office in 1989. Welcome back to the 1970s.

Here’s the math behind that depressing calculation. Today’s top federal income tax rate is 35%. Almost all Democrats in Washington want to repeal the Bush tax cuts on those who make more than $250,000 and phase out certain deductions, so the effective income tax rate would rise to about 41.5%. The 3% millionaire surtax raises that rate to 44.5%. (more…)

Substance aside, Mr. Obama’s new order is a significant symbolic concession. The White House is admitting that after an historic voter rebuke due in part to its regulatory overkill, it must show some willingness to pull back the throttle. The President is gradually conceding the conservative and business critique of his first two years, even if the concessions so far are mostly in style and rhetoric.

This rules rethink is akin to the Democratic Congress’s vote to extend all the Bush-era tax rates while being forced to admit that raising them would hurt the recovery. Liberals have spent years dismissing warnings that their agenda created uncertainty and harmed the economy, and then they wake up to find their leader on the Wall Street Journal editorial page disowning “unreasonable burdens on business—burdens that have stifled innovation and have had a chilling effect on growth and jobs.”

The real test will be how Mr. Obama defines “unreasonable.” The executive order he signed yesterday instructs federal agencies to weigh the costs and benefits of proposed rules and choose the least burdensome alternative. Yet that merely reiterates an executive order President Clinton signed in 1993 and that was supposed to be governing the Obama Administration all along. Mr. Obama also ordered a “retrospective analysis” of all rules to streamline or repeal the damaging ones.

(more…)