BUDGET FEBRUARY 21, 2013
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President Obama on Tuesday appeared alongside police officers and firefighters, warning that the automatic spending cuts set to take place on March 1 would cause local and state governments to lay off first responders. Get used to this sort of thing. As the cuts of “budget sequestration” approach, both sides of the debate will be talking about the dire consequences that worry them most. You’ll hear Obama and the Democrats warning that the cuts will impair government’s ability to inspect food and control air traffic, while dealing a blow to the economy; you’ll hear Republicans warning that the cuts will force reductions in defense spending, hammering contractors and compromising national security.
But the real debate is what it has always been—less about the cuts themselves, more about how to replace them. Democrats say they want a deficit reduction package that brings in new revenue, ideally by closing tax loopholes that benefit the wealthy. Republicans will hear nothing of it. The last fiscal agreement, the one the parties reached in January, raised taxes on higher incomes and will generate about $600 billion in new revenue over the next decade. Republicans were not happy about that and, having agreed to that increase, they’re not about to embrace another one. “The president got his tax increases last year,” House Budget Chairman Paul Ryan said while appearing on ABC News Sunday.
Actually, the January deal produced less than half of the revenue Obama was seeking when negotiations began. And he had good reason to seek more. Take a closer look at the annual projections that the Congressional Budget Office released earlier this month. According to those projections, tax revenue this year was equal to about 15.8 percent of Gross Domestic Product, or GDP. Thanks to the January agreement, taxes will quickly rise, relative to economic output: By 2023, according to the CBO, revenue will be at 19.1 percent, the highest it’s been since the 1990s. But, even then, receipts will still be lower than they were during their Clinton-era peak. In 2000, tax receipts were actually 20.6 percent of revenue. (See graph.)
Source: Congressional Budget Office
OVERTAXED? NOT REALLY
Revenue as a percentage of Gross Domestic Product, through 2023
Raising taxes yet again would obviously push revenues even higher, maybe even high enough to match or exceed that Clinton-era peak. That shouldn’t bother anybody. In fact, attempting to maintain revenue at current levels, as the Republicans are basically insisting, makes no sense whatsoever. Today we ask government to do a lot more than we asked it to do thirty or forty years ago, mostly because we’ve asked it assume responsibility for health care—a necessary, but expensive job, particularly when it comes to health care for the elderly. That spending is growing faster than we’d like and we’re in the middle of a multi-year debate over how to reduce that spending. But, under almost any realistic scenario that preserves a reasonable commitment to seniors’ health care, we’re going to need more money to finance government services.1
The alternative would be to gut everything else. But the sequestration cuts show how counter-productive that approach is. Cuts to education programs reduce future productivity. Cuts to regulatory agencies put our society at risk of health and safety hazards. Cuts to defense—well, I could live with some of those, just as many conservatives could live with cuts to the spending programs. Every part of the budget has some waste, which means there’s room to cut a little more. But a lot more? Enough to bring expenditures in line with current revenue projections? “Discretionary spending,” the money that government spends on everything besides entitlements, is already at historic lows. Further reductions would push it lower. It’s hard to see how government could function in a way most Americans would find acceptable. Conservatives insist that higher taxes will strangle the economy, a claim that the evidence (from Europe, among other places) doesn’t support. But if we don’t find the money to pay for infrastructure and training tomorrow’s workforce, then we really might be undermining the future.
No, Americans aren’t enthusiastic about new taxes. The reason we have deficits—well, one reason—is that voters like government services but don’t want to pay for them. The fiscal debate we’re having today is over how to reconcile these conflicting imperatives. But one side, Obama and the Democrats, would seek a middle ground, with modest revenue increases and spending cuts.2 The other side, the Republicans, insists revenues cannot go up at all. If we asked no more of government than we did in the 1960s, that would be fine. But we ask the government to do a lot more. That means we need to pay more, too.
12 comments
One of the paradoxes of public policy is that those who are right about the policy are the ones who must compromise the most. Means testing. There, I said it. Means testing denialism will not make it not happen. Progressives better be prepared with their own plan for means testing or entitlements will be means tested out of existence. Progressives don't have to call it means testing. They can call it "equitable cost sharing" or some such. I know, once we cross the rubicon, there's no going back. But what's alternative? Wait until the next financial collapse (and it's coming) and then let the conservative plan for means testing sweep the land.
- rayward
February 21, 2013 at 8:23am
Means testing makes sense to me, but you have to abandon the notion that people are paying into social security in the sense that it is a self funded retirement plan...not that there is anything wrong with abandoning that.
- Nusholtz
February 21, 2013 at 12:35pm
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How ironic that the GOP and Right lament all the takers and their endless lust for 'free stuff'. But when tasked with the burden of taxing folks to pay for that 'free stuff' after all, well then it's just not fair say the Republicans! We can't ask the people to pay more for the things they want for 'free' because then we couldn't brow beat those 'takers' for being the sore-losing, parasitic waistoids that they are.
- singlspeed
February 21, 2013 at 1:48pm
Alas, finally JC comes around to realize that taxes on the middle class are going to go through the roof. But he dare not put the services provided by government to a test. The population LIKES the government we're getting when we get it for pennies on the dollar. But once asked to pay full fare it'll be a resounding "no"/// We've watched the middle class writhe about on the teeny tax increase they just experienced. The middle class won't be able to bear that burden./// But the elite don't care. Taxes are the fuel for the modern elite. All for me, and none for thee.
- seattleeng
February 21, 2013 at 4:09pm
Ray, the problem with means testing is that it becomes a massive tax on those that do what they should do: Work hard and save. Take a guy making a modest $100K, who manages to save $20K a year by scrimping, and then manages to put both kids through college by himself, and then retires with 40 years of savings growing at 5%. He retires with almost $3M in the bank.///Now take the case of the guy making $100K per year who pisses it all away and saves nothing, and both kids have $100K in college debt.///You are saying the guy that scrimped and saved NOW gets nothing from the gov because he scrimped and saved???///The old adage "Tax what you want less of" will give just that: Less savings, less working. There is a reason Europe works so little: It pays less to work in Europe. And as a result, their growth has been pathetic compared to the US. ///But of course, that is where these programs excel: level everyone down a notch. Can't have anyone enjoying the fruits of their labor, can we? Nor can we have anyone responsible for their own bad planning.
- seattleeng
February 21, 2013 at 4:19pm
Singlespeed writes: "But when tasked with the burden of taxing folks to pay for that 'free stuff' after all, well then it's just not fair say the Republicans!"///Do you believe the middle class would accept their taxes being raised to cover their fare share of the bill? Today, the middle 20% contribute 14.2% to the running of the government all up. That means an extra trillion in spending requires those 20M households to pay an extra $140B in taxes. That's $7K per household per year. If put to a vote of just the middle class, would they take all the extra spending under Obama for $7K/year tax increase?
- seattleeng
February 21, 2013 at 4:23pm
Seattle...I had zero issues with the recent return to the original payroll tax rates. Of course I understood it to be temporary and I also thought it was a bad idea. I have no issues with taxes being raised to pay for the government services I use, knowing full well I do get a bargain. That being said, neither part, but most especially the GOP are allergic to any revenue increases simply because they don't want to pay for any government because by doing so, they tacitly admit that government serves a purpose and that we actually have to pay for this stuff.______ I fully recognize that Americans (not just the middle class but everyone) likes to think they pay too much in taxes and don't get anything in return but like their stuff cheap or free. I've put my proposals on the table before about where we could shift spending - both entitlement and general budget spending that would (I think) move the country forward. Instead we get caught in these feedback loops of don't cut this or don't cut that or we can't spend this or can't spend that.______ The only thing the GOP has added to the discussion is "we can't raise revenue, we can't raise taxes." But then they complain about not paying for anything. I suspect sequestration has forced their hand and now they realize that real austerity isn't going to make things better but worse. Instead of Congress pushing policies to actually invest in America, they've spent all of their time divesting itself of putting policies forth that would / could be actual investments for future growth and near term growth.
- singlspeed
February 22, 2013 at 10:43am
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I wish Democrats would publicly state that all of the money to be gained from closing loopholes would go directly to defense and then let Republicans say, no we can't tax people to pay for our defense by doing precisely the revenue enhancements that Romney laid out in his campaign because they need that money to lower upper class tax rates.
- blackton
February 21, 2013 at 7:06pm
As ever, seattle fails to understand that the society as a whole is well able to support decent retirement for all who have labored, sustenance for those who are disabled, and medical care for all its members (if, that is, we are willing to adopt the cost control solution of every other advanced industrial economy). There are many who do exactly what they are supposed to do who cannot afford these things on the income share our economy allows them. Thus, in the richest country in history, seattle wishes for workers to die in poverty, the disabled to live in poverty, and anyone who sickens or is injured and cannot afford medical care to die. Libertarianism is a grotesque, moral abomination. Phony economic arguments do not rescue it. They merely display profound economic ignorance, the wackery of libertarian rationalization. If he denies that he wishes poverty and death on those who do not earn enough, even if they work enough, then a share of national output most be devoted to their sustenance and health care. And if it is, the means of financing is essentially irrelevant as long as it works. Among the libertarian lies is that taxes on the middle class must rise. Yet, income has become so skewed that the top 10% could pay the entire operating cost of government, not including social security and Medicare, and still have a net income share larger than in 1980 when the rise in inequality began under the economic crackpot Reagan. If the cost of entitlements were not born entirely by workers with regressive taxes, we can easily afford those too.
- roidubouloi
February 21, 2013 at 11:48pm
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Blackton, a USA today poll shows republicans overwhelmingly support legislation to combat the deficit, including taxes and cuts. They want something done. Dems on the other hand, are more focused on gun legislation--that is a much higher priority for them just now. Once again showing just how poorly most informed dems are. Keep kicking the can, and focus on stuff (gun legislation) that won't change a thing. BTW, this year we'll spend around $300B to service the debt. About half what we spend on the military. As Bill Clinton said, if the interest rates rise to where they were when he was president, then poof, we're spending more on debt payments than we are on the military.
- seattleeng
February 22, 2013 at 12:18am
Ah yes, when the facts fail you, try the specious citation of opinion polls. Opinion polls also show that a clear majority want to preserve entitlement benefits and the raise taxes on the rich. Is that therefore what the libertarian fruitcakes advocate? No, of course not. No matter what the opinion polls say, no matter what the economic reality, the nuts want to run deficits in the operating budget to keep taxes low on the rich, fund entitlements with regressive taxes that impact a shrinking share of GDP, and reduce entitlement benefits to what what that shrinking base can bear (or less). All facts and pseudo-facts, even when they clearly prove the opposite, are shamelessly cited, in the most preposterous manner, for the same ideologically-driven endpoint. Is there any evidence that this is better for growth or income distribution or economic stability? No. None. All the evidence of the last 100 years, particularly our 30-year, real-time experiment with wacko libertarian economics, is to the contrary. To be a libertarian is to have but one goal, the elimination of anything that smacks of government redistribution of wealth, just because they detest the redistribution of wealth and believe that the market distribution of the moment is given by god. This is no different than believing the earth is flat and was created 6,000 years ago. Religious nonsense. The fact that there are many possible market distributions, all affected by the structure of government, is also irrelevant to them. Indeed, everything that a sane person would consider a fact is irrelevant.
- roidubouloi
February 22, 2013 at 7:48am
Here is a perfect example or right-wing and libertarian lies. The false claim is made that taxes have to go up on the middle class to fund our supposedly lavish system of retirement and medical benefits. The false claim is made that these benefits are the reason for our deficits. Lies. Take 2012. We budgeted $2.5 trillion of revenues and $3.8 trillion of expenditures, for a deficit of $1.3 trillion. However, social security and Medicare contributed $450 billion to that deficit (payroll taxes less benefits) while the rest of the budget contributed $850 billion. Even if we eliminated the deficit in entitlements, we would still have nearly a trillion dollar deficit. If that were to happen, you had better believe that suddenly the right-wingnuts would be telling as that deficits don’t matter. Sure. They don’t matter if the alternative is higher taxes on the rich. They matter a great deal if the alternative is cutting social security and Medicare benefits. What about the claim that there are far too few rich from whom to raise the necessary revenues? More lies. We have $15.8 trillion of GDP. Subtract $2 trillion of depreciation for a net national income of $13.8 trillion. The top 10% have $6 trillion of that, the other 90% $7.8 trillion? Not enough of the wealthy to tax, you say? If we eliminated 15% payroll taxes and had a unified income tax, we could have one rate of 10% from the first dollar, an effective reduction in taxes for working people, and a rate of 50% on household incomes over $100,000 (assuming no tax preferences, all income being counted). The first 10% therefore raises $1.4 trillion. There are 120 million households. The first $100,000 of income for the top 10% is therefore $1.2 trillion. Their income above that is therefore $4.8 trillion. Taxed at 50% yields an additional $2.4 trillion. That comes to $3.8 trillion in 2012. Zero deficit. Plus, we had $200 billion of excise taxes and other income. With that, we could exempt $2 trillion of wage income from taxation for such things as retirement savings subsidies. The bottom 90% would have a net income of $7 trillion. The top 10% would have a net income share of $3 trillion, 30% of aggregate net household income. That is larger than the net income share of the top 10% in 1980, before the huge rise in income inequality that is the result of actually practicing libertarian wackonomics. Under such a progressive system, with a lower top rate than we had for decades, about 95% of Americans would see a tax cut and we would still balance the budget. With a top rate of 60% for incomes over $10 million a year, we could reduce the burden on the middle and working classes even more. Now consider that a fair part of the deficit is due to unemployment. If we told the nuts to take their austerity hysteria and shove it and increased government investment sufficiently to return to full employment, we would have a surplus under this tax structure. Libertarians are liars. Nothing they say should be believed. It is all nonsense served up in the service of their radical market theology.
- roidubouloi
February 22, 2013 at 8:20am