What about the Spending Side?
Rosanne Altshuler and I have argued in recent posts that Washington will be hard pressed to close our ongoing budget gap with politically palatable tax increases. (Is that an oxymoron?) Neither raising the individual income tax nor boosting corporate levies will erase the deficit.
But what about the spending side of the budget? We at the Tax Policy Center naturally focus on taxes but we do understand that cutting a dollar of spending has pretty much the same effect on the deficit as raising another dollar in taxes.
Let’s look first at the big picture and concentrate once again on 2012, the budget-window year with the smallest deficit—a mere $633 billion. The Congressional Budget Office’s baseline projects total 2012 spending of $3.4 trillion: $1.9 trillion mandatory, $1.2 trillion discretionary, and $300 billion in interest paid to the public. Washington can’t stop paying interest (well, it could, but it would become Argentina) so balancing the 2012 budget would require cutting a third of all mandatory spending or more than half of discretionary outlays. That’s a tall order in the best of times.
Most mandatory spending involves two politically popular programs: 40 percent pays Social Security benefits and another 30 percent covers Medicare. If you protect them, you could zero out the rest—Medicaid, military and federal retirement, and income support programs like unemployment compensation and Supplemental Security Income—and just about balance the budget in 2012. You might squeeze some cost savings out of Medicare, but just stop by your congressman’s town meeting to see how easy that would be. Big cuts in Social Security benefits won’t happen either.
Cutting on the discretionary side may seem a better bet but that’s unlikely to be any easier. CBO’s latest Budget Options volume suggests lots of cuts but they’re all small potatoes. The biggest one I could find—reducing highway funding to maintain positive balances in the highway trust fund—would save not quite $11 billion in 2012. (Don’t get me started on that one; we haven’t raised the federal gas tax that feeds the trust fund since 1997 so Congress tosses in extra money each year.) Most of CBO’s options would reduce spending by less than $1 billion. All of them probably don’t total enough savings to wipe out the deficit.
So let’s review the bidding. Politically feasible tax increases alone won’t solve the problem. Neither will cutting spending. In fact, if history is any guide, we’re unlikely to do much of anything on the outlay side. We will certainly have to slash the growth of healthcare to keep the budget from spiraling totally out of control. But that’s likely to take the form of “bending the cost curve” to get gradual savings over many years. In the near term, I suspect taxes will do the heavy lifting. And that will require either major tax reform or tapping new revenue sources.
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Actually, taxes amerliorate the dead weight loss that is actually documented when employers are able to pay wages in a monopsonistic labor market. This suppresses the number of workers and allows employers to charge economic rent by not paying employees for all of the gains from their productivity. Taxes on high income wages and employers allow that rent to be tapped and redistributed to the employees, although minimum wage laws are the only way to stop the dead weight loss. This is demonstrated by the fact that when minimum wage laws are enacted or the wage increased, jobs are not lost. Study after study has documented this, especially among low wage workers. The Austrians disagree with this, but the data proves them wrong.
“…we do understand that cutting a dollar of spending has pretty much the same effect on the deficit as raising another dollar in taxes.”
Raising taxes by a dollar results in a deadweight loss that does not occur when spending is cut by a dollar. You'd actually have to raise taxes by more than a dollar to get the same reduction in deficit as you would from a dollar cut in spending.
The U.S. government spends about as much on its military as the rest of the world combined spends on theirs — making it the single largest hunk of U.S. discretionary spending, and, no surprise, the biggest source of the debt.
If we were to outspend our closest competitor by a factor of two, or spend as much on our military as the combined budgets of every country on earth that is not in a formal military alliance with us, either of these would mean a tremendous spending cut.
They would also be less batshit insane and more likely to save the historical legacy of America the Beautiful from being a quiz show multiple choice answer alongside Atilla the Hun and Adolf the Hitler.
Why do we have to pretend that it would be a nutty idea to spend something within a standard deviation or so of what every other country on the planet seems to think is perfectly adequate? Sure, maybe we'd be less equipped to engage in ill-considered overseas wars, but, as we say in the software field: that's not a bug, it's a feature.
You are right on the need for major tax reform. If you include in the reform tying various types of taxes to various types of spending, you may get consensus on spending cuts. For example, if entitlement spending were tied to a revamped business income tax, there may be calls for more efficient and effective programs in this area – especially if the tax were made to float upward to cover costs. If you tie discretionary spending to a more visible VAT, people might start paying attention to the discretionary spending they ask for. Finally, if you force high income individuals to pay both net interest, paybacks to the Social Security Trust Fund, other debt repayment and foreign military operations, you will likely see the rich joining the peace movement.
Bob, it seems to me that politicians will much prefer to run deficits, print money, and blame inflation on the Chinese. Voters will not agree to major spending cuts or tax increases until high inflation hits them in the face. Elected politicians will accurately represent this preference.