In the Tea Party Free Zone: A Serious Debate on the Budget Deficit

By :: September 14th, 2010

America’s long-term fiscal challenge will drive the nation’s domestic policy for years to come. But in an age of partisan noise and name-calling, it is not easy to find reasoned commentary over the tough fiscal choices we will inevitably confront.   

 

Fortunately, in recent days, I’ve come across two valuable discussions of both the deficit and ways to address it. Both, interestingly, come in the form of debates. In one, the Tax Policy Center's Gene Steuerle and Brookings Institution’s Henry Aaron face off  here.  The other pits Brookings scholar Belle Sawhill against Century Foundation vice president Greg Anrig here.

 

The debaters come from quite different perspectives. Henry, Gene, and Belle all agree that addressing the long-term deficit is critical to the nation’s future. Greg is less convinced. Belle and Gene favor broad changes in Social Security and Medicare. Greg would leave benefits in these social programs untouched. Henry comes in somewhere in the middle. He supports some changes in these programs, but far more modest ones than Belle and Gene.

 

The biggest differences, however, are not in their policy prescriptions. Instead, as Henry notes in his rebuttal to Gene, they are in tone and overall perspective. To Gene and Belle, budget deficits are far more significant than a mere matter of government spending more than it collects. They are symptoms of a larger disease that Gene defines as nothing less than a risk to fiscal democracy.

 

Their concern: Because so much of the federal budget is mandated—not only Social Security, Medicare, and Medicaid, but the interest on the money we borrow to pay for these programs—that today’s legislators have little to say about government priorities. Unless lawmakers are willing to address social insurance programs, all they can do is tinker around the edges of domestic policy.

 

Belle, a top budget official in the Clinton Administration, and Gene, a top tax official in the Reagan Administration, share an additional fear: that spending on programs for the elderly will inevitably short-change others, especially children.

 

But where Gene and Belle define big government spending on Medicare and Social Security as both excessive and a sign of profound fiscal failure, Henry proudly embraces these programs.  “What Steuerle sees as problems,” Henry writes, “I see as achievements.”

 

For instance, Henry agrees that Medicare will require ongoing changes, but finding new efficiencies in health care delivery, he argues, will take many years. Beyond the reforms already enacted as part of health reform, don’t count on medical spending cuts as a source of deficit reduction any time soon, he argues. 

 

All four do agree that Washington must take a hard look at tax policy in the context of long-term fiscal imbalances. All favor long-term reform, and all would scale back tax expenditures, those targeted tax subsidies that feel much like government spending. And Henry, Gene, and Greg like a value-added tax.

 

But, here again, they differ on scale. Henry and Greg would place much more of the deficit reduction burden on new revenues, while Gene and Belle feel there are limits to how much of the deficit problem can—or should-- be addressed through higher taxes.

 

These two debates are provocative and may challenge some of your preconceived notions about liberals and conservatives. Read them.   

 

   

13Comments

  1. Anonymous  ::  8:56 pm on September 14th, 2010:

    I did read the Gene and Henry debate, which was interesting. I will look at the other.
    I am not sure in all of this, however, if we can find new answers from the same sources. Well credentialed debaters will give you ideas that you have already heard. Perhaps it is time to seek fresher voices if we wish to solve these problems (and I'm not talking Paul Ryan here).

  2. Anonymous  ::  9:02 pm on September 14th, 2010:

    I find it very hard to take seriously any debate on taxes that doesn't address defense spending. Social security can not be cut without expanding disability insurance (or, alternatively, increasing the poverty rate among seniors, placing additional strain on already-overworked and under-funded social services) and health care costs can not be addressed without fundamentally changing the way we think about health care (yes, it needs to be rationed, and yes, government-supported health care should be rationed on the basis of cost-effectiveness and yes, the government should negotiate prices with drug companies the way it already does with providers.)
    Defense spending, on the other hand, is merely a matter of political will, since even the DoD is asking Congress to slow the continued inflation of its budget. It is clear that there are inefficiencies and corrupt spending, especially with regards to contractors. It shouldn't be hard in any sense except politically to reduce defense spending without reducing the benefit to the majority of tax payers (clearly it will hurt those employed by the many companies supported only through military spending.)

  3. Anonymous  ::  10:26 pm on September 14th, 2010:

    It's striking to see people seriously arguing that government should raise taxes to 30% of GDP or more to make good on irresponsible promises made long ago.
    I'll make an analogy. People like hummingbirds. They often buy hummingbird feeders, which they maintain for a few months. Then they tire of the task and leave the feeders empty. The hummingbirds, who have become accustomed to this rich food source, often die when it disappears. This is not compassionate to the hummingbirds.
    The government has over-promised, and the people are going to experience a major withdrawal of benefits when the government bond market crashes. Cutting benefits now in an attempt to avoid that crash would be much more compassionate.

  4. Anonymous  ::  7:34 pm on September 15th, 2010:

    Actually, the promise we should void is the one where the tax rate on unearned income is below 70% – or possibly 90%. This would put an end to companies squeezing their employees for wage concessions and middle class wages would rise – as they did in the 1950s and 1960s.
    Employee-ownership of most companies now traded publicly would have the same effect. Do this and all promises can be met.

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  6. Anonymous  ::  3:44 am on September 16th, 2010:

    >”the promise we should void is the one where the tax rate on unearned income is below 70% – or possibly 90%.”
    Rates that high are sure to cause economic damage far in excess of the revenue raised, and there's a chance that they will also lose revenue as compared to lower rates. Read the first two paragraphs of the Intro of this paper by Austan Goolsbee: http://faculty.chicagobooth.edu/austan.goolsbee/research/laf.pdf
    Also note that “unearned” income is non-labor income and has much higher elasticity of realization in taxable form. The optimum rate for this income is therefore much lower than for labor income, as virtually any economist would agree.
    90% rates are a destructive fantasy. 70% for labor income is a near-concensus for the revenue peak:
    http://voices.washingtonpost.com/ezra-klein/2010/08/where_does_the_laffer_curve_be.html
    However that 70% is computed inclusive of Social Security, Medicare, unemployment tax, state income tax and state sales tax on the portion spent on taxable purchases. We are already above 50% today, in 2010.

  7. Anonymous  ::  5:27 pm on September 16th, 2010:

    The purpose of the high rate would not be to raise revenue – indeed, we know it would not – but to discourage income. The current tax rates do nothing to discourage managers from driving down wages in order to boost profitability. Higher rates are required for that purpose – not for raising federal revenue. The rates would not be on every dollar – and never were. They were and would be on the last dollar earned. They are designed to remove the incentive to cut payroll. It is pure social engineering – which worked, by the way, to develop a healthy middle class (which is now diminishing even as we blog).

  8. Anonymous  ::  5:36 pm on September 16th, 2010:

    >The purpose of the high rate would not be to raise revenue – indeed, we know it would not – but to discourage income
    Driving economic activity underground because the government does not like it is virtually always bad policy, harmful to society on average. However if this remains the objective, taxation is the least harmful method.

  9. Anonymous  ::  4:07 pm on September 17th, 2010:

    I'm not talking about driving CEO pay underground, I am talking about making it so dividends and outsized options are not paid at all by raising taxes so much that people won't bother to engage in wage raids on their workers.

  10. Anonymous  ::  4:36 pm on September 17th, 2010:

    >I'm not talking about driving CEO pay underground
    So you don't think the market will find a way to compensate CEOs while avoiding 90% tax rates? Of course it will. Company-paid perks will multiply, and legislation to stop these tricks will always be a step behind.
    The problem with government employee retirement plans and retiree health care expenses is an example of how people get around limitations on cash compensation by increasing deferred and non-cash benefits.

  11. Anonymous  ::  7:25 pm on September 22nd, 2010:

    There will always be perks and there probably should be – however raising taxes on unearned income would stop big shareholders from getting outsized gains from cutting back on worker salaries and resisting unions. It is no accident that union busting began in earnest when tax policy made it profitable to do so.
    I fear that non-union food processors with unsanitary conditions will make us pay with our lives for this mistake.

  12. Anonymous  ::  4:15 pm on September 23rd, 2010:

    It's so important that we reduce the deficit, but must we accept either the Republicans or the Tea Partiers to do it?
    I'd like a choice that allows fiscal conservativeness, AND social liberalness. I really want our budgetary issues handled, and to see prosperity in the future.
    But as a Tantra teacher, I value our right to free expression. I'd like our politicians to provide both financial and personal freedom.

  13. Anonymous  ::  12:20 am on September 25th, 2010:

    I am not persuaded that current benefit levels are unsustainable. I think we vastly underestimate the productivity gains that lie ahead. Moore's Law is not just about how much a $2,000 computer can do – it's about how sophisticated our apps can be. The gains from robotics may well be exponential.
    Then there's China. What our automators cannot figure out how to make without workers, the Chinese will make for us because they want to keep their people employed. We want to keep ours employed, too, but the hypothesis behind unsustainability is that we will have a shortage of workers when the dependency ratio hits 2 to 1. But will we? Why shouldn't our factories be 50% more productive thirty years from now? And why shouldn't the economies of scale make it a cinch to crank out a few extra widgets for Grandpa (or, as is more likely, Grandma)?
    Right now, we have an unemployment problem, not a dependency ratio problem. If enough older workers would retire now to make room for out-of-work young people, would the latter not be able to make enough stuff to support the former? And if not now, how about in thirty years? Robots don't object to making stuff for retirees.
    In terms of tax policy, I would suggest that the tax code simply revert to 1999 levels, but with enhanced deductions for philanthropy against incomes in the highest brackets. Instead of taxing high earners to provide funds to Congress, how about in effect taxing them to provide funds to charities? The Chinese are not competing with our non-profit sector, so increased philanthropy should create jobs here, although the problem will remain that the workers' new shoes come from China.
    I don't claim to have a crystal ball, but I have a hard time reconciling our high unemployment rate with cutting the programs that enable people to leave the workforce.