Adult converstation about fiscal affairs...

Discussion in 'Politics' started by OPTIONAL777, Apr 12, 2011.

  1. Daniel Gross, On Tuesday April 12, 2011, 11:56 am EDT

    Is the "adult conversation" we've long been promised about the nation's fiscal affairs about to begin?

    Last week Rep. Paul Ryan put his cards on the table. As I noted, it rests on some rather absurd projections: that the budget would cause unemployment to fall to 2.8 percent, that in 40 years all discretionary spending — including defense — would equal a mere 3 percent of GDP, and that Americans are ready for massive cuts in social insurance.

    In the accompanying video, Republican activist Grover Norquist discusses the state of the budget with my Daily Ticker colleague Aaron Task and me:

    <div><object width="576" height="324"><param name="movie" value=""></param><param name="flashVars" value="thumbnailUrl=http%3A//"></param><param name="allowfullscreen" value="true"></param><param name="wmode" value="transparent"></param><embed width="576" height="324" allowFullScreen="true" src="" type="application/x-shockwave-flash" flashvars="thumbnailUrl=http%3A//"></embed></object></div>

    Now President Obama, who was essentially a bystander during the recent budget debate, is planning to make an address on Wednesday. Word is that he will endorse the findings of the bipartisan Simpson-Bowles fiscal commission , which he largely ignored when they were issued last December.

    In Washington, the numerous species of faux-fiscal hawks are enthused about the prospect of some grand bargain that would reduce the debt while not raising taxes on any of the people whose donations support Washington think tanks. I'm less enthused about the prospects for two big reasons.

    First, this has every sign of being another round of the long-running fiscal clown show. For the past 10 years, Washington — regardless of who controls the levers of power — has simply shown no inclination or willingness to take the actions necessary to align the government's resources with its revenues. A new Medicare prescription drug benefit with no funding mechanism? Big tax cuts with no offsetting spending cuts? Expensive wars fought off the balance sheet? A big stimulus program? Payroll tax cuts? No problem. So long as interest rates remain low, there was no reason to fret too much about the sustainability of these initiatives.

    In the 1980s and early 1990s, Washington antagonists executed a series of deals that included tax increases and spending reductions. But these days, due to a combination of utter Republican intransigence and Democratic wishy-washiness, no such deals are possible. The legislative and executive branches have no problem working together to massively increase deficits — think about 2009's uni-partisan stimulus package or the more recent bipartisan lame-duck to extend Bush tax cuts and enact a new payroll tax cut. But our government has an extremely difficult time making even symbolic spending cuts. Slashing about $40 billion in spending, an amount equal to 2.5 percent of this year's projected budget deficit, spurred the news networks to create shut-down clocks. And revenue enhancements? The phrase doesn't seem to be in official Washington's vocabulary. President Obama campaigned on letting the tax cuts for high earners expire at the end of 2010, swore up and down that he wanted them to expire throughout 2009 and 2010, and then meekly surrendered.

    Second, even if Washington were somehow to get serious, I don't think the public is anywhere near prepared for the truth about our fiscal affairs. That's largely because nobody has bothered to tell the Americans that, as much as they feel overtaxed, the federal government, largely by design, has done an extremely poor job of collecting revenues in the past few years. That failure, as much as spending, lies at the heart of our massive structural deficits. Don't take it from me. Go to the OMB's website and check out Table 1.2, which documents spending and receipts as a percentage of GDP going back several decades. For the last 40 years, federal government spending has generally stood somewhere between 19 and 23.5 percent of GDP. In 2009, when the economy shrank and spending on bailouts and stimulus spiked, the ratio soared to 25 percent. In 2010, it shrank back to 23.8 percent. That's still elevated, but it's almost exactly what it was in the third year of Ronald Reagan's first term (23.5 percent in 1983).

    Now look at the column on receipts as a percentage of GDP. Between 1968 and 2008, the federal government generally collected between 16.1 percent and about 19 percent of GDP in taxes. And that was relatively steady under all different types of tax regimes. (In 2000, the blow-out year of the dotcom bubble, receipts were 20.6 percent of GDP.) But the collapse of the markets, declining corporate profits, and massive job losses caused tax receipts to collapse in 2009. That year, federal receipts fell about 16 percent in real terms. In 2009, tax receipts were only 14.9 percent of GDP, the lowest level since 1943. In 2010, even as the economy rebounded, receipts remained at 14.9 percent of GDP.

    Yes, the U.S. has a spending problem. But the federal government also has a serious taxing problem. As currently designed, the system does a poor job of collecting revenues. Receipts are unacceptably volatile. And all the political momentum is in the direction of reducing taxes. Now the size of the U.S. economy in 2010 was $14.66 trillion, which means one percent of GDP is equal to $146 billion. And so if federal taxes were anywhere near the normal rate of recent history — say at the 18.2 percent of GDP as they were as recently as 2006 — the deficit would be about $482 billion smaller than it is today.

    This is not to say that politicians should be laying plans for across-the-board tax increases right now. The Simpson-Bowles plan called for eliminating or reducing huge tax expenditures like the home mortgage interest deduction. In contrast to cuts in Social Security or Medicare, letting tax rates on income above $250,000 revert to their 1990s levels is politically popular. The corporate tax code can and should be simplified so that companies like General Electric actually pay a meaningful amount of taxes. There's no reason hedge fund managers should pay low capital-gains tax rates on the fees they receive for putting other people's money at risk. There's plenty that can and should be done.

    To a degree, critics like Grover Norquist are correct when they note that higher levels of taxes enable higher levels of spending. The problem in Washington is that lower levels of taxes also enable higher levels of spending. Congress and the White House can cut and cut and cut again. But given the structural mismatch between our desire to spend and our willingness to tax, cuts can only take us so far.

    Subscribe to Daniel Gross's RSS feed here.