Taxes Are Not a Barrier to Job Growth
The new congressional committee on deficit reduction (the so-called "supercommittee") not only can consider revenue increases, but must consider them — as well as spending cuts — if it's going to produce a balanced plan. [1]
There are five main reasons why.
Spending cuts alone can't do the job. The key fiscal policy goal is to reduce deficits sufficiently to stabilize the debt relative to the size of the economy. The only way to accomplish this without severe cuts that would hit low- and middle-income Americans hard — in areas ranging from Medicare, Medicaid, and possibly Social Security to basic assistance for the poor — and weaken core government functions like education, scientific research, and ensuring safe food and water, is through revenue increases.
The 2001-2003 tax cuts are a significant contributor to projected deficits. Letting some or all of those tax cuts expire would make a significant contribution to reducing the deficit.
Higher-income people can and should share in the sacrifices needed to reduce long-term deficits. Low- and moderate-income households shouldn't be forced to bear a disproportionate share of the burden through cuts in Medicare, Medicaid, Social Security, and programs targeted on people who are poor or near-poor.
Taxes are low both in historical terms and in comparison with other countries. By either standard, the United States has significant room for increasing tax revenues.
Higher taxes are not an inherent barrier to economic growth. In fact, the Congressional Budget Office (CBO) has said that tax increases used to reduce budget deficits can improve long-term economic growth and job creation. The experience of the 1990s shows that claims that reasonable revenue increases will sink the economy largely reflect politics and ideology, not solid analysis.
Spending Cuts Alone Can't Do the Job
The recent debt ceiling legislation (the Budget Control Act) calls for the Joint Select Committee on Deficit Reduction to propose, by November 23, steps to reduce the deficit by $1.2 to $1.5 trillion or more over the next ten years, in addition to the approximately $1 trillion in savings from reducing discretionary spending that has already been agreed to. Achieving this amount of deficit reduction solely by reducing spending would result in deep cuts in Medicare, Medicaid, and other federal programs, including programs targeted on the poorest Americans.
As a first step, the Budget Control Act has placed binding limits or "caps" on annual appropriations (which cover "discretionary" — or non-entitlement — programs such as defense, education, low-income housing assistance, national parks, the FBI, the EPA, medical research, and many others) that reduce projected funding for these programs by somewhat less than $1 trillion through 2021. Under these caps, CBO estimates, discretionary spending will shrink from about 9 percent of gross domestic product (GDP) in 2011 to 6.2 percent in 2021, "well below the 8.7 percent average over the past 40 years."[2]
Meeting those caps will pose a great challenge.[3] The federal government's responsibilities have grown in recent years, with developments at home and abroad pushing spending above the average for earlier decades. These responsibilities include medical care for veterans of the Iraq and Afghanistan wars, homeland security (in the aftermath of September 11, 2001), and education (with the federal government providing more resources to improve educational quality and outcomes). Additional discretionary funding is also needed to implement recent bipartisan Wall Street reform and food safety legislation and to provide adequate administrative funding to serve the growing numbers of Social Security and Medicare applicants as the population ages.
If the joint committee recommends less than $1.2 trillion in additional deficit-reduction measures, across-the-board reductions in spending would be automatically triggered to make up the shortfall. In 2013, about 85 percent of these automatic cuts would fall on discretionary programs, which would be cut by about 9 percent (if the committee achieves no savings) below the already-low levels mandated by the Budget Control Act caps. [4]
If the joint committee chose to reach its $1.2 trillion goal entirely through cuts in mandatory programs (such as Medicare and Medicaid), the cuts there would have to be harsh, as well. The deal that President Obama and Speaker Boehner were negotiating in July would have raised Medicare's eligibility age,[5] increased Medicare cost-sharing charges, shifted significant Medicaid costs to states,[6] lowered inflation adjustments in Social Security (and the tax code), and instituted a wide array of other entitlement savings, alongside revenue increases. Those cuts in entitlement programs would have saved $650 to $700 billion over ten years. To meet its target solely through entitlement cuts, the joint committee would have to produce cuts twice as deep as these — and roughly twice as deep as those in the plan of the "Gang of Six" senators and in the proposal by Fiscal Commission co-chairs Erskine Bowles and Alan Simpson.[7]
While policymakers will need to take additional steps over the long term to slow the growth of health care costs in the private and public sectors alike, the Affordable Care Act includes most of the good ideas we know now for slowing the growth of Medicare spending. Achieving large additional savings over the near term will therefore be difficult. Studies have shown that proposals such as replacing Medicare with vouchers that don't keep pace with health costs or raising Medicare's eligibility age would generally shift costs to beneficiaries, states, and employers — and in many cases, would increase total health care spending and thus add to the burden that high health care costs place on the economy.
This is why every recent bipartisan proposal, including Bowles-Simpson, the Bipartisan Policy Center panel chaired by Pete Domenici and Alice Rivlin, and the Senate's "Gang of Six," has called for a balanced package that includes both substantial budget cuts and substantial revenue increases. The report of a panel on deficit reduction convened by the National Academy of Sciences and the National Academy of Public Administration also concluded that putting the budget on a sustainable path without increasing revenues is likely to require large cuts in Social Security, very large cuts in Medicare and Medicaid, and cutting all other programs by about 20 percent overall (with deeper cuts in all other areas if one or more of these categories were protected).[8]
The joint committee needs to develop a balanced deficit-reduction package, including significant revenues, to reach its target. Only by proposing substantial increases in revenues can the committee avert automatic cuts in discretionary spending and overly harsh cuts in Medicare, Medicaid, and Social Security.
2001-2003 Tax Cuts Are a Significant Contributor to Projected Deficits
As recently as 2001, the federal government was running large surpluses, and CBO and the Office of Management and Budget were projecting surpluses for years to come. What explains the sharp deterioration in the budgetary outlook? Just two policies dating from the Bush Administration — the 2001-2003 tax cuts and the wars in Iraq and Afghanistan — accounted for over $500 billion of the deficit in 2009 and will account for $7 trillion in deficits in 2009 through 2019, including the associated debt-service costs. By 2019, these two policies will account for almost half — nearly $10 trillion — of the $20 trillion in debt that will be owed under current policies (see Figure 1).[9]
Although the temporary policies adopted to stabilize the economy and financial system during and after the recent recession added to budget deficits in 2009 through 2011, their effects will fade quickly thereafter, and they do not contribute much to the long-run budget shortfall. Nor are the projected deficits caused by a temporary large increase in discretionary spending instituted to respond to the recession. As noted, discretionary spending in 2011 is estimated to total about 9 percent of GDP — only slightly above its historical average even though some areas of discretionary spending are temporarily elevated now due to the wars and the Recovery Act — and is slated to decline markedly over the next decade.
Letting part or all of the 2001-2003 tax cuts expire would make a significant contribution to reducing projected deficits. Letting all of the tax cuts expire — as former Reagan economic adviser and Harvard professor Martin Feldstein, former OMB director Peter Orszag, and we (among others) have recommended — would save about $3.6 trillion over the next ten years, including the resulting savings in interest payments, and (in conjunction with the savings in the Budget Control Act) stabilize the debt-to-GDP ratio in the years ahead, which most economists consider the key intermediate goal for fiscal policy. Letting only the high-income tax cuts expire would save about $830 billion....
Of course this would be the sane approach. Yet Washington with the help of a media who only seems able to report the complexities of the latest sex scandal, seems sold on the insane idea that the U.S. can cut spending as the only road to economic recovery. We do not have a spending problem, we have a revenue problem and a lack of courage by conservative Republican to do the right thing.
