Revenuers

Is our fiscal dilemma a spending problem or a revenue problem? The answer is obviously yes. The President has proposed raising revenues chiefly by allowing the Bush era tax cuts to expire only on the upper income brackets. By the estimates of the CBO and the Tax Policy Center, taxing the rich would net an additional $900 billion over ten years. That is well under the total deficit for any year since Obama took office. Additional revenue increases proposed by the President would bring the total "saved" to $1.6 trillion. That would erase the deficit for 2009 and about a quarter of the deficit for 2010. If our fiscal problem has a revenue solution, that isn't it.

What about allowing the Bush cuts to expire for all tax payers? The Christian Science Monitor has some interesting data that we might have considered during the recent election campaign.

The cost of extending all the tax cuts is $4.5 trillion over ten years. The cost of extending all but the top bracket cuts is $3.7 trillion over ten years. (Both costs are without associated interest costs.) In other words, allowing the upper brackets to expire saves only about $800 billion out of $4.5 trillion–or just 18 percent of the total cost. In other words, change the choice to extend the tax cuts to one extending just the "middle-class" tax cuts, and you only shave less than one fifth from the tax policy segments in the chart above, and policymakers would still be choosing to deviate quite substantially from the current-law baseline by extending and deficit-financing those tax cuts. Based on the (over-)dramatic, political mud-slinging over the two parties' tax policy positions, one would think there was a much bigger difference between extending the tax cuts "for the rich" and not.

The CSM piece is a comment on the CBO report from last August. Here is the CBO comment on what happens under current law (i.e. if the tax cuts and spending cuts are allowed to happen).

In CBO's current-law baseline, budget deficits are projected to continue to shrink for several years—to 2.4 percent of GDP in 2014 and 0.4 percent by 2018— before rising again to 0.9 percent by 2022. With deficits small relative to the size of the economy, debt held by the public is also projected to drop relative to GDP—from about 77 percent in 2014 to about 58 percent in 2022. Even with that decline, however, debt would represent a larger share of GDP in 2022 than in any year between 1955 and 2009.

So a $4.5 trillion tax increase still leaves us with a historically large public debt. For that to be manageable requires a lot of optimistic assumptions about what comes after 2012. However, the President is hardly proposing any such thing. His proposal differs from Bush policy only cosmetically. What happens if we keep the tax cuts largely intact?

Under the alternative fiscal scenario, deficits over the 2014–2022 period would be much higher than those projected in CBO's baseline, averaging about 5 percent of GDP rather than 1 percent. Revenues would remain below 19 percent of GDP throughout that period, and outlays would rise to more than 24 percent. Debt held by the public would climb to 90 percent of GDP by 2022— higher than at any time since shortly after World War II.

Should we allow all the Bush cuts to expire? I have said so before and I say so again. We are going to have to raise taxes. Allowing them all to expire immediately would be very painful in the short run. It might be the right thing to do, but we aren't going to do it. Raising the rates gradually seems like the only plausible policy. Either way, it is sheer fantasy to think that we can do it without bringing spending under control. Bear in mind that all of this is in the context of $16 trillion in federal debt. Sooner or later the bill is going to have to be paid.

Comments

[larry kurtz]

"A marijuana-legalization initiative on the November ballot could raise at least $560 million a year in new taxes — well more than double what the Initiative 502 campaign itself had predicted."

http://seattletimes.com/html/localnews/2017810760_marijuana22m.html

http://www.prohibitioncosts.org/

[Donald Pay]

The guy who hallucinated that graph? Bush economic advisor. Ahhhh!...Ahhhh!....Haaaaa!.....Ahhhhh!....Haaaaa! Kenny Boy, you're killing me!

[Donald Pay]

We have a revenue problem and a war problem, not a domestic discretionary spending problem. We also have an economy that's growing, but weak. Too much austerity right now is not the way to go.

Ending the Bush tax cuts for people making over $250,000 would get us about 0.5% GDP, which is a start on closing the 6% GDP deficit. But it is just a start. When the economy improves, moving the top rate to 45% and moving the rates up progressively should be a priority. People need to pay for the government we need, not foist it off as debt for our children to pay. However, part of doing that requires jobs, and the real job creators (the middle class) should receive a tax cut until the economy is on a steady footing.

But I agree more has to be done. Closing loopholes in the tax code would yield another 0.5% GDP. We could tax accumulated wealth above $5.0 million would get us 1% GDP. If we tighten rules on foreign income and other loopholes in the corporate code we could get another 1% GDP. Taxing fossil fuels would get another 1% GDP. Tax financial transactions to get another 1-2% GDP. There's always tax evasion to crack down on, which could garner 0.5-1% GDP. Remove the cap on FICA taxes, too. Obviously all this can't be done all at once, but we need to get serious about balancing spending and revenue.

On the spending side, health care reform should save 1.0% GDP. Ending the wars yields 1% GDP, and reforming military procurement will get us 1.5% GDP in savings.

[Bill Fleming]

http://news.investors.com/blogs-capital-hill/112012-634082-federal-deficit-falling-fastest-since-world-war-ii.htm

Just FYI, KB.