BUDGET FEBRUARY 21, 2013
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.)
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.